Direct Tax - I Solved Papers: Nov' 2013

DIRECT TAX LAW I – NEW SYLLABUS QUESTION PAPERS

2013 (November)

COMMERCE (Speciality)

Course: 504 (Direct Tax – I)

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

(b) Reproduce the correct answer:      1x4=4

2. Write short notes on:                                4x4=16

Ans: Person [Section 2(31)]: Person includes seven types of persons namely:

The 2 basic differences between AOP and BOI are:

a) In BOI there are only individuals but in AOP there can be any type of persons.

b) BOI is creation of law whereas AOP can be created by different persons coming together for doing some income producing activity on the voluntary basis.

An Association of person or body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person was formed or established or incorporated with object of deriving income, profits and gains.

Ans: Deemed assessee or representative assessee is a person who may not be liable only for his own income or loss but also on the income or loss of other persons e.g. guardian of minor or lunatic, agent of an NRI etc. The below mentioned person are deemed to be an assessee:

Ans: Non-Resident in India: An individual is a non-resident in India if he satisfies none of the basic conditions.

Basic conditions are:

a) He is in India in the previous year for a period of 182 days or more

OR

b) He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.

Note: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:

(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.

(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).

An NRI is liable to pay taxes on income earned or deemed to be earned in Indian and received or deemed to be received in India.

Ans: 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).

2. In case of persons leaving India permanently [Section 174].

3. Assessment of association of persons or body of individuals or artificial judicial person formed for a particular event or purpose [Sec.174A].

4. In case of persons trying to transfer their assets [Section 175].

5. Discontinued business [Section 176].

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.

3. (a) Give an overview of income-tax law in India.                           11

Ans: Tax System in India

Taxes are important instruments of Government for raising resources and reducing disparities in the society. As such, the role of income tax in a developing country like ours is very vital. The Government of India has embarked upon economic planning to raise the standard of living of the masses, to reduce disparities and regional imbalances for national integration. Taxes can be used for economic growth in the following ways.

1. Helps in mobilization of resources : It is an instrument by the use of which developmental finance for the public sector can be mobilized.

2. Helps in reduction in equalities : As income tax rates are progressive it can be used to reduce inequalities in the distribution of income.

3. Reduces conspicuous consumption : A progressive tax on income arrests the purchasing power of rich people and thereby tends to reduce the demand for conspicuous consumption.

4. Creation of demand for economic development : A progressive taxation tends to change the allocation of income into consumption and savings with the objectives of increasing consumption and reducing the propensity to save.

Meaning and Definition of Tax

A tax is a fee charged (levied) by a government on a product, income or activity. If tax is levied directly on person or corporate income, it is called direct tax. If tax is levied on the price of a good or service, it is called indirect tax. The purpose of taxation is to finance government expenditure.

According to Hugh Dalton, “A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the tax payer in return and not imposed as penalty for any legal offences.” In general, tax is a levy or other type of a financial charge or fee imposed by state or central governments on legal entities or individuals. Local authorities like local governments, like panchayats or municipal corporations also have right to impose taxes.

Brief history of Income tax in India

In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. Thereafter; several amendments were made in it from time to time. In 1886, a separate Income tax act was passed. This act remained in force up to, with various amendments from time to time. In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments. The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent the evasion of tax. The law commission submitted its report-in September 1958, but in the meantime the Government of India had appointed the Direct Taxes Administration Enquiry Committee submitted its report in 1956.In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.

The Income Tax Act 1961 has been brought into force with 1 April 1962. It applies to the whole of India including Jammu and Kashmir.

Central Board of Direct Taxes: CBDT is the apex body of Income Tax Department. It has the power to frame rules under the control of the Central Government.

Income Tax Law in India

The income tax law in India consists of the following components:

1. Income tax Acts

2. Income tax rules

3. Finance Act

4. Circulars, notifications etc

5. Legal decision of courts.

Income tax Act, 1961: At present the law of income tax in India is governed by the Income Tax Act, 1961 which extends to whole of India, including the Sates of Jammu and Kashmir and Sikkim. It as administered along with other direct taxes by the Central Board of Direct Taxes (C.B.D.T.) The Board has framed various rules for the administration of income tax, which are known as the Income Tax Rules, 1962. They are amended and modified from time to time, as required by the amending Income tax Act. The Income Tax Act, 1961 is having 298 sections and many more subsections and twelve schedules.

Income-tax Rules: The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962.

Finance Act: Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President of India, it becomes the Finance Act.

Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessee.

Or

(b) Write an explanatory note on ‘residential status and tax liability’ of a person as per the provisions of Income-Tax Act.

Ans: Residential Status and Tax Incidence

Tax incidence on an assessee depends on his residential status. The residential status of an assessee is determined with reference to his residence in India during the previous year. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship.

Residential Status of an Individual

As per section 6, an individual may be (a) resident and ordinarily resident in India, (b) resident but not ordinarily resident in India, or(c) non-resident in India. The following are the two sets of conditions for determining the residential status of an individual:

Basic conditions:

a) He is in India in the previous year for a period of 182 days or more

OR

b) He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.

Note: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:

(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.

(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).

Additional Conditions:

(i) He has been resident in India in at least 2 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year.

AND

(ii) He has been in India for a period of 730 days or more during 7 years immediately preceeding the relevant previous year.

RESIDENT: An individual is said to be resident in India if he satisfies any one of the basic conditions.

Resident and Ordinarily Resident: An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.

Resident but Not Ordinarily Resident: An individual is said to be resident but not ordinarily resident in India if he satisfies any one of the basic conditions but not satisfies both of the additional conditions.

Non-Resident: An individual is a non-resident in India if he satisfies none of the basic conditions.

Residential Status of a Hindu Undivided Family

As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.

HUF: Resident or Non-Resident

A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.

A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b).

Additional condition (i) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in immediately preceding the relevant previous year)

Additional condition (ii) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.

If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

Residential Status of Firm and Association of Persons

As per section 6(2), a partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.

Residential Status of A Company

As per section 6(3), an Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.

4. (a) What do you mean by income exempted from tax? Name any fourteen items of income which do not form part of total income.     4+7=11

Ans: Income Exempted from tax under Sec. 10:

1. Agricultural Income: Income from agriculture is exempt. However, if the net agricultural income exceeds Rs.5,000, it is taken into account for determining the rates of income-tax on incomes liable to tax. [Sec.10 (1)]

2. Receipt from Hindu Undivided Family: Any sum received by an individual as a member of Hindu Undivided Family where such sum has been paid out of the income of the family or in the case of any impartible estate, where such sum has been paid out of the income of the estate belonging to the family, irrespective of whether tax is payable or not by the HUF on its total income. However, certain receipts from HUF are liable to be clubbed in the hands of an individual member u/s 64(2). [Sec.10 (2)]

3. Partner’s Share in the Firm’s Income: In the case of a person being a partner of a firm which is separately assessed as such, partner’s share in the total income of the firm is exempt. Share of a partner of the firm shall be computed by dividing the total income of the firm in the profit sharing ratio mentioned in the Partnership Deed. [Sec.10 (2A)]

4. Value of Leave Travel Concession: Value of any leave travel concession or assistance received by or due from the employer to employee (including noncitizens) and his family (spouse, children and dependent- father, mother, brother, sister dependent on him) in connection with his proceeding on leave or after retirement or termination of his service to any part of India. [Sec.10(5)]

5. Leave Encashment : Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits. For details see ‘Receipts Exempt from Income Tax’ in the chapter ‘Salary’. [Sec.10(10AA)]

6. Compensation to Employee: Any compensation received by a workman under Industrial Disputes Act or under any other Act or rules, order or notification issued there under or under any standing order or under any award, contract of service or otherwise at the time of his retrenchment is exempt to the extent such compensation is in accordance with Section 25F (b) of Industrial Disputes Act, subject to a maximum of Rs.5,00,000.

7. Payment from Provident Fund: Any payment (including interest) from a provident fund under Provident Fund Act, 1925 or Public Provident Fund Scheme, 1968. [Sec.10(11)]

8. Payment from Sukanya Samriddhi Account: Any payment from an account under the Sukanya Samriddhi Account Rules, 2014 [Sec.10(11A)]

9. Accumulated Balance of Recognised Provident Fund: Any accumulated balance due and becoming payable to an employee from a recognised provident fund, on fulfillment of any of the following conditions:

(i) If he has rendered a continuous services of five years or more; or

(ii) If his service, though not as stated in (i) above, has been terminated due to his ill-health or by the contraction or discontinuation of his employer’s business or any other cause beyond his control; or

(iii) If on cessation of his employment, his accumulated balance is transferred to recognised provident fund maintained by his new employer;

10. House Rent Allowance: Any special allowance granted to an assessee by the employer to meet expenditure incurred on payment of rent for residential accommodation subject to prescribed limits and conditions. [Sec.10(13A)]

11. Allowances of MPS and MLAs:

(a) Any daily allowance received by Members of Parliament or any State Legislature.

(b) Any allowance received by any Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986.

(c) Any constituency allowance received by any member of any State Legislature under any Act or rules made by it. [Sec.10(17)]

12. Income of a Professional Association set up for the control, supervision, regulation or encouragement of the professions of law, medicine, accountancy, engineering, architecture or other notified profession (i.e. Company Secretary, Chemistry, Materials Management and Town Planning), subject to specified conditions. [Sec.10(23A)]

13. Income of a New Agency [i.e. Press Trust of India Ltd.] set up in India, which applies its income or accumulates it for application solely for collection and distribution of news and does not distribute its income in any manner to its members. [Sec.10(22B)]

14. Income of a Minor Child liable to be included in income of his parent u/s 64(1A) is a exempt up to a maximum of Rs.1,500 per minor child. [Sec.10(32)]

15. Any Capital gain arising to an individual /HUF on compulsory acquisition of an agricultural and in urban areas (i.e. situated within the jurisdiction of a municipality or a cantonment board having population of 10,000 or more or within specified distance from the local limits of such municipality/board), provided the compensation/consideration is received on or after 1.4.2004 and 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. [Sec.10(37)]

Or

(b) Explain the provisions of law relating to tax holiday for newly established units in Special Economic Zones.      11

5. (a) From the following information, compute the taxable income for the assessment year 2013 – 14 under the head ‘salaries’ of Mr. R who is an employee of a tea company at Guwahati:  12

Or

(b) What is the meaning of the term ‘perquisites’ under the head ‘salary’? Explain tax-free perquisites with suitable example.                             4+8=12

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 effect an assurance on the life of the employee or to effect a contract for an annuity;

(vi) the value of any other fringe benefit or amenity as may be prescribed.

The perquisites can be divided into three categories:

Perquisites which are fully exempted (Tax free):

6. (a) Explain the following as per the provision of the Income-tax Act:                         4+3+4=11

(i) Basis of charging income from house property.

Ans: Basis of charge of tax on income generated under the “income from house property”

Under section 22 of the income tax act, The annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from house property’. However, if a house property, or any portion thereof, is occupied by the assessee, for the purpose of any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head.

Thus, three conditions are to be satisfied for property income to be taxable under this head

1) The property should consist of buildings or lands appurtenant thereto: The scope of this head of income is limited to the income from building or land appurtenant thereto. Land which is not appurtenant to any buildings does not come within the scope of this section.

2) The assessee should be the owner of the property: It is only the owner of the house property who can be tax under this head of income. The tax under this section is in respect of the legal or beneficial owner and not the occupation or possession of house property.

3) The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. But where the profits of such business or profession are not chargeable to tax, the annual value of the house property is chargeable under this head.

(ii) Deemed to let out property.

Ans: Deemed to be let out property (Section 23(4)):  This case arises when the assessee has more than two Self-occupied properties in a previous year. In such case, only two of such properties is treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.

(iii) Allowable deductions in computing house property income.

Ans: 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 31^st 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:

For all other cases maximum allowed deduction is Rs. 30000

Or

(b) Mr. A owns two self-occupied house in Jorhat. From the following information, find out that which house he should choose as self-occupied.                 11

Date of completion of these houses was 31-01-2010. Mr. A had taken a loan of Rs. 4,00,000 @ 10% p.a. for construction of House – I on 01-06-2008 and he repaid Rs. 2,00,000 on 01-10-2012.

Ans: This type of Question is not expected. (Instead my special video on this topic)

7. (a) What are the authorities provided by the Income-tax Act for the administration of tax? Discuss very briefly the powers of Income-tax officer.                   4+7=11

Ans: Income Tax Authorities

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. These authorities have been grouped into three main wings:

(i)  Administrative [Income Tax Authorities] [Sec. 116]

(ii) Judicial: Judicial section of income tax authorities includes the following:

(a) Commissioner of Income tax (Appeals)

(b) Appellate Tribunal

(c) High Court

(d) Supreme court

(iii) 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;

ASSESSING OFFICER (DEPUTY COMMISSIONER / ASSISTANT COMMISSIONER / INCOME-TAX OFFICER ) AND THEIR POWERS

"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;

Powers of assessing officers and others as named above: The Assessing Office shall exercise the following powers:

(a) can call any firm to provide him with a return of the addresses and names of partners of the firm and their shares;

(b) can ask any Hindu Undivided Family to provide him with return of the addresses and names of members of the family and the manager;

(c) can ask any person who is a trustee, guardian or an agent to deliver him with return of the names of persons for or of whom he is an agent, trustee or guardian and their addresses;

(d)  can ask an assessee to furnish a statement of names and addresses of all the persons to whom he has paid in any previous year rent, interest, commission, royalty or brokerage etc. amounting to more than Rs. 1,000 or such higher amount as may be prescribed together with particulars of all such payments.

5. Power of Survey. An Income-tax authority may enter any place where business or profession is carried on, if such place is within the limits of the area assigned to him or is occupied by any person is respect of whom the Assessing Officer exercises jurisdiction. The objectives of conducting Income Tax surveys are:

• To discover new assessees;

• To collect useful information for the purpose of assessment;

• To verify that the assessee who claims not to maintain any books of accounts is in-fact maintaining the books;

• To check whether the books are maintained, reflect the correct state of affairs.

6. Power to Inspect Registers of Companies: The above-mentioned authority, may inspect, if necessary, take copies or causes copies to be taken of any register of members, debenture holders, mortgagees of company or of any entry in such register.

7. Collection of Information: For the purpose of collection of information which may be useful for any purpose, the Income tax authority can enter any building or place within the limits of the area assigned to such authority, or any place or building occupied by any person in respect of whom he exercises jurisdiction.

Or

(b) Write short notes on:                              6+5=11

Ans: Central Board of Direct Taxes and their powers

The Central Board of Direct Taxes (CBDT) is the highest executive authority. It is sub­ject to the overall control of the Central Government. It is authorized to discharge all those functions prescribed in the Act and those which are entrusted to it by the Central Government. The Central Board of Direct Taxes consists of a Chairman and following six Members:

Powers of Central Board of Direct Taxes:

Income tax department are totally operated under the control of central board of direct taxes (CBDT). It performs the function of administration, supervision and control of entire income-tax structure in our country. The Income tax Act provides the following specific power to the CBDT:

Ans: The Central Government may appoint such persons as it thinks fit to be the Commissioners of Income-tax. The jurisdiction of Commissioners is to be determined by the Central Board of Direct Taxes keeping in view the area, person, income or cases. The Board may, be general or specific order and subject to such conditions, restrictions or limitations, authorize any commissioner to perform such functions of any other income tax authority as may be assigned to him in such order.

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