2016 (May)
COMMERCE
(General)
Course: 601
(Income Tax)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions
1. (a) Write ‘True’ or ‘False’: 1x4=4
a) Income Tax is calculated on the basis of residential status of assessee. True
b) Salary is taxable on due basis or on receipt basis, whichever is earlier. True
c) House or property used by the political party is exempted from House Property Tax. True
d) An Income Tax Inspector is appointed by the Central Government. True
(b) Fill in the blanks: 1x4=4
a) According to Income-Tax Act, 1961, the previous year is that year in which year income is earned to be taxable in the next year.
b) Gross total income of an assessee consists of income from salaries, income from house property, profits and gains of business or professions, capital gains and from other sources
c) As per the Income Tax Act, 1961, agriculture income in India is exempted to tax.
d) Capital Gain arises from the transfer of any capital asset.
2. Write short notes on any four of the following: 4x4=16
(a) Assessee [Section 2 (7)]: 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.
Persons Liable to Pay Income Tax :
A. Following persons are liable to pay income-tax if their taxable income’ in a year exceeds the basic exemption limit for the year:
1. Individuals (including non-residents),
2. Hindu Undivided Families (HUFs)
3. Association of Persons (AOPs)/Bodies of Individuals (BOIs) (where the individual shares of the members are known)
4. Artificial juridical persons, such as, deities of temples
5. Societies and charitable/religious trusts
B. Following persons are liable to pay income-tax irrespective of their income :
1. All partnership firms (including limited liability partnership firms)
2. Co-operative societies
3. Companies
4. Local authorities
5. AOP/BOI where shares of the members are indeterminate or unknown.
(b) Agricultural 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:
1. The building is or on the immediate vicinity of the agricultural land;
2. It is occupied by the cultivator or receiver of rent or revenue
3. It is used as a dwelling house or store house or out house ;
4. The land is assessed to land revenue and it is not situated within the specified area.
(c) Person (as per Income-tax Act, 1961): 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.
An Association of person or body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person was formed or established or incorporated with object of deriving income, profits and gains.
(d) Income exempted from Income-tax Act: Exempted incomes are those on which the assessee has no tax liability. These incomes are covered under the Sec. 10 of the Income tax. Some of them are illustrated below:
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. 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)]
3. 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)]
4. 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)]
(e) Tax evasion and its penalties: Tax Evasion term is usually used to mean 'illegal arrangements where liability to tax is hidden or ignored i.e. the tax payer pays less than he is legally obligated to pay or by hiding income or information from tax authority. Thus, here the tax liability is reduced by "illegal and fraudulent" means. For example: understatement of income.
The Direct Taxes Enquiry Committee (Wanchoo Committee) has tried to draw a distinction between the two items in the following words. “The distinction between ‘evasion’ and ‘avoidance’, therefore, is largely dependent on the difference in methods of escape resorted to. Some are instances of merely availing, strictly in accordance with law, the tax exemptions or tax privileges offered by the government. Others are maneuvers involving an element of deceit, misrepresentation of facts, falsification of accounting calculations or downright fraud. The first represents what is truly tax planning, the latter tax evasion. However, between these two extremes, there lies a vast domain for selecting a variety of methods which, though technically satisfying the requirements of law, in fact circumvent it with a view to eliminate or reduce tax burden. It is these methods which constitute “tax avoidance”.
3. (a) From the following information of Mr. Ashok, compute his taxable income for the assessment year, 2015-16: 14
a) Basic salary @ Rs. 20,000 p.m.
b) Arrears of salary Rs. 10,000.
c) Dearness allowance @ Rs. 8,000 p.m.
d) Employer is paying insurance premium of Rs. 20,000 p.a. on his life.
e) Bonus Rs. 30,000.
f) Education allowance for his two children @ Rs. 600 p.m.
g) Cash gift Rs. 40,000.
h) City compensatory allowance @ Rs. 2,000 p.m.
i) Medical expenses paid by employer Rs. 18,000.
j) He contributes 15% of his salary to a recognized provident fund and his employer also contributes the same.
k) He is provided with a mobile phone, the bill of which is paid by the company Rs. 6,000.
l) He is given lunch allowance @ Rs. 100 per day for 250 days during the previous year.
Ans: Computation of Income under the salaries of Mr. Ashok for the AY 2015 - 2016
| 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. Bonus 5. Cash Gift (Fully Taxable) 6. CCA 7. Arrear of salary 8. Medical expenses reimbursed Less: Exempted upto 9. Employer’s contribution to RPF (15% of basic i.e. 2,40,000) Less: exempted upto 12% of salary 10. Mobile phone expenses 11. Lunch allowance is fully taxable (Free meal is exempted upto Rs. 50) | 7,200 2,400 18,000 15,000 36,000 28,800 | 2,40,000 96,000 4,800 30,000 40,000 24,000 10,000 3,000 7,200 Exempt 25,000 |
| Gross Salary Less: Deduction u/s 16 | | 4,80,000 Nil |
| Income under the head Salaries Less: Deduction under sec. 80 C (Maximum deduction Rs. 1,50,000) a) LIP b) Contribution to RPF | 20,000 36,000 | 4,80,000 56,000 |
| Taxable income | | 4,24,000 |
Or
(b) Explain how the following items are treated under Income-tax Act, 1961:
(1) 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. |
(2) House rent allowance: 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. | |
(3) Residential accommodation provided by employer: Rent free furnished/unfurnished accommodation or House at concessional rent
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. | |
(4) Encashment of earned leave: 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
4. (a) Mr. Bimal owns a residential house property. It has two equal residential units, Unit – I and Unit – II. While Unit – I is self-occupied by Mr. Bimal for his residential purpose, Unit – II is let out (rent being Rs. 6,000 per month, rent of two months could not be recovered). Municipal value of the property is Rs. 1,30,000, standard rent is Rs. 1,25,000 and fair rent is Rs. 1,40,000. Municipal tax is imposed @ 15% which is paid by Mr. Bimal. Other expenses for the previous year 2014 – 15 being repairs Rs. 800, insurance Rs. 1,500, interest on capital for constructing the property Rs. 63,000. Compute the house property income of Mr. Bimal for the assessment year 2015-16. 14
Ans: Computation of Income from house property of Mr. Bimal for the assessment year 2015-16
| Particulars | Unit I (Self – Occupied) | Unit II (Let – Out) |
| 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 (15% of MRV) | | 65,000 70,000 62,500 62,500 60,000 60,000 9,750 |
| 8. Net Annual value (6-7) Less: Deduction under section. 24 (a) Standard Deduction @ 30% (b) Interest on money borrowed | Nil 30,000 | 50,250 15,075 31,500 |
| Income/ (Loss from house property) Total Income from house property = (30,000) + 3,675 = (26,325) | (30,000) | 3,675 |
Or
(b) (i) Distinguish: Annual value and Annual rental value.
Ans: Annual Value: House property which is let out the Net Annual Value will be calculated as; Gross Annual Value – Municipal Taxes paid.
Where, Gross Annual Value = Higher of Actual Rent Received or Expected Rent
Expected Rent = Higher of Municipal Value or Fair Rental Value but restricted to the Standard Rent
Annual Rental Value: Gross annual value is called annual rental value. It is value of rent before deduction of municipal tax.
(ii) How would you determine the annual value of let-out house and self-occupied house (as per Income-tax Act, 1961) 7+7=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 ++++++
5. (a) What do you mean by “Tax Holiday” in a trade zone? Write a note on industries which are under the preview of Tax Holiday Scheme in the North-Eastern Region. 5+9=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.
FREE TRADE ZONE (FTZ)[ Section 10A]
1. CONDITIONS TO BE SATISFIED: In order to get deduction, an undertaking must satisfy the following conditions:
| Condition 1: | It must begin manufacture or production in free trade zone : It has begun or begins to manufacture or produce during the previous year relevant to the assessment year— (a) commencing on or after 1-4-1981, in any free trade zone; or (b) commencing on or after 1-04-1994, in any software technology park or electronic hardware technology park or; (c) commencing on or after the 1-04-2001 in any special economic zone; |
| Conditions 2 : | It should not be formed by splitting / reconstruction of business.: |
| Conditions 3 : | It should not be formed by transfer of old machinery: it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. |
| Conditions 4 : | Sale construction should be remitted to India in convertible foreign exchange.: Sale consideration should be remitted to India in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. |
| Condition 5 : | Report of Chartered Accountant : The deduction under [this section] shall not be admissible for any assessment year beginning on or after the 1st day of April, 2001, unless the assessee furnishes in the prescribed Form 56 , along with the return of income, the report of an Chartered Accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. |
| Condition 6 : | Return of income should be submitted in time.: |
2. AMOUNT OF DEDUCTION – GENERAL PROVISIONS: If the aforesaid conditions are satisfied, the deduction u/s 10A may be computed as under : Profits of the business of eligible undertaking = Export Turnover of eligible undertaking/Total Turnover of eligible undertaking.
3. PERIOD AND RATE OF DEDUCTION: Out of the total income of an assessee a deduction of 90% of such profits and gains as are derived by an undertaking from the export of articles, or things or computer software shall be allowed. Rate of deduction for unit set up in Special Economic Zone on or after 1-4-2003 shall be as follows for first 10 assessment years:
First 5 Years – 100 % of profits and gains.
Next 2 Years : 50% of such Profit and Gains is deductible for further 2 assessment years.
Next 3 Years : for the next three consecutive assessment years, so much of the 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.
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.
Or
(b) What do you mean by Special Economic Zone? State 10 incomes which are not form a part of total income (as per Section 10 of the Income-tax Act, 1961).
Ans: Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. The category 'SEZ' covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign investment.
One of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years. Following the Chinese examples, Special Economic Zones have been established in several countries, including Brazil, India, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland, Russia, and Ukraine.
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.
6. (a) What are the legal provisions to be made in computing taxable income from income from capital gain? How are taxes chargeable in short-term capital assets and long-term capital assets? 8+6=14
Or
(b) Write short notes on: 3 ½ x4=14
a) Income from other sources.
b) Deemed income and Deemed ownership.
c) Tax deducted at source.
d) Central Board of Direct Taxes (CBDT)