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7.1

1 Taxation of Individuals,

Partnership Firms/LLPand Companies

This Chapter includes

! Basic Concepts and Taxation ofIndividuals

! Taxation of Companies.

! Taxation of Firm/Limited LiabilityPartnership (LLP)

Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions

CS Professional Programme (Module III)

SHORT NOTES

2005 - Dec [3] Write notes on the following:(i) Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act,

1961.

7.2 OOOO Solved ScannerSolved ScannerSolved ScannerSolved Scanner CS Prof. Prog. M-III Paper 7 (New Syllabus)

(5 marks)Answer:

Minimum Alternate Tax under Section 115JB of the Income-tax Act, 1961.

Where in the case of a company, the income tax payable on the total income as

computed under the Income tax Act, in respect of previous year relevant to the

assessment year 2014-15 or thereafter is less than 18.5% of its book profit, such

book profit shall be deemed to be the total income of the assessee and tax payable

by the assessee on such total income (book profit) shall be the amount of the

income-tax at the rate of 18.5%.

Every company for the purposes of this section shall prepare its Profit and Loss

Account for the relevant Previous Year in accordance with the provisions of Part II

and III of schedules VI to the Companies Act, 1956. However, while preparing the

annual accounts including profit and loss account, the accounting policies, the

accounting standards followed for preparing such accounts including profit and loss

account and the methods and rates adopted for calculating the depreciation shall be

the same as have been adopted for the purpose of preparing such accounts

including profit and loss account as laid before the company at its annual general

meeting in accordance with the provision of Section 210 of the Companies Act,

1956.

For the purpose of MAT, book profit means the net profit as shown in the profit and

loss account for the relevant previous year prepared as aforesaid and would be

subject to some adjustments as mentioned in section 115 JB of the Income Tax Act,

1961.

Every company to which section 115 JB applies shall furnish a report from Chartered

Accountant certifying that the book profit has been computed in accordance with the

provisions of Section 115JB alongwith the return of income filed.

DESCRIPTIVE QUESTIONS

2004 - June [2] (a) The incidence of income-tax of a company depends upon its

residential status. Explain. (10 marks)

Answer:

The incidence of income tax depends upon the residential status of a company in India

during the relevant previous year. A company may either resident or non-resident in

India. As per section 6 (3) of the Act, a company is said to be resident in India in any

previous year, if:

(a) it is an Indian company; or

[Chapter #### 1] Taxation of Individuals, Partnership Firms/LLP... OOOO 7.3

(b) during the relevant previous year, the control and management of its affairs is

situated wholly in India.

If one of the above two tests is not satisfied, the company would be a non-resident.

As per section 5 (1) of the Act, the total income of a resident company would consist

of:

(a) any income which is received or is deemed to be received in India in the relevant

previous year by or on behalf of such company;

(b) any income which accrues or arises or is deemed to accrue or arise in India during

the relevant previous year;

(c) any income which accrues or arises outside India during the relevant previous

year.

2007 - June [3] (a) What is ‘minimum alternate tax’ (MAT) ? What is the treatment of

following debited to profit and loss account while calculating book profit:

(i) Fringe benefit tax

(ii) Wealth-tax

(iii) Provision for doubtful debt

(iv) Penalty for non-payment of income-tax

(v) Dividend tax

(vi) Banking cash transaction tax

(vii) Proposed dividend

(viii) Excise duty due, but not paid

(ix) Provision for gratuity

(x) Depreciation (12 marks)

Answer:

Minimum Alternate Tax (MAT)

Where in the case of a company, the income-tax payable on the total income as

computed under the Income-tax Act, in respect of previous year relevant to the

assessment year 2014-15 or thereafter is less than 18.5% of its book profit, such book

profit shall be deemed to be the total income of the assessee and the tax payable by the

assessee on such total income (book profit) shall be the amount of the income tax at the

rate of 18.5%.

Thus in case of a company income tax payable shall be higher of the following two

amounts:

1. Tax on total income computed as per the normal provisions of the Act by charging

applicable normal rates and special rates if any, income included in the total


income of the company is taxable at special rates.

2. 18.5% of book profit.

For the purpose of computing "book profit", the net profit as per profit and loss account

is adjusted for items given under Section 115 JB, by adding them back to net profit or

deducting from it. Treatment of the following debited to P & L Account while calculating

book profit:

(i) Fringe Benefit Tax–Not to be added back.

(ii) Wealth Tax–not to be added back.

(iii) Provision for doubtful debt–added back to net profit.

(iv) Penalty for non-payment of income tax-not to be added back.

(v) Dividend tax –added back to net profit.

(vi) Banking cash transaction tax–not to be added back.

(vii) Proposed dividend–added back to net profit.

(viii) Excise duty due, but not paid–not to be added back.

(ix) Provision for gratuity–not to be added back.

(x) Depreciation–The whole amount of depreciation is to be added back and the

amount of depreciation which is not on account of revaluation of assets is then

required to be deducted from the net profit.

2009 - June [3] (a) When will the 'book profits' of a company deemed to be the total

income of the company for the purposes of levy of minimum alternate tax (MAT) under

section 115JB ? (3 marks)

(b) Indicate briefly the points to be taken into account while preparing annual accounts

for the purpose of MAT. (3 marks)

(c) The MAT does not apply to foreign companies operating in India. Do you agree ?

Give reasons. (3 marks)

Answer:

(a) Minimum alternate tax on certain companies under Section 115 JB Wherein the

case of a company, the income tax payable on the total income as computed under

the Income Tax Act, in respect of previous year relevant to the assessment year

2014-15 or thereafter is less than 18.5% of its book profit, such book profit shall be

deemed to be the total income of the assessee and the tax payable by the

assessee on such total income (book profit) shall be the amount of the income tax

at the rate of 18.5%.

(b) According to sub-section (2) of section 115 JB requires the company to prepare

its profit and loss account for the relevant previous year in accordance with

provisions of Part II and III of Schedule VI of the companies Act, 1956. However,

while preparing the annual accounts including profit and loss account:


(a) The accounting policies of the company;

(b) The accounting standards followed for preparing such accounts including

profit and loss accounts;

(c) The method and rates adopted for calculating the depreciation by the

company, shall be the same as have been adopted for the purpose of

preparing such accounts including profit and loss account as laid before the

company at its annual general meeting in accordance with on the provisions

of section 210 of the Companies Act, 1956. But where the company has

adopted or adopts the financial year which is different from the previous year

under the Income Tax Act, (a), (b) and (c) aforesaid shall correspond to the

accounting policies, accounting standards and the method and rates for

calculating the depreciation which have been adopted for preparing such

accounts including profit and loss account for such financial year or part of

such financial year falling within the relevant previous year.

(c) No, MAT applies to any company whether it is domestic or foreign. However,

where a non-resident companies income is assessed on a presumptive basis

under Section 44 B or 44BB or at a flat rate under Section 115 A on royalty and

technical fees, the book profit becomes immaterial for regular assessment and the

presumptive income tax will prevail.

2010 - June [2] (a) Answer the following :

(i) What is the quantum of Minimum Alternate Tax (MAT) for a ‘domestic company’

and ‘foreign company’ for the assessment year 2014-15? (3 marks)

(c) Discuss the concept of ‘deemed dividend’ under section 2(22). (3 marks)

Answer:

(a) (i) The rates of Minimum Alternate Tax (MAT) for the A.Y. 2014-15 are as

follows:

(A) Domestic Company:

(i) If Book Profit does not exceed ` 1 crore:

IT 18.5

SC —

EC (@ 2%) + SHEC (@ 1%) 0.555

Total 19.055

(ii) If Book Profit is in the range of ` 1 crore - ` 10 crore:

IT 18.5

SC 0.925

EC (@2%) + SHEC (@1%) 0.58275

Total 20.00775


(iii) If Book Profit exceeds ` 10 crore:

IT 18.5

SC 1.85

EC (@ 2%) + SHEC (@ 1%) 0.6105

Total 20.9605

(B) Foreign Company:(i) If Book Profit does not exceed ` 1 crore:

IT 18.5SC —EC (@ 2%) + SHEC (@ 1%) 0.555Total 19.055

(ii) If Book Profit is in the range of ` 1 crore - ` 10 crore:IT 18.5SC 0.37EC (@2%) + SHEC (@1%) 0.5661Total 19.4361

(iii) If Book Profit exceeds ` 10 crore:IT 18.5SC 0.925EC (@ 2%) + SHEC (@ 1%) 0.58275Total 20.00775

(c) Dividend in its ordinary connotation means the sum paid to a shareholderproportionate to his shareholding in a company out of the total divisible profits.However, under section 2 (22) following disbursement are also treated as dividendif they are paid by a company to a shareholder to the extent of accumulated profits:(i) Any distribution by a company to the extent of accumulated profits involving

the release of the assets of the company;(ii) Distribution of debentures / deposit certificate to shareholders and bonus

shares to preference shareholders;(iii) Distribution to shareholders on liquidation of the company;(iv) Distribution on reduction of share capital;(v) Loans or advances by a closely held company to certain shareholders/

concerns.

2012 - June [3] What is the difference between ‘minimum alternate tax’ under section115JAA and ‘alternate minimum tax’ under section 115JC? Who is subject to thesetaxes? Also discuss the implication of these taxes in the case of an overseas entityhaving a permanent establishment (PE) in India. (15 marks)


Answer:Minimum Alternate Tax (MAT) under Section 115 JB of the Income Tax Act, 1961 :Where in the case of a company, the Income Tax payable on the total income ascomputed under the Income Tax Act, in respect of previous year relevant to theassessment year 2013-14 & 2014-15 or thereafter is less than 18.5% of its book profitsuch book profit shall be deemed to be the total income of the assessee and taxpayable by the assessee on such total income (book-profit)shall be the amount of theincome-tax at the rate of 18.5%.

Every company for the purpose of this section shall prepare its Profit and Loss

Account for the relevant previous year in accordance with the provisions of Part II and

III Schedules VI to the Companies Act, 1956. However, while preparing the annual

accounts including Profit and Loss Account, the accounting policies, the accounting

standards followed for preparing such accounts including profit and loss account and

the methods and rates adopted for calculating the depreciation shall be the same as

have been adopted for the purpose of preparing such accounts including Profit and

Loss account as laid before the company at its annual general meeting in accordance

with the provision of Section 210 of the Companies Act, 1956.

For the purpose of MAT, book profit means the net profit shown in the profit and loss

account for the relevant previous year prepared as aforesaid and would be subject to

some adjustments as mentioned in section 115 JB of the Income Tax Act, 1961.

Every company to which section 115 JB applies shall furnish a report from Chartered

Accountant certifying that the book profit has been computed in accordance with the

provisions of section 115 JB alongwith the return of income filed.

Alternative Minimum Tax for Limited Liability Partnership [Section 115 JC

to115JF]

As per newly inserted section 115JC where the regular income tax payable for a

previous year by a limited liability partnership is less than the alternative minimum tax

payable for such previous year, the adjusted total income shall be deemed to be the

total income of such limited liability partnership and it shall be liable to pay income-tax

on such total income at the rate of 18.5%.

Meaning of adjusted total income alternate minimum tax and regular income tax

[Section 115JC (2) and section 115 JF]

(i) "adjusted total income" shall be the total income before giving effect to this newly

inserted chapter XII-BA as increased by the deduction claimed under any section

included in chapter VI-A under the heading "C-Deduction in respect of certain

incomes" and deduction claimed under Section 10AA [Section 115 JC (2)];

(ii) "alternative minimum tax" shall be the amount of tax computed on adjusted total

income at a rate of 18.5%; and


(iii) "regular income tax" shall be the income tax payable for a previous year by a

limited liability partnership on its total income in accordance with the provisions

of the act other than the provisions of this newly inserted Chapter XII-BA.

Report of Chartered Accountant [Section 115 JC (3)]

Every limited liability partnership to which this section applies shall obtain a report, in

such form as may be prescribed, from an accountant certifying that the adjusted total

income and the alternate minimum tax have been computed in accordance with the

provisions of this chapter and furnish such report on or before the due date of filing of

return u/s 139 (1).

Tax credit for alternate minimum tax [Section 115 JD]

1. Credit for tax paid [Section 115JD (1)] : The credit for tax paid by a limited

liability partnership under Section 115 JC shall be allowed to it in accordance with

the provisions of this section.

2. How to compute tax credit [Section 115 JD (2)] : The tax credit of an

assessment year to be allowed under Section 115 JD (I) shall be the excess of

alternate minimum tax paid over the regular income tax payable of that year.

3. Interest not payable on tax credit allowed [Section 115 JD (3) ] : No interest

shall be payable on tax credit allowed under sub-section (1).

4. Tax credit to be carried forward and set-off upto next 10 assessment years

[Section 115 JD (4)] : The amount of tax credit determine u/s 115 JD (2) shall be

carried forward and set-off in accordance with the provisions of Section 115 JD (5)

and 115 JD (6) mentioned below but such carry forward shall not be allowed

beyond the 10th assessment year immediately succeeding the assessment year for

which tax credit become allowable u/s 115 JD (1).

5. Tax credit is allowed to the maximum extent of the excess of regular income

tax over alternate minimum Tax : In any assessment year in which the regular

income - tax exceeds the alternate minimum tax, the tax credit shall be allowed to

set-off to the extent of the excess of regular income-tax over the alternate minimum

tax and the balance of the tax credit, if any shall be carried forward.

6. Effect of assessment order to be adjusted [Section 115 JD (6)] : If the amount

of regular income tax or the alternate minimum tax is reduced or increased as a

result of any order passed under this act, the amount of tax credit allowed under

this section shall also be varied accordingly.

2012 - Dec [1] (a) Discuss briefly the treatment of un-availed tax credit of minimum

alternate tax (MAT) in case of conversion of a private company or unlisted public

company into a limited liability partnership (LLP). (3 marks)


Answer:

Section 115JAA provides that where tax is paid by a company for any assessment year

in relation to deemed income under Section 115JA(1) or 115JB(1), a tax credit will be

allowed in subsequent years.

However, newly inserted Section 115JAA(7) w.e.f. 1.04.2011, Assessment Year

2011-12 and onwards, provides that in case of conversion of a private company or

unlisted public company into a Limited Liability Partnership Act, 2008, the provisions of

Section 115JAA shall not apply to the successor LLP, that is to say tax credit will not be

allowed to such LLP.

2012 - Dec [3] (a) Discuss with the help of an example, the cascading effect of dividend

distribution tax and the remedial action taken by the government. (7 marks)

Answer:

According to Section 115-O, the domestic company shall, in addition to the income tax

chargeable in respect of its total income, be liable to pay additional income tax on any

amount declared, distributed, or paid by such company by way of dividend (whether

interim or otherwise), whether out of current on accumulated profits such additional

income tax shall be payable @ 15% plus surcharge plus education and secondary and

higher education cess. Such tax is known as Dividend Distribution Tax (DDT). Such

distributed dividend is exempt in the hands of recipients. As per Section 10 (34), any

income by way of dividends referred to in Section 115-O shall be exempt from income

tax. However, this provision resulted in a cascading effect in the case of holding

company declaring dividend out of dividend received from its subsidiary.

To mitigate cascading effect of DDT, Section 115-O (1A) of the Act provides that

dividend liable for DDT in case of a company is to be reduced by an amount of dividend

received from its subsidiary after payment of DDT if the following conditions are

satisfied:

(i) the amount of dividend is received from its subsidiary;

(ii) the subsidiary has paid tax under this section on such dividend; and

(iii) the domestic company (holding company) is not a subsidiary of any other

company.

For Example:

A Ltd. holds 65% shares in B Ltd. A Ltd. received 40,00,000 dividend from B Ltd.

A Ltd. declares Final Dividend of ` 80,00,000 to its shareholders.A Ltd. shall be liable

to pay DDT of ` 12,97,800 @ 16.2225% on full amount of ` 80,00,000 including the

amount received from B Ltd. Due to this the amount of ̀ 40,00,000 is taxed twice once

in the hands of B Ltd. and secondly in the hands of A Ltd.

Thus, to mitigate the cascading effect of above said DDT, A Ltd. shall be liable to


pay DDT on ` 40,00,000 (` 80,00,000 - ` 40,00,000) @ 16.2225% of ` 6,48,900.

2013 - Dec [3] (b) What is the time-limit in the following different cases:

(i) To file return of income under section 139(1) by an assessee who is required to

furnish audit report under section 92E.

(ii) To file a revised return, if the assessee discovers any omission or wrong

statement in the originally filed return. (2 marks each)

PRACTICAL QUESTIONS

2004 - Dec [2] Sunil Ltd., an Indian company, is engaged in the business ofdevelopment of computer software. The following is the profit and loss account for theyear ended 31st March, 2013:

` `

To Freight and insurance By Sale of software attributable to delivery in India 12,00,000 of software outside India 1,00,000 By Sale of softwareTo Expenses incurred in foreign and providing

exchange for providing technical servicestechnical services outside India 17,00,000outside India 1,50,000 By Export incentives 70,000

To Other business expenses 7,50,000 By Interest 2,10,000To Depreciation 3,00,000 By Profit of foreignTo Income-tax penalty 20,000 branch 3,60,000To Income-tax 2,20,000To Net profit 20,00,000

35,40,000 35,40,000For tax purposes, other information are submitted as under:

(i) Depreciation allowed under section 32 is ` 2,10,000.(ii) Customs duty pertaining to financial year 2011-12 paid during the previous year

2012-13 amounted to ` 60,000 were not charged to profit and loss account.(iii) Amount received in convertible foreign exchange upto 30th September, 2013

was ̀ 13,90,000 (out of which ̀ 60,000 was freight and insurance for delivery ofsoftware).

Compute the net income of Sunil Ltd. for the assessment year 2013-14. (20 marks)Answer:Computation of Total Income of Sunil Ltd. for the Assessment Year 2013-14

` `

Net Profit as per P/L A/c 20,00,000


Add: Expenes not allowed:Income tax penalty 20,000

Depreciation over charged 90,000

Income Tax 2,20,0000 3,30,000

23,30,000

Less: Expenses allowable but not charged:

Customs duty paid for Financial Year 2011-12 60,000

Total Taxable Income 22,70,000

2007 - June [3] (b) Sun Bright Ltd., an Indian company, furnishes following particularsof its income for the previous year 2013-14. Calculate its total income and income-taxliability for the assessment year 2014-15:

`Income from business 5,20,000Dividend received during the year:

— from Indian company 20,000— from foreign company 5,000

Gains from transfer of capital assets:— short term capital gains 25,000— long term capital gains 50,000

Agricultural income in India 35,000Additional information:

(i) Income from business includes '1,50,000 profit earned from a new small scaleindustry set up on 1st October, 2013 which is eligible for deduction under section80-IB.

(ii) Business expenses already charged from business income include ` 10,000revenue expenditure and ` 30,000 capital expenditure on family planningprogramme for employees.

(iii) Company has debited following donations in the profit and loss account of thebusiness of company:— Rajiv Gandhi Foundation: ` 50,000; and— Prime Minister’s National Relief Fund: ` 25,000. (8 marks)

Answer:Computation of Total Income for the

Assessment Year 2014-15Amount `

Income from Business as per P/L A/c 5,20,000

Add: Disallowed Expenditure

(a) Donation 75,000


(b) Capital Expenditure on Family (+)

Planning (` 30,000-6,000) 24,000 90,000

6,19,000

Capital Gains on long term 50,000

Capital Gain on short-term 25,000 75,000

Dividend from Indian Co. Exempt

Dividend from Foreign Co. 5,000 5,000

Agriculture Income Exempt –

6,99,000

Less: Deduction

(a) Under Section 80IB 30% of 1,50,000 45,000

(b) Under Section 80-G

(i) PMNRF 25,000

(ii) 50% of Rajiv Gandhi

Foundation 25,000 50,000 -95,000

Total Income 6,04,000

Tax Liability

(i) 20% on LTCG [50,000] 10,000

(ii) 30% on other Income [5,54,000] 1,66,200

1,76,200

(iii) Surcharge NIL

1,76,200

(iv) 2% Education Cess & 1% SHEC 5,286

Tax Liability 1,81,486

2008 - June [1] A company claims deduction of certain expenditures in computation of

its total income under the Income-tax Act, 1961. Consider the allowability or otherwise

of the following expenditures giving brief reasons for your answers:

(i) Payments made by the company for sponsoring a sports tournament.

(ii) Water pollution treatment plant installed permanently in the factory in

compliance with statutory requirements.

(iii) As a holding company, it has borrowed money and advanced the same to its

subsidiary in whose business it has deep interest. The subsidiary uses the same

for its business. The company claims interest paid on such borrowings as a

deduction.

(iv) Expenditure incurred for earning share income from a firm.

(v) Provision made in the accounts of the company on a scientific basis in respect


of liabilities estimated to arise under warranty provided to customers in respect

of products sold. (4 marks each)

Answer:

(i) This is an activity of business promotion through advertisement and the

sponsoring of the tournaments carries with it. Hence it is allowable as a revenue

expenditure.

(ii) It is a revenue expenditure because expenses incurred under a statutory

stipulation rather than on personal wish.

(iii) Where it is obvious that a holding company has deep interest in its subsidiary

and hence if the holding company advances borrowed money to its subsidiary

and the same has been used by the subsidiary for some business purpose, then

the assessee will be entitled to a deduction of interest under Section 36(1) (iii).

(iv) According to section 14-A, if the income is exempt any expenditure incurred on

earning that income shall not be allowed as deduction.

(v) Warranty provided on a scientific basis or past experience is allowable as

deduction.

2009 - Dec [2] (b) Modern Ltd. entered into an agreement with Synergy Ltd. for granting

on lease to Synergy Ltd. its 8000 sq. mtr. land lying vacant adjacent to the factory

premises of Synergy Ltd. for a period of 12 years commencing from May, 2001. Under

the terms of the agreement, Synergy Ltd. had to build a factory building, pay an annual

rent @`100 per sq. mtr. of the leased land of 8,000 sq. mtr. and surrender the building

to Modern Ltd. at the end of the lease without any consideration. Synergy Ltd. complied

with the terms and conditions of the lease agreement.

The depreciated value of the building surrendered and taken possession by

Modern Ltd. in May, 2013 was `4,22 crore. Accounts department of Modern Ltd. is of

the opinion that an equivalent amount is to be taken in the accounts of the year 2013-14

as income received.

Critically examine the matter and offer your comments. (3 marks)

Answer:

Accounts Department's opinion of Modern Ltd. is incorrect. The depreciated value of the

building is of course to be brought into the books of accounts.

However, the equivalent amount viz. ` 4.22 crores cannot be treated as income

from the business. By its very nature it is a capital receipt and is not a revenue income.

The amount cannot be treated as a revenue receipt unless it is conclusively established

that this represented deferred rent as the lease rent was unreasonably low. Further

Modern Ltd. is not in the business of real estate to treat the benefit as incidental

revenue receipt earned during the course of such business.


2010 - Dec [3] (a) The book profits of a company in the previous year 2013-14

computed in accordance with section 115JB is ` 15 lakh. If the total income computed

for the same period as per the provisions of the Income-tax Act, 1961 is ` 3 lakh,

calculate the tax payable by the company in the assessment year 2014-15 and also

indicate whether the company is eligible for any tax credit. (5 marks)

Answer :

1. Calculation of tax liability u/s 115JB:

Particulars Details Amount

Book profit Given 15,00,000

Tax Liability 18.5% of ` 15 lakhs 2,77,500

Add: Surcharge NIL

Tax Liability after surcharge 2,77,500

Add: Education cess and SHEC @ 3% 3% of ` 2,77,500 8,325

Tax Liability after cess 2,85,825

2. Calculation of tax liability as per Income Tax Act, 1961:


Total Income Given 3,00,000

Tax Liability 30% of ` 3 lakhs 90,000

Add: Education cess and SHEC @ 3% 2,700

Tax Liability after cess 92,700

3. Computation of Final Tax payable:


Tax Liability Tax Liability u/s 115B> Normal Tax liability 2,85,825

Actual tax liability 2,85,825

The company is eligible for MAT tax credit of ` 1,93,125 (` 2,85,825 - ` 92,700), which

can be carried forward for 10 years or is to be awaited within 10 years u/s 115JAA.

2012 - Dec [2] (b) Whether minimum alternate tax (MAT) under section 115JB is

payable in advance and interest under sections 234B and 234C is payable on failure

to pay such advance tax? Also explain whether MAT credit admissible under section

115JAA has to be set-off against the assessed tax payable before calculating the

interest under sections 234A, 234B and 234C.


You may take help of decided case law, if any. (6 marks)

Answer :

Companies liable to pay tax on the basis of MAT under section 115JB are required to

pay advance tax and interest under sections 234B and 234C is payable on failure to pay

such advance tax. [JCIT v Rolta India Ltd. (2011)]

For the purpose of computing interest chargeable under section 234A, 234B and

234C, credit of MAT under section 115JAA has to be set off against the assessed tax

payable. [CIT v Tulsian NEC Ltd. (2011)]

2013 - June [2] (a) The net profit of Renuka Ltd., an Indian company, as per its profit

and loss account prepared as per the Income-tax Act, 1961 is ̀ 90,00,000 after debiting

and crediting following items:

`

Provision for income-tax 5,00,000

Provisions for deferred tax 3,00,000

Proposed dividend 7,50,000

Depreciation including depreciation on revaluation of assets

` 20,00,000 debited to profit and loss account 60,00,000

Profit from industrial unit in SEZ area 80,000

Provision for permanent diminution in the value of investments 70,000

Compute tax liability under section 115JB for the assessment year 2014-15.

(9 marks)

Answer:

Computation of Tax Liability of Renuka Limited for Assessment Year 2014-15.

(a) Computation of book profits : `

Net Profit as per Profit & Loss A/c 90,00,000

Add : Non-admissible Expenditure :

— Provision for Income-tax 5,00,000

— Provision for deferred tax 3,00,000

— Proposed dividend 7,50,000

— Depreciation 60,00,000

— Provision for diminution 70,000 76,20,000

Less : Inadmissible Incomes &

Admissible Expenditure :

— Depreciation allowed 40,00,000 (40,00,000)

BOOK PROFITS 1,26,20,000

(b) Computation of Taxable Income ` `


Profit as per Profit & Loss A/c 90,00,000

Add : Inadmissible Expenditure,

if debited to Profit & Loss Account :

— Provision for Income tax 5,00,000

— Provision for deferred tax 3,00,000

— Proposed dividend 7,50,000— Provision for diminution in the value of the asset 70,000— Depreciation as per A/c’s 60,00,000 76,20,000

Less : Depreciation as per income tax (assumed same amount excluding depreciation on revaluation) 40,00,000 (40,00,000)

GROSS TOTAL INCOME 1,26,20,000Less : Deduction on Profit from SEZ unit (80,000)

TAXABLE INCOME 1,25,40,000

— Tax Liability as per the provisions of MAT `

@ 18.5% on ` 1,26,20,000 23,34,700Add : Surcharge @ 5% 1,16,735Add : Education cess @ 2% & SHEC @ 1% 73,543Total Tax Liability 25,24,978

— Tax Liability as per normal tax rates@ 30% on ` 1,25,40,000 37,62,000Add : Surcharge @ 5% 1,88,100Add : Education cess @ 2% & SHEC @ 1% 1,18,503Total Tax Liability 40,68,603

Here, the tax liability as per MAT provisions is less than the tax liability as per normaltax provisions, therefore, the Tax payable shall be ` 40,68,603.

2013 - June [3] (a) A limited liability partnership (LLP) has following income for theassessment year 2014-15:

`

Profit from business eligible for deduction @ 100% of profitsunder section 80-IA 32,00,000

Profit from other business 48,00,000Compute the tax payable by the LLP, assuming that it has no other income during theassessment year 2014-15. (5 marks)Answer:(i) Computation of Total Income and Income Tax Payable

For Assessment Year 2014-15.As per the normal provisions of the Act `


Profits & gains of business or profession (Total) 80,00,000Less : Deduction under section 80-IA 32,00,000

Total Income 48,00,000Tax payable @ 30% 14,40,000Add : EC @ 2% & SHEC @ 1% 43,200

Tax Payable 14,83,200

(ii) Computation of Alternate Minimum Tax (AMT)

`

Profits & Gains of business or profession 48,00,000

Add : Deduction under section 80IA 32,00,000

Adjusted Total Income 80,00,000

AMT @ 18.5% 14,80,000

Add: EC @ 2% & SHEC @ 1% 44,400

AMT Payable 15,24,400

Here, as per Section 115JC, since the income tax payable as per normal provisions of

the Income Tax Act is less than the AMT, the LLP would be liable to pay ` 15,24,400

as tax.

2013 - Dec [1] (a) Y Ltd. is a company in which 80% shares are held by G Ltd. Y Ltd.

declared a dividend amounting to ` 30 lakh to its shareholders for the financial year

2012-13 in its annual general meeting held on 18th May, 2013. Dividend distribution tax

was paid by Y Ltd. on 20th May, 2013. G Ltd. declared an interim dividend amounting

to ` 40 lakh on 1st December, 2013 for the year ended 31st March, 2014.

Compute the amount of tax on dividend payable by G Ltd. What would be your answer,

if 52% shares of G Ltd. are held by S Ltd., an Indian company? (6 marks)

2013 - Dec [2] (b) X Ltd. charged depreciation on its fixed assets at the rate prescribed

in the income tax rules. However, the Assessing Officer disallowed the same and

allowed the rate as prescribed in the Companies Act, 1956 for the purpose of

computation of book profit under section 115JB for the previous year 2013-14. Examine

the legality of action taken by the Assessing Authority. (5 marks)

2013 - Dec [3] (a) Comment in brief on allowability of following expenditure while

computing the income under the head ‘profits and gains of business or profession’ for

the assessment year 2014-15:

(i) Kanha commenced operations of the business of setting-up a warehousing

facility for storage of sugar on 1st June, 2013. He incurred capital expenditure on

purchase of building during the period from January, 2013 to March, 2013

exclusively for the above business and capitalised the same in its books of


account on 1st June, 2013.

(ii) Ms. Radha incurred expenditure on purchase of computer software and

capitalised such expenditure in her books of account.

(iii) Murli is operating a pharmaceutical factory. he incurred expenditure in providing

freebees to medical practitoners. (3 marks each)

CS Executive Programme (Module I)

SHORT NOTES

2008 - Dec [4] (b) Write short notes on the following:

(i) The activities of a co-operative society which are eligible for deduction under

section 80P. (3 marks)

Answer:

The activities of a co-operative society which are eligible for deduction @ 100% under

Section 80P are as follows:

(i) Income from banking business & providing credit facilities to its members

(ii) Cottage Industry

(iii) Marketing agricultural produce

(iv) Purchase of agricultural implements

(v) Processing of agricultural produce without aid of power of its member

(vi) Collective disposal of Labour for its members

(vii) Primary Society engaged in supply of milk, oilseeds, fruits etc

(viii) Investment in securities

(ix) Letting of Godowns & warehouses.

2009 - Dec [2] (b) Write short notes on the following:

(i) Taxation of zero coupon bonds

(ii) Share of profit from partnership firm (3 marks each)

Answer:

(i) Zero coupon bonds means –

1. Bond issued by an infrastructure capital company or infrastructure capital

fund or public sector company on or after 1st June, 2005.

2. Bond in respect of which no payment and benefit is received or receivable

before maturity or redemption from infrastructure capital company or

infrastructure capital fund or public sector company.


3. Bonds which Central Government may, by notification in the Official Gazette

specify in this behalf.

Maturity and redemption of Zero coupon bonds to be treated as transfer. The

profits arising on the transfer of zero coupon bonds shall be subject to capital

gains tax. In case of short term capital asset, the same will be taxable as per

assessee specific income tax slab rates.

In case of long term capital asset, the assessee will have either of the two

options to pay minimum tax u/s 112(1):

Option I: 20% of long term capital gain after indexation of the cost of such

bonds; or Option II: 10% of long term capital gains before indexation of the cost

of such bonds;

(ii) Share of Profits from partnership firm

Share of profits which a partner receives from the firm (after deduction of

remuneration and interest allowable) shall be fully exempt in the hands of the

partners. However, only that part of the interest and remuneration which was

allowed as a deduction to the firm shall be taxable in the hands of the partners

in their individual assessment under the head ‘profits and gains of business or

profession’.

2010 - June [2] (b)Write short notes on the following:

(ii) Taxation of zero coupon bonds

(iii) Profit in lieu of salary. (3 marks each)

Answer:

(ii) Please refer 2009 Dec [2] (b) (i) on page no. 28

(iii) Profit in lieu of salary

Following Items are Included in this Category

Compensation: By virtue of Sec. 17(3) (i), any compensation due to or received

by an employee from his employer or former employer at or in connection with

the termination of his employment or modification in terms of his employment is

taxable as profit in lieu of salary.

Other Payments

Any payment in the form of:

• Gratuity

• Commuted value of pension

• Retrenchment compensation

• House rent allowance

Received or due to be received to the extent which is not exempt, and which

it does not consist of contribution made by the employee, or interest thereon, is


taxable as profits in lieu of salary.

Keyman Insurance Policy: Surrender value of the policy endorsed in favour of

the employee, or the sum received by him at the time of retirement, will be

taxable as profit in lieu of salary.

Lump-sum Incentives:

Any amount due or received- before joining employment or after leaving

employment, it is Taxable as profit in lieu of salary.

2010 - Dec [6] (a) Write short notes on the following:

(ii) Capital gains in case of damage or destruction of capital asset

(iii) Clubbing of income of a minor child

(v) Tax on income of foreign institutional investors from capital gains arising from

transfer of their securities. (3 marks each)

Answer:

(ii) Where any person receives at any time during any previous year any money or

other assets under insurance from an insurer on account of damages to, or

destruction of any capital asset, as a result of:

(a) Flood, typhoon, hurricane, cyclone, earthquake or other convulsion of

nature; or

(b) Riot or civil disturbance; or

(c) Accidental fire or explosion; or

(d) Action by an enemy or action taken in combating an enemy (whether with

or without a declaration of war)

Then, any profits or gains arising from receipts of such money or other assets

shall be chargeable to income-tax under the head “capital gains” and shall be

deemed to be the income of such person of the previous year in which such

money or other asset was received and for the purposes of section 48, value of

any money or the fair market value of other assets on the date of such receipts

shall be deemed to be the full value of the consideration received or accruing as

a result of the transfer of such capital asset.

(iii) Clubbing of Income of a minor child

As per this section, income of a minor child will be clubbed in the income of the

parent, whose total income before such clubbing is higher.

Following points are relevant to be noted in this regard –

C If the child earns any income by doing manual work or due to a special skill,

such income will not be clubbed.

C A special deduction of ` 1,500 per child will be allowed to the parent, in

whose income it is clubbed.


C Child’s income will be added to the income of parent, whose income before

such clubbing is higher, in case of separated couple, income of the child will

be added in the income of the parent who maintains the child in the

previous year.

C Any income of a minor child, suffering from any disability of the nature

specified in section 80U will not be clubbed.

(v) Tax on foreign institutional investors from capital gains arising from transfer oftheir securities [Section 115AD]Where the total income of the above assessee includes:(a) Income received in respect of securities other than units of mutual funds

covered under section 10(23D) or of Unit Trust of India; or(b) Income by way of short term or long term capital gains arising from the

transfer of such securitiesThe income-tax on the total income shall be chargeable as under:(a) On the income in respect of securities referred to in clause (a) above @

20%(b) On the income by way of short term capital gains covered under section

111A @ 15%(c) On the income by way of long term capital gains referred to in clause (b)

above @10%(d) On the balance income included in total income special/normal rate as the

case may be.

2011 - Dec [5] (a) Write short notes on the following:(i) Deduction in respect of interest on loan taken for higher education. (3 marks)

Answer:The deduction under section 80E is available to an individual if following conditions aresatisfied:1. Deduction available only to Individual not to HUF or other type of Assessee.2. Deduction amount:– The amount of interest paid is eligible for deduction and

moreover there is no cap on the amount to be deducted. You can deduct the entireinterest amount from your taxable income. However there is no benefit availableon the repayment of principal amount of the loan.

3. Deduction available if Interest is been paid during the previous year and was paidout of income chargeable to tax which means if repayment is made from incomenot chargeable to tax than deduction will not available.

4. Interest should have been paid on loan taken by him from any financial institutionor any approved charitable institution for the purpose of pursuing his highereducation. Interest on Loan taken from relatives or friends will not be eligible fordeduction under section 80E.


5. Loan should have been taken for the purpose of pursuing higherstudies ofIndividual, Spouse, Children of Individual or of the student of whom individual islegal Guardian.

6. The whole of the amount paid during previous year towards interest is allowed asdeduction and deduction shall be allowed for 8 assessment years starting from theassessment year in which the assessee starts paying the interest on loan, or untilthe interest thereon is paid by the assessee in full, whichever is earlier.

2012 - June [5] (b) Write short notes on the following:

(i) Scientific research expenditure

(ii) Capital assets (3 marks each)

Answer:

(i) Scientific Research Expenditure

Section 35 of the Act provides tax incentives for scientific research expenditure.

Where the assessee himself carries on scientific research and incurs revenue

& capital expenditure, deduction is allowed for such expenditure only if the

research relates to his business. Further, Expenditure incurred during 3 years

prior to commencement of business shall be deemed to be the expenditure of

the year in which business commenced.

Where the assessee does not himself carry on scientific research but makes

contribution to an approved scientific research association, university, college or

approved institutions to be used for scientific research, related or unrelated to the

business of assessee, deduction shall be allowed to the extent of 175% of the

sum paid.

(Where any sum is paid to a National Laboratory, approved for this purpose

by the ICAR or ICMR or CSIR etc. or to any university, or to I.I.T. (Indian Institute

of Technology), a weighted deduction of 175% or 200% of the sum paid shall be

allowed as deduction.)

(ii) Capital Assets

Section 2 (14) of the Income-tax Act defines the term "Capital Assets: to

means:

Property of any kind held by an assessee whether or not connected with his

business or profession, but does not include:

(i) Any stock-in-trade, consumable stores, or raw materials, held for the

purposes of business or profession

(ii) Personal effects (excluding jewellery, archaeological collections, drawings,

painting. Sculptures or any work art.)

(iii) Rural Agricultural land in India. In other words, it must not be an Urban

agricultural land. Rural agricultural land means an agricultural land in India


provided it is not situated in !

(a) Any area which is comprised within th jurisdiction of a municipality

having a population of 10,000 or more.

(b) Any area within the distance, measured aerially :

C More than 2 kms from the local limits of any Municipality or

Cantonment Board having a population of more than 10,000 but not

exceeding 1,00,000; or


Cantonment Board having a population of more than 1,00,000 but

not exceeding 10,00,000 ; or


Cantonment Board having a population of more than 10,00,000.

(iv) 6½% Gold Bond, 1977 or 7% Gold Bonds, 1980 or National Defence Gold

Bonds, 1980 issued by the Central Government.

(v) Special Bearer Bonds, 1991 issued by Central Government.

(iv) Gold Deposit Bonds issued under Gold Deposit Scheme, 1999.

DISTINGUISH BETWEEN

2008 - Dec [3] (b) Distinguish between of the following:

(i) ‘House rent allowance’ and ‘rent free house’.

(ii) ‘Cost of acquisition’ and ‘cost of improvement’.

(iii) ‘Fair rent’ and ‘annual rent’. (3 marks each)

Answer:

(i) ‘House rent allowance’ and ‘rent free house’

S. No. House Rent Allowance Rent free house

1 It is dealt under section 10(13A) and

Rule 2A

It is a kind of perquisite. It is dealt

under section 17(2)(i) of the Act.

2 While calculating salary and basic pay,

dearness allowance and commission (if

terms of employment provide) is

included.

Under calculation of salary, apart

f rom basic pay, DA and

Commission, Bonus, fees and other

taxable allowance are also included

3 Only taxable portion (after deduction) is

added to the Gross Salary of the

assessee

In this case, it is included in the

Gross Salary of the assessee as

perquisite.


(ii) ‘Cost of acquisition’ and ‘cost of improvement’:

The distinction between ‘Cost of acquisition’ and ‘cost of improvement’ can be

explained in the following lines. The above two terms are associated with the

capital assets.

Cost of Acquisition:

Cost of acquisition of an asset is the value for which it was acquired by the

assessee. Expenses of capital nature for completing or acquiring the title to the

property are includible in the cost of acquisition. Cost of acquisition always

precedes cost of improvement.

Cost of Improvement:

It is the capital expenditure incurred by the assessee in making any

additions/improvement to the capital asset. It also includes any expenditure

incurred to protect or complete the title to the capital assets or cure such title.

Any expenditure incurred to increase the value of the capital asset is treated as

cost of improvement. Any cost of improvement incurred before 1.4.1981 is not

taken into consideration for calculating capital gains chargeable to tax.

(iii) ‘Fair rent’ and ‘annual rent’:

Fair rent means the sum of for which the property might reasonably be expected

to let from year to year. This rent is also known as notional rent. It will be equal

to the rent which a similar property fetches in the neighborhood.

Where as annual rent means the actual rent. This happens only where the house

property has been actually let. Again annual rent means (i) if property is let out

throughout the previous year the annual rent received or receivable for that year

and (ii) if the property is let out for a part of the year the amount which bears the

same proportion to actual rent received or receivable for the period of letting as

the period of twelve month bears to the period of letting.

2009 - June [3] (a) Distinguish between the following:

(ii) 'Long-term capital gain' and 'short-term capital gain'. (2 marks)

Answer:

Distinguish between Short - term capital gain and long - term capital gain:

Short term capital gain:

S.T.C. gains means any gains arising from transfer of a Capital Asset for which the

holding period is less than 36 months from date of purchase except for shares &

securities of such companies listed on recognised stock exchanges & traded through

such exchanges & on which securities transaction tax is paid where the holding period

less than 12 months shall be termed as short term. If Capital Asset as defined u/s

2(42A). Short Term Capital gains also includes S.T.C. Loss termed as negative gains


Long term capital gain:

L.T.C. Gains means any gains arising from transfer of any Capital Asset, for which the

holding period is 36 months or more, except for shares & securities of such companies

listed on recognised Stock Exchanges & traded through such exchanges on which

securities transaction tax is paid, the holding period shall be 12 months or more from

the date of purchase. Such Assets Shall be termed as Long Term Capital Assets.

2009 - Dec [3] (a) Distinguish between the following:

(ii) ‘Recognised provident fund’ and ‘statutory provident fund’. (4 marks)

(iv) ‘Exemptions’ and ‘deductions’. (4 marks)

Answer:

(ii) Recognized Provident Fund is set-up under the provisions of Employee's

Provident Fund Act, 1952. This fund is maintained by the private sector

organizations and factories.

Apart from this where provident fund maintained by other organization is

recognized by the income-tax authorities, such fund is also deemed as

recognized provident fund. On the other hand statutory provident fund is set-up

under the provisions of Provident Fund Act, 1925. This fund is applicable to the

employees of Central Government, State Government and Semi-Government.

Under this fund only the employee's contribution is deposited. The Government

does not contribute any amount while in case of RPF both employer and

employee can deposit the contribution. Employer's contribution to RPF up to

12% of salary is exempted and any amount in excess of 12% is included in gross

sal ary of the employee. Interest up to 9.5% p.a. is exempted and any amount

of interest in excess of 9.5% p.a. included in the gross salary of the employee.

(iv) Exemptions from tax are covered under section 10 and 11 of the income tax act

and deductions are covered under chapter VIA of the Income Tax act.

Certain incomes are exempt and they are not considered during the

calculation of total income such as interest from PPF, dividends from Indian

companies, agricultural income, income from NRE account, etc. These are

known as exempt incomes.

But deductions are done from taxable income suppose you invest in ELSS,

PPF, LIC ,etc. pay medical insurance or donate to approved charitable

institutions then you get deductions from your gross total income. There are

however limitations to the quantum of deductions. as per provision laid down in

Sec. 80


2010 - June [3] (b) Distinguish between the following:

(iii) ‘Exemption to capital gains under section 54G’ and ‘exemption to capital gains

under section 54GA’. (2 marks)

Answer:

Exemption under section 54G is available for capital gains on transfer of assets in cases

of shifting of industrial undertakings from urban areas whereas exemption under section

54GA is available for capital gains on transfer of shifting of industrial undertaking from

urban area to any special economic zone.

Under section 54G the transfer is affected in the course of or in consequence of shifting

the undertaking from an urban area to any area whereas under section 54GA the

transfer is effected in the course of or in consequence of shifting the undertaking from

an urban area to any special economic zone.


(i) ‘Long-term capital gains’ and ‘short-term capital gains’.

(iii) ‘Normal depreciation’ and ‘additional depreciation’. (4 marks each)

Answer:

(i) Please refer 2009 - June [3] (a) (ii) on page no. 34

(iii) Normal depreciation & additional depreciation

(a) Normal depreciation is available in respect of all tangible assets and

intangible asset such as building, machinery, plant, furniture, patent, etc.

while additional depreciation is available only in the case of Plant &

Machinery.

(b) Normal depreciation is available in respect of both types of new and old

while additional depreciation is available only in respect of new plant &

machinery which is acquired and installed after 31st March, 2005

(c) Normal depreciation is computed by applying different rates of depreciation

prescribed for a particular asset while additional depreciation is computed

by applying a uniform rate of depreciation viz. 20% of the actual cost of new

plant & machinery

(d) The system of “block of assets” is quite relevant for computing normal

depreciation while it is not relevant for computing additional depreciation

(e) Any plant & machinery which is used in business of the assessee is eligible

for normal depreciation while certain plant & machinery, even if new, are not

eligible for additional depreciation like ships and aircrafts, plant & machinery

which was already used by a person either in India or abroad, plant &

machinery which is used in any office premises or any residential


accommodation or in a guest house, any office appliances or road transport

vehicle or plant & machinery the entire cost of which has already been

allowed as deduction either by way of depreciation or otherwise.


(i) 'Cost of acquisition' and 'cost of improvement'.

(iii) 'Short-term capital gains' and 'long-term capital gains'. (3 marks each)

Answer:

(i) Please refer 2008 - Dec [3] (b) (ii) on page no. 33

(iii) Please refer 2009 - June [3] (a) (ii) on page no. 34


(ii) ‘Allowances’ and ‘perquisites’.

(iv) ‘Exemption under section 54G’ and ‘exemption under section 54GA’.

(v) ‘Statutory provident fund’ and ‘public provident fund’. (3 marks each)

Answer:

(ii) ‘Allowances’ and ‘perquisites’

S.No. Allowance Perquisites

1. An allowance is a cash payment to

employees on regular basis in

addition to salary to meet certain

expenses incurred by him in

connection with duties of his office

or to compensate him for any

expenditure relating to performance

of his duty in particular circums-

tances or at particular place or

under a contract

Perquisites means any casual emolument,

fee or profit attached to an office or

position in addition to salary or wages.

2. An allowance may be wholly

taxable, partially taxable or wholly

exempt

It is a personal advantage & benefit of the

recipient. It may also be given voluntary or

under a contract, in cash or in kind by way

of goods, service benefit or amenities

(iv) ‘Exemption under section 54G’ and ‘exemption under section 54GA’

S.No. Exemption under section 54G Exemption under section 54GA

1. This exemption is available on

Capital Gain on Transfer of Capital

This exemption is available on Capital

Gain on Transfer of Capital assets in


assets in Case of Shifting of

Industrial Undertaking from Urban

Area

Case of Shifting of Industrial

Undertaking from Urban Area to any

SEZ

2. This exemption is available an

individual, HUF, company or any

other person who transfers the

capital assets (being plant,

machinery, land or building or any

right in the land or building) being

used for the purpose of industrial

undertaking situated in an urban

area to any area other than urban

area

This exemption is available an

individual, HUF, company or any other

person who transfers the capital assets

(being plant, machinery, land or building

or any right in the land or building) being

used for the purpose of industrial

undertaking situated in an urban area to

a special economic zone (SEZ).

(v) ‘Statutory provident fund’ and ‘public provident fund’

S.No. Statutory Provident Fund Public Provident Fund

1. Statutory Provident fund is set up

under the Provident Fund Act, 1925

and is maintained by Government

or Semi-Government offices or

bodies, local authorities, railways,

universities, colleges, corporations,

banks and recognized educational

institutions, etc.

While provident fund is governed by

Public Provident Fund Act, 1968 to

mobilize public savings

Only salaried person can become

members of Statutory Provident

Fund

Any person can become the member of

Public Provident Fund

The contribution of members is

deducted by the employers from

the salary of their employees

Members of PPF have to open provident

fund account at any branch of the SBI or

its subsidiaries and specified branches

of nationalized banks

Amount of contribution to SPF is

computed at a specified rate on

account of salary of an employees

Member can deposit any amount subject

to a minimum of ` 500 and a maximum

of ` 1,00,000 per year


(i) ‘Firm’ and ‘association of persons’. (3 marks)


Answer:

A firm refers to a partnership firm. Partnership has been defined under the Partnership

Act, 1932 as "relationship between persons who have agreed to share the profits of a

business carried on by all or any of them acting for all.” Persons who have entered into

partnership with one another are individually called partners and collectively a firm and

the name under which their business is carried on, is call the firm’s name.

An association of persons (AOP) implies a voluntary getting together for a common

design or particular venture to engage in an income producing activities.

2012 - Dec [6] (c) Distinguish between the following:

(i) ‘Recognised provident fund’ and ‘unrecognised provident fund’.

(iii) ‘Taxation of unrealised rent received’ and ‘taxation of arrears of rent received’.

(3 marks each)

Answer:

(i) Recognized Provident Fund is set-up under the provisions of Employee's

Provident Fund Act, 1952. This fund is maintained by the private sector

organizations and factories.

Apart from this where provident fund maintained by other organization is

recognized by the income-tax authorities, such fund is also deemed as

recognized provident fund. On the other hand statutory provident fund is set-up

under the provisions of Provident Fund Act, 1925. This fund is applicable to the

employees of Central Government, State Government and Semi-Government.

Under this fund only the employee's contribution is deposited. The Government

does not contribute any amount while in case of RPF both employer and

employee can deposit the contribution. Employer's contribution to RPF up to

12% of salary is exempted and any amount in excess of 12% is included in gross

salary of the employee. Interest up to 9.5% p.a. is exempted and any amount of

interest in excess of 9.5% p.a. included in the gross salary of the employee

(iii) Taxation of unrealized rent received and taxation of arrears of rent received

Provisions regarding taxation of unrealized rent are given under section 25AA,

where the assesses cannot realize rent from a property let to a tenant and

subsequently the assesses has realized any amount in respect of such rent the

amount so realized shall be deemed to be the income chargeable under the

head income from house property and accordingly charged to income tax as the

income of that previous year in which such rent is realized whether or not the

assessees is the owner of that property in the previous year.

While in case of taxation of arrears of rent, section 25B provides that if any

arrears of rent are received in subsequent year the same will be taxed in the


year of receipt whether the property is owned by the assesses in the year of

receipt or not, deduction of sum equal to 30% of such amount of rent shall be

allowed towards receipts and collection of rent.


2008 - Dec [3] (a) Attempt the following:

(ii) “Expenditure on scientific research is allowed as deduction even if contribution

is made to other institutions for scientific research.” Explain the statement.

(iii) A Person receives money from an insurer on account of damage to a capital

asset resulting from accidental fire. Whether such money shall be taxable as

capital gains? Explain. (3 marks each)

Answer:

(ii) • Contribution made to an approved Scientific Research Association/

University/ College/ Institution, a weighted deduction of 175% of the

contribution paid is available [Section 35(1) (ii)]. Such association has, as its

object, undertaking of scientific research related or unrelated to the business

of the assessee

• The payment is made to an approved university, college or institution for the

purpose of scientific research that is related or unrelated to the business of

the assessee, a weighted deduction of 125% is allowed.

• The payment is made to an approved university, college or institution for the

purpose of research for social sciences that is related or unrelated to the

business of the assessee

Contribution made to an approved Scientific Research Company, a weighted

deduction of the contribution paid is available subject to following conditions

[Section 35(1)(iia)]

• The Taxpayer may be any Person as defined under the Income Tax Act,

1961

• The Payee Company is registered in India;

• The scientific research may/ may not be related to the business of the

company;

• The Payee Company has as its main object Scientific research and

development;

• The Payee Company is, for the purposes of this clause, for the time being

approved by the prescribed authority in the prescribed manner;


• The Payee Company fulfils such other conditions as may be prescribed.

However deduction under Section 35(1)/ (2) would continue to be allowed being

Revenue/ Capital expenditure incurred.

Contribution made to Notified Institutions, wherein weighted deduction is

available to the extent of 200% of such payment made [Section 35(2AA)]

The Notified institutions are:

(i) National Laboratory.

(ii) University.

(iii) Indian Institute of Technology.

(iv) Specified persons as approved by the prescribed authority.

• The above payment is made under a specific direction that it should be

used by aforesaid persons for undertaking scientific research

programs approved by the prescribed authority.

(iii) Yes, such money shall be taxable as capital gains.

Where any capital asset is destroyed as a result of fire, earthquake or for any

other reasons, e.g. sinking of a ship, etc, such destruction of asset will be

included in the extended meaning of the word ̀ transfer'. Section 2(47) of the Act

which defines `transfer' does not include destruction of an asset.

2008 - Dec [6] (b) Indicate the amount of deduction available to an assessee from his

gross total income under section 80GG in respect of rent paid. Point out the

circumstances when the deduction will be denied. (7 marks)

Answer:

Deduction in respect of Rent Paid (Section 80GG)

Deduction admissible under this section is:

C Actual rent paid less 10% of Adjusted Total Income

C 25% of such Adjusted Total Income

C Amount calculated at ` 2,000 p.m.

Whichever is least

Adjusted Total Income is the adjusted total income under section 80G except exempted

income less long term capital gain. However, certain conditions as given below are

required to be fulfilled/satisfied for claiming u/s 80GG

(i) The assessee should not be receiving any house rent allowance exempt under

section 10(13A) or rent free accommodation

(ii) The accommodation should be occupied by the assessee for the purpose of his

own residence

(iii) The assessee fulfills such other conditions or limitations as may be prescribed

having regard to the area or place in which such accommodation is situated and


other relevant consideration.

(iv) The assessee or his spouse or his minor child or an HUF of which he is a

member does not own any accommodation at the place where he ordinarily

resides or performs duties of his office or employment or carries on his business

or profession.

(v) If the assessee owns any accommodation at any place other than that referred

to above, such accommodation should not be in occupation of the assessee and

its annual value is not required to be determined.

(vi) Allowed only to an individual assessee after furnishing Form 10BA along with

return of income.

2009 - June [4] (c) Discuss the items which are disallowed as deduction under section

40 (b) while computing firm's income from business and profession. (3 ‘marks)

Answer:Section 40 (b) deals with the amount which are not deductible in case of a firm.Therefore deductions on accounts of interest and remunerations to the partners can beclaimed u/s 36 or 37, as the case may be, but it will be subject to conditions prescribedby section 40(b) which are as follows:1. Payment of salary, bonus, commission or remuneration, by whatever name called

to non – working partner shall not be allowed as deduction.2. Remuneration to working partners and interest to any partner will be allowed as

deduction only when it is authorized by partnership deed.3. Payment of remuneration/interest although authorized by partnership deed but

which relates to a period prior to the date of such partnership deed shall not beallowed.

4. Interest payable to a partner shall be allowed as deduction subject to a maximumof 12% simple interest p.a.

If the partnership deed provides for an interest @ less than 12% p.a. thendeduction of interest shall be allowed to that extent.

5. Payment of remuneration to a working partner although relates to period after thedate of partnership deed and authorized by the partnership deed shall be allowedas deduction to the extent provided in the partnership deed but subject to themaximum limits provided in the act.

2009 - Dec [4] (a) What are the special provisions for computing profits and gains ofretail business? (5 marks)(b) What are the provisions relating to clubbing of income arising to spouse from the

assets transferred ? (5 marks)Answer:(a) Provisions under section 44 AD shall become Applicable in case of an assessee


engaged in any business except the business of plying, hiring or leasing goodscarriage, 8% of the total turnover or such higher income as may be returned by theassessee shall be deemed to be the profits of such business. This provisionapplies only if the total turnover of sales of such retail business does not exceed` 1 crore. In calculating such presumptive profits @ 8% of sales the said provisionsshall have to be considered(i) All deductions u/s 30 to 38 including deprecation shall be deemed to have

been allowed [i.e no expenditure shall be allowed as deduction from suchincome @ 8% of T/o]

(ii) Provisions of Sec. 44AA & 44AB pertaining to maintaining of books ofAccounts & disallowance with reference to monetary limits of transactions shallnot apply. However all such data which [i.e. maintenance of books of accountsis not required] shall show the calculation of sales, stock, debtors, creditorsshall be maintained by the assessee.

(iii) In case of an assessee which is a firm to which prov. of 44AD are applied, the

salary/remuneration & interest paid to its partners shall be deducted from the

income computed under this provisions & the allowance of

salary/Remuneration & interest shall be subject to the conditions & limits

specified in sec 40(b)

(iv) WDV of assets used for the purpose of such business shall be calculated as

if depreciation has been actually provided.

(b) As per the provision of Sec 64(1) (iv) in computing the total income of the

individual, all such income arising directly or indirectly to the spouse of such

individual from assets transferred to the spouse by such individual otherwise then

for adequate consideration or in connection with an agreement to live apart shall

be clubbed in the income of transferor. However any further income earned on

such clubbed income shall be taxable in the hands of spouse.

Income from assets transferred to any person for the benefit of the spouse of the

transferor as per the provision of sec 64(1) (vii) shall be taxable in the hands of

transferor of the asset.

Condition for clubbing:

1. The relationship of husband and wife must exist both at the time of transfer of asset

and at the time of accrual of income.

2. Consideration must be NIL or inadequate.

3. Where such assets or cash transfer by way of gift to the spouse is invested by the

transferee in any business (except by way of capital contribution in a partnership

firm), the income shall be clubbed in the following manner.


No clubbing provision shall persist where both the spouse are prof. qualified and are

partners earning income by virtue of the qualifications.

2009 - Dec [5] (c) “Loss under any head of income for any assessment year can be set-

off against the income from other heads of income but when it has to be carried forward

for being set-off, it can only be set-off from income under the same head.” Explain.

(5 marks)

Answer:

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. Consider a situation where Harsh has two properties – one, occupied by him

and the other, let out. Harsh pays interest on loan of ` 1.50 lakh on the property

occupied and derives net rental income of ̀ 1.50 lakh from the let-out property. In case

of a self-occupied property, income is computed as nil and interest expenditure results

in loss. The loss of ` 1.50 lakh can be set off against rent income of ` 1.50 lakh; the

income chargeable under the head ‘House property’ will be ‘Nil’.

An exception to intra head set off is loss under the head ‘Capital gains’, which may

arise from transfer of any capital asset. Long-term capital loss arises from transfer of

shares or units where holding period is more than 12 months and in respect of other

assets holding period is more than 36 months prior to sale. Transfer of assets held for

less than prescribed period results in short-term capital loss. Long-term capital loss

cannot be set off against short-term capital gains. but S. Term loss can be adjusted

against S.T.C.G or LTCG.

Further, loss incurred from speculation loss (e.g. from shares or commodities)

cannot be set off against any other income.

Also, it is unlikely that the benefit of set off of loss under an activity or source will

be available, where the income from an activity or source is exempt from taxation.

2009 - Dec [6] (b) What are ‘capital assets’ ? What items are not included in capital

assets? (5 marks)

Answer:

As per the definition of capital asset under section 2(14), Capital asset means property

of any kind, whether fixed, circulating, movable, immovable, tangible or intangible. The

following are however excluded:


(i) Any stock in trade, consumable stores or raw materials held for the purposes of

business or profession.

(ii) Personal Assets of the assessee, i.e., movable property (including wearing

apparels of the assessee and furniture) held for personal use, but excludes:

• Jewellery;

• Archaeological collections;

• Drawings;

• Paintings;

• Sculptures;

• Any work of art.

(iii) Rural agricultural land in India.

(iv) Gold Deposit Bonds issued under Gold Deposit scheme 1999.

(v) Special Bearer bonds 1991 issued by the Central Government.

(vi) 6.5% Gold Bonds 1977; 7% Gold Bonds 1980 or National Defense Gold bonds

1980 issued by the Central Government.

2010 - June [3] (a) An asset is transferred by a person to another person under a partly

revocable transfer whereby a part of the asset will revert back to the transferor. Who

shall be liable to pay tax in respect of income from the asset transferred as per section

61? (2 marks)

Answer:

All income arising to any person by virtue of a revocable transfer or partly revocable

transfer of assets shall be chargeable to income-tax as the income of the transferor and

shall be included in his total income. Therefore transferor shall be liable to pay tax in

respect of income from the assets transferred as per section 61.

2010 - June [4] (c) Discuss the cases in which payment by way of loan/advance to the

extent of accumulated profits by a closely held company is treated as dividend under

section 2(22)(e). (4 marks)

Answer:

As per section 2(22)(e) of Income Tax Act 1961:“any payment by a company, not being

a company in which the public are substantially interested, of any sum (whether as

representing a part of the assets of the company or otherwise) [made after the 31st day

of May, 1987, by way of advance or loan to a shareholder, being 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) holding not less than ten per cent of the

voting power, or to any concern, in which such shareholder is a member or a partner

and in which he has a substantial interest (hereafter in this clause referred to as the said

concern)] or any payment by any such company on behalf, or for- the individual benefit,


of any such shareholder, to the extent to which the company in either case possesses

accumulated profits”

Private Limited Companies generally give Loan or Advance to their director and family

members who are again shareholders holding 10% or more voting power or to a

concern in which such shareholder has substantial interest. Such loan or advance is

treated as deemed dividend covered under section 2(22)(e) and taxable in the hands

of shareholders or concern as the case may be.

Following points are to be understood with reference to the above:

(i) Sub-clause (e) applies when distribution or payment referred to therein are

connected with accumulated profits. The undistributed income, when

accumulated from year to year, generates what is known as "accumulated profit".

Accumulated profits shall include all profits of the company till the date of

distribution or payment

(ii) Current profits are included in "accumulated profits" in section 2(22)(e) of I.T. Act

1961. The expression "accumulated profits" was defined in the 1961 Act so as

to include current profit up to date of distribution or payment.

(iii) The phrase "accumulated profits" does not mean aggregate of assessed profits

but commercial profits. If certain disbursements have been disallowed in the

assessment proceedings but the expenditure had in fact been incurred, they

should be excluded from accumulated profits. In computing commercial profits,

all the disbursements made and expenditure incurred for the purpose of

business should be taken into account.

2010 - Dec [5] (b) Discuss the provisions relating to ‘carry forward and set-off of

business losses’. (3 marks)

Answer:

Carry forward and set off of losses

The provision relating to carry forward and set off of losses are given as below:

If the losses of any head could not be set off in the same year such losses shall be

carried forward to next years. The following losses can be carried forward:

1. Losses from House Property

2. Losses from general business

3. Losses from speculation business

4. Losses from specified business

5. Capital losses-Short term and Long term

6. Losses from horses maintenance

7. Losses from firm


Rules for Carry Forward

1. The losses from house property can be carried forward for maximum period of 8

years and be set off only from Income from house property

2. Losses from general business can be carried forward for maximum period of 8

years and be set off from the profits of general business as well as profits from

speculation business

3. Losses of speculation business can be carried forward for maximum period of 8

years and be set off only from the profits from speculation business

4. Short term or long term capital losses can be carried forward for 8 years and set

off only against capital gains

5. Losses on owing and maintaining of horse races be carried forward for 4 years and

be set off only from profits under the same head.

2011 - June [6] (a) Describe the provisions relating to chargeability of unexplained

investment not recorded in the books of account. (4 marks)

(b) "If an individual writes a book, he shall be allowed deduction from his gross total

income". Explain the statement. (4 marks)

Answer:

(a) Where in the financial year immediately preceding the assessment year the

assessee has made investments which are not recorded in the books of account,

if any, maintained by him for any source of income, and the assessee offers no

explanation about the nature and source of the investments or the explanation

offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value

of the investments may be deemed to be the income of the assessee of such

financial year.

(b) If an individual writes a book he shall be allowed a deduction for his gross total

income under section 80QQB of the act 80QQB.

(1) Where, in the case of an individual resident in India, being an author, the

gross total income includes any income, derived by him in the exercise of his

profession, on account of any lump sum consideration for the assignment or

grant of any of his interests in the copyright of any book being a work of

literary, artistic or scientific nature, or of royalty or copyright fees (whether

receivable in lump sum or otherwise) in respect of such book, there shall, in

accordance with and subject to the provisions of this section, be allowed, in

computing the total income of the assessee, a deduction from such income,

computed in the manner specified in sub-section (2).

(2) The deduction under this section shall be equal to the whole of such income

referred to in sub-section (1), or an amount of three lakh rupees, whichever is


less:

Provided that where the income by way of such royalty or the copyright

fee, is not a lump sum consideration in lieu of all rights of the assessee in the

book, so much of the income, before allowing expenses attributable to such

income, as is in excess of fifteen per cent of the value of such books sold

during the previous year shall be ignored:

Provided further that in respect of any income earned from any source

outside India, so much of the income shall be taken into account for the

purpose of this section as is brought into India by, or on behalf of, the

assessee in convertible foreign exchange within a period of six months from

the end of the previous year in which such income is earned or within such

further period as the competent authority may allow in this behalf.

(3) No deduction under this section shall be allowed unless the assessee

furnishes a certificate in the prescribed form and in the prescribed manner,

duly verified by any person responsible for making such payment to the

assessee as referred to in sub-section (1), along with the return of income,

setting forth such particulars as may be prescribed.

(4) No deduction under this section shall be allowed in respect of any income

earned from any source outside India, unless the assessee furnishes a

certificate, in the prescribed form from the prescribed authority, along with the

return of income in the prescribed manner.

(5) Where a deduction for any previous year has been claimed and allowed in

respect of any income referred to in this section, no deduction in respect of

such income shall be allowed under any other provision of this Act in any

assessment year.

Explanation.—For the purposes of this section,—

(a) “author” includes a joint author;

(b) “books” shall not include brochures, commentaries, diaries, guides,

journals, magazines, newspapers, pamphlets, text-books for schools,

tracts and other publications of similar nature, by whatever name called;

(c) “competent authority” means the Reserve Bank of India or such other

authority as is authorised under any law for the time being in force for

regulating payments and dealings in foreign exchange;

(d) “lump sum”, in regard to royalties or copyright fees, includes an advance

payment on account of such royalties or copyright fees which is not

returnable.


2011 - Dec [3] (c) Describe the provisions relating to chargeability of cash credits in

respect of which the assessee has no satisfactory explanation. (5 marks)

Answer:

Under section 68 of the Act where any sum is found credited in the books of an

assessee maintained for any accounting year and the assessee is not in a position to

offer explanation about the nature and sources thereof or the explanation offered by him

is not satisfactory in the opinion of the assessing officers, the sum so credited may be

treated as the assessee in respect of the accounting year in which the cash credit are

found to have made in the books. This section comes into operation only when the

following conditions are satisfied:

1. The assessee maintains books of account

2. The assessee fails to explain the source and nature of the sum credited; and

3. The explanation offered by the assessee is not satisfactory and the assessing

officer comes to the conclusion that it is the undisclosed income of the assessee.

2012 - June [3] (c) What is meant by ‘block of assets’? Explain. (3 marks)

Answer:

Block of Assests

As per section 2(11), Block of assets means a group of assets falling within a class of

assets comprising,

(a) Tangible assets being buildings, machinery, plant or furniture.

(b) Intangible assets, being Know-how, patents, copyrights, trademarks, lincenses, in

respect of which the same percentage of depreciation is prescribed.

Each class of assets other than intangible assets may have different blocks or

groups on which separate rates of depreciation are prescribed and for each such rate,

separate block will be formed.

2012 - Dec [1] {C} (Or) (c) What are the provisions of section 54F in relation to capital

gains on transfer of asset other than a residential house? (5 marks)

Answer:

Any long term capital gain, arising to an individual or HUF from the transfer of any long

term capital asset, not being residential house property shall be exempt in full, if the

entire net sales consideration is invested in purchase of one residential house within

one year before or 2 years after the date of transfer of such an asset or in the

construction of one residential house within 3 years after the date of such transfer.

Where part of the net sales consideration is invested, then Long term capital gain shall

be exempted proportionately.

The proportionate exemption shall be that amount of capital gains which bears the


same proportion which the amount invested in the new house bears to the net

consideration price of the asset transferred i.e.

The above exemption shall be available only when the assessee does not own more

than one residential house property on the date of transfer of such asset exclusive of

the one which he has bought for claming exemption u/s 54F.

2012 - Dec [4] (b) (ii) Explain the provisions relating to taxation of winnings from

lotteries. (3 marks)

(c) “Capital gains arise in the previous year in which the transfer took place.” Are

there any exceptions to this rule? Explain. (5 marks)

Answer:

(b) Taxation of winnings from lotteries

Any winnings from lotteries, crossword puzzles, races including horse races, card

games and other games of any sort or from gambling or betting of any form or

nature whatsoever are chargeable to tax as “Income from other sources”. Although

winning from lotteries is part of total income of the assessee, such income is

taxable at a special rate 30%. Deduction of any expenses, allowances or loss are

not allowed from such winnings.

(c) Capital gain arises in the previous year in which the transfer of the asset takes

place even if the consideration for the transfer is received or released in later years.

However, there are 3 exceptional cases where capital gain is taxable not in the

year of transfer of the asset but in some other year. These exceptions are:

(i) Damage or destruction of any capital asset by fire or other calamities

(ii) Conversion of capital asset into stock-in-trade

(iii) Compulsory acquisition of an asset.

PRACTICAL QUESTIONS

2008 - Dec [5] (a) Gulshan submits the following information relevant for the financial

year 2013-14:

Profit Loss

(`) (`)

Salary income 8,00,000 $

Income from house property:

House-A 25,000 $


House-B $ 30,000

Profits and gains of business or profession:

Business-A 12,000 $

Business-B $ 20,000

Business-C (Speculative) 22,000 $

Business-D (Speculative) $ 35,000

Capital gains:

Short term capital gains 10,000 $

Short term capital loss $ 30,000

Long-term capital gains on sale of building 16,000 $

Income from other sources:

Loss on maintenance of race horses $ 15,000

Determine the net income of Gulshan for the assessment year 2014-15. (7 marks)

Answer:

Income from Salary 8,00,000

Income from HP (House A) 25,000

(House B) (30,000) (5,000)

Income from Business & Profession

Business A 12,000

Business B (20,000) (8,000)

Income from speculative business

Business C 22,000

Business D (35,000) (13,000)

Income from Capital gain

Short term capital gain 10,000

Short term capital loss (30,000)

Long term capital gains 16,000 (4,000)

Income from other sources

Loss on maintenance of race horses (15,000)

Net Income of Gulshan ` ` ` ` 7,95,000*

*Notes:

• Loss from PGBP can not be set-off against salary income.

• Loss from speculative business can be set-off against speculative income only.

• Capital loss would be allowed to adjusted against capital gain only.

• Loss on maintenance of race horses can not be set off against other incomes.

2009 - June [5] (b) Discuss the taxability or otherwise of the following gifts received by

Madhuri, a lady, during the financial year 2013-14:


(i) ` 30,000 from her elder sister.

(ii) ` 50,000 from the daughter of her elder sister.

(iii) Wrist watch valued at ` 6,000 from her friend. (3 marks)

Answer:

Applicable section: - 56(2)(vi)

(i) Gift received form elder sister will not be taxable as per the IT Act, 1961 as she

is a relative of Madhuri and any sum received from a relative is not taxed as per

the provisions of the Act.

(ii) Amount received from the daughter of her sister would have been taxable, had

it exceeded ` 50, 000. Up to ` 50, 000 it is not chargeable to tax.

(iii) Wrist watch is not a cash gift, hence will not be taxable.

2009 - Dec [5] (a) Anurag sells a plot of land on 8th July, 2013 for ` 40 lakh and paid

brokerage on its sale @ 1%. He purchased this plot on 19th December, 1986 for

` 4,20,000. On 1st February, 2014, he purchased a residential house for ` 15 lakh. He

owns one residential house on 8th July, 2013. The cost inflation index for 1986-87 was

140 and for 2013-14 is 939. Find out the amount of capital gains chargeable to tax for

the assessment year 2014-15. Suppose Anurag sells the new residential house before

1st February, 2017, what will be the taxable amount of capital gains and in which year

it will be charged to tax ? If Anurag purchases any other residential house before 1st

February, 2016, what will be the taxable amount of capital gains and in which year it will

be charged to tax ? (5 marks)

(b) Danny has the following investments in the previous year ended 31st March, 2014:

(i) ` 7,160 received as interest on securities of Karnataka government.

(ii) ` 9,000 received as interest on securities of a listed paper manufacturing

company.

(iii) ` 7,200 received as interest on the unlisted securities of a sugar company.

(iv) ` 30,000, 11% securities (unlisted) of a textile company.

(v) ` 20,000, 10% Tamil Nadu government loan.

(vi) ` 50,000, 13.5% listed debentures of Dolly Ltd.

Interest on all securities is payable on 30th June, and 31st December. The bank

charges 1.5% commission on net realisation of interest as collection charges.

Danny also received ̀ 15,000 as director’s fee from a company. His other incomes are

— winnings from horse race: ̀ 25,000 (gross); and interest on post office savings bank

account: ` 6,000.

Find out taxable income of Danny from other sources for the assessment year 2014-15.

(5 marks)

Answer:


(a) Computation of income from Capital Gains of Mr. Anurag for the Assessment

Year 2014-15

Particulars Amount ( ` ` ` `)

Sales consideration

Less: Brokerage on Sales @ 1%

Net sales consideration

40,00,000

40,000

39,60,000

Less: Indexed Cost of Acquisition 4,20,000 × 28,17,000

LTCG 11,43,000

Less: Exemption under section 54F 11,43,000 × 4,32,955

Taxable Income from Capital Gains 7,10,045

If Mr. Anurag sells the new house before February, 2017 then ̀ 4,32,955 being the

amount of capital gains exempted during the Assessment Year 2014-15 under

section 54F will be chargeable to tax for the year in which the house is sold as

long-term capital gains.

If Mr. Anurag purchases any other residential house before February 1, 2016

but after July 8, 2016 then he will not have any tax liability on account of Capital

Gain. If Mr. Anurag purchases any other residential house before July 8, 2016

(i.e., within two years from the date of transfer of the original asset) then

` 4,32,955 will be taxable as long-term capital gains for the year in which another

house is purchased.

(b) Computation of Income from other sources of Mr. Danny for the Assessment

Year 2014-15

Particulars Amount ( ` ` ` `)

Karnataka Government Securities (No TDS)

Paper Company Securities (9,000 × 100/90)

Sugar Mill Company Securities (7,200 × 100/90)

Textile Company Securities

Tamilnadu Government Loan (No TDS)

DCM Ltd. Debentures (listed)

Director’s Fee

Winnings from Horse races

7,160

10,000

8,000

3,300

2,000

6,750

15,000

25,000


Interest on Post Office Saving Bank A/c (Exempt upto ` 3,500)

Gross Receipts

Less: Deduction under Section 57 for collection charges

Taxable income from other sources

2,500

79,710

516

79,194

Computation of Collection Charges

Particulars Amount ( `)

Amount of Collection charges for securities:

Karnataka Government Securities (No TDS)

Paper Company Securities

Sugar Mill Company Securities

Taxtile Company Securities [3,300 ×90/100]

Tamilnadu Government Loan

DCM Ltd. Debentures [6,750 × 90/100]

Total Net Collection:

Collection Charges @ 1.5%

34,405 × 1.5/100 = ` 516

7,160

9,000

7,200

2,970

2,000

6,075

34,405

2010 - June [1] {C} (c) Particulars of income received by Mrs. Sarita for the year ended

31st March, 2014 are as follows:

(i) Family pension received from the Government of Madhya Pradesh ` 15,000.

(ii) Royalty received from a publisher `42,700. She spent ` 2,700 on books,

stationery, typing etc.

(iii) Winnings from lotteries (gross) ` 90,000.

(iv) Winnings from horse race (net) ` 35,000.

(v) Interest from tax-free debentures of a public company (listed) ` 18,000.

(vi) Interest on tax free notified government bonds ` 10,000.

(vii) Dividend received from a foreign company (net) ̀ 8,000. Nothing has been paid

to the Government of India out of tax deducted at source.

From the above information, compute income from other sources of Mrs. Sarita for the

assessment year 2014-15. (5 marks)

Answer:

Calculation of Income from other Sources of Mrs. Sarita

(for the Assessment Year 2014-15)

Family Pension(1/3rd is exempt) ` 10,000

Royalty Income ` 42,700

Less: Expenses ` 2,700 ` 40,000

Wining from lotteries ` 90,000


Wining from Horse Races (gross) ` 50,000

Interest from tax free debentures ` 20,000

Interest on tax free government bonds Nil

Dividend received form foreign company ` 8,000

Income from other sources ` 2,18,000

2010 - June [3] (c) Ram and Shyam are partners in Mozart Co., a partnership firm,

which is engaged in manufacturing carpets. They share profits and losses in the ratio

of 2:3. The profit and loss account of the firm for the year ended 31st March, 2014 is

as follows:

Liabilities `

Cost of goods sold 10,00,000

Depreciation 50,000

Salary to staff 1,00,000

Remuneration to partners:

Ram ` 2,50,000

Shyam ` 1,20,000 3,70,000

Interest on capital @ 15%:

Ram ` 45,000

Shyam ` 67,500 1,12,500

Sundry expenses 1,00,500

Net profit 7,35,200

24,68,200

AssetsSales 23,00,000Dividends 28,200Winnings from lotteries (` 2,00,000) 1,40,000

24,68,200Additional information:

(i) The firm donated ̀ 30,000 to National Defence Fund and this amount is includedin sundry expenses.

(ii) Depreciation admissible under the income-tax rules is ` 68,000.(iii) The firm is evidenced by partnership deed.

Compute the taxable income and amount of tax liability of the firm for theassessment year 2014-15. (7 marks)Answer: Computation of book – profit `


Net Profit as per P&L 7,35,200Add: Interest paid to partners in excess of 12% Ram 9,000 Shayam 13,500Remuneration of partners 3,70,000Donation 30,000

11,57,700Less: Dividends 28,200Winning from lotteries 1,40,000Depreciation 18,000

9,71,500Less: Remuneration of partners 3,70,000

6,01,500Income from other sourcesWinning from lotteries 2,00,000Dividends exempt

2,00,000Gross total income 8,01,500Less: Deduction u/s 80G 30,000Total Income 7,71,500Calculation of Tax30% on 200000 60,000On balance 30 % (7,71,500 ! 2,00,000) 1,71,450

2,31,450Add: cess 6,944Less: TDS 60,000Tax payable 1,78,394Tax payable rounded off 1,78,3902010 - June [6] (a) Naveen owns a house at Indore. Its municipal valuation is ̀ 24,000.

He incurred the following expenses in respect of the house property:

Municipal tax @ 20%, fire insurance premium ` 2,000 and land revenue ` 2,400. He

took a loan of ` 25,000 @ 16% per annum on 1st April, 2011. The whole amount is still

unpaid. The house was completed on 1st April, 2013. Find out the income from house

property for the assessment year 2014-15 in respect of the following options:

(i) If the house is used by the assessee throughout the previous year for his

residential purpose; and

(ii) If the house is let-out for residential purposes on monthly rent of ` 2,000 from

1st April, 2013 to 31st January, 2014 and self-occupied for the remaining period.

(6 marks)


Answer:

(i) Gross Annual Value of the house shall be Nil

Gross Annual Value NIL

Less: Deduction ` 6,400

Income from House Property ` (6,400)

(ii) Gross Annual Value ` 24,000

Less: Municipal tax paid ` 4,800

Net Annual Value ` 19,200

Less: 30% Statutory deduction ` 5,760

Interest on loan (4,000+2,400) ` 6,400

Income from House Property ` 7,040

2010 - Dec [3] (a) Sanjay furnishes following particulars of income from his business

for the previous year 2013-14:

(i) Net profit as per profit and loss account ` 72,000 after charging the following:

(a) Depreciation on building ` 31,000

(b) Provision for discount on debtors ` 40,000

(c) Private household expenses ` 50,000

(d) Charity (unapproved) ` 7,000

(e) Computer for scientific research ` 60,000

(f) Payment of expenses made through bearer cheque ` 25,000

(g) Security deposit ` 16,000

(h) Audit fee paid in cash ` 25,000

(i) Patent purchased during the year ` 75,000

(j) Market survey feasibility report expenses ` 50,000 on new project costing

` 6,00,000.

(ii) Opening stock ` 66,000 valued at 10% above cost and closing stock ` 72,000

valued at 10% below cost.

(iii) Income credited to profit and loss account include—(a) Bank interest on fixed deposits ` 9,000(b) Refund of excise duty ` 18,000 earlier allowed as deduction(c) Bad debts recovered ` 5,000.

Compute total income of Sanjay and his tax liability if he is a senior citizen assumingdepreciation on building as per the Income-tax Act, 1961 is ` 50,000. (7 marks)Answer:

Computation of tax Liability of Mr. Sanjayfor the Assessment Year 2014-15

Profits and Gains of Business and Profession


Net Profit 72,000Add: Expenses Inadmissible

Depreciation on Building 31,000Provision for discount on debtors 40,000Household Expenses 50,000Charity 7,000Expenses paid through bearer cheque 25,000Security deposit 16,000Audit Fees 25,000Patent (Depreciation considered separately) 75,000Market Survey Expenses 44,000opening stock over valued 6,000closing stock under valued 8,000 3,27,000

Less: Expenses AllowedDepreciation on Building 50,000 Depreciation on Patent 18,750 68,750

Less: Income from other head Bank Interest on Fixed Deposits 9,000

Profits and Gains of Business and Profession 3,21,250Income from other source-Bank Interest 9,000Gross Total Income 3,30,250Less: Deductions NilTotal Income 3,30,250Tax LiabilityTax on ` 3,30,250 8,025 Less: Rebate u/s 87A 2,000

6,025 Add: Edu. Cess & SHEC @ 3% 181 Tax Payable 6,206 Rounded off 6,210

Working Notes:1. Least of the following shall be eligible as Market Survey Expenses

(a) Actual Expenditure incurred ` 50,000

(b) 5% of project cost ` 30,000

Hence, ̀ 30,000 shall be allowed for deduction in 5 equal installments i.e. ̀ 6,000 (1/5

of ` 30000)

2010 - Dec [4] (c) Rupesh acquired a residential house on 1st September, 1979 for

` 1,00,000. He spent ̀ 25,000 on 1st July, 1981 for improvement of this house property.


A further amount of ` 50,000 was spent by him on 15th November, 1986 on

improvement of the house. Rupesh gifted the said property to his son Bhupesh on 12th

October, 1995. Bhupesh also spent the following amounts on improvement of the

house:

Date of Expenditure Amount (`)

15th July, 1996 60,000

15th June, 2013 40,000

Bhupesh sold the above house on 30th November, 2013 for a sum of ` 15,00,000.

Expenses on transfer were 2% of the sale consideration. Compute the capital gains for

the assessment year 2014-15, assuming the fair market value of the house as on 1st

April, 1981 to be ` 3,00,000.

Cost inflation index for various years is as under:

1985-86 — 133

1994-95 — 259

1995-96 — 281

2011-12 — 785

2013-14 — 939 (5 marks)

Answer:

Computation of Capital Gains

for the assessment year 2014-15

Sale Consideration 15,00,000

Less:1. Expenses on transfer (30,000)

2. Indexed cost of acquisition (300000 × 939/259) (10,87,645)

3. Indexed cost of improvement

(i) By the previous owner (50,000 × 939/133) (3,53,008)

(ii) By the assessee [(60,000 × 939/281) + (40,000 × 939/939)] (2,40,498)

Long term capital loss 2,11,151

2011 - June [2] (b) From the following information, compute the total income of Anuragfor the assessment year 2014-15 and calculate his tax liability assuming he is notallowed any deduction under sections 80C to 80U: `

Income from salary 1,80,000Income from house property 40,000Business loss (-) 1,90,000Loss from a specified business referred to

under section 35AD (-) 60,000Short-term capital loss (-) 60,000Long-term capital gains 2,40,000


(5 marks)Answer: Computation of total Income of Anurag

for the A.Y. 2014-15

Income from salaryIncome from house propertyLess: Business loss adjustedBusiness LossLess: Set of against capital gainLess: Set off against house propertyLoss from specified business not allowed to be set offIncome from capital gainLong term capital gainLess: short term capital loss

40,00010,000

!1,90,0001,80,000

10,00016,000

2,40,00060,000

1,80,000

30,000

Nil

1,80,000

Less: Business Loss adjustedGross total IncomeLess: DeductionsTotal IncomeTotal tax liability

1,80,000 Nil2,10,000

Nil2,10,000

1,030

2011 - June [3] (a) After serving for 29 years and 7 months in Mansha Steels Ltd.,Narayan retired on 30th September 2013. He is covered by the Payment of Gratuity Act,1972. The company has paid him a gratuity of ` 4,19,800. At the time of retirement, hewas getting basic salary ` 11,800, dearness allowance ` 2,260 and house rentallowance ` 1,400 per month. Determine the amount of gratuity exempt under section10(10). (5 marks)

Answer:

(a)

Exemption shall be allowed to the extent of the minimum of the

following amounts

(a) Amount of gratuity received

(b) 15 days salary for every year of services (14,060 x x 30)

(c) ` 10,00,000

Therefore ` 2,43,346 is exempt from tax

` 4,19,800

` 2,43,346


2012 - June [1] {C} (c) Sanjeev owns a house property. Following are the details about

the property:

Municipal value of house : ` 72,000 per annum.

Fair rent of house : ` 66,000 per annum.

Standard rent of house : ` 60,000 per annum.

The house was let out at ` 6,000 per month but was sold on 1st January, 2014.

Find out income from house property for the assessment year 2014 - 15. (5 marks)

Answer:

Computation of Income from House Property For the Assessment Year 2014-15

Gross Annual Value Shall Be higher of Expected Rent or Actual Rent Received

(i) Expected rent shall be higher of Municipal Value or Fair Rent whichever is

higher but limited to standard rent

Municipal Value (72,000 × 9/12) = 54,000

Fair Rent for 9 Months(66,000 × 9/12) = 49,500

Standard Rent for 9 months (60,000) × 9/12) = 45,000

Therefore Expected Rent shall be ` 45,000 45,000

(ii) Actual Rent Received (6,000 × 9) 54,000

Gross Annual Value 54,000

Less: Standard Deduction @ 30% 16,200

Income from House Property 37,800

2012 - June [2] (b) Savita submits the following information regarding her salary

income:

Basic salary ...` 11,000 per month

City compensatory allowance ...` 150 per month

Children education allowance ...` 400 per month (for 3 children)

Reimbursement of medical expenses ...` 25,000

She was entitled to house rent allowance of ` 6,000 per month from 1st April,

2013 to 31st August, 2013. However, she was paying a rent of ` 7,000 per month

for a house in New Delhi. With effect from 1st September, 2013, she was provided

with an accommodation by the company for which the company was paying a rent

of ` 5,000 per month.

Compute her gross salary for the assessment year 2014-15. (5 marks)

(c) For the previous year 2013-14, gross total income of Gopal is ` 12,50,700. During

the previous year he has made the following payments:

`

(i) Contribution to recognised provident fund 18,000


(ii) Donation to Rajiv Gandhi Foundation 50,000

(iii) Donation to Prime Minister Drought Relief Fund 30,000

(iv) Donation to Prime Minister National Relief Fund 20,000

(v) Donation to a government hospital for family planning 1,00,000

(vi) Financial assistance to poor students 50,000

(vii) Medical insurance premium 20,000

Compute total income of Gopal for the assessment year 2014-15. (5 marks)

Answer:

(b) Computation of Gross Salary of Savita for Assessment Year 2014-15

Basic Salary (11,000 × 12) 1,32,000

City Compensatory allowance (150 ×12) 1,800

Children Education Allowance (400 ×12) 4,800

Less: Exempt 100 p.m. upto 2,400 2,400

2 children (200 × 12)

2,400

Reimbursement of Medical Expenses 25,000

Less: Exempt 15,000 10,000

House Rent Allowance (6,000 × 5) 30,000

Less: Exempt (see Note 1) 27,500 2,500

Rent Free Accommodation (See Note 2) 11,918

GROSS SALARY 1,60,618

Note:

(i) HRA shall be exempted to the minimum of the following:

(a) HRA received 30,000

(b) Actual rent - 10% of salary

[7,000 ×5-(10% of 55,000)] 29,500

(c) 50% of ` 55,000(as she resides in Delhi) 27,500

Therefore, House rent allowance of `̀̀̀ 27,500 shall be exempted.

(ii) Value of Rent free accommodation:

Least of following shall be taxable

(a) Actual amount of Rent paid by employer (5,000×7) 35,000

(b) 15% of Salary [(1,32,000+1,800+2,400)×15%] 11,918

Therefore, value for rent free accommodation shall be `̀̀̀ 11,918.

(c) Computation of Total Income of Gopal for the Assessment Year 2014-15


Gross Total Income 12,50,700

Less: Deduction under chapter VI-A

Deduction under section 80-C (RPF) 18,000

Deduction under Section 80-D

(Medical Insurance Premium) 15,000

Deduction under section 80-G (Donation) 1,60,000 1,93,000


Working Note:

(i) Calculation of Deduction under section 80-G

(A) Donations to which qualify limit does not apply

(a) Allowed 100%

PMNRF (20,000 × 100%) 20,000

(b) Allowed 50%

PMDRF (30,000 × 50%) 15,000

RGF (50,000 × 50%) 25,000 40,000

(B) Donations which are subject to qualifying limit

(a) Donation to Government for family planning

(100% of ` 1,00,000) 1,00,000

Within 10% of adjusted total income

(10% of 12,17,700) i.e.` 1,21,770 _______

Total Donation Allowed 1,60,000

Adjusted total income: (Gross Income - Deductions under Chapter VI-A except under

Section 80G) i.e. 12,50,700-18,000,-15,000 = 12,17,700.

2012 - June [3] (a) Kundan sold his properties during the year 2013-14 as under:

(i) Household TV and refrigerator, costing ` 56,000 purchased in January, 2005,

sold in February, 2014 for ` 70,000.

(ii) A car sold on 1st December, 2013 for ` 2,00,000 which was purchased by him

in January, 2010 for ̀ 3,00,000 and its written down value on 1st April, 2013 was

` 1,72,000. The car is used for business purposes.

(iii) Agricultural land was sold for ̀ 9,50,000 on 1st February, 2014 and its purchaseprice in 1981-82 was ̀ 1,00,000. He purchased new land for his own cultivationfor ` 2,50,000 in May, 2014.

(iv) Gold ornaments acquired in July, 2010 for ` 2,00,000 were sold for ` 2,40,000in June, 2013.

(v) Let out residential house at Indore was inherited by him in 1975. Sale price on


30th November, 2013: ` 16,00,000; fair market value on 1st April, 1981:` 2,00,000; cost of improvement during 1990-91: ` 40,000; and expenses ontransfer: ` 60,000.

Compute his total capital gains for the assessment year 2014-15.Cost inflation indices:

1981-82 ... 1001982-83 ... 1091989-90 ... 1722003-04 ... 4632008-09 ... 5822010-11 ... 7112011-12 ... 7852013-14 ... 939 (7 marks)

(b) Kailash furnishes the following particulars of income and losses for the assessmentyear 2014-15:

`

Short-term capital loss on sale of shares 3,25,200Income from card games (gross) 99,800Loss from betting 1,02,500Income from lotteries (gross) 3,87,500Expenses on lottery ticket purchased 7,500Long-term capital gains 97,800Long-term capital loss of assessment year 2012-13 1,12,500Short-term capital loss of assessment year 2013-14 97,800Set-off various losses from other income and compute gross total income. Find out theamount which can be carried forward. (5 marks)

Answer:(a) Computation of Capital Gains(i) Household TV and refrigerator are personal effects and hence not capital assets.(ii) Car

Sale Consideration 2,00,000Less: Written down value 1,72,000Short-term capital gain 28,000 28,000

(iii) Agricultural LandSales Consideration 9,50,000

Less: Indexed cost of acquisition 9,39,000


11,000

×

100

1,00,000 852

Less: Exempt under section 54B 11,000 NIL

Agriculture land purchased for

` 2,50,000 but limited to

Capital gain.

(iv) Gold Ornament

Sales consideration 2,40,000

Less: Cost of acquisition 2,00,000 40,000

Short - Term Capital gain

(v) Residential House

Sales Consideration 16,00,000

Less: Expenses on transfer 60,000

Less: Indexed Cost of Acquisition

18,78,000

Less: Indexed Cost of Improvment

2,18,372

Long Term Capital loss (5,56,372)

Short Term Capital Gain 68,000

(b) Computation of Gross Total Income of Kailash for the Assessment year 2014-15

Income from Capital Gain

Short - Term Capital Loss 3,25,000

Less: B/F short term capital Loss of

Assessment year 2013-14 97,800 NIL

(The amount of ` 4,23,000 shall be carried

Forward to next assessment year)

Long-term Capital Gains 97,800

Less: B/F Long- term Capital Loss 1,12,500 NIL


Income from Lotteries 3,87,500

Income from card games 99,800

Loses from betting (not allowed for set-off) ---- 4,87,300



Note:

(i) Long-term capital loss can be set-off from long-term capital gain only. Hence, the

remaining unadjusted loss of Assessment year 2012-13 of ` 14,700 (1,12,500

- 97,800) has to be carried forward to the next assessment year.

(ii) Loss from betting can neither be set-off against any other Income not it can be

carried forward to subsequent year.

(iii) Expenses on lottery tickets are not are allowed as deduction.

2012 - Dec [2] (b) Following is the trading and profit and loss account of Narendra for

the year ended 31st March, 2014:

` `

Opening stock 20,250 Sales 3,83,600

Purchases 1,80,500 Closing stock 23,200

Wages 10,200 Gift from father 10,000

Donation to Prime Minister Income-tax refund 2,500

National Relief Fund 20,000

Building rent 60,000

Repairs of car 5,300

Medical expenses (personal) 8,000

General expenses 4,200

Depreciation on car 12,000

Profit for the year 98,850

4,19,300 4,19,300

Additional information:

(i) Opening stock has been undervalued by 10% of cost while closing stock has

been valued at its cost.

(ii) One-third of the building rent is related to self-residential house.

(iii) The car is used equally for business as well as for personal purposes.

(iv) Wages includes wages of household servant ` 250 per month.

From the above information, you are required to determine the taxable income of

Narendra under the head income from business and profession. (10 marks)


Answer:

Computation of taxable Income of Narendra under the

head Income from business and profession

`

Net profit as per Profit & Loss Account 98,850

Add: Items disallowed

`̀̀̀

Donation to PMRF 20,000

Building Rent 60,000 × 1/3 20,000

Repairs of Car 5,300 × 1/2 2,650

Medical Expenses 8,000

Depreciation of Car 12,000× 1/2 6,000

Weges of servant 250 × 12 3,000 59,650

1,58,500

Less: Items not taxable:

Gift from father 10,000

Income tax refund 2,500 12,500

1,46,000

Less: Opening stock undervalued × 10 = 2,250

Income from Business and Profession 1,43,750

2012 - Dec [4] (a) Anand owns a house at Delhi. From the following particulars,

compute the income from house property for the assessment year 2014-15:

`

Municipal valuation 2,50,000

Fair rent 2,80,000

Actual rent (` 25,000 per month) 3,00,000

Standard rent 2,60,000

Municipal taxes paid (half of it was borne by the tenant) 25,000

Expenses on repairs 5,000

Fire insurance premium paid 5,000

Ground rent 6,000

Unrealised rent 1 month


Vacancy period 1 month

He had borrowed a sum of ` 20,00,000 @ 10% p.a. from LIC Housing Ltd. on 1st

August, 2009 and the construction of the house was completed on 1st January, 2013.

Total loan is still unpaid. (5 marks)

Answer:

Calculation of Income from House Property

for the Assessment Year 2014-15

`

Gross Annual Value

(i) Expected Rent ( Higher of fair value of ` 2,80,000 and

municipal value of ` 2,50,000 but subject to standard

rent of ` 2,60,000) 2,60,000

(ii) Rent actually received/ receivable (` 25, 000 × 11) 2,75,000

Higher of (i) and (ii) 2,75,000

Less: Loss due to vacancy 25,000

Gross annual value 2,50,000

Less: Municipal taxes (borne by the owner 12,500

Net annual value 2,37,500

Less: Standard deduction @ 30% under section 24 71,250

Interest on loan*

Pre-Construction Period 1,06,667

Previous year 2,00,000 3,06,667

Income from house property 1,40,417

* Interest on borrowed amount:

1. Pre-construction period 1.8.2009 to (1.1.2013) i.e. 31.3.2012

Previous year 2009-10 1,33,333 i.e. ` 2,00,000 × 8/12

2010-11 2,00,000

2011-12 2,00,000

5,33,333

1/5th ` 5,33,333 = ` 1,06,667

2. Interest for Previous year 2013-14 2,00,000

2012 - Dec [5] (a) Lalit submits the following details of his income for the assessment

year 2014-15:

`


Income from salary 3,00,000

Loss from let-out house property 40,000

Income from sugar business 50,000

Brought forward loss of iron ore business

(discontinued in financial year 2006-07) 1,20,000

Short-term capital loss 60,000

Long-term capital gains 40,000

Dividend 5,000

Income from lottery winnings (gross) 50,000

Winnings in card games (gross) 6,000

Agricultural income 20,000

Long-term capital gains from the shares (STT paid) 10,000

Short-term capital loss from shares under section 111A 15,000

Bank interest 5,000

Calculate gross total income and losses to be carried forward. (5 marks)

Answer:

Computation of Income of Lalit

for the Assessment Year 2014-15

Salary

`

Business

Income

`

Long-

term

capital

gain

`

Income

from other

sources

`

Salary 3,00,000 - - -

Business Income - 50,000 - -

Long term capital gain - - 40,000 -

Winning from lottery - - - 50,000

Winnings from card games - - - 6,000

Bank interest - - - 5,000

Total 3,00,000 50,000 40,000 61,000

Less: Current year losses

Loss from house property 40,000 - - -

Short term capital loss - - 40,000 -

Balance 2,60,000 50,000 - 61,000

Less: Brought forward business loss - 50,000 - -

Net income (Total 3,21,000) 2,60,000 - - 61,000

The following losses will be carried forward:


1. Current year’s short term capital loss of ` 60,000 is adjusted against long-term

capital gain of ̀ 40,000. The unadjusted amount of ̀ 20,000 will be carried forward.

2. Short-term capital loss of ` 15,000 pertaining to transfer of securities (subject to

STT) will be carried forward.

3. Brought forward loss of iron ore business is set off against the current year’s

business to the extent of ` 50,000. The unadjusted amount of ` 70,000 will be

carried forward.

Assumptions:

(i) Dividend is from an Indian company, therefore exempt.

(ii) Agricultural income is generated in India, therefore exempt.

CS Inter Gr. I

DISTINGUISH BETWEEN


(i) ‘Recognised provident fund’ and ‘unrecognised provident fund’. (4 marks)

(iii) ‘Tax audit under section 44AB’ and ‘special audit under section 142(2A)’.

(4 marks)

Answer:

(i) Please refer 2009 - Dec [3] (a) (ii) on page no. 34

(iii) Please refer 2008 - June [4] (b) (i) on page no. 69

2008 - June [4] (b) Distinguish between the following

(i) Provisions of tax audit as contained in ‘section 44AB’ and ‘section 142(2A)’.

(5 marks)

(ii) ‘Change in constitution’ and ‘succession of firm’. (5 marks)

Answer:

(i) Tax Audit or Audit of Accounts u/s 44AB of Income Tax Act 1961 is that audit

which is applicable to every such Assessee whether company or non Company,

except for persons/ assessees who derive income of nature referred to u/s 44 B

& 44BBA [non residents & foreign companies]

Audit of Accounts [Tax Audit] u/s 44 AB shall be compulsory carried out in case

of a person:

(a) Carrying on any business where the sales, turnover or gross receipts

exceeds ` 1 crore lakhs in the said financial year


(b) Carrying on profession where gross receipts exceed ` 25 lakhs

(c) Carrying on the business referred to in section 44 AD or 44AE or 44BB or

44BBA & claiming his income from any such businesses to be lower than the

income prescribed under the relevant section.

The Books of Accounts for the relevant previous year are required to be audited

by a Chartered Accountant before the "specified date" & the audit report

obtained under this provision is required to be furnished by that date alongwith

the return of income failing which penalty @ 0.50% of turnover or ` 1,50,000/-

whichever is lower shall be levied on the Assessee & such return filed shall be

treated as incomplete or defective u/s 139(9).

The "specified date" prescribed for this purpose is 30th September of the

relevant assessment year or any such extended due date as extended by CBDT

by way of a notification. According to CBDT Circular No 452 dated 17.03.1986,

in the case of agent who earns only commission income, the audit of accounts

is required only if the commission exceeds ̀ 1 crore. The Tax audit report means

report in Form 3CA/3CB alongwith annexure of details in Form 3 CD.

(ii) Change in constitution of a Firm (Section 187 of the Income Tax Act): There is

a change in the constitution of a firm if:

(a) One or more of the partners cease to be partners or one or more new

partners are admitted; or

(b) Where all the partners continue with a change in their respective shares or

in the shares of some of them.

Where at the time of making an assessment under Section 143 or 144, it is

found that a change has occurred in the constitution of a firm, the assessment

shall be made on the firm as constituted at the time of making the assessment.

Succession of one firm by another firm (Section 188) where a firm

carrying on a business or profession is succeeded by another firm and the case

is not covered by Section 187, separate assessment shall be made on the

predecessor firm and the successor firm in accordance with the Provisions of

Section 170 of the Act.

The Supreme Court laid down the following requisites of succession:

(i) There is a change of ownership.

(ii) The whole business is transferred.

(iii) Substantially the identity and the continuity of the business are preserved.



2004 - Dec [1] {C} (a) Prudent Ltd. intends to take a 'keyman insurance policy' in the

name of its CEO and mentor. The company seeks your advice as to tax implications of

such policy in the hands of company and the CEO. Explain. (3 marks)

Answer:

Keyman Insurance policy is a policy taken on the life of one person by another

person in whose organisation the first mentioned person plays a key role. The

relationship between these two persons could be that of employer-employee or that of

a principal and agent or a contractor and contractee. Where a premium is paid on such

a policy, it can qualify for deduction as business expenditure. It can be established that

the policy has been taken on the life of such person in the interest of the business.

A keyman insurance policy which has been assigned to any person during its term,

with or without consideration, shall continue to be treated as a keyman insurance policy.

As regards the treatment of maturity proceeds of Keyman Insurance Policy, Section

2(24) treats it as income for the purpose of income Tax Act. The exemption available

under Section 10(10D) in respect of maturity proceeds of Life Insurance Policy is not

extended to proceeds of Keyman Insurance Policy. However if maturity received on

death it is exempt. A keyman insurance policy which has been assigned to any person

during its term, with or without consideration, shall continue to be treated as a keyman

insurance policy. Thus, it is taxable as follows.

When Employer-Employee

relationship subsists

When Employer- Employee

relationship subsists

When no Employer -

Employee relationship

subsists

When no Employer -

Employee relation subsists.

Policy matures in the hands

of person who has taken

the policy


of person to whose name it

is assigned and in whose

name it was taken.


of person who has taken

the policy


of person to whom it is

assigned and in whose

name it was taken.

Taxable under Section 28

as “Profits and gains of

business or profession”.


as “Profits in lieu of Salary”


as “Income from other

sources”


as “Income from Other

sources”

2004 - Dec [2] (a) Discuss the provisions regarding tax on income from bonds or global

depository receipts purchased in foreign currency or capital gains arising from their


transfer under section 115AC of the Income-tax Act, 1961. (5 marks)

Answer:

1. Where the total income of an assessee, being a non-resident, includes –

(a) Income by way of interest or [Dividends other than dividends referred to in

section 115-O], on bonds or shares of an Indian company issued in

accordance with such scheme as the Central Government may, by notification

in the Official Gazette, specify in this behalf [Bonds or shares of a public

sector company, sold by the Government] and purchased by him in foreign

currency; or

(b) Income by way of long-term capital gains arising from the transfer of bonds or,

as the case may be, shares referred to in clause (a), the income-tax payable

shall be the aggregate of –

(i) The amount of income-tax calculated on the income by way of interest

or [Dividends other than dividends referred to in section 115-O], as the

case may be, in respect of bonds or shares referred to in clause (a), if

any, included in the total income, at the rate of ten per cent;

(ii) The amount of income-tax calculated on the income by way of

long-term capital gains referred to in clause (b), if any, at the rate of ten

per cent; and

(iii) The amount of income-tax with which the non-resident would have been

chargeable had his total income been reduced by the amount of income

referred to in clause (a) and clause (b)

2. Where the gross total income of the non-resident -

(a) consists only of income by way of interest or [ Dividends other than dividends

referred to in section 115-O] in respect of bonds or, as the case may be,

shares referred to in clause (a) of sub-section (1), no deduction shall be

allowed to him under sections 28 to 44C or clause (i) or clause (iii) of section

57 or under Chapter VI-A;

(b) Includes any income referred to in clause (a) or clause (b) of sub-section (1)

the gross total income shall be reduced by the amount of such income and the

deduction under Chapter VI-A shall be allowed as if the gross total income as

so reduced, were the gross total income of the assessee.

3. Nothing contained in the first and second provisos to section 48 shall apply for the

computation of long-term capital gains arising out of the transfer of long-term

capital asset, being bonds or shares referred to in clause (b) of sub-section (1).

4. It shall not be necessary for a non-resident to furnish under sub-section (1) of


section 139 a return of his income if -

(a) His total income in respect of which he is assessable under this Act during the

previous year consisted only of income referred to in clause (a) of sub-section

(1); and

(b) The tax deductible at source under the provisions of Chapter XVII-B has been

deducted from such income.

5. Where the assessee acquired shares or bonds in an amalgamated or resulting

company by virtue of his holding shares or bonds in the amalgamating or

demerged company, as the case may be, in accordance with the provisions of

sub-section (1), the provisions of the said sub-section shall apply to such shares

or bonds.

2004 - Dec [5] (b) Explain the taxation aspects when a capital asset is converted into

stock-in-trade. (5 marks)

Answer:

As per the section of income tax Act, 1961 Income Tax Act, conversion of a capital

asset into stock-in-trade is treated as a transfer in the previous year in which such

conversion is made. The capital gains tax is chargeable on such transfer only in the

previous year in which such stock – in - trade is either sold or transferred.

The taxation of such transaction has two parts, which are as follows:

Chargeability as Capital gains

• Full Value of Consideration shall be taken as the fair market value on the date of

conversion.

• Cost of Acquisition will be taken as the cost incurred by the assessee at first

instance on purchase of such asset along with indexation applicable on the asset,

being recognized as long term.

• Cost of Improvement (if any) made before conversion shall be considered along

with indexation applicable if the asset was a long term capital asset on the date of

conversion.

• Expenses on transfer shall be allowable to the extent specifically related to such

conversion.

Chargeability as Business Income:

• The Sale Price less market price at which converted value as on the date of such

conversion shall be taxed under the head ‘Profits and Gains from Business and

Profession'.

Note:-Indexation of cost in the above case shall be done till the year of conversion of

the capital asset into stock in trade although the capital gains will be computed in the

year of sale or transfer of such converted capital asset.


2005 - June [1] {C} (c) Discuss the tax liability of the following:

(i) Any sum received under a Keyman insurance policy. (1 mark)

(iii) Conveyance facility provided to an employee to cover the journey between office

and residence. (1 mark)

Answer:

(i) As per section 10(10D) of IT Act, 1961, any sum received under a Key man

Insurance Policy is chargeable to tax. Except if it is received due to death of

insured such amount received is exempt.

(ii) Conveyance facility provided to an employee to cover the journey between office

and residence is not taxable in the hands of employee. However, if Conveyance

allowance is provided by the employer, the same is exempted to the extent of

` 800 p.m. and in case of blind and orthopedically handicapped with disability of

lower extremities, is exempt to the extent of ` 1,600 p.m. instead of ` 800.

2005 - June [4] (b) Advise an assessee on the admissibility or otherwise on the

following aspects giving reasons in respect of its business income:

(i) Brokerage paid for raising loan for the business.

(ii) Cost of erecting medical unit annexe to the factory for emergency treatment of

the employees.

(iii) Compensation paid to an employee for the premature termination of his services.

(iv) Travelling expenses of a director, who went to Japan for negotiating the

purchase of a new heavy machinery which was to be installed during next year.

(v) Lump sum consideration of `5 lakh paid for acquiring know-how. (5 marks)

Answer:

(i) The brokerage paid for raising a loan for the business is an admissible

expenditure, since the funds are procured for the business operations.

(ii) The cost of erecting a medical unit is a capital expenditure and hence not

admissible as business expenditure. However, depreciation can be claimed

under section 32(1)

(iii) Assuming that the termination of services of employees is in the interest of

business, the compensation paid to him will be an admissible expenditure.

(iv) Since the travelling expenses are incurred in connection with purchase of

machinery, this will be in the nature of capital expenditure. Hence, it is not

admissible.

(v) Lump sum consideration paid for acquiring know-how will be in the nature of

capital expenditure and hence not admissible as business expenditure. However,

depreciation can be claimed as per section 32(1).


2005 - June [5] (a) What are the exceptions to well accepted principle that loss of one

person cannot be availed for 'set off' or 'carry forward' by another person under the

provisions of the Income-tax Act, 1961? (5 marks)

Answer:

The general principal under the Income Tax Act is that the loss of one person cannot

be availed for set off or carry forward by another person unless there is a specific

provision enabling such benefit or requiring such treatment. Even where a business is

transferred, the unabsorbed depreciation allowance and other losses of the predecessor

cannot be assigned to the successor so as to enable carry forward and set off of such

loss and allowance against the profits of the successor. However, there are few

exceptions to this well accepted principle as under:

1. In the case of succession by way of inheritance, the successor of business can

carry forward and set off the loss of his predecessor

2. In case of amalgamation, demerger, reorganization of business whereby a firm or

a proprietary concern is succeeded by a company, the benefit of carry forward and

set off of the past losses and unabsorbed depreciation of the amalgamating

company/demerged company/firm or proprietary concern is allowed in the hands

of amalgamated company/resulting company/succeeded company

3. When clubbing provision applies, loss is required to be clubbed in the same

manner as income. The person in whose hands the loss is so clubbed can set off

and carry forward such loss as if it is determined in his case.

2005 - Dec [1] {C} (d) Explain briefly the scope of the term 'capital asset', as defined

under Section 2(14) of the Income-tax Act, 1961. (3 marks)

Answer:

According to Section 2(14) of the income tax Act, 1961 the expression “capital asset”

means property of any kind held by an assessee, whether or not connected with his

business or profession but does not include-

(a) any stock-in-trade, consumable stores or raw materials held for the purposes of

business or profession;

(b) personal effects of the assessee;

(c) rural agricultural land in India

(d) 6.5% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Bonds, 1980

issued by the Central Government,

(e) Special Bearer Bonds, 1991; and

(f) Gold deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the

Central Government.


2006 - June [3] Attempt the following:

(iv) Discuss the special provisions relating to tax on income of foreign institutional

investors from securities or capital gains arising from their transfer. (5 marks)

Answer:

(iv) As per section 115AD, where the total income of a Foreign Institutional Investor

includes—

(a) Income other than income by way of dividends referred to in section 115-O

received in respect of securities (other than unit referred to in section

115AB); or

(b) Income by way of short-term or long-term capital gains arising from the

transfer of such securities,

The income-tax payable shall be the aggregate of—

(i) The amount of income-tax calculated on the income in respect of securities

referred to in clause (a), if any, included in the total income, at the rate of

twenty per cent;

(ii) the amount of income-tax calculated on the income by way of short-term

capital gains referred to in clause (b), if any, included in the total income, at

the rate of thirty per cent; However, the amount of income-tax calculated on

the income by way of short-term capital gains referred to in section 111A

shall be at the rate of ten per cent;

(iii) the amount of income-tax calculated on the income by way of long-term

capital gains referred to in clause (b), if any, included in the total income, at

the rate of ten per cent; and

(iv) The amount of income-tax with which the Foreign Institutional Investor

would have been chargeable had its total income been reduced by the

amount of income referred to in clause (a) and clause(b)

Where the gross total income of the Foreign Institutional Investor—

(a) consists only of income in respect of securities referred to in clause (a)

of sub-section (1), no deduction shall be allowed to it under sections 28

to 44C or clause (i) or clause (iii) of section 57 or under Chapter VI-A;

(b) includes any income referred to in clause (a) or clause (b) of sub-section

(1), the gross total income shall be reduced by the amount of such

income and the deduction under Chapter VI-A shall be allowed as if the

gross total income as so reduced, were the gross total income of the

Foreign Institutional Investor.

2006 - Dec [1] {C} (d) Discuss in brief the special provisions for computing profits and

gains of business under section 44AD of the Income-tax Act, 1961. (3 marks)


Answer:

The scheme is applicable to an assessee engaged in any business except the business

of plying, hiring or leasing goods carriage and the total turnover from such business

does not exceed `1 crore in the previous year.

A sum equal to 8% of the total turnover in the previous year is deemed to be the

profit of such business chargeable under the head profit and gains from business and

profession. The assessee can, however declare a higher income in his return.

All deductions under section 30 to 38, including depreciation are deemed to have

been allowed and no further deduction is allowed under this section. However, in the

case of the firm, the normal deduction in respect of salary and interest to partners under

section 40(b) shall be allowed.

C provision for maintenance of books of account u/s 44AA /compulsory audit u/s

44AB not applicable

C It is possible to declare lower income, provided the tax payer maintains books of

account under section 44AB and gets his books of account audited and furnishes

report of audit by the specified date as required under section 44AB irrespective

of turnover.

2007 - June [2] (b) Explain the provisions of the Income-tax Act, 1961 regarding set-off

and carry forward of losses from transfer of capital assets. (5 marks)

Answer:

Where in respect of any Assessment year, the net result of the computation under the

head capital gains is a loss to the assessee; it can be carried forward to the following

assessment year. The short term and long term losses shall be separately carried

forward. In case of short term capital loss it can be set off against income, if any under

the head ‘capital gains’ assessable for that assessment year in respect of any other

capital asset. But in case of long term capital loss, it can be set off only against long

term capital gain.

While losses on transfer of capital assets, whether short term or long term cannot

be set off against any other income of the assessee under other heads of income i.e,

heads other than capital gains in the previous year in which such loss was incurred, it

can be carried forward to set off against capital gains if any during the next 8

assessment year.

2007 - June [3] (b) Briefly answer the following:

(v) What are the special provisions for computing income on presumptive basis in

the case of tax payers engaged in the business of civil constructions?(1 mark)

(vi) What deductions are allowed under Section 24 while computing ‘income from


house property’? (1 mark)

Answer:

(v) For an assessee engaged in the business of civil construction or supply for civil

construction, a sum equal to 8% of the gross receipts paid or payable to the

assessee in the previous year on account of such business shall be deemed to

be the profits and gains of such business chargeable to tax under the head

profits and gains of business or profession’. The assessee can however

voluntarily declare higher income in his return. This scheme is applicable only

to those assessees whose gross receipts from the above mentioned business

do not exceed ` 1 crore.

(vi) Deductions allowable u/s 24 while computing income from H/P are

(i) Standard deduction @ 30% of NAV in case where NAV is negative

deduction shall be NIL.

(ii) Deduction for interest on Housing Loan subject to the following conditions

(a) Income of self occupied property ̀ 30,000/- or ̀ 1,50,000/- as applicable

or Actual Amount paid/accrued /payable whichever is less

(b) In case of Let out/Deemed Let out property the actual amount of interest

paid/payable during the year when the maximum limit of 30,000/-

/1,50,000/- does not apply

(c) 1/5th of accumulated interest pertaining to the pre- construction period

shall be suitably adjusted alongwith the actual interest for the relevant

year for calculating the allowable interest limits.

2008 - June [1] {C} (a) Attempt the following:

(iv) What are ‘intangible assets’ ? Give examples. (3 marks)

(v) “Loss can be carried forward only by the person, who has incurred the loss.”

Discuss. (3 marks)

Answer:

(iv) Assets which are not corporeal, not capable of being touched, smelt and are

represented by right of the persons through such as knowhow, patents,

copyrights, trademarks, licences, franchises or any other business or commercial

right acquired on or after April 1, 1998.

(v) Please refer 2005 - June [5] (a) on page no. 74

PRACTICAL QUESTIONS

2004 - June [2] (a) Naresh, who is neither a director nor he has substantial interest in

any company, is offered an employment by Freewheel Ltd., Mumbai with the following


two alternatives:

ALTERNATIVE

I II

(`) (`)

Basic pay 1,36,000 1,36,000

Bonus 9,000 9,000

Education allowance for 2 children 22,000 —

Education facility for 2 children in a

school maintained by employer — 22,000

Sweeper allowance 10,000 —

Sweeper facility — 10,000

Entertainment allowance 6,000 —

Club facility — 6,000

Transport allowance for personal use 12,000 —

Free car (1200 cc) facility for personal use

(car owned by the employer) — 12,000

Medical allowance 18,000 —

Medical facility for Naresh and his family

members in a hospital maintained by employer — 18,000

Allowance for gas, electricity and water supply 4,500 —

Free gas, electricity and water supply (bills

will be in the name of the employer) — 4,500

Holiday home allowance 8,000 —

Holiday home facility — 8,000

Lunch allowance 18,000 —

Free lunch

(` 70 × 200 days +` 80 × 50 days) — 18,000

Diwali gift allowance 7,500 —

Gift on Diwali — 7,500

A rent-free unfurnished home - lease rent 14,000 14,000

Which of the two alternatives Naresh should opt for on the assumption that both

employer and employee will contribute 10% of salary towards unrecognised provident

fund ? Interest-free loan of ̀ 20,000 will be given to him for purchasing household items.

(7 marks)


Answer:

Alternative

I II

(`) (`)

Basic pay 1,36,000 1,36,000

Bonus 9,000 9,000

Education allowance for 2 children 19,600 Tax free

Sweeper allowance 10,000 —

Sweeper facility — 10,000

Entertainment allowance 6,000 —

Club facility — Nil

Transport allowance for personal use 2,400 —

Medical allowance 18,000 Nil

Allowance for gas, electricity and

water supply 4,500 —

Free gas, electricity, and water supply

(bills will be in the name of employer) — 4,500

Holiday home allowance 8,000 —

Holiday home facility — Nil

Lunch allowance 18,000 —

Free lunch

(` 20 x 200 days + ` 30 x 50 days) — 5,500

Diwali gift allowance 7,500 —

Gift on Diwali — 2,500

A rent-free unfurnished home – lease rent 14,000 14,000

Gross Salary 2,53,000 1,81,500

Tax on total income 5,300 Nil

Less: Rebate 2,000

3,300

Add: EC & SHEL 69

Tax rounded off 3,369

Therefore he should opt for option 2 as the same will be beneficial for both, the

employee and the employer.

2004 - June [3] (a) From the following particulars, compute the gross total income of

Radha for A.Y. 2014-15:

(i) She is employed on a part time basis in a fashion designing firm on a monthly

salary of ` 5,000.


(ii) She has a house property situated in Delhi which has been let out at a rent of

` 3,000 p.m.

(iii) She holds the following shares and securities:

— 1,000 Equity shares in X Ltd. of ` 10 each, bought @ ` 40 per share.

— ` 20,000, 8% ICICI Bonds.

— 1,000, 12% Preference shares of ̀ 100 each in Rosa Ltd. Dividend received

on 25th March, 2014.

— X Ltd. declared 18% equity dividend on 25th March, 2014, but the cheque

was received subsequent to 31st March, 2014. Other interest and dividends

were, however, duly received.

(iv) She had set up a factory with building, plant, machinery, furniture, etc. However,

she decided to give it on hire at a composite rent of ` 12,000 p.m.

During the year, she spent ̀ 15,000 for repairs and ̀ 5,000 for insurance of the factory.

The depreciation allowable is ̀ 50,000. She had borrowed ̀ 5,00.000 against mortgage

of these assets and paid ̀ 60,000 interest thereon. The amount was spent for marriage

of her brother. (7 marks)

(b) Roger, a foreign national, furnishes the following data for the previous year ended

31st March, 2014:

`

(i) Royalty from Indian concern under an

agreement made on 15th September, 2013

approved by the central government 3,00,000

(ii) Expenditures as per sections 28 to 44C for earning such income 2,00,000

(iii) Interest from an Indian company on money lent in foreign currency 6,00,000

(iv) Expenditure on collection of above interest 50,000

(v) Income from units of UTI purchased in foreign currency 5,00,000

(vi) Collection charges for collecting above income 40,000

(vii) Gross sale of business in India 30,00,000

(viii) Expenditure as per sections 28 to 44C for above business 28,00,000

(ix) Donations to Prime Minister National Relief Fund 6,00,000

Determine the total income of Roger for the assessment year 2014-15 and the tax

payable by him. (8 marks)

Answer:

(a) ` `

Income from Salary

Annual Salary (5000*12) 60,000

Income from House Property


Annual rent (3000*12) 36,000

Less: Statutory deduction @30% 10,800 25,200


Dividend on equity shares of X Ltd. Exempt

Dividend on preference shares Exempt

Interest on bonds 1,600

Rent of Building (12,000*12) 1,44,000

Less: Expenses (15,000 + 5,000 + 50,000) 70,000 75,600

Gross total income 1,60,800

(b) Computation of Total income and Tax Payable by Roger for the assessment

year 2014-15

Business in India

Sales 30,00,000

Less: Expenses u/s 28 to 44C 28,00,000 2,00,000

Royalty 3,00,000

Less: Expense Not allowed 3,00,000 5,00,000


Interest on loan 6,00,000

Less: Expenses Not allowed 6,00,000

Income from units 5,00,000

Less: Expenses Not allowed 5,00,000 11,00,000


Less: Deduction u/s 80G (6,00,000)

Taxable Income 10,00,000

Calculation of Tax Liability

Tax @ 20% on 1000000 u/s 115A(I)(a) 2,00,000

Add: Education less @3% 6,000

Total Tax. 2,06,000

2004 - Dec [2] (b) Hitesh was holding 3,000 shares in Jay Ltd., purchased by him on

8th August, 1997 @ ` 60 per share. He gifted these shares to his girlfriend Mona on

10th February, 1998. Hitesh married Mona on 1st March, 1998. Mona was allotted

bonus shares by the company at the rate of one share for every three shares held on

10th September, 2013. Mona sold all the shares including the bonus shares on 31st

March, 2014 @ ` 150 per share.

State in whose hands capital gains on sale of shares is taxable, Also compute the

capital gains.

Cost Inflation Index for the year 1997-98: 331


Cost Inflation Index for the year 2013-14: 939 (5 marks)

Answer:

Long term capital gain on the original shares shall be exempt under section 10(38) as

the shares have been sold through the recognized stock exchange after 1-10-2004

Short term capital gain on sale of Bonus Share `

Consideration price of Bonus share @ 150 each 1,50,000

Less: Cost of acquisition Nil

Short term capital gain 1,50,000

The capital gains are taxable in the hands of Mona as the relationship of husband and

wife did not exist at the time the shares were gifted. Short-term capital gains shall be

taxable at a concessional rate of 15% as per section 111A.

2005 - June [4] (a) Himalaya Ltd. reimburses the following expenditure on medical

treatment of the son of an employee Karan. The treatment was done at UK:

(i) Travelling expenses ` 1,15,000.

(ii) Stay expenses at UK permitted by RBI ` 45,000 (Actual expenses ` 70,000).

(iii) Medical expenses permitted by RBI ` 50,000 (Actual expenses ` 70,000).Compute the taxable perquisites for the assessment year 2014-15 in the hands of

Karan, if his annual income from salary was (i) ` 1,70,000; (ii) ` 2,00,000. (5 marks)

Answer:Stay expenses taxable (70,000 - 45,000) 25,000Medical expenses taxable (70,000 – 50,000) 20,000

45,000Case 1 Case 2

Salary Income 1,70,000 2,00,000Taxable portion of perks 45,000 45,000Travelling Exp. Reimbursement Nil 1,15,000

2,15,000 3,60,000

Notes:

Case 1: Since the gross total income does not exceed ` 2,00,000 the reimbursement

of travel expenses of ` 1,15,000 is not taxable. The taxable income will be ` 2,15,000

Case 2: Since the gross total income exceeds ` 2,00,000 the reimbursement of travel

expenses of ̀ 1,15,000 is taxable. The taxable perquisites will be ̀ 45,000 + ̀ 1,15,000

= ` 1,60,000. The taxable income will be ` 2,00,000 + ` 1,60,000 = ` 3,60,000.

2005 - Dec [1] {C} (a) Discuss the allowability or otherwise of the following in the handsof Rasikbhai, who is aged about 67 years:

(i) He paid insurance of `18,000 (` 16,000 by cheque and ` 2,000 by cash) underMediclaim Policy to New India Insurance Company covering himself and hiswife.


(ii) He spent a sum of ̀ 55,000 during September, 2013 towards medical treatmentof his wife who suffered from blindness.

(iii) His younger brother who is fully dependent on him, suffered from chronic renal

failure for which he spent a sum of ` 75,000 towards medical treatment.(3 marks)

(b) Kajol, working in a software company at Bangalore, is drawing a remuneration of

` 23,000 per month. She is paid D.A. of ̀ 7,000 per month as provided in the terms

of employment. In addition, she is also paid HRA of ` 5,000 per month and is

entitled to 3% commission on turnover of ̀ 18,00,000 achieved by her during 2013-

14. She pays a rent of ̀ 7,200 per month. Further, she received advance salary of

` 46,000 in March, 2014 relating to the period April-May, 2014. Determine thetaxable income under the head 'salaries'. for A.Y.-2014-15 (3 marks)

Answer:

(a) Rasikbhai, being a Senior Citizen is eligible for the following deductions:

(i) Under Section 80D, the medical insurance premium paid by cheque amounting

to ̀ 16,000 is fully eligible. The Medical Insurance Premium paid by cash is not

eligible for deduction.

(ii) Under Section 80DD, the amount of deduction is ` 1,00,000 in the case of

severe disability irrespective of quantum of expenditure incurred, In this case,

Rasikbhai is eligible for deduction of ` 1,00,000 even though he spent

` 55,000/-

(iii) As his younger brother is fully dependent and the disease is specified in Rule

11DD for the purpose of Section 80DDB and the actual amount incurred is

` 75,000, he is eligible for deduction of lower of actual amount incurred or

` 40,000. Accordingly, he is eligible for deduction of ` 40,000 under Section

80DDB. However, if the younger brother is aged 65 years or more the amount

of deduction would be ̀ 60,000. For claiming deduction under Section 80DDB,

Rasikbhai is required to furnish a certificate in the prescribed from issued by

medical authority.

(b) Basic Salary (23,000*12) 2,76,000

Dearness allowance (7,000*12) 84,000

Commission(3% on 18,00,000) 54,000

Advance salary 46,000

4,60,000

HRA Received 60,000

Less: Exempt 45,000 15,000

Total Salary 4,75,000

Less: Deduction Nil


Taxable salary 4,75,000

2005 - Dec [2] (c) Pritish, who owns 9 acres of land near Chennai since July, 1985

purchased for ` 12 lakh, commenced real estate business from April, 2005 and

introduced this land as his capital. Fair market value of the land on the date of

commencement of the business was ` 65 lakh. However, the value of such land has

been recorded at ̀ 80 lakh in the books of business. The entire land after development

and conversion into housing plots was sold for ` 135 lakh between September, 2013

and February, 2014. Expenses incurred for project development were ̀ 37 lakh. Advise

him as to the taxability of income and under what heads and in which assessment

years.

Note: Cost Inflation Index for year —

1985-1986 : 133

2005-2006 : 497

2013-2014 : 939 (5 marks)

Answer:

(a) Long-term capital gains: `

Fair market value of land 65,00,000

Less: Indexed cost of acquisition

(1,200,000*497/133) 44,84,211

Long term capital gain 20,15,789

(b) Business Income

Turnover on sale of plots 1,35,00,000

Less: Cost of Land (FMV) ` 65,00,000

Expenses for project development ` 37,00,000 1,02,00,000

Business income 33,00,000

2005 - Dec [4] (a) An industrial undertaking which commenced the manufacturing

activity with effect from lst September, 2013 has acquired the following assets during

the previous year 2013-14:

Assets Date of Date when Cost of

Acquisition put to use Acquisition

(`)

Factory buildings 4.4.2013 1.9.2013 50,00,000

Plant and machinery:

Air pollution control

equipment 4.5.2013 1.9.2013 4,00,000

Machinery-A 5.5.2013 1.9.2013 2,00,000

Machinery-B 7.6.2013 1.9.2013 5,00,000


Machinery-C 30.8.2013 1.9.2013 10,00,000

Machinery-D 1.9.2013 31.10.2013 4,00,000

Machinery-E 1.1.2014 28.2.2014 3,00,000

Machinery-F (second hand) 11.1.2014 13.1.2014 2,00,000

Motor car 1.2.2014 1.2.2014 5,00,000

Air-conditioner

(installed in the Office) 1.2.2014 2.2.2014 1,00,000

Compute the depreciation allowable for the assessment year 2014-15 and the written

down value as on 1st April, 2014. (8 marks)

Answer:

Particulars Factory Plant & Plant &

Building Machinery Machinery

10% 100% 15%

Normal Depreciation 5,00,000 4,00,000 3,97,500

Addition Nil Nil 4,50,000

Total 5,00,000 4,00,000 8,47,500

WDV 45,00,000 NIL 33,52,500

2006 - June [1] {C} (a) Arun, a citizen of India residing in Germany for the past 10

years, came back to India for the first time during January, 2014. During the financial

year 2013-14, he received the following income:

— He works in a company in Germany and earns a salary of Euro 1,000 per month;

— He owns agricultural land near Bangalore and a residential house in Delhi which

has been let-out. While the agricultural income is being remitted to his account in

Germany every year, the rental income of ` 84,000 is being deposited in his bank

account at Delhi; and

— He also owns shares in various Indian companies and receives dividend every

year, which has been regularly deposited in his bank account at Delhi.

He seeks your advice as to taxability of the above income under the provisions of

the Income-tax Act, 1961 as he is an Indian citizen and earning income in India.

(3 marks)

(b) On 23rd December, 2013, Rajat sold 500 grams of gold, the sale consideration of

which was ̀ 3,50,000. He had acquired this gold on 20th August, 1980 for ̀ 40,000.

Fair market value of 500 grams of gold on 1st April, 1981 was ̀ 36,000. Find out the

amount of capital gain chargeable to tax for the assessment year 2014-15. Also

calculate the tax liability.

Note: Cost Inflation Index for the year 2013-14: 939; (3 marks)


(d) Sunder died on 23rd July, 2010 while being in Central Government service. In terms

of rules governing his service, his widow Mrs. Sunder is paid a family pension of

` 10,000 per month and dearness allowance of 40% thereof. State whether the

amount of family pension is assessable in her hands, and if so, under what head

of income. Can she claim any relief/deduction on such receipt? Compute taxable

income for the assessment year 2014-15 and tax thereon. (3 marks)

Answer:

(a) Mr. Arun is a non-resident under Income-tax Act, 1961 as he has been out of India

continuously for the last 10 years. He does not satisfy any of the conditions of

being resident in India. Therefore, only the following income will be taxed in India.

(i) Incomes received or deemed to be received in India

(ii) Incomes which accrue or arise or are deemed to accrue or arise in India

The following will be included in his taxable income:

(i) Salary income will not form part of his taxable income in India since it is

earned and received abroad.

(ii) The agricultural income, being exempt under section 10(1), will be included

only for the purpose of determining the rate of tax. The rental income

received in India will be included in his taxable income in India

(iii) Dividend received by him in India from Indian Companies is exempt u/s

10(34)

(b) `

Sale proceeds of gold 3,50,000

Less: Indexed cost of acquisition (40000*939/100) 3,75,600

Long term capital Loss 25,600

Tax Liability Nil

(d) In the given case the widow of sunder is chargeable to tax in respect of the family

pension under the head “income from other sources”. The taxable amount of family

pension is computed as under:

`

Pension (`10,000*12) 1,20,000

Dearness allowance (40% of 1,20,000) 48,000

1,68,000

Less: Deduction of 1/3rd or `15,000 whichever is less u/s 57 15,000

Taxable income 1,53,000

2006 - June [4] (a) Manish is the general manager of a transport company drawing a

salary of ` 15,000 per month. The company has provided him with accommodation in


Meerut for which 10% of his basic salary is deducted. Actual rent paid by the company

for accommodation is ` 1,20,000 per annum. He is also receiving entertainment

allowance of ̀ 500 per month. He is provided by the company with a car having engine

cubic capacity of 1.8 litres for his personal and official use, but running and

maintenance expenses for the same are borne by the assessee himself. He is in receipt

of bonus equivalent to 2 months’ salary. Compute his taxable income under the head

‘salary’ for the assessment year 2014-15. (7 marks)

Answer:

Computation of Salary income of Mr. Manish for the A.Y. 2014-15

`

Salary (15,000*12) 1,80,000

Bonus 30,000

Entertainment allowance 6,000

Car facility (` 900*12 months) 10,800

Value of accommodation at concessional rate

10% of salary i.e. `2,16,000

(`1,80,000 + 30,000 + 6,000) 21,600

Less: Received from the employee 18,000 3,600

Gross Salary 2,30,400

Less: Deduction Nil

Income from salary 2,30,400

2006 - Dec [1] {C} (a) A firm of Company Secretaries consisting of 3 partners earned

a net surplus of ` 2,08,000 during the accounting year ended 31st March, 2014 after

charging interest on capitals amounting to ` 36,000 calculated @ 18% per annum on

the capitals of partners but before charging remuneration to partners. You are required

to calculate the taxable income of the firm and tax thereon after allowing the maximum

allowable remuneration to partners under the provisions of the Income-tax Act, 1961.

(3 marks)

(b) Compute the value of perquisites in respect of rent free furnished house, if Ashok

stays in a city with a population of (i) more than 25 lakh; (ii) less than 25 lakh.

Ashok is in receipt of the following amounts from his employer during the previous

year ended 31st March, 2013: Basic pay: ̀ 1,80,000; Dearness allowance : 25% of

basic pay; Commission; 5% of basic pay; and Bonus; ` 8,000; His employer has

paid income-tax of ` 5,000 and professional tax of ` 1,500 on his behalf. Besides,

his employer provided refrigerator and television costing ` 24,000 and paid ` 500

per month towards rent of other furniture provided. (3 marks)


Answer:

(a) Computation of taxable income of Firm for the assessment year 2014-15

Calculation of book profits

`

Net surplus as per profit and loss account 2,08,000

Add: Disallowance of interest in excess of 12% 12,000

Book Profits 2,20,000

Less: Remuneration allowed u/s 40(b)

On first ` 2,20,000@ 90% or ` 1,50,000 1,98,000

Taxable income of firm 22,000

Tax on ` 22,000 @ 30% 6,600

Add: Surcharge Nil

Add: Education cess & SHEC 198

Total tax after rounding off u/s 288B 6,800

(b) Salary for the purpose of rent free accommodation `

Basic salary 1,80,000

Dearness allowance (25% of basic pay) 45,000

Commission (5% of basic pay) 9,000

Bonus 8,000

Professional tax 1,500

Income tax (paid by the employer) 5,000

Total 2,48,500

Where the population more than 25 lakhs

Value of rent free unfurnished accommodation shall be 15% of salary = ` 37,275

Value of furnished accommodation = 37,275 + 2,400 + 6,000 = ` 45,675

Where population is less then 25 lakhs

Value of rent free unfurnished accommodation shall be 10% of salary =

Value of furnished accommodation = 24,850 + 2,400 + 6,000 = ` 33,250

2006 - Dec [2] (a) A perusal of Rammohan’s bank account revealed the following

deposits during the financial year 2013-14:

(i) Gift from his friend on 8th December, 2013 on his birthday: ` 12,000.

(ii) Dividends from shares of various Indian companies : ` 13,200.

(iii) Gift from his fiancee on 5th February, 2014: ` 85,000.

(iv) Gift from his mother’s friend on 7th July, 2013 on his engagement; ` 28,000.

(v) Gift from his sister in Netherlands on 29th September, 2013: ` 2,20,000.

(vi) Interest on bank deposits: ` 30,000.


Compute his total income for the assessment year 2014-15 assuming that his

income from house property (computed) is ` 72,000. (5 marks)

Answer:

Computation of total income for the assessment year 2014-15

`

Income from house property 72,000


Gift from friend 12,000

Gift from fiancée 85,000

Gift from mother’s friend 28,000

Gift from sister (Netherlands) Exempted —

Dividend from shares exempt

Interest on bank deposits 30,000 1,55,000

Gross total Income 2,27,000

Less: Deduction Nil

Total income 2,27,000

2007 - June [1] {C} Attempt the following:

(iv) Arun, a resident of Meerut, receives ` 38,000 per annum as basic salary. In

addition, he gets ` 12,000 per annum as dearness allowance, which does not

form part of basic salary, 5% commission on turnover achieved by him (turnover

achieved by him during the relevant previous year 2013-14 is ` 6,00,000) and

` 7,000 per annum as house rent allowance. He, however, pays ` 8,000 per

annum as house rent. Determine the quantum of house rent allowance exempt

from tax. (3 marks)

Answer:

Minimum of the following three shall be exempt from tax: `

Actual amount received 7,000

40% of salary (38,000 + 30,000) 27,200

Rent paid in excess of 10% salary (8,000 ! 6,800) 1,200

Therefore, ` 1,200 will be exempt

2007 - Dec [3] Comment on the correctness or otherwise of the following

statements/propositions with reference to the relevant provisions of tax laws:

(i) An assessee can have a loss from a house property. (5 marks)

(ii) In case of depreciable assets forming part of block of assets, there can be a

short term capital gain but no short term capital loss. (5 marks)


Answer:

(i) Correct Statement: There can be loss from house in the following

cases:

(a) In respect of a self occupied house property, the net annual value is taken

as nil. No deductions are allowed except for interest on borrowed funds up

to a maximum of ` 30,000/1,50,000 as the case may be

(b) In respect of any other type of house property, namely of interest & municipal

tax actually paid a house property which is fully let out, etc. There are no

restrictions on deductions and therefore, there can be loss under this head

in respect of such properties due to municipal taxes as well as deductions.

Similarly, deductions under section 24 in case of property deemed to be let

out, can be more than net annual value.

(ii) Incorrect Statement: In case of depreciable assets forming part of block of

assets, there can be a short term capital loss if all the assets of the block are

sold/ transferred during the year and net sale consideration is less than value of

the block. In this case the deficit will be treaded as a short term capital; loss.

2008 - June [2] (a) The net profits of Jolly Brothers, a partnership firm, consisting of

three partners carrying on business for the accounting year ended 31st March, 2014 was

` 5,40,000. The said net profits after charging salary payable to all the partners were

amounting to ̀ 1,08,000, but before crediting interest to partners' accounts on their fixed

capitals amounting to ` 10 lakh totally. The partnership deed provided for payment of

interest on fixed capital at 18% per annum.

The partnership deed does not, however, specify any salary entitlement to partners. On

this information, you are required to -

(i) compute the taxable income of the firm; and

(ii) calculate the remuneration allowable under provisions of the Income-tax Act,

1961 to all the partners, if the partnership deed had provided for the payment of

remuneration to them. (5 marks)

Answer:

Computation of total income for the firm assessment year 2013-14

(i) Net Profit 5,40,000

Add: Salary of partners 1,08,000

6,48,000

Less: Interest allowable to maximum extent of

12% on `10,00,000 1,20,000


(ii) The allowable remuneration to partners if the partnership deed so authorize will be


computed as under

On 1st ` 3,00,000 @ 90% or ` 1,50,000

whichever is more 2,70,000

Balance @ 60% 1,36,800

Maximum Remuneration allowed 4,06,800

2008 - June [3] (b) Mrs. Padma (age: 25 years) is offered an employment by Pritam Ltd.

at a basic salary of ` 24,000 per month; other allowances according to rules of the

company are ! Dearness allowance: 18% of basic pay (not forming part of salary for

calculating retirement benefits); Bonus: 1 month basic pay; and Project allowance: 6%

of basic pay.

The company gives Mrs. Padma an option either to take a rent-free unfurnished

accommodation at Mumbai for which the company would directly bear the rent of

` 15,000 per month or to accept a house rent allowance of ̀ 15,000 per month and find

out her own accommodation. If Mrs. Padma opts for house rent allowance, she will have

to pay ` 15,000 per month for an unfurnished house.

Which one of the two options should be opted by Mrs. Padma in order to minimise

her tax liability? (5 marks)

Answer:

For determining which one is better option, the following taxable income is calculated

of Mrs. Padma

Option 1 [Rent

free

accommodation]

Option 2

[House Rent

allowance]

Basic Salary (24000*12)

Dearness Allowance (18% of ` 2,88,000)

Bonus

Project Allowance (6% of ` 2,88,000)

Rent free accommodation

House rent allowance

2,88,000

51,840

24,000

17,280

49,392

—

2,88,000

51,840

24,000

17,280

—-

36,000

Income from salary 4,30,512 4,17,120

Mrs. Padma should therefore, opt for House Rent Allowance (Option 2)

Note-1 Calculation of taxable perquisite of rent free accommodation:

`

Basic Salary 2,88,000

Bonus 24,000


Project Allowance 17,280

3,29,280

(a) 15% of salary 49,392

(b) Rent of the house 1,80,000

Whichever is less

Note -2

Amount of house rent allowance exempt from tax is the minimum of the following:

(a) ` 1,80,000 (being house rent allowance)

(b) ` 1,51,200 (Rent paid in excess of 10% of the salary)

(c) `1,44,000 (being 50% of salary)

Therefore, amount exempt is ` 1,44,000

Amount taxable is ` 1,80,000-1,44,000= ` 36,000

Repeatedly Asked Questions

No. Question Frequency

1 Distinguish between the ‘Recognised provident fund’ and

‘statutory provident fund’

09 - Dec [3] (a) (ii), 12 - Dec [6] (c) (i) 2 Times

2 Write short notes on Taxation of zero coupon bonds

09 - Dec [2] (b) (i), 10 - June [2] (b) (ii) 2 Times

3 Distinguish between the ‘Long-term capital gains’ and

‘short-term capital gains’.

09 - June [3] (a) (ii), 10 - Dec [5] (a) (i) 2 Times

Documents

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