2015 (May)
Commerce (Speciality)
Course: 601
(Direct Tax: II)
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. Capital Assets means property of any kind held by an assessee whether or not connected with his business or profession. True
b. Provision for bad and doubtful debts is an allowable deduction in computing business income. False
c. Net wealth comprises of aggregate of all assets including deemed assets but excluding exempted assets.
d. As per Section 73(1) of the Income tax Act, the loss arising out of speculation business can be set off against profit from non-speculative business. False, Only speculative gain within 4 years
(b) Mention four exceptions to the rule given u/s 70 that a loss can be set off against any other income under the same head. 4
Ans: 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.
2. Write short notes on any four of the following: 4x4=16
(a) 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.
(b) Expressly admissible deduction in computing business income
Ans: EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION: All the expenses relating to business and profession are allowed against income. Following are few examples of expenditures which are allowed against income: (ALLOWED EXPENSES)
1. Rent of Business Premises (Sec. 30): Rent of the business premises is allowed as deduction. In case of own premises rent cannot be debited. In property is partly for business and partly for personal purpose, then rent relating to business is allowed as deduction. Rent paid to a partner of the firm for using premises is also allowed as deduction. (Sec. 30)
2. Expenses relating to machinery, plant and furniture [Sec.31] : According to Sec.31 the following expenses are deductible: (a) Current repairs (b) Insurance premium. However, any repair expenditure of capital nature shall not be allowed as deduction under this section.
3. Depreciation (Sec. 32): Depreciation on buildings, machinery, plant or furniture, being tangible assets; know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession are allowed as deduction as per rate specified in income tax act.
4. Development rebate (Sec. 33): In respect of a new ship or new machinery or plant which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction as development rebate to the extent of 40%, 35% or 25% of the actual cost as the case may be.
5. Tea Development Account, Coffee Development Account and Rubber Development Account (Sec. 33AB): This deduction is allowed only to an assessee who is engaged in the business of Tea, coffee and rubber production. The amount of deduction will be 40% of PGBP or amount deposited in site restoration accounts whichever is less.
6. Site restoration fund (Sec. 33ABA): This deduction is allowed only to an assessee who is engaged in the business of extraction and production of petroleum, natural gas or both and entered into an agreement with central government in this respect. The amount of deduction will be 20% of PGBP or amount deposited in site restoration accounts whichever is less.
7. Conditions for Allowance of depreciation (Sec. 34): This section deals with the conditions under which depreciation is allowed under the Sec. 32 and Sec. 33 of the Income tax Act, 1961.
8. Expenditure on Scientific research (Sec. 35): Expenditure on scientific research is divided into two categories:
a) Expenditure on research carried on by assessee himself.
1. Revenue Expenditure: Any revenue expenditure incurred by an assessee in a research which is helpful in his business is fully allowed as deduction.
2. Capital Expenditure: Any expenditure of capital nature on scientific research carried on the assessee himself and related which assessee’s business or profession shall be allowed as deduction in full.
3. Expenditure on in-house research and development: Weighted deduction @ 150% of the expenditure incurred on in-house research by a company engaged in the business of bio-technology or in any business of manufacture or production of any article is allowed.
b) Expenditure on research carried on by outsiders whether or not research is related to assessee’s business:
1. Contribution to an approve research association, university, college or other institutions:
A) If Amount is given to an approved research association, university, college or other institutions for research which is unrelated to assessee’s business, a weighted deduction @ 150% of actual expenditure shall be allowed. W.e.f A/y 20121 – 22, no weighted deduction shall be allowed.
B) If amount is given to an approved research association, university, college or other institutions for research in the field of social science or statistical research which is unrelated to assessee’s business, a deduction upto actual expenditure shall be allowed.
2. Contribution to National Laboratory: A higher weighted deduction @ 150% of actual amount shall be allowed if amount is given to a national laboratory or a university or an Indian institute of technology for undertaking scientific research programme approved by the prescribed authority.
3. Contribution to a company for scientific research: In case any assessee provides money to an Indian company engaged in the scientific research and approved for this purpose, a weighted deduction @ 100% of the amount paid shall be allowed.
(c) Deemed income
Ans: The following are the deemed incomes.
1. Cash Credits [Section 68] : Where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of Assessing Officer (A.O), satisfactory, the sum so credited may be charged to income-tax as the income of assessee of that previous year. Such cash credits may be assessed either as business profits or an income form other sources. In the case of business community it is normally considered as business profit.
2. Unexplained Investments [Section 69] : Where, in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of accounts and the assessee fails to furnish any satisfactory explanation as and from where this money came or if the Assessing Officer is not satisfied with the explanation the value of such unexplained investment may be deemed to be the income of the assessee of such financial year.
3. Unexplained Money etc. [Section 69A] : Where, in any financial year the assessee is found to be the owner of any money, bullion and jewellery or other valuable articles the assessee either does not furnish any explanation as to how he acquired these things or his explanation, if furnished is not up to the satisfaction of the Assessing Officer, the money, bullion, jewellery or other valuable articles may be deemed to be the income of the assessee for such financial year.
4. Investments, Jewellery etc. not fully disclosed in Books of Accounts [Section 69B] : In case the assessee acquired certain investments, jewellery, valuable article etc. and the actual money spent on these items is more than what is shown or recorded in his books of accounts and the assessee either does not furnish any explanation for this or with his explanation the A.O. is not satisfied, the excess amount under section 69B may be deemed to the income of the assessee for such financial year.
5. Unexplained Expenditure [Section 69C] : According to Section 69C, where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof or the explanation offered by him is not satisfactory according to the opinion of A.O., the amount covered by such expenditure or part thereof, as the case may be, is deemed to be the income of the assessee for such financial year. The amount of unexplained expenditure which is deemed as income of the assessee, shall not be allowed to be deducted under any head of income
(d) 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.
(e) Transactions not regarded as transfer
Ans: Transactions not regarded as transfer
In the following transactions although there is a transfer, but these are not considered to be transfer for purposes of capital gains:
(i) where the assets of a company are distributed to its shareholders on liquidation of a company
(ii) any distribution of capital assets on the total or partial partition of HUF
(iii) any transfer of a capital asset under a gift or will or an irrevocable trust
(iv) any transfer of a capital asset
a) by a company to its 100% subsidiary company or
b) by a wholly owned subsidiary to its holding company
c) provided the transferee company is an Indian company
(v) any transfer in a scheme of amalgamation if the amalgamated company is an Indian company
(vi) any transfer in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company to the amalgamated foreign company
(vii) any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company
(viii) any transfer in a business reorganisation, of a capital asset by the predecessor co-operative bank to the successor co-operative bank
(ix) any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking
(x) any transfer by a shareholder, in a scheme of amalgamation, of shares held by him in the amalgamating company if:
(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and
(b) the amalgamated company is an Indian company
(xi) any transfer of bonds or GDR of a public sector company purchased in foreign currency, made outside India by a non-resident to another non-resident
(xii) any transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, of a company into shares or debentures of that company or any transfer by way of conversion of foreign currency exchangeable bonds into shares or debentures of any company.
(xiii) any transfer of a capital asset being land of a sick industrial company made under a scheme prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 where such sick industrial company is being managed by its workers' co-operative.
(xiv) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, provided the following conditions are satisfied:
(a) all the assets and liabilities of the firm or AOP/BOI become the assets and liabilities of the company;
(b) all the partners of the firm become the shareholders of the company in the same proportion of their capital ratio
(c) the partners of the firm receive only shares in the company as consideration
(d) partners have at least 50% shareholding/ voting power in the company at least for a period of 5 years from the date of the succession
(xv) transfer of capital assets from a sole proprietary concern to the company in case of conversion provided conditions stated in above point are satisfied.
It may be observed that the above transactions are not treated as transfer for purposes of capital gains.
3. (a) What do you mean by depreciation? Discuss the conditions to claim deduction for depreciation in computing income from business and profession. 3+8=11
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:
1. Written down value method;
2. 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
(i) Tangible assets, being buildings, machinery, plant or furniture.
(ii) 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.
ACTUAL COST SECTION 43(1):
Actual cost means the actual cost of the assets to the assessee as reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
Items to be included in cost of fixed assets.
(1) Cost of fixed asset.
(2) Interest on money borrowed for purchase of the assets till the asset is put to use.
(3) Carriage inward, loading or unloading charges.
(4) Installation charges.
(5) Cost of repair and modification prior to the use of asset.
(6) Commission paid to banker for giving guarantee to supplier of the asset.
Items not to be included in cost of fixed assets:
(i) Excise duty and additional duty leviable thereon in respect of which credit is claimed and allowed.
(ii) Amount of subsidy, grant or reimbursement by the Central Govt. of State Govt. or any authority established under any law or any other person towards a portion of cost of asset.
(iii) Expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs.10,000, such expenditure shall be ignored for the purposes of determination of actual cost.
Or
(b) Mr. X, a resident, is a practicing chartered accountant. He also runs a private accountancy coaching institute. He keeps his accounts on cash basis and his summarised cash account for the year ended on 31st March, 2015 is as under:
| Particulars | Amounts | Particulars | Amount |
| To Balance B/d To Income from accounting work To Audit fee To Institute fee To Examination fee To Withdrawal from PPF To Interest on Investment To Agricultural Income To Rent from let out house property | 13,000 1,25,400 2,14,700 6,100 4,600 50,000 18,000 10,000 48,000 | By Office expenses By Office telephone of bills By Municipal tax of house property By Institute expenses By Miscellaneous expenses By Membership fee and certificate fee By Life insurance premium By Income Tax By Motorcar purchased By Motorcar expenses By Insurance of house property By Balance c/d | 24,000 7,000 4,000 1,800 43,500 1,200 17,000 22,500 1,80,000 9,600 840 1,78,360 |
| 4,89,800 | 4,89,800 |
Additional Information:
1) 1/3rd of motorcar expenses are in respect of his professional practice.
2) Miscellaneous expenses includes Rs. 6000 paid as stipend to trainees and balance is his personal expenses.
3) He purchased a computer on 30th November, 2014 for Rs. 54,000 and took a loan of Rs. 50,000 @ 15% P.a.
4) Motorcar comes under 15% block while computer comes under 60% block.
Compute professional income of Mr. X for the previous year, 2014-15. 11
Solution: Calculation of Professional Income
| Particulars | Amount |
| Professional receipts: Income from account works Audit fee Institute fee Examination fee | 1,25,400 2,14,700 6,100 4,600 |
| | 3,50,800 |
| Less: Professional expenses: Office expenses Office Telephone bill Institute expenses Miscellaneous expenses (stipend to Trainees) Membership fee Depreciation Motor Car (1,80,000 x 1/3 x 15%) Motor Car Expenses (9,600 x 1/3) Depreciation Computer (54,000 x 1/2 x 60%) | 24,000 7,000 1,800 6,000 1,200 9,000 3,200 16,200 |
| | 68,400 |
| Professional Income | 2,82,400 |
Note: With effect from 1-4-2017, rate of depreciation on computers is reduced to 40%.
4. (a) What do you mean by capital assets? Explain the mode of computation of capital gains. 4+7=11
Ans: Meaning of Capital Assets under Sec. 2(14): 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
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.
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) Following are the particulars of assets head by Vandana during the previous year, 2014 – 15:
| Assets | Year of acquisition | Cost of Acquisition | CII | FMV as on 1-4-81 | Selling expenses | Selling price |
| Shop Jewellery Shares Shares Plant(Depreciable) Residential house | 1980-81 1980-81 1990-91 1982-83 1982-83 1984-85 | 20,000 10,000 6,000 20,000 4,00,000(WDV) 60,000 | 100 100 182 109 109 125 | 40,000 50,000 ……….. ……….. ……….. ………… | 10,000 ………. 1,000 2,000 ……… ……… | 5,80,000 5,20,000 30,000 2,21,560 7,00,000 5,32,560 |
Calculate the taxable amount of capital gain if CII for 2014 – 15 is 1024. Security transaction tax on sale of shares has been paid. 11
5. (a) What is net wealth? How it is computed? 4+7=11
Or
(b) Discuss, in detail, the provisions of the Wealth Tax Act regarding the deemed assets. 11
6. (a) What do you mean by setoff of losses? When can a loss be carried forward to set off against future income? Discuss briefly the provisions of the Income-Tax Act regarding the carry forward and setoff of losses from capital gain. 3+4+5=12
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.
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.
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.
Set off of Long Term and short 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.
Carry forward of Losses 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.
Or
(b) Determine the total income of Mr. A from the particulars given below for the previous year, 2013-14 and present year 2014-15: 12
| Particulars | Previous year 2013 – 14 | Previous year 2014 – 15 |
| Computed Property Income Computed Salary Income Business profit before depreciation Depreciation for the year Short-term Capital gain Income from other sources | 20,000 1,90,000 40,000 1,20,000 10,000 20,000 | 20,000 2,20,000 1,20,000 1,40,000 Nil 40,000 |
6. (b) Calculation of GTI for the assessment year 2014 -15
| Particulars | Amount | Amount | Amount |
| I. Salary Income II. Income from house property (Computed) III. Business income Less: Depreciation for current year Unabsorbed depreciation (Set off against other head except salary income) IV. STCG V. Income from other sources | 40,000 1,20,000 80,000 | 20,000 10,000 20,000 | 1,90,000 |
| Set of current year’s dep. out of house property income, STCG and Income from other source except salary income to the extent of available income | | 50,000 80,000 | Nil |
| Unabsorbed dep. To be carried forward indefinitely | | (30,000) | |
| Total income | | | 1,90,000 |
Calculation of GTI for the assessment year 2015 -16
| Particulars | Amount | Amount | Amount |
| I. Salary Income II. Income from house property (Computed) III. Business income Less: Dep. for current year and brought forward from P/Y (1,40,000+30,000) Unabsorbed depreciation (Set off against other head except salary income) IV. STCG V. Income from other sources | 1,20,000 1,70,000 50,000 | 20,000 Nil 40,000 | 2,20,000 |
| Set of current year’s dep. out of house property income, STCG and Income from other source except salary income to the extent of available income | | 60,000 50,000 | 10,000 |
| Total income | | | 2,30,000 |
Note: unabsorbed depreciation and any loss from business is not allowed to be set-off out of salary income.
7. (a) What propositions may an employee consider for the purpose of tax planning under the head “Salaries”? 11
Ans: A) Tax Planning of Salaried Assessee
Existence of ‘master-servant’ or ‘employer-employee’ relationship is absolutely essential for taxing income under the head “Salaries”. Where such relationship does not exist income is taxable under some other head as in the case of partner of a firm, advocates, chartered accountants, LIC agents, small saving agents, commission agents, etc. Besides, only those payments which have a nexus with the employment are taxable under the head ‘Salaries’. Salary is chargeable to income-tax on due or paid basis, whichever is earlier. Any arrears of salary paid in the previous year, if not taxed in any earlier previous year, shall be taxable in the year of payment.
Following are the some of the tips of tax planning under the head salaries:
1. Salary Structure: The employer should not pay a consolidated amount as salary to the employee. If so paid entire amount is taxable. So split the salary as basic pay, allowances and perquisites in order to get exemptions and deductions available to allowance and perquisites. The employer has to make a careful study and fix the salary structure in such a manner that it will include allowances which are exempt.
2. Employees Welfare Schemes: There are several employees’ welfare schemes such as PF, approved superannuation fund, gratuity, etc. Payments received from such funds by the employees are totally exempt or exempt up to significant amounts. The employer is well advised to institute such welfare schemes for the benefit of the employees.
3. Insurance Policies: Any payment made by an employer on behalf of an employee to maintain a life policy will be treated as perquisite in the hands of employee. Further, payments received from the employer in respect of Key man Insurance Policies constitute income in the hands of the employees. But the premium paid by employer on accident insurance of employee will not be treated as perquisites.
4. Rent Free Accommodation/ House Rent Allowance: An employee should analyze the tax incidence of a perquisite and an allowance, whenever he is given an option. The employee should work out the taxability of HRA and taxability of RFA separately and select least taxable item.
5. Dearness Allowance, Dearness Pay: It should be ensured that, under the terms of employment, dearness allowance and dearness pay form part of basic salary. This will minimize the tax incidence on house rent allowance, gratuity and commuted pension. Likewise, incidence of tax on employer’s contribution to recognized provident fund will be lesser if dearness allowance forms a part of basic salary.
6. Commission: Commission payable as per the terms of contract of employment at a fixed percentage of turnover achieved by an employee, falls within the expression “salary” as defined in rule 2(h). Consequently, tax incidence on house rent allowance, entertainment allowance, gratuity and commuted pension will be lesser if commission is paid at a fixed percentage of turnovers achieved by the employee.
7. Uncommuted / Commuted Pension: An uncommuted pension is always taxable; employees should get their pension commuted. Commuted pension is fully exempt from tax in the case of Government employees and partly exempt from tax in the case of non government employees who can claim relief under section 89.
8. Provident Fund: An employee being the member of recognized provident fund, who resigns before 5 years of continuous service, should ensure that he joins the firm which maintains a recognized fund for the simple reason that the accumulated balance of the provident fund with the former employer will be exempt from tax, provided the same is transferred to the new employer who also maintains a recognized provident fund.
Since employers’ contribution towards recognized provident fund is exempt from tax up to 12 percent of salary, employer may give extra benefit to their employees by raising their contribution to 12 percent of salary without increasing any tax liability.
9. Medical Allowances: While medical allowance payable in cash is taxable, provision of ordinary medical facilities is not taxable if some conditions are satisfied. Therefore, employees should go in for free medical facilities instead of fixed medical allowance.
10. Retirement Benefits: Since the incidence of tax on retirement benefits like gratuity, commuted pension, accumulated unrecognized provident fund is lower if they are paid in the beginning of the financial year, employer and employees should mutually plan their affairs in such a way that retirement, termination or resignation, as the case may be, takes place in the beginning of the financial year. An employee should take the benefit of relief available section 89 wherever possible. Relief can be claimed even in the case of a sum received from URPF so far as it is attributable to employer’s contribution and interest thereon. Although gratuity received during the employment is not exempt u/s 10(10), relief u/s 89 can be claimed. It should, however, be ensured that the relief is claimed only when it is beneficial.
11. Pension Received by Non Residents: Pension received in India by a non resident assessee from abroad is taxable in India. If however, such pension is received by or on behalf of the employee in a foreign country and later on remitted to India, it will be exempt from tax.
12. Leave Travel Concession: As the perquisite in respect of leave travel concession is not taxable in the hands of the employees if certain conditions are satisfied, it should be ensured that the travel concession should be claimed to the maximum possible extent without attracting any incidence of tax.
13. Free Gift of Assets: As the perquisites in respect of free gift of movable assets(other than computer, electronic items, car) by employer after using for 10 years or more are not taxable, employees can claim these benefits without adding to their tax bill.
14. Perquisites: Since the term “salary” includes basic salary, bonus, commission, fees and all other taxable allowances for the purpose of valuation of perquisite in respect of rent free house, it would be advantageous if an employee goes in for perquisites rather than for taxable allowances. This will reduce valuation of rent free house, on one hand, and, on the other hand, the employee may not fall in the category of specified employee. The effect of this ingenuity will be that all the perquisites specified u/s 17(2)(iii) will not be taxable.
Or
(b) Write notes on the following: 5+6=11
(i) Tax Evasion
Ans: 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.
(ii) Deduction u/s 80C
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.
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