2017 (May)
COMMERCE (Speciality)
Course: 601 (Direct Tax - II)
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 or False: 1x4=4
1) The income earned from a smuggling business is taxable under the head of income from business and profession. True, Whether business is legal or illegal it is taxable
2) Stock-in-trade, raw materials, consumable stores held by the assessee for his business and profession is capital asset. False, excluded from capital asset
3) Short-term capital loss can be set off from either short-term capital gain or long-term capital gain. True
4) Income from card game, horse race, gambling is taxable under the head of income from other sources. True
(b) Fill in the blanks: 1x4=4
1) The maximum qualifying amount of deduction u/s 80C is 1,50,000.
2) Deduction under Section 80D for health insurance premium paid can be claimed by an individual and HUF.
3) Long-term capital gain = Net transfer price – Indexed cost of acquisition and Improvement.
4) For computing depreciation under the Income-tax Act, 1961 intangible assets are included under 25% block.
2. Write notes on the following: 4x4=16
a) Meaning of ‘business’ and ‘profession’ as defined u/s 28 of the Income-tax Act.
Ans: Business: “Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has defined the term as “ any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”. In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary.
Profession: Section 2(36) defines “Profession’’ to include vocation. Therefore, even if a person carries on any activity, not on the basis of ability and knowledge acquired out of a carries on any activity, not on the basis of ability and knowledge acquired out of a professed study, degree or diploma but on account in inborn talent, skill and attributes, any income derived there from shall also be considered as professional income. Example, income earned by rendering services by C.A., Lawyer, Doctor, Engineer, Architect, photographer etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.
b) Long-term and short-term capital assets.
Ans: a) Short-term capital asset [Section 2(42A)]: A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset. However, the following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
(a) A security and shares of companies listed in a recognised stock exchange in India.
(b) A unit of an equity oriented fund.
(c) A zero coupon bonds.
The following assets shall be treated as short term capital assets if such assets are held by the owner (before transfer) for not more than 24 months:
(a) Unlisted shares of companies.
(b) An immovable property being land and building or both.
b) Long-term capital asset [Section 2(29A)]: It means a capital asset which is not a short-term capital asset i.e. the assets which are held by the assessee for a period exceeding 36 months/24months/12 months, as the case may be, immediately preceding the date of transfer, are called “long term capital assets”.
c) Corporate assessee.
Ans: Any company registered under the Companies Act, 2013 is called corporate assessee. In case of corporate assessee, firstly we have to compute Gross Total Income (GTI) by combining four heads of income. i.e. Income from House Property, Profit and Gains from Business, Capital Gains and Income from Other Sources. From the above GTI various deductions u/s 80G, 80GGA, 80GGB, 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE, 80JJA, 80JJAA & 80LA are available to corporate assessee.
a) DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE INSTITUTIONS, ETC. [SEC. 80G]
Conditions for claiming deduction:
(i) The donation should be of a sum of money and not in kind.
(ii) The donation should be to specified funds/institutions.
(iii) Amount paid by any mode of payment other than cash and if paid in cash the amount should not exceed Rs10,000.
b) DEDUCTION IN RESPECT OF CERTAIN DONATIONS FOR SCIENTIFIC RESEARCH OR RURAL DEVELOPMENT [SEC. 80GGA]. In computing the Total Income of accompany whose Gross Total Income does not include income from “Profits and Gains of Business or Profession”, deduction shall be allowed of an amount paid by him to:
(a) an approved scientific research association or University or College or other institution to be used for scientific research, research in social science or statistical research.
(b) an approved association or institution to be used for carrying out any approved programme or rural development,
(c) an approved institution or association which has the object of training of persons for implementing programmes of rural development [Sec. 35CCA]
(d) public sector company or local authority or an approved association or institution for carrying out any eligible project or scheme u/s 35AC.
c) DEDUCTIONS BY COMPANIES TO POLITICAL PARTIES [SEC. 80GGB]
Condition: Amount should be contributed by a company any mode other than cash. Amount of Deduction:100% of sum contributed during a Previous Year to any political party, registered u/s 29A of Representation of the People Act, 1951.
d) DEDUCTIONS IN RESPECT OF PROFITS & GAINS FROM INDUSTRIAL UNDERTAKINGS OR ENTERPRISES ENGAGED IN INFRASTRUCTURE DEVELOPMENT [SEC. 80IA]
The deduction under this Section is applicable to all assessees whose Gross Total Income includes any profits and gains derived from any business of an industrial undertaking or an enterprise.
d) Procedure to set off of unabsorbed depreciation.
Ans: If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation.
The assessee should set off brought forward losses in the following manner:
a) First of all current year depreciation will be adjusted.
b) Then brought forward business losses will be set off (speculative or non-speculative)
c) Then unabsorbed depreciation will be set-off against business income.
d) Unabsorbed depreciation can be carried forward for indefinite number of years.
e) Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.
3. (a) What do you mean by the term ‘depreciation’? What are the conditions regarding the claim of deduction of depreciation? 4+10=14
Ans: DEPRECIATION ON ASSETS (Section 32): Depreciation means diminution in value of an asset on account of wear and tear and obsolescence. It is debited to profit and loss account and is an allowed expenditure. Depreciation is provided on all tangible and intangible assets except land, animals and goodwill on block of asset basis.
Block of assets: Block of assets means a group of assets falling within a class of assets and on which same rate of depreciation is charged. Class of assets comprised of:
(i) Tangible assets being building, machinery, plant and furniture.
(ii) Intangible assets being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature.
METHODS OF DEPRECIATION AND WHICH METHOD IS TO BE ADOPTED:
Depreciation under income tax is calculated by using the following methods:
a) Written down value method;
b) Straight line method.
Diminishing Balance Method/Written down value method: Under this method the depreciation is charged every year at a fixed rate on the book value of the block of assets. Book value of asset is calculated by deducting yearly depreciation from the cost of assets.
Straight line method: Under this method the depreciation is calculated at a fixed rate every year on the amount of actual cost of the asset. Block of assets concept is not applicable in this case. This method is applicable on certain assets of power generating units referred to in section 32(1)(i).
Depreciation under Income tax Act is calculated under written value method except in case of an undertaking engaged in generation and distribution of power which have the option to choose the straight line method of charging depreciation.
CONDITIONS FOR CLAIMING DEPRECIATION
a) Depreciation is allowed on all tangible or intangible assets except land, animals or goodwill.
b) Asset must be owned (wholly or partly) by the assessee and must be used for the purpose of business or profession.
c) If an asset is partly used for the purpose of business or profession and partly for personal purpose then, proportionate depreciation is to be provided.
d) No depreciation is charged on the hired asset but if any capital expenditure is incurred on hired building then depreciation can be claimed on such capital expenditure.
e) Asset must be used during the relevant previous year. It is not necessary that asset must be used throughout the year, even use during any part of the year would be sufficient to claim depreciation.
f) Depreciation is calculated on the last day of accounting year and only on those assets which are in use on that day.
g) Depreciation shall be allowed on WDV of Block of asset at a prescribed rate. Under section 2(11), “Block of assets” means a group of assets falling within a class of assets comprising
Ø Tangible assets, being buildings, machinery, plant or furniture.
Ø Intangible assets, being know-how, patents, copyrights, Trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
h) Total depreciation in the life of an asset cannot exceed its actual cost.
i) Depreciation on stand-by assets or assets which are not used during previous year is not allowed except in case generator.
j) No depreciation is allowed in the year in which the assets is sold or demolished or discarded or destroyed.
k) When a new asset acquired during previous year, full depreciation is allowed if assets used for 180 or more than 180 days and half year’s depreciation is allowed if installed and used for less than 180 days.
Or
(b) Dr. Arunabh is a medical practitioner. He gives you the following summary of cashbook for the year ending 31.03.2016:
Summary of Cash book
| | Rs. | | Rs. |
| To Balance To Consultation Fee To Visiting Fee To Gifts and Presents To Sales of Medicine To dividend from UTI To Life Insurance Maturity Dividend from an Indian Company | 10,000 60,000 45,000 8,000 42,000 6,000 1,00,000 6,000 | By Rent of Clinic By Purchase of Medicine By Staff Salaries By Surgical Equipment By Motor Car Expenses By Purchase of Motor car By Household Expenses By Closing Balance | 18,000 38,000 24,000 40,000 8,000 1,40,000 7,000 2,000 |
| | 2,77,000 | | 2,77,000 |
Information:
a) 50% of the motor car expenses are incurred in connection with his profession. Car was purchased in December 2015.
b) Household expenses include Rs. 6,800 paid as insurance premium.
c) Gifts and presents include gift worth Rs. 3,000 from relatives.
d) Closing stock for medicine Rs. 12,000 and stock on 01.04.2016 for the Assessment Year 2016-17. 14
Solution: Calculation of Professional Income of Dr. Arunabh for Assessment Year 2016-17
| Particulars | Amount |
| Professional receipts: Consultation fees Visiting fees Gifts & Presents (8,000 – 3,000) Sale of medicine | 60,000 45,000 5,000 42,000 |
| Total: Receipts | 1,52,000 |
| Less: Professional expenses: Rent of clinic Purchase of Medicine Staff Salaries Depreciation on surgical equipment (40,000 x 15%) Motor Car Expenses (8,000 x 50%) Depreciation on Motor Car (1,40,000 x 15% x 50%x 1/2) | 18,000 38,000 24,000 6,000 4,000 5,250 |
| Total Expenses | 95,250 |
| Total Professional Income | 56,750 |
Note:
a) All capital expenditure including balance of cash and bank are ignored while calculating professional income.
b) Income from other head such as house property income, dividends are not considered.
c) No personal expenses are allowed. (50% of motor car expenses are allowed. 50% of depreciation is allowed. Depreciation is further divided by 2 because it is used for less than 180 days)
d) Closing and opening stocks are ignored in cash system.
4. (a) Discuss the provisions regarding exemption of long-term capital gain under Section 54 of the Income-tax Act, 1961. 14
Ans: Capital Gains Exempted from tax
1. Capital Gains from Transfer of a Residential House: [Sec.54]: Any long-term capital gains arising on the transfer of a residential house (including self-occupied house), to an individual or HUF, will be exempt from tax if the assessee has within a period of one year before or two years after the date of such transfer purchased, or within a period of three years constructed, one residential house in India.
Amount of exemption: The amount of exemption available is equal to the amount so utilised or the amount of capital gain, whichever is less. If the whole or any part of the capital gain cannot be so utilised for acquisition of a residential house before filing the return, the same should be deposited in Capital Gains Account Scheme, 1988 in order to claim exemption, before the due date for furnishing the return.
For availing this exemption, the assessee must not transfer the new house, within a period of three years from the date of its purchase or construction, as the case may be. Otherwise the exemption allowed under this section shall be reduced from the cost of the new house, in computing the capital gains arising therefrom.
2. Capital Gains from Transfer of Agricultural Land : [Sec.54B]: Any capital gain (both short-term and long-term) arising to an individual or H.U.F. from transfer of any land, which was used by the assessee or his parent (in case of individual assessee) for agricultural purpose in the immediately preceding two years, shall be exempt from tax, if the assessee purchases within 2 years from the date of such transfer, any other land (to be used for agricultural purposes). Other-wise, the amount can be deposited under Capital Gains Account Scheme, 1988 before the due date for furnishing the return.
Amount of exemption: The amount of exemption allowable is equal to the amount of capital gain or the cost of new agricultural land purchased (including the amount deposited in Capital Gains, Account Scheme), whichever is less. The new land is not to be transferred for a period of three years from the date of its purchase, otherwise the amount of exemption allowed earlier shall be withdrawn, by reducing this amount from the case of the new land, in computing the capital gains arising from its transfer.
3. Capital Gains from Compulsory Acquisition of Industrial Undertaking: [Sec. 54D]: Any capital gain arising from the transfer by way of compulsory acquisition of land or building of an industrial undertaking, shall be exempt, if the assessee purchases/ constructs within three years from the date of compulsory acquisition, any land or building forming part of industrial undertaking. Otherwise, the amount can be deposited under the ‘Capital Gains Accounts Scheme, 1988’ before the due date for furnishing the return.
Amount of exemption : The amount of capital gain exempt shall be equal to the capital gain or the cost of new land or building purchased or constructed (including the amount deposited under the CGA scheme), whichever is less. The new land or building purchased or constructed, as the case may be, is not to be transferred for a period of three years from its purchase or construction, otherwise the exemption allowed shall be withdrawn, by reducing it from the cost of the new land or building, in computing the capital gains arising from their transfer.
4. Capital Gains invested in Certain Bonds: [Sec.54EC]: Any long-term capital gain arising from transfer [of land or building or both] that takes place on or after 1.4.2000, shall be exempt if the whole of the amount of such capital gain is invested in long-term specified assets i.e. bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd., or any other notified bonds within a period of six months from the date of transfer. The amount of investment in long-tem specified assets by an assessee during a financial year shall not exceed Rs.50 lakhs.
5. Capital Gains invested in Units of a Notified Fund for Financing Start-Ups: [Sec.54EE]: Any long-term capital gain shall be exempt if the whole of the amount of such capital gain is invested, within a period of six months from the date of transfer, in long-term specified assets i.e. units issued up to 31.3.2019 by a notified fund set up for financing start ups. The amount of investment in long-term specified assets by an assessee during a financial year shall not exceed Rs.50 lakhs.
6. Capital Gains from an Asset other than Residential House: [Sec. 54F]: Any long-term capital gain arising to an individual or HUF, from the transfer of any asset, other than a residential house, shall be exempt if the whole of the net consideration is utilised within a period of one year before or two years after the date of transferor for purchase, or within 3 years in construction, of one residential house in India.
Amount of exemption : If, however, only a part of net consideration is so utilised, the amount of exemption shall be equal to: (Capital Gains × New Residential House)/ Amount of Net Consideration
Further, if the amount cannot be so utilised before filing the return, then in order to avail of the exemption, it may be deposited under the Capital Gains Accounts Scheme, 1988 before the due date for filing the return u/s 139.
7. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to Rural Area [Sec.54G] : Any capital gains arising from transfer of machinery, plant, land or building or any rights therein, in the course of shifting of an industrial undertaking in urban area, shall be exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer, purchased new plant or machinery, acquired or constructed land or building, shifted the original asset and transferred the establishment, to a rural area.
Amount of exemption : The amount of exemption shall be equal to the amount so utilised or the amount of capital gain, whichever is less.
8. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to SEZ: [Sec.54GA]: Any capital gains arising from transfer of machinery, plant, land or building or any rights therein, in the course of shifting of an industrial undertaking in an urban area, to any Special Economic Zone, shall be exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer, purchased new plant or machinery, acquired or constructed land or building, shifted the original asset and transferred the establishment, to the SEZ, or incurred expenses on purposes specified in a scheme framed by the Government in this regard.
Amount exemption : The amount exempt shall be equal to the amount so utilised or the amount of capital gain, whichever is less. If the capital gain cannot be so utilised, then it should be deposited under Capital Gains Accounts Scheme, to avail the benefit, before the due date of filing the return.
9. Capital Gain from Transfer of a Residential Property invested in a manufacturing small or medium enterprise: [Sec. 54GB]: Any long-term capital gain arising to an individual or HUF, from the transfer of a residential property (house or plot of land) effected upto 31.3.2017 (up to 31.3.2019 in case investment is made in an eligible start-up), shall be exempt if the net consideration is invested in the equity of a new start-up SME company or in an eligible start-up in the manufacturing sector or in an eligible business, which is in turn utilised by such company for the purchase of new plant and machinery.
10. Capital Gain on Compulsory Acquisition of Agricultural Land: [Sec. 10(37)]: Any capital gain arising to an individual/HUF on compulsory acquisition of an agricultural land situate in urban areas, where the compensation/consideration is received by the assessee on or after 1.4.2004, provided, the land was being used for agricultural purposes by the HUF/individual or his parent(s), during the period of two years immediately before acquisition. The exemption would be allowed even if agricultural land was not cultivated by the assessee himself but by hired labourer or through his family member.
Or
(b) Mr. Anuraag owns two residential houses one at Jorhat and other at Dibrugarh. He submits the following information about sale of assets during previous year, 2015-16 (CII-1081)
| Assets | Residential House | Plot | Jewelry | ||
| Date of Acquisition Cost of Acquisition FMV as on 01.04.81 Date of Sale Sale Price | 01.03.79 Rs. 1,40,000 Rs. 2,00,000 15.06.15 Rs. 24,00,000 | 01.11.90 Rs. 1,60,000 - 16.06.15 Rs. 11,20,000 | 03.04.2000 Rs. 80,000 - 17.06.15 Rs. 2,80,000 | ||
| | | | | ||
| Investments | Date of Acquisition | Amount Invested (Rs.) | |||
| Residential House Bonds of National Highway Authority of India | 19.12.15 12.12.15 | 13,00,000 1,00,000 | |||
| | | | |||
Cost Inflationary Index for
1990-91 – 182
2000-01 – 406
2001-02- - 426
2015-16 – 1081
You are required to compute taxable capital gain of Mr. Anuraag for the Assessment year, 2016-17. 14
Solution: Computation of Capital Gains for the assessment year 2016-17
| Particulars | House | Plot | Jewellery |
| Sale Consideration Less: Index Cost of Acquisition | 24,00,000 21,62,000 (2,00,000*1081/100) | 11,20,000 9,50,330 (1,60,000*1081/182) | 2,80,000 2,13,005 (80,000*1081/406) |
| Long term Capital Gain Exemption of U/S 54 (out of 13,00,000 paid for acquisition of residential house, 2,38,000 is utilized for closing exemption U/S 54) Exemption U/S 54 EC Bond of Nation Highway Authority of India | 2,38,000 2,38,000 - | 1,69,670 33,005 | 66,995 66,995 |
| Exemption U/S 54 F | Nil - | 1,36,665 1,36,665 | Nil |
| Tong Term Capital Gain | Nil | Nil | Nil |
Note: Exemption u/s 54F has been allowed out of capital gain of plot as there is no capital gain left from any other asset. If there had been capital gain from other assets as well the exemption u/s 54F shall be calculated in such a manner, which is most beneficial to the assessee.
Purchases Value of House = 13,00,000
Exemption claimed u/s 54 = 2,38,000
Exemption u/s 54 F = [(10,62 ,000/11,20,000)*1,69,670] = 1,60,884 (Upto available income)
5. (a) Discuss in detail the procedures as per the Income-tax Act regarding set-off of losses within the head and outside the head. How are brought forward losses set off? 7+7=14
Ans: Set-Off of Losses: After computing the income under five heads one by one and after taking the clubbing of income under Sec.60 to 64, we have to aggregate all these incomes to get Gross Total Income. But before arriving at the gross total income, we have to adjust losses either in the same head or against other heads under Sec.70 to 80. First we have to set off the losses within the same head and if it cannot be adjusted, against income of other heads. The adjustment of losses from one head against the income, profits or gains of any other head of income during the same tax year is called set-off of losses.
A) Set off of loss under the same head of income.(Sec.70: Inter-source set off): The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called inter-source adjustment, e.g. Adjustment of loss from business A against profit from business B.
Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many but yet they could be classified under the same head. For instance, an individual may have a dual employment, yet the income would be classified under the head ‘Salaries’. However, given the mechanism of computing taxable salary income, it would be safe to say that an individual cannot incur losses under this head of income. Some of the inter-source adjustable incomes are given below:
a. Speculative Business Losses: An Assessee can set off the Losses incurred in speculation Business only against the profits of any other speculation Business. It is not permissible to set off speculative Loss against any other Business or Professional Income. An Assessee has an Opportunity to set off any other Business Loss with the profits of speculation Business.
b. Long Term Capital Losses: A long term Capital Loss can be set off only against the profits of any other long term capital gains, but short term capital loss can be set off against both short term and long term capital gains.
c. Loss from owning and maintaining race horses: This loss can be set off only against the income from owning and maintaining race horses.
d. Loss of specified Business under section 35AD: Specified Business loss can be set off only against profit from such specified business, but loss from other business can be set off against the profit of the specified business.
B) Set off Loss from one head against Income from another Head (Sec. 71: Inter head set off): After making inter-source adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.
A person may have various sources of income computed under different heads of income. Loss under one head of income is generally allowed to be set off against income under another head. Some of the inter-head adjustable incomes are given below:
a. House Property Losses: House Property Losses can be set off against profits from other heads. It can be set off against salary income, Business income, Income from capital gain, and income from other sources except casual income.
b. Non Speculative Business Losses: Non speculative Business Losses can be set off under any other head except income from salary. Means it can be set off from income from house property, income from capital gain and Income from other sources except casual income.
In the following cases losses cannot be set off under inter-head adjustments. Speculative Business Losses. Specified Business Losses. Capital Gain Losses.(Both short term capital loss and long term capital loss). Losses from owning and maintaining race Horses.
C) Carry forward of losses: Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un- adjustable losses to the next year is known as carry-forward of losses. Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. Carry forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the status of carry forward of loss of previous years.
Rules regarding carry forward of losses of various heads are given below
1. Loss under head House Property: The loss under the head house property, let out or self occupied, can be carried forward to the subsequent years subject to a limit of 8 assessment years. The loss is to be set off against the income from house property only. Loss under the head `house property’ may be et off against income under any other head upto a maximum of Rs.2,00,000 [Sec.71(3A)].
2. Business Loss: It can be carried forward for subsequent years subject to a limit of 8 assessment years and it is to be set off against profit from under head business only. In set off and carry forward of business losses the following important points are to be considered:
(a) The person who has incurred the loss, alone has the right to carry it forward. The successor except succession by inheritance (business passing from father to son) cannot claim to carry forward the loss incurred by his predecessor in business. However, where a company merges with another under the scheme of amalgamation, the past loss of the amalgamating company can be carried forward by the new company.
(b) The unabsorbed business loss of an industrial undertaking which was discontinued due to natural calamities shall be carried forward and set off against the profit of the reconstructed, re-established business upto a period of 8 assessment years as reckoned from the previous year in which the business is re-started.
(c) The business loss could be carried forward for 8 assessment years to be set off from income under the head ``profits and gains of business or profession.’’
(d) Loss from any asset held as stock-in-trade can be set off from any income from such asset even if it is taxable under the head other sources.’
(e) To carry forward business losses, continuity of same business is not necessary.
3. Speculation Loss: The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year. But if speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to claim as a set off in the subsequent year, but only against the income of any speculation business. Such loss is also allowed to be carried forward for 4 assessment years immediately succeeding the assessment year for which the loss was first computed.
It may be observed that it is not necessary that the same speculation business must continue n the assessment year in which the loss is set off. It can be carried forward for succeeding 4 assessment years. But the loss is to be set off against the speculation profit only. A company whose principal business is that of trading in shares has been excluded from the purview of the explanation to Sec.73. Consequently, such activity shall not be regarded as speculation activity and any los arising there from shall be treated as normal business loss and not as speculation loss.
4. Unabsorbed Depreciation [Sec. 32(2)]: If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation.
The assessee should set off brought forward losses in the following manner:
a) First of all current year depreciation will be adjusted.
b) Then brought forward business losses will be set off (speculative or non-speculative)
c) Then unabsorbed depreciation will be set-off against business income.
d) Unabsorbed depreciation can be carried forward for indefinite number of years.
e) Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.
5. Loss under the head “Capital Gain’: Where in respect of any assessment year, the net result of the computation under the head `Capital gains’ is a loss to the assessee, whether short-term or long-term such short-term and long-term capital losses shall be separately carried forward. Further, such carried forward short-term capital loss can be set off in the subsequent assessment year from income under the head capital gains whether short-term or long-term. But brought forward long-term capital loss shall be allowed to be set off only from long-term capital gain. Such capital losses can also be carried forward to a maximum of 8 assessment years, immediately succeeding the assessment year for which the loss was first computed.
6. Expenses incurred on maintenance of race horses: Loss from Owning and maintaining race horses: (Section 74A) An Assessee can carry forward these losses up to 4 years immediately succeeding the Assessment year in which the loss has incurred. It can be set off only against that income and an Assessee must file the Income Tax Return within due date prescribed under section 139(1).
Or
(b) Mr. A submits the following information of his incomes and losses for the year ending 31.3.2016.
| Particulars | Rs. |
| 1. Salary income (computed) 2. Income from house property: House A (income) House B (loss) House C (self-occupied) (loss) 3. Income from Business: Cloth business (profit) Hardware business (loss) Speculation profit Speculation loss 4. Capital gains: Short-term gain Short-term loss Long-term gain 5. Other sources: Income from betting Loss from card games Income from card games Interest on securities | 24,000 10,000 40,000 28,000 10,000 12,000 12,000 17,000 8,000 24,000 8,000 12,000 6,000 9,000 8,000 |
Compute the Gross Total Income of Mr. A after making inside and outside head adjustment of losses. You are also to show how much loss is to be carried forwarded to set off against future income. 14
Solution: Computation of Gross total income of Mr. R for the assessment year (2012-13)
| Particulars | Amount | Amount |
| 1. Income From Salary Less: Loss under the head house property (set-off) | 24,000 24,000 | Nil |
| | | |
| 2. Income From House Property House A House B House C | 10,000 (40,000) (28,000) | |
| | (58,000) | |
| Less: Set off from salary Less: Set off from interest on securities | 24,000 8,000 | |
| 3. Income from Business (Non-Speculative Business) Cloth Business Hardware Business | (26,000) 10,000 (12,000) | Nil |
| Business Loss to be carried forward | (2,000) | Nil |
| Speculative Profit Less: Speculative Loss | 12,000 (17,000) | |
| C/F of Speculative business loss | (5,000) | Nil |
| 4. Capital Gain STCG Less: STCL | 8,000 (24,000) | |
| STCL Long term capital gain | (16,000) 8,000 | |
| STCL (Carried forward) | (8,000) | Nil |
| 5. Income from other sources Interest on securities Less: Loss from HP set off Casual Income: Income from betting Income from card games | 8,000 8,000 12,000 9,000 | Nil 21,000 |
| Gross Total Income | | 21,000 |
Note: Any loss of casual nature such as loss from horse race, card games, crossword puzzles, lotteries cannot be setoff and carried forward from any income.
6. (a) (i) Discuss any seven approved savings schemes which are eligible for deduction under Section 80C of the Income-tax Act, 1961. 7
Ans: 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.
(ii) From the following particulars of the Mr. X, compute the amount of deduction u/s 80C for the previous year, 2015-16 7
| Particulars | Rs. |
| 1. Life Insurance Premium paid during the previous year, 2015-16 On his own life On the life of his wife On the life of his father All life policies were taken in 2010 2. Contribution towards RPF 3. Deposit in public provident fund 4. Group insurance premium 5. Invested in NSC (VIII issue) out of his Agricultural Income 6. Repayment of loan taken from SBI for construction of his residential house Rs. 4,000 p.m. which includes Rs. 1,000 p.m. interest. 7. Accrued Interest on NSC (VIII issue) | 30,000 10,000 10,000 24,000 45,000 3,000 10,000 4,000 |
Ans: Computation of deduction allowed u/s 80C
| Particulars | Rs. |
| 1. Life Insurance Premium paid during the previous year, 2015-16 On his own life On the life of his wife On the life of his father (Not allowed) 2. Contribution towards RPF (Allowed) 3. Deposit in public provident fund (Allowed) 4. Group insurance premium (Allowed) 5. Invested in NSC (VIII issue) out of his Agricultural Income (Allowed) 6. Repayment of loan taken from SBI for construction of his residential house Rs. 4,000 p.m. which includes Rs. 1,000 p.m. interest. (Only loan repayment is allowed but interest is not allowed as deduction) 7. Accrued Interest on NSC (VIII issue) (Not allowed) | 30,000 10,000 24,000 45,000 3,000 10,000 48,000 |
| Qualifying amount Or Whichever is less is allowed as deduction | 1,70,000 1,50,000 1,50,000 |
Or
(b) Explain the methods commonly used by tax payers to minimize tax liability. 14
Ans: Tax Planning, Tax Avoidance, Tax evasion, Tax Mitigation and Tax Management
The methods adopted to reduce the tax liability can be broadly put into four categories:”Tax Planning”, ”Tax Avoidance”; "Tax Evasion", "Tax Mitigation” and “Tax Management”. The difference between these three methods sometimes become blurred owing to the perception of the tax authorities and / or tax payer.
Tax Planning: In an organized society, tax is unavoidable because it is the price paid for administrative and political stability by the public to the Government. It is the duty of each citizen to pay due taxes in time and not to resort to any device to evade the payment of taxes. An effective tax strategy is vital for successful financial planning since payment of taxes reduces the disposable income of the tax payers. To solve the problem of tax burden, the concept of tax planning has been introduced in the Income Tax Act. Tax planning may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provisions, full advantage is taken of all tax exemptions, rebates, allowances and other reliefs or benefits permitted under the Act. This will reduce the burden of taxation on the assessee as far as possible. Tax planning may be regarded as a method of intelligent application of expert knowledge of planning one’s economic affairs with a view to securing the consciously provided tax benefits on the basis of national priorities in keeping with the legislative and judicial opinion. But it does not imply taking undue advantage of loopholes in tax laws or evading tax liability. Hence tax planning is defined as the methods used by a tax payer to reduce his burden of taxes in a legal manner. Tax planning may be legitimate provided it is within the frame work of tax laws. Hence tax evasion and tax avoidance must be understood as distinct from tax planning.
Tax Avoidance: Tax Avoidance refers to the legal means so as to avoid or reduce tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law. Thus, in this case tax payer tries to reduce his tax liability but here the arrangement will be legal, but may not be as per intent of the law. Thus, in this case, tax payer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or otherwise. For example: misinterpreting the provisions of the IT Act.
Tax Evasion: It refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant laws. Under direct tax laws provisions have been made for imposition of heavy penalty and institution of prosecution proceeding against tax evaders. The tax evaders reduce his taxable income by one or more of the following steps:
a. Non-disclosure of capital gains on sale of asset.
b. Non-disclosure of income from ‘Binami transactions’.
c. Willfully unrecording or partial recording of incomes. E.g.: sales, rent, fees, etc.
d. Charging personal expenses as business expenses. E.g.: car expenses, telephone expenses, medical expenses incurred for self or family recorded in business books.
e. Submission of bogus receipts for charitable donations under section 80 G.
Although tax Evasion may lead to lower cash outflow on account of taxes yet such saving of money may not be real and absolute. In fact, tax evaded remains a liability of the evader. If trapped, he will have to pay the tax evaded. Moreover, the additional tax outflow on account of penalties and unnecessary mental tension and due to fear of action and prosecution may prove heavy on tax evader.
Tax evasion is considered as a white collar crime and is spreading like anything. It is the most serious and perpetual problem being faced not only by the India but by all most all the countries of the world. Tax evasion leads to generation of ‘black money’ which, with its all ills, is a matter of grave concern since it has adverse long lasting ill economic effects on the Society. Therefore, in order curb the practice of tax evasion, the Government all over the world has framed stringent provisions.
Tax Mitigation: "Tax Mitigation" is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails. A good example of tax mitigation is the setting up of a business undertaking by a tax payer in a specified area such as Special Economic Zone (SEZ).
Tax Management
Tax planning is a wider term and it includes tax management also. Tax management is an important aspect of tax planning. Planning which leads to filing of various returns in time, compliance of the applicable provisions of law and avoiding of levy of interest and penalties can be termed as efficient tax management. It is an exercise by which defaults are avoided and legal compliance is secured. The filing of returns with all proper documentary evidence for the various claims, rebates, reliefs, deductions and computation of income and tax liability would come under the purview of tax management. The assessee is exposed to certain unpleasant consequences if obligations cast under the tax laws are not duly discharged. Such consequences take shape of levy of interest, penalty, prosecutions, forfeiture of certain rights etc. Therefore any effort in tax planning is incomplete unless proper discharge of responsibilities is made. Tax management includes:
1) Compiling and preserving data and supporting documents evidencing transactions, claims etc.
2) Making timely payment of taxes.
3) TDS and TCS compliance.
4) Following procedural requirements.
5) Timely filing of returns.
6) Responding to notices received from the authorities.
7) Preserving record for the prescribed number of years.
8) Mentioning PAN, TAN etc. at appropriate places.
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