2017 (May)
COMMERCE (General)
Course: 601 (Income Tax)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(New Course)
Full Marks: 80 Pass Marks: 24
1. (a) Write ‘True’ of ‘False’: 1x4=4
a) Body of individuals should consist of individuals only. TRUE
b) A resident in India cannot become resident in any other country for the same assessment year. False
c) Casual income received by the assessee is fully exempt. False, Fully taxable @30%
d) Municipal tax due is allowed as deduction for computation of income from house property. False
(b) Fill in the blanks: 1x4=4
a) The status of Reserve Bank of India as a person is ROR as per the Income-tax Act.
b) Income which accrues or arises in London from a business controlled from India is taxable in the case of Resident (Ordinarily and not-ordinarily).
c) An income under the head capital gain to a trade union is taxable.
d) Employer-employee relationship is necessary to term any receipt as salary.
2. Write short notes on any four of the following: 4x4=16
a) Previous year.
Ans: Previous Year: [Sec. 3]: As the word ‘Previous’ means ‘coming before’ , hence it can be simply said that the Previous Year is the Financial Year preceding the Assessment Year e.g. for Assessment Year 2019-2020 the Previous Year should be the Financial Year ending 31st March 2019. The term previous year is very important because it is the earned during the previous year is to be assessed to tax in the assessment year. The simple rule is that the income of a previous year is taxed in its relevant assessment year. At present the previous Year 2018-2019 (1-4-2018 to 31-3-2019) is going on.
b) Perquisites.
Ans: Perquisites (Sec. 17[2]): The term perquisite is defined to signify some benefit in addition to the amount that may be legally due by way of contract of services rendered. Section 17(2) gives an inclusive definition of perquisites. As per the Terms of Section 17(2), Perquisites Includes:
(i) The value of rent-free accommodation provided (used or not) to the assessee by his employer;
(ii) The value of any concession in the matter of rent respecting any accommodation provided (used or not) to the assessee by his employer;
(iii) The value of any benefit or amenity granted or provided (used or not) free of cost or at concessional rate in any of the following cases (specified employee):
(a) By a company to an employee, who is a director thereof;
(b) By a company to an employee being a person who has a substantial interest in the company;
‘Substantial Interest’ : In relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power.
(c) by any employer (including a company) to an employee to whom the provision of clause (a) and (b) do not apply and whose income under the head of Salaries (whether due from, or paid or allowed by, one or more employer), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000.
(iv) Any sum actually paid by the employer in respect of any obligation on behalf of the employee;
(v) any sum payable (not necessarily paid) by the employer to affect an assurance on the life of the employee or to affect a contract for an annuity;
(vi) the value of any other fringe benefit or amenity as may be prescribed.
c) Annual value.
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.
d) Capital assets.
Ans: 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
e) Income tax authorities.
Ans: Section 116 of the Income Tax Act, 1961 provides for the administrative and judicial authorities for administration of this Act. The Direct Tax Laws Act, 1987 has brought far-reaching changes in the organizational structure. The implementation of the Act lies in the hands of these authorities. The change in designation of certain authorities and creation of certain new posts in the structure are the main features of amendments made by The Direct Tax Laws Act, 1987. The new feature of authorities has been properly depicted in a chart on the facing page. These authorities have been grouped into two main wings:
(i) Administrative [Income Tax Authorities] [Sec. 116]
a) the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
b) Directors-General of Income-tax or Chief Commissioners of Income-tax,
c) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
d) Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),
e) Joint Directors of Income-tax or Joint Commissioners of Income-tax.
f) Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
g) Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
h) Income-tax Officers,
i) Tax Recovery Officers,
j) Inspectors of Income-tax.
(ii) Assessing Officer [ Sec. 2(7A)]
"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act;
3. (a) “The incidence of income tax depends upon the residential status of an assessee.” Explain in detail this statement. 14
Ans: Incidence of Taxes
As per Section 5 of the Income Tax Act 1961, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income.
In order to understand the relationship between residential status and tax liability, one must understand the meaning of “Indian income” and “Foreign income”. An Indian income is one which satisfies any of the following conditions:
1) If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year, or
2) if income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year, or
3) if income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
Similarly, foreign income is one which satisfies both the following conditions:
1) Income is not received (or not deemed to be received) in India; and
2) Income does not accrue or arise (or does not deemed to accrue or arise) in India.
Indian income is always taxable in India irrespective of the residential status of the taxpayer. Foreign income of an individual and HUF from a business controlled or profession setup in India will be taxable in the hands of resident and ordinarily resident and resident but not ordinarily resident but not in the hands of a non-resident. However, Foreign income from a business controlled or profession setup outside India will be taxable only in the hands of resident and ordinarily resident and not in the hands of a resident but not ordinarily resident or a non-resident person.
Foreign income of any other taxpayer (Company, Firm, AOP, BOI etc.) will be taxable if the taxpayer is resident in India and will not be taxable in case the taxpayer is non-resident in India.
Tax incidence of different taxpayers is as follows—
| Particulars | ROR | RNOR | NR |
| Income received in India Income deemed to be received in India Income accruing or arising in India Income deemed to accrue or arise in India Income received/ accrued outside India from a business in India Income received/ accrued outside India from a business controlled outside India | Yes Yes Yes Yes Yes Yes | Yes Yes Yes Yes Yes No | Yes Yes Yes Yes No No |
Or
(b) “Income tax is charged on the income of the previous year.” Do you fully agree with this statement? If not, what are the exceptions?
Ans: Exception to the rule Income tax is charged on the income of the previous year
As a normal rule, the income earned during any previous year is charged to tax in the immediately succeeding assessment year. However, in the following circumstances the income is taxed in the same year in which is earned.
1. Income of Shipping Business (Section 172) : In case a non-resident Shipping Company, which has no representative in India, earns income from any Indian port it will not be allowed to leave the port till the tax on such income has been paid or alternative arrangements to pay tax are made in the current year itself.
2. In case of persons leaving India permanently [Section 174] : If the Assessing Officer has the reasons to believe that an individual will leave India with no intentions of coming back, he may him to pay tax on the income earned during the previous year up to the date of his leaving the country.
3. Assessment of association of persons or body of individuals or artificial judicial person formed for a particular event or purpose [Sec.174A] : Where it appears to the Assessing Officer that any association of persons or a body of individuals or an artificial judicial person formed or established or incorporated or immediately after such assessment year, the total income of such person or body or judicial person, for the period from the expiry of the previous year for that assessment year upto the date of its dissolution, shall be chargeable to tax in that assessment year.
4. In case of persons trying to transfer their assets [Section 175] : If the Assessing Officer is of the opinion that any person is likely to sell, transfer, dispose off or to part with any of his assets with the intentions to avoid payment of any tax liability, he may ask to file the return and pay taxes during the previous year itself.
5. Discontinued business [Section 176] : In case any business or profession is discontinued during a previous year the income of the period from the expiry of last previous year till the date of discontinuation will be assessed to tax in the current previous year itself.
The power of the Assessing Officer to invoke the provisions of section 176 is discretionary and with reference to the other provisions mentioned above, it is mandatory. In the above cases, the income of the previous year may be taxed as the income of the assessment year immediately preceding the normal assessment at the rates applicable to that assessment year. For example, when a person is likely to leave abroad on 15-9-2018, the assessing officer can assess in his case the income earned from 1-4-2018 to the probable date of departure at the rates applicable to the assessment year 2018-19 itself, though as per the rules he will have to be assessed during 2019-20 assessment year.
4. (a) Mr. X has the following Income during the previous year, 2015 – 16:
a) Basic salary Rs. 2,60,000
b) Dearness allowance (forming part of salary) Rs. 40,000
c) Education allowance (for three children) Rs. 6,000
d) Rent paid for a residential house at Guwahati Rs. 60,000
e) House rent allowance Rs. 48,000
f) He has been provided with motorcar of 1.8 litre engine capacity for the official and personal use. All expenses of the motorcar are borne by the employer.
g) He contributes 14% of his salary to a recognized provident fund and his employer also contributes the same amount.
h) Interest credited to recognized provident fund @ 13% amounted to Rs. 13,000
i) Medical expenses paid by his employer Rs. 25,000
j) Mr. X paid Rs. 2,500 for his professional tax.
Compute the Income from salary for the Assessment year, 2016 – 17. 14
Computation of salary income for the Assessment Year 2018-19
| Particulars | Amount | Amount |
| 1. Basic Salary 2. Dearness Allowance 3. Children Education allowance Less: Exempted @ Rs. 100 per month per child for a maximum of two children 4. House Rent Allowance Less: Exempted upto minimum of the following three points a) Actual HRA b) 40% of Salary (Salary=2,60,000+40,000=3,00,000) c) Rent paid in excess of 10% of salary (60,000 – 10% of salary) Exempted 5. Value of Motor car (2,400*12) 6. Medical Expenses Less: Exempted 7. Employer’s contribution in employee’s RPF @ 14% Less: Exempted @ 12% of Salaries (Salaries = 2,60,000+40,000) 8. Interest to RPF @ 13% Less: Exempted upto @ 9.5% | 6,000 2,400 48,000 48,000 1,20,000 30,000 30,000 25,000 15,000 42,000 36,000 13,000 9,500 | 2,60,000 40,000 3,600 18,000 28,800 10,000 6,000 3,500 |
| Gross Salary Less: Deduction u/s 16 (iii) Professional Tax paid | | 3,69,900 2,500 |
| Income from Salary | | 3,67,400 |
Or
(b) Explain the provisions of the Income-tax Act, 1961 with regard to different kinds of provident funds. 14
Ans: Ans: Types of Provident Fund
At present there are 4 types of provident funds:
a) Statutory Provident Fund (SPF): This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.
b) Recognized Provident Fund (RPF): 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.
c) Unrecognized Provident Fund (URPF): Such schemes are those that are started by employer and employees in an establishment, but are not approved by The Commissioner of Income Tax. Since they are not recognized, URPF schemes have a different tax treatment as compared to RPFs.
d) Public Provident Fund (PPF): This is a scheme under Public Provident Fund Act 1968. In this scheme even self-employed persons can make a contribution. The minimum contribution is Rs.500 per annum and the maximum contribution is Rs.1, 00,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended.
Taxability of Provident Funds
| Particulars | SPF | RPF | URPF | PPF |
| 1. Employee's/ assessee's contribution | Deduction u/s 80C is available from gross total income subject to the limit specified therein | Deduction u/s 80C is available from gross total income subject to the limit specified therein | No deduction u/s 80C is available | Deduction u/s 80C is available from gross total income subject to the limit specified therein |
| 2.Employer's contribution | Fully exempt from tax | Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary. | Not exempt but also not taxable every year. For taxability see point 4 below | Not applicable as there is only assessee's own contribution |
| 3. Interest on Provident Fund | Fully exempt from tax | Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary | Not exempt but also not taxable every year. For taxability see point 4 below | Fully exempt |
| 4.Repayment of lump sum amount on retirement / resignation /termination | Fully exempt u/s 10(11) | Exempt if the employee has rendered minimum 5 years of continuous service | Accumulated employee's contribution is not taxable Accumulated employer's contribution + interest on employer's contribution (till date) is taxable as profit in lieu of salary. Interest on employees contribution (till date) is taxable as income from other sources | Fully exempt. u/s 10(11) |
Transferred Balance of Provident Fund: The balance of unrecognised fund which is transferred to recognised fund is called transferred balance.
Points to remember:
Ø The fund will be treated as RPF from the date fund was instituted
Ø The employer’s contribution to URPF shall qualify for exemption upto 12% of salary and excess shall be taxable.
Ø Interest upto 9.5% is exempted, excess taxable
Ø Salary means: basic + DP + DA (Which enters) + Commission on turnover
5. (a) Mr. Y is the owner of a house property. From the following particulars, compute the Income from his house property for the Assessment Year, 2016 – 17: 14
| Municipal valuation Fair rent Standard rent fixed by the court | 1,20,000 1,40,000 1,30,000 |
The house was let out w.e.f. 01.04.2015 for Rs. 10,000 per month which was vacated by the tenant on 30.09.2015. From 01.10.2015, it was again given to rent @ Rs. 12,000 per month.
Municipal tax paid Rs. 20,000 for the house.
Municipal tax due for the house 20% of municipal valuation
Repairs, electricity, etc., paid Rs. 7,500
Interest on money borrowed for construction of house property Rs. 30,000
Ans: Computation of Income from house property of Mr. Y for the assessment year 2016-17 (Previous Year 2015-16)
| 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 (10,000x6+12,000x6) 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 (20% of MRV) | 1,20,000 1,40,000 1,30,000 1,30,000 1,32,000 1,32,000 20,000 |
| 8. Net Annual value (6-7) Less: Deduction under section. 24 (a) Standard Deduction @ 30% (b) Interest on money borrowed | 1,12,000 33,600 30,000 |
| Income/ (Loss from house property) | 48,400 |
Or
(b) State the provisions relating to computation of ‘Income from House Property’ under different categories of house property as per the 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 are 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 from capital gains. 2+4+8=14
Ans: Capital Gain: Capital gain is the gain which arises from the transfer of a capital asset. Any profit or gain, which arises during a previous year, is chargeable under the head "capital gains" under Section 45. For a gain to be charged under the head "capital gain," it should arise due to a transfer of a capital asset. Such a profit or gain should not be exempt from tax under sections 54, 54B, 54D, 54EC, 54ED, 54FD, and 54G of Income Tax Act.
TYPE OF CAPITAL GAINS
a) Long term capital gains: When a capital asset is transferred by an assessee after having held it for 36 months/24months/12 months, as the case may be, the capital gains arising from this transfer is known as Long Term Capital Gains.
b) Short term capital gain: If the period of holding of capital asset before transfer is less than 36 months/24months/12 months, as the case may be, the capital gains arising from such transfer are known as Short Term Capital Gains.
Differences between short-term and long-term capital gain:
| Short term capital gains | Long term capital gains |
| STCG is included in the Gross total income of the assessee and taxed as per rate applicable to that assessee. | LTCG is in Gross total income and is taxed on the flat rate of 20% (10% in certain case or Nil in certain cases). |
| Deductions under sections 80C to 80U are available. | Deductions under sections 80C to 80U are not available. |
| Set-off of minimum exemption limit is available from all STCGs for resident as well as Non-resident. | Set-off of minimum exemption limit is available only for resident. |
| STCL can be set-off against STCG and LTCG. | LTCL can be set-off against only LTCG. |
| Cost of acquisition & Cost of improvement are not indexed in case of STCG. | Cost of acquisition & Cost of improvement are indexed in case of long-term capital gains. |
Mode of Computation of Capital Gain [Sec. 48]
| Computation of Short-term Capital Gains A. Full value of consideration Less:(a) Expenditure incurred in such a transfer ( b)Cost of acquisition (c) Cost of improvement B. Gross short-term capital gains (A – (a) – (b) – (c)) C. Less: Exemption, if available, u/s 54B/54D/54G/54GA D. Taxable Short-term capital gains (B – C) | Computation of Long-term Capital Gains A. Full value of consideration Less:(a) Expenditure incurred in such a transfer ( b)Indexed Cost of acquisition (c) Indexed Cost of improvement B. Gross short-term capital gains (A – (a) – (b) – (c)) C. Less: Exemption, if available, u/s 54B/54D/54G/54GA D. Taxable Long -term capital gains (B – C) |
Note: No deduction shall be allowed on account of securities transaction tax. (Sec. 48)
Basis of Charge of Capital Gains
Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA. The following are the essential conditions for taxing capital gains:
a) there must be a capital asset;
b) the capital asset must have been transferred;
c) there must be profits or gains on such transfer, which will be known as capital gain;
d) such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA.
Or
(b) State any five items of income included under the head ‘Income from Other Sources’. State any five items not deductible in computing taxable income under the head ‘Income for Other Sources’. State any four items deductible in computing taxable income under the head ‘Income from other sources’. 5+5+4=14
Ans: Incomes: Following incomes are the specific incomes which are chargeable to tax under the head “Income from other sources”
a) Dividend : if such income is not chargeable to income-tax under the head "Profits and gains of business of profession.
b) Winning from Lotteries , etc.: it includes any winning from lotteries, crossword puzzle, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.
c) Interest on securities : Interest on Debentures, Government securities / bonds is taxable under the head “ Income from other sources”
d) Rental income of machinery, plant or furniture: Rental income from machinery, plant, or furniture let on hire is taxable as income from other sources.
e) Rental income of letting out of plant, machinery or furniture along with letting out of building and the two meetings are not separable.
f) Sum received under Keyman Insurance Policy :
g) Gift : if any sum of money is received during a previous year without consideration by an individual or a HUF from any person or persons exceeds Rs. 50,000 the whole of such amount is taxable in the hands of the recipient as income from other sources.
Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the taxpayer. For instance, if book of accounts are kept on basis of mercantile system, income is taxable and expenditure is deductible on ‘‘due basis, whereas if books of account are kept on the basis of cash system, income is taxable on ‘‘receipt ’’basis and expenditure is deductible on ‘‘payment ’’basis.
Deductions Not allowed from income from other sources (Sec. 58)
The following are not allowed as deduction in computing income form other sources .
1. Personal expenses : Any personal expenses of the assessee are not deductible.
2. Interest : Any interest chargeable under the Act which is payable outside India on which tax has not been deducted at source is not deductible.
3. Salary without TDS : Any payment chargeable under the head ``Salaries’’ and payable outside India is not deductible if tax has not been paid or deducted there from.
4. Wealth Tax : Any sum paid on account of wealth tax is not deductible.
5. Amount specified by Section 40A : Any amount specified by section 40A under the head profit or gain from business or profession is not deductible while calculating income under the head ``Income from other sources’’.
6. Expenditure in respect of Royalty and Technical fees received by a foreign company : In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.
7. Expenditure in respect of winnings from Lotteries : No deduction in respect of any expenditure or allowance in connection with income under the head “Income from other sources’’ allowed in computing the income by way of any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature. However, in the case of income from the activity of owning and maintaining race horses, the expenses incurred on the maintenance of horse is allowed as deduction.
Deduction Allowed from Income from other sources (Sec. 57)
The following deductions are allowed from income from other sources:
A) Deductions for Interest on Securities, Dividends etc.:
(a) Collection charges [Section 57(i)] : Any reasonable sum paid by way of commission or remuneration to a banker, or any other person for the purpose of realizing the interest.
(b) Interest on Loan [Section 57(iii)] : Interest on money borrowed for investment in securities is allowed as deduction.
(c) Any other expenditure [Section 57(iii)] : Any other expenditure, not being an expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income is allowed as deduction.
B) Deductions permissible from letting out of machinery, plant or furniture and buildings [Section 57(ii) and (iii)]: The following deductions are allowable:
a. current repairs, to the premises
b. Insurance premium against risk of damage or destruction of the premises
c. Repairs and insurance of machinery, plant or furniture
d. Depreciation based upon lock of assets, in the same manner as allowed under section 32.
e. Any other expenditure not being a expenditure of a capital nature, laid out or expended wholly and exclusively for the purpose of making or earning such income is to be given as deduction
C) Deductions in respect of employee’s contribution towards staff welfare schemes [Section 57(ia)]:
Deduction in respect of any sum received by an employer as contribution from his employees towards any welfare fund of such employee is allowable only if such sum is credited by the employer to the employee’s account in the relevant fund before the due date.
D) Family pension payments received by the legal heirs of a deceased employee [Sec.57(iii)]
Family pension is taxable under the `Income from other sources’. On such family pension a standard deduction is to be allowed to the legal heir at 33 1/3% of such pension, or ` 15,000 whichever is less.
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