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Direct Tax

Rajiv S. MishraM.Com., MBA, M.Phil., UGC NET

Assistant Professor at N.E.S. Ratnam College of Arts,Science & Commerce for BBI & Coordinator for M.Com., Bhandup (W), Mumbai-400078.

Visiting Faculty at Nitin Godiwala,N.G. Acharya, V.K. Menon College,

Sikkim Manipal University &Vikas College for M.Com., MBA, BBI, BMS,

BFM & BAF.

[As Per the Revised Syllabus of T.Y. BAF, 2015-16, Semester V,University of Mumbai]

Asif BaigM.Com., B.Ed., M.Phil., MBA, NET

HOD (Accounts) at Gurukul College, Ghatkopar.

H.G. PradhanM.Com., M.Phil., UGC NET

Assistant Professor,Western College, Sanapada and

Vikas College, Vikroli.

Piyush AnamM.Com., M.Phil., SET

Assistant Professor in Accounts,Gurukul College, Ghatkopar.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNELUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR KOLKATA

Pratima SinghM.Com., M.Phil., B.Ed.,Vice Principal & HOD,Account Department,

Chandrabhan Sharma College.

Mukesh C. KanojiaM.Com., M.Phil., B.Ed. & NET

Co-ordinator,R.D. & S.H. National College, Bandra (W).

© AuthorsNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission ofthe publisher and authors.

First Edition : 2015Second Revised Edition : 2016

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Ernakulam : 39/176 (New No: 60/251) 1st Floor, Karikkamuri Road, Ernakulam, Kochi – 682011.Phone: 0484-2378012, 2378016; Mobile: 09387122121

Bhubaneswar : 5 Station Square, Bhubaneswar - 751 001 (Odisha).Phone: 0674-2532129, Mobile: 09338746007

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DTP by : Sunanda

Printed at : Rose Fine Art, Mumbai. On behalf of HPH.

Preface

It is a matter of great pleasure to present First edition of the book on DirectTax to the students and teachers of Bachelor of Commerce – Accounting andFinance course for University of Mumbai. This book is written on lines of syllabusinstituted by the University. The book presents the subject matter in a simpleand convincing language.

We owe a great many thanks to a great many people who helped andsupported us during the writing of this book which includes Principal, HOD,Co-coordinator, and Students of K.M. College, DAV, Ratnam College,K.J. Somaiya, Vivekananda Education Society, Vikas College, R.J. College,N.G. Archarya College, Menon College, Nitin Godiwala College of the B.Com.,M.Com., BBI, BMS, BAF and BFM Section.

Our deepest thanks to Mr. Manoj Sharma of the Nitin Godiwala Collegewho has always given strength to us.

We would also thank all of them who have being a part of this and helpedus knowingly or unknowingly. We also extend our heartfelt thanks to our familyand well-wishers without whom it would have been a distant reality.

Authors

SyllabusModules at a Glance

Sr. No. Modules/Units1 Definitions u/s – 2 and Basis of Charge

Definitions u/s – 2Section 2 –Assessee, Assessment Year, Assessment, Annual Value, Business, CapitalAsset, Income, Person, Previous Year, TransferBasis of ChargeSections 3-9 – Previous Year, Residential Status, Scope of Total Income, Deemed Income

2 Exclusions from Total IncomeSection 10 – restricted to Agricultural Income, Sums Received from HUF by Member,Share of Profit from Firm, Casual and Non-recurring Receipts, Scholarships, Income ofMinor Child, Allowance to Members of Parliament and Legislative Assembly.Note: Exemptions related to specific Heads of Income to be covered with RelevantProvisions.

3 Heads of IncomeSalary: Section 15-17, Including Section 10 relating to House Rent Allowance, TravelConcession, Special Allowance, Pension – Commutation, Leave Encashment,Compensation, Voluntary Retirement, Payment from Provident FundIncome from House Property: Sections 22-27, including Section 2 – Annual ValueProfits and Gains from Business and ProfessionVocation Sections 28-32, 36, 37, 40, 40A and 43B, including Section 2 – BusinessCapital Gains: Sections 45, 48, 49, 50, 54 and 55Income from Other Sources: Sections 56-59

4 Deductions under Chapter VI – A80A – Restriction on claim in Chapter VI- A deductions80C – Payment of LIC/PF and other eligible investments80CCC – Contribution to certain Pension Fund80D – Medical Insurance Premium80DD – Maintenance and medical treatment of handicapped dependent80E – Interest on Educational Loan80TTA – Interest on Saving Bank account80U – Deduction in the case of totally blind or physically handicapped or mentallyretarded resident person

5 Computation of Total IncomeComputation of Total Income of Individual and HUF

Duration: 2½ Hrs. Maximum Marks: 75All Questions are Compulsory Carrying 15 marks each. Questions to be Set: 05

Particulars MarksQ.1 Objective Questions

(a) Sub questions to be asked 10 and to be answered any 08(b) Sub questions to be asked 10 and to be answered any 07(*Multiple Choice/True or False/Match the Column, Fill in the Blanks) 15 Marks

Q.2 Full Length Practical Question 15 MarksOR

Q.2 Full Length Practical Question 15 MarksQ.3 Full Length Practical Question 15 Marks

ORQ.3 Full Length Practical Question 15 MarksQ.4 Full Length Practical Question 15 Marks

ORQ.4 Full Length Practical Question 15 MarksQ.5 (a) Theory Questions 08 Marks

(b) Theory Questions 07 MarksOR

Q.5 Short Notes 15 MarksTo be asked 05To be answered 03

Note: Full length question of 15 marks may be divided into two sub-questions of 08 and 07 marks.

Question Paper Pattern

Contents1. Introduction and Definition 1 – 17

Introduction Objectives Definition and Meaning of Taxation Scope of Income Tax Structure of Taxation in India Importance of Tax to Government Revenue Features of Indirect Tax Drawbacks of Indirect Tax Definitions (Sections 2 and 3) Exhaustive vs. Inclusive Definitions Income – Definition and Meaning Income Includes Exempted Income Some Important Definitions

2. Basis of Charge and Scope of Total Income 18 – 38 Introduction Charge of Income Tax (Section 4) Classification According to Residential Status Scope of Total Income

3. Income Exempted from Tax 39 – 49 Introduction Incomes Not Included in Total Income Tabular Form of Exempted Income

4. Heads of Income 50 – 52 Introduction Heads of Income u/s 14 Importance Expenditure Incurred with Respect to Exemption

5. Income from Salary 53 – 85 What is Salary? What Incomes Come under Head of Salary? What is Leave Encashment? What is Annuity? What is Gratuity? What is Allowance? What is Perquisite? Deductions from Salary Income Different Forms of Salary and Tax Treatment Deductions from Salaries [u/s 16]

6. Income from House Property 86 – 109 Introduction Properties Covered under Heads of House Property Properties Included under the Term ‘Building’ Basic Questions for Understanding House Property Basic Charge [u/s 22] Define Building Annual Value is RLV or Actual Rent

7. Income from Business and Profession 110 – 132 Introduction Disallowed Expenditure for Business Exempted Income from Business Format Provisions Basis of Charge [u/s 28] What Conditions must be Satisfied for an Income to Fall under the Head

of Income from Profits and Gains of Business? What Income will be Chargeable to Income Tax under the Head ‘Profits

and Gains of Business or Profession’? Deductions Which are Allowed in Computing Income from Profits and

Gains of Business or Profession

8. Income from Capital Gain 133 – 154 Capital Asset Are the Gains, Arising from Sale or Transfer of Property, Subject to

Income Tax? What Transactions are Not Regarded as Transfers? In What Circumstances are Capital Gains that Arise from the Transfer of

House Property Exempt? What are the Consequences if a New House is Transferred within 3 Years? What is the Amount of Exemption Available on Capital Gains that Arise

from Transfer of House Property? What is the Mode of Computation? What is the Indexed Cost of Acquisition? What is the Indexed Cost of Improvement? Is There Any Tax Shelter for Avoiding Capital Gains Tax? What is Cost Inflation Index (CII)?

9. Income from Other Sources 155 – 169 Introduction Items Included under the Head “Income from other Sources” Things that can be Charged under Income from Other Sources is Not

Listed in any Other Heads Is the Dividend Income of All Assessee Liable to Tax? What are the Deductions Allowed under the Head ‘Income from Other

Sources’? Income from Securities by Way of Interest Personal Expenses of Assessee

10. Deductions to be Made in Computing Total Income 170 – 195 Deduction vs. Exemption Tabular Format of All Applicable Deductions Tax upon Clubbing Total Income Avoiding Double Taxation Filing Tax Returns

11. Computation of Total Income for Individual 196 – 220 Introduction Format for Computation of Total Income

Introduction and Definition 1

C H A P T E R1

INTRODUCTION ANDDEFINITION

1. Introduction

2. Objectives

3. Definition and Meaning of Taxation

4. Scope of Income Tax

5. Structure of Taxation in India

6. Importance of Tax to Government Revenue

7. Features of Indirect Tax

8. Drawbacks of Indirect Tax

9. Definitions (Sections 2 and 3)

10. Exhaustive vs. Inclusive Definitions

11. Income – Definition and Meaning

12. Income Includes

13. Exempted Income

14. Some Important Definitions

Introduction and Definition2

IntroductionIncome Tax means tax on a person’s income. Every person whose income exceeds or

crosses the prescribed limits is liable to be taxed. The Finance Act decides the limit of taxableincome or in other words the limits of income exempted from tax. In India, the concept ofIncome tax is being levied by the British Rulers since 1860. The Government needs to generaterevenue to meet its expenses. It carries out the function of maintaining law, order and peacethroughout the country. Similarly, it is the duty of the Government to ensure security of thenation through proper defense mechanism. The duty and the scope of the Government hasincreased manifold.

ObjectivesAfter studying this unit, you will be able to:

Tell the definition and meaning of tax,Enumerate and identify the benefits and drawbacks of direct and indirect taxation,Know the objectives and scope of taxation,Know the features (highlights) of the structure of taxation,Know the canons of taxation,Know the importance of taxation in revenue generation for the government.

TaxationIt is now a generally accepted practice that Government expenditure is met by raising

funds through taxation. The Finance Minister while preparing the budget has to considerhow the income through taxation would be increased. The Government has to design thetaxation policy in such a way that would earn maximum revenue for it and at the same timewould not be burdensome or cumbersome to the public at large.

Definition and Meaning of TaxationTax is one of the most important means of income for the Government. In other words,

tax could be said as compulsory donation made to the Government does not assure anyspecial benefits to the taxpayers. The Government provides basic amenities and services topublic from the revenue generated through tax collection. All are benefited from such services.This may not have a direct nexus with the tax paid by an individual. Tax means compulsorilycollected donation by the Government for fulfilling its functions. Tax has been defined byvarious experts as under:

Selingman: “Tax means a compulsory collected donation from public which is usedfor the benefit of all. Tax does not cater to individual needs.”

Taylor: “Tax means a compulsory donation by public without any direct benefit forsuch donation.”


Dr. Dalton: “Tax is mandatory liability and it does not resemble any reciprocal orproportionate benefit.”

In short, the amount given by public to the Government with any reciprocal benefit orconsideration means tax. The following features become evident from the definition of tax.

Indirect TaxesA major portion of the country’s income comes from the contribution made by indirect

taxes. Indirect tax is levied on products and not on people. Since every person is a buyer ofsome or the other products, he automatically pays the taxes. Such taxes are levied onmanufacture of goods, sale of goods and import as well. This tax is paid by both, poor andrich.

Meaning and DefinitionIn these, the tax is not paid on goods to the government and recovers the same from

the buyers. Indirect tax is the tax that can be transferred on other person. The burden ofcharging is on one person and the payment is made by others.

Dr. Dalton: “The tax which is levied on one person but recovered, partly or fully fromsome other person can be defined as indirect tax.”

Direct TaxesA Direct tax is paid by the person from whom the Government expects the tax to come.

The responsibilities of paying tax is fixed on the person and the burden of paying tax lies onthat person, such tax is called direct tax.

Dr. Dalton: “When tax is levied on one person and the same is paid by that person,then it is said to be direct tax.”

Scope of Income TaxUnder the Income Tax Act, 1961, the Income earner must pay tax.While computing the total income of a person income earned by a person, the following

heads of income are taken into account:1. Income from Salary.2. Income from House Property.3. Income from Business.4. Capital Gain or Loss.5. Income from Other Sources.Tax is calculated at the rates prescribed in the finance bill for the relevant period.


Structure of Taxation in IndiaThe Constitution has defined in its State and Central List as to which areas of taxation

rest with the State and what kind of taxes are to be levied by the Central Government. Thelocal governing bodies are subsidiary to the State government and under the control of theState Governments. The State government has endowed some powers on the Local Governingbodies to levy some taxes.

Capital ExpenditureAny fixed asset which is regularly used for deriving income over a period of time and

the expenditure of which the business will the benefit over such period.

Revenue ExpenditureExpenditure incurred for running of the business towards general administration of

the business is revenue expenditure.In other words, expenditure incurred to run the business, to preserve the fixed assets

and to maintain the same is termed as revenue expenditure.

Advance Payment of TaxEvery assessee has to pay the advance tax towards his tax liability to be computed

during the assessment year.

Tax Structure in India1. Direct Tax2. Indirect Tax

Direct Tax

(a) Income Tax(b) Wealth Tax(c) Gift Tax

Indirect Tax

(a) Excise Duty(b) Customs Duty(c) Sales Duty

Importance of Tax in Government RevenueIn countries like India to achieve economic development and create stability, the place

of public funding has gained a lot of importance.


As the objectives as shown:

1. To make available resources for the development of public sector.2. To make the best and maximum use of the available resources.3. To curb inflation and gain economic stability.

Benefits of Direct Tax1. Capacity and Equity2. Flexibility3. Economical4. Certainty5. Evasion not Possibility6. Awareness7. Equity

Drawbacks of Direct TaxesDirect tax has its benefits as well as its darker side.The drawbacks are as follows:

1. Difficulty in Defining Taxability2. Inconvenience3. Protest4. Expensive5. Tyrannical6. Limited Base

Features of Indirect Tax

1. Goods and Services: Indirect Tax is levied on goods or services.2. Customers: Person paying the indirect tax does not bear the burden but the same is

recovered from customers.3. Traders and Customers: Traders and consumers do not feel the burden of Indirect

tax and generally do not prohibit levy of such taxes.4. Government: Governments get substantial revenue from indirect tax.

Benefits of Indirect Tax1. No burden of Tax2. Low rate of Tax


3. Tax according to Capacity4. Economical5. Indirect tax justified6. Progressive Taxation7. Unavoidability of Taxes

Drawbacks of Indirect TaxIt is criticized due to the following drawbacks:

1. Tyrannical and Regressive2. Uncertainty of Income3. Knowledge/Realization4. Economy5. Burden of Tax not realized

Definitions (Sections 2 and 3) Section 2 of the Income Tax Act, 1961 define various terms and concepts which are

used throughout the Income Tax Act. Before we start with various aspects of Income taxlaw, it is necessary to start a deep understanding about these definitions. It is also necessary,while interpreting the various provisions of the Income tax law, to give the same meaningto various terms, as is expressly given to or defined in Section 2.

Exhaustive vs. Inclusive DefinitionsAn Exhaustive definition is one which gives a very clear and precise meaning of the

given term. No outside elements are to be brought in while understanding the meaning ofthis term. The meaning of the term is very clearly defined in Income Tax Act.

E.g.: Assessment year is the best example of an exhaustive definition.On the other hand, an inclusive definition is one in which the definition gives some

meaning in addition to the dictionary or the common meaning of the term. It includesseveral other meanings of the term, which otherwise would not have been so included, butfor the definition given.

The Income Tax Act in the year 1961 in India passed by the House of People (LokSabha). And the same was applicable to the whole of India with effect from April 1, 1962. TheAct consists of 400 sections, 12 schedules and is supplemented by numerous Rules and hencethe Act has become a complex and complicated feature. In the year 1970, a committee for‘Enquiry of Direct Taxes’ was set up under the Chairmanship of Mr. K.N. Wanchhoo. Thecomplex nature of Act is increasing day by day. In every year, the rates of taxes are decidedby the Income Tax Rules.


Subject DescriptionThe Income Tax Act, 1961 does not contain full-fledged and exhaustive definitions of

term ‘income’. Hence, various aspects of income and the sources of income are consideredevery year. To understand such important terms and definition, various items like income,person, agriculture income, income exempt from tax, assesse, etc. are dealt in this chapter.

Income – [Section 2(24)]

Definition and ConceptTerm income is a broad concept and includes variety of income, wherein no exact

definition of term income.The Income Tax Act, 1961 has not defined the term income but has tried to explain it as

an inclusive list of sources of items.As per Income Tax Act, the definition of income is an Inclusive Definition.That is they have given a list of items which fall within the meaning of the term

Definition.

Income IncludesThey are as follows:

(i) Profits and gains;(ii) Dividend;

(iii) The value of any perquisite or profit in lieu of salary taxable under clauses (2) and(3) of section 17:(a) Any special allowance or benefit, other than perquisite included under sub-

clause (iii), specifically granted to the assessee to meet expenses wholly, necessarilyand exclusively for the performance of the duties of an office or employment ofprofit;

(b) Any allowance granted to the assessee either to meet his personal expenses atthe place where the duties of his office or employment of profit are ordinarilyperformed by him or at a place where he ordinarily resides or to compensatehim for the increased cost of living;

(iv) The value of any benefit or perquisite, whether convertible into money or not, obtainedfrom a company either by a director or by a person who has a substantial interest inthe company, or by a relative of the director or such person, and any sum paid byany such company in respect of any obligation which, but for such payment, wouldhave been payable by the director or other person aforesaid;

(v) Any sum chargeable to income tax under clauses (ii) and (iii) of section 28 or section41 or section 59:(a) Any sum chargeable to income tax under clause (iiia) of section 28(b) Any sum chargeable to income tax under clause (iiib) of section 28


(c) Any sum chargeable to income tax under clause (iiic) of section 28(d) The value of any benefit or perquisite taxable under clause (iv) of section 28(e) Any sum chargeable to income tax under clause (v) of section 28

(vi) Any capital gains chargeable under section 45;(vii) The profits and gains of any business of insurance carried on by a mutual insurance

company or by a co-operative society, computed in accordance with section 44 or anysurplus taken to be such profits and gains by virtue of provisions contained in theFirst Schedule:(a) the profits and gains of any business of banking (including providing credit

facilities) carried on by a co-operative society with its members;(viii) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-clause was inserted

by the Finance Act, 1964, w.e.f. 1-4-1964;](ix) 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 ornature whatsoever:(a) Lottery includes winnings from prizes awarded to any person by draw of lots

or by chance or in any other manner whatsoever, under any scheme orarrangement by whatever name called;

(b) Card game and other game of any sort includes any game show, an entertainmentprogramme on television or electronic mode, in which people compete to winprizes or any other similar game.

(x) Any sum received by the assessee from his employees as contributions to any providentfund or superannuation fund or any fund set up under the provisions of theEmployees State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare ofsuch employees.

(xi) Any sum received under a Keyman Insurance Policy including the sum allocated byway of bonus on such policy.

(xii) Any sum referred to in 26[clause (va)] of section 28.(xiii) Any sum referred to in clause (v) of sub-section (2) of section 56.(xiv) Any sum referred to in clause (vi) of sub-section (2) of section 56.

Exempted IncomeA person has to pay tax on his income, it is not necessary that the assessee should pay

tax on all incomes. According to section 10 of the Income Tax Act, 1961, some incomes arefully exempt from tax and some are partly exempt. Exempted income is divided into thefollowing:

1. Fully Exempted Income2. Partly Exempted Income


Any other Artificial PersonA separate category to include other artificial persons is provided for in the Act.

Partnership FirmAs under the Income Tax Act, 1961, a partnership firm is included in the definition of a

person. It is a separate taxable entity. According to section 4 of the Partnership Act, 1932, aPartnership firm is an organization where Partnership is the relation between persons whohave agreed to share the profits of a business carried on by all or any of them acting for all.If a partnership firm has paid the tax, the partner gets an exemption.

Some Important Definitions

(a) Person – Section 2(31)

As per Section 2(31) of the Income Tax Act, 1961, person includes:1. Individual: It indicates only a natural person, i.e., human being. It also includes a

minor or a person of unsound mind.2. Hindu Undivided Family: Commonly referred as HUF is one arising from Hindu

law. It consists of all persons lineally descended from a common ancestor and theirwives, sons and daughters.

3. Joint Stock Company and Partnership Firm: A firm is treated as a separate entityhaving its own legal status and a perpetual succession distinct from its partners,though under partnership act, a firm has not be accorded to have a separate entity.

4. Association of Persons: It has not been defined by the act. Hence, these terms mustbe understood in their plain ordinary meaning. Thus, when there is a combinationof persons, formed for the promotion of a joint enterprise. They constitute“Associations of persons“ if they don’t satisfy the partnership clause. The term Bodyof Individuals normally refers to trustees of a charitable trust – where trustees havecome together, not for personal gain but for social upliftment.

5. Local Authority: Would include gram panchayat, a municipality, district municipalcorporation board, port trust or any other body entrusted by the government withthe control and management of a municipal or local body.

6. Other Artificial Person: “Artificial Juridical person“ would include an idol, a deity, auniversity, a bar council, etc.

The above definition of “Person” gives the classification of the assessees accordingly totheir legal status.

IllustrationPersons Legal Status

Mumbai University Artificial Juridical person

HDFC Bank Ltd. Company

Baroda Municipal Corporation Local authority


Juhu Kelavani Mandal Association of Persons

Sudhir Co-operative Housing Society Ltd. Association of Persons

Mehta Industries Ltd. Company

Prof. Anil Shah Individual

(b) Assessee – Section 2(7)

The persons who are liable to pay tax are called “Assessess” under section 2(7).“Assessee means a person by whom any tax or any other sum of money is payable

under the Income Tax Act , 1961.”

(c) Assessment – Section 2(8)

“Assessment is the process of determining: (i) the income or loss of an assessee, (ii) thetax liability on the income so determined and (iii) the tax payable by or refund due to theassessee.

There are three stages in an “Assessment”:1. Computation of total tax liability on the total income2. Determining the total tax liability on the total income3. Determination of tax payable or amount refundable

(d) Assessment Year – Section 2(9)

“Assessment year” means the period starting from April 1 and ending on March 31 ofthe next year.

Example: Assessment year 2006-07 which will commence on April 1, 2006, and will endon March 31, 2007. Income of previous year of an assessee is taxed during the next followingassessment year at the rates prescribed by the relevant Finance Act.

(e) Previous Year – Section 2(34) & 3

Income earned in a year is taxable in the next year. The year in which income is earnedis known as previous year and the next year in which income is taxable is known asassessment year. In other words, previous year is the financial year immediately precedingthe assessment year.

Illustration 1: For the assessment year 2006-07, the immediately preceding financialyear (i.e., 2005-06) is the previous year.

Income earned by an individual during the previous year 2005-06 is taxable in theimmediately following assessment year 2006-07 at the rates applicable for the assessmentyear 2006-07.

Similarly, income earned during the previous year 2006-07 by a company will be taxablein the assessment year 2007-08 at the rates applicable for the assessment year 2007-08.


When Income of Previous Year in Not Taxable in the Immediate Following Year

The rule that the income of the previous year is taxable as the income of the immediatelyfollowing assessment year has certain exceptions. These are:

(a) Income of non-residents from shipping;(b) Income of persons leaving India either permanently or for a long period of time;(c) Income of bodies formed for short duration;(d) Income of a persons trying to alienate his assets with a view to avoiding payment of

tax; and(e) Income of a discontinued business.

In these cases, income of a previous year may be taxed as the income of the assessmentyear immediately preceding the normal assessment year.

These exceptions have been incorporated in order to ensure smooth collection of incometax from the aforesaid taxpayers who may not be traceable if tax assessment procedure ispostponed till the commencement of the normal assessment.

Questions

1. Multiple Options Questions1. The constitution of India empowers _________ to levy tax on income.

(a) State Government (b) Central Government(c) Parliament (d) Finance Minister

2. Income tax is a tax on _________.(a) Income (b) Profit(c) Turnover (d) Expenditure

3. The Income Tax Act, 1961 has 298 _________.(a) Sections (b) Sub-sections(c) Clauses (d) Sub-clauses

4. The _________ makes the amendment in the form of omissions, insertions andsubstitutions in the Income Tax Act.(a) Finance Bill (b) Finance Minister(c) Finance Act (d) Parliament

5. The Income Tax Act extends to _________ of India.(a) States (b) Union territories(c) Citizens (d) Whole


6. Gross tax liability is calculated on _________.(a) Gross total income (b) Net taxable income(c) Income (d) Salary

7. The term HUF stands for _________.(a) Hindu divided family (b) Human undivided family(c) Hindu undivided family (d) Human divided family

8. Residential has nothing to do with _________.(a) Constitution (b) Citizenship(c) Censorship (d) Change

9. AOP is the abbreviation used for _________.(a) Association of Persons (b) Association of Professors(c) Association of Panchayats (d) Association of Person

10. AOP should consist of _________.(a) Individual only (b) Person other than individual also(c) None of the above (d) Both of the above

11. Body of individual should consist of _________.(a) Individual only (b) Persons other than individual only(c) Both of the above (d) None of the above

12. Residential status of an individual depends on the stay of the assessees in India duringthe _________.(a) Calendar year (b) Accounting year(c) Assessment year (d) Previous year

13. A person by whom any tax is payable under Income Tax Act 1961 is called _________.(a) Individual (b) Tax receiver(c) Assessee (d) None of the above

14. The financial year in which the income is earned is called as the _________.(a) Assessment year (b) Present year(c) Previous year (d) Current year

15. An company is always resident in India _________.(a) Industrial (b) Individual(c) Indian (d) Investment

16. Income Tax Act extends to _________.(a) Whole of India(b) Whole of India except Jammu & Kashmir


(c) India and Sri Lanka(d) None of these

17. A new business was set up on 15-11-2013 and it commended its business from1-12-2013. The first previous year in this case shall be _________.(a) 15-11-2013 to 31-3-2014 (b) 1 01-12-2013 to 31-03-2014(c) 2013-2014 (d) None of these

18. Shivaji University is assessable under the Income Tax Act as_________.(a) A undividual (b) An artificial juridical person(c) A local authority (d) None of these

19. Income Tax Act has _________ schedules.(a) 23 (b) 14(c) 298 (d) 40

20. 58(1)(A)(ii) is read as _________.(a) Section 58 schedule (1) clause (A) sub-clause (ii)(b) Section 58 clause (1) sub-section (A) schedule (ii)(c) Section 58 sub-section (1) clause (A) sub-clause (ii)(d) Section 58 sub-section (1) clause (A) sub-schedule (ii)

21. In 59(3)(b)(iv), (b) is _________.(a) Section (b) Clause(c) Sub-section (d) Sub-clause

22. _________ are definite, specific, complete and full.(a) Exhaustive definition (b) Inclusive definition(c) Sections (d) Clauses

23. A firm is regarded as a unit of assessment as per _________.(a) Income Tax (b) Partnership Act(c) Companies Act (d) Finance Act

24. _________ is chargeable u/s 45.(a) Capital gains (b) Voluntary contribution(c) Capital gains (d) All the above

25. Any sum of money received in excess of ` _________ without consideration ischargeable to tax.(a) 5,000/- (b) 5,00,000/-(c) 50,000/- (d) 55,000/-


26. Previous year can be of _________ 12 months.(a) More than (b) Less than(c) Only (d) Any

27. Any sum received or receivable in cash or kind under an agreement for not carryingout an activity in relation to a business is called as _________.(a) Pin money (b) Mutual activity(c) No competition deal (d) Non-compete agreement

28. _________ is expected to be periodical monetary return.(a) Salary (b) Profit(c) Income (d) Interest

29. _________ are not taxable.(a) Losses (b) Personal gifts(c) Illegal income (d) Awards

30. _________ received by wife is not taxable.(a) Pin money (b) Compensation(c) Gift (d) Salary

31. The term Person includes(a) HUF (b) AOP(c) BOI (d) All of them

32. Partners are liable to pay tax on _________ received from firm.(a) Salary (b) Profit(c) Income (d) Both (a) and (c)

2. Fill in the Blanks1. Income tax extends to _________ of India.2. Income tax is a tax on _________.3. In all, there are _________ number of sections under the Income Tax Act, 1961.4. The rate of tax on Income is decided every year by the _________.5. Income Tax Act came into force from _________.6. Constitution is the _________ in India.7. The Constitution of India empowers _________ to levy tax on income.8. Gross tax liability – _________ = Net tax liability.9. The finance bill is introduced by _________.

10. Finance bill, once approved, becomes _________.


11. The Act provides for _________ of the assessee.12. The _________ on the total income is decided every year by passing the Finance Act.13. The two types of definitions are _________ and _________.14. A person by whom tax is payable under the Act is called _________.15. Income Tax Act defines assessment to include _________.16. Person includes a natural human being and also includes _________ or a person of

_________.17. Previous year of a newly setup business can be of _________ 12 months.18. A period of 12 month commencing on 1st day of April every year is called an _________.19. _________ of the Income Tax Act, 1961 gives the definition of various terms.20. _________ provide scope for interpretation.21. Income should be real and not _________.22. Income can be on _________ and _________ basis.23. Non-compete agreements are also called _________.24. _________ received by a professional sportsman is an income.25. Loss is to be taken as _________.26. _________ gifts are not chargeable to tax.27. Income is expected to be a _________.28. _________ is chargeable u/s 45.29. A person by whom a tax is payable under the act is called as _________.

3. Match the Following1. Column 1 Column 2

1. Constitution of India (a) Income tax act2. Central government (b) 1st April 19613. Income Tax Act (c) Approves finance bill4. Net tax liability (d) Introduce finance bill5. Rate of tax (e) Parent law6. Finance minister (f) Finance act7. Parliament (g) Levies tax on income8. Determination of total income (h) Gross tax liability – TDS

2. Column 1 Column 21. Assessment year (a) F.Y. 2012-132. Assessee (b) Gift above ` 50,000


3. Previous year (c) 2013-144. Assessment (d) Person liable to pay tax5. Income (e) Reassessment

3. Column 1 Column 21. Capital Gain (a) Section 2(8)2. Company (b) Section 2(24)3. Assessment (c) Section 2(34)4. Assessee (d) Section 2(45)5. Income (e) Section 2(17)6. Assessment Year (f) Section 2(31)7. Previous Year (g) Section 2(9)8. Person (h) Section 2(7)

4. Complete Following1. Income tax is extended to whole India _________.2. Income Tax is tax on tax _________.3. Income tax in India is governed by the Income Tax Act, 1961 _________.4. The constitution of India empowers Central Government to levy tax on income

_________.5. The Income Tax came into force from financial year 1962-63 _________.6. Gross tax liability is calculated on gross total income _________.7. The Income Tax Act has 289 sections _________.8. Finance bill becomes finance act after the assent of parliament _________.9. The finance bill makes the amendment in the form of omissions, insertions and

substitutions in the Income Tax Act _________.10. The Income Tax Act is applicable to whole India _________.11. The finance minister introduces the finance bill in the parliament _________12. The rate of tax on the total income is decided every year by passing the finance act

_________.13. The Finance Act is substitute to Income Tax Act _________.

5. State whether True or False1. Dharampur gram panchayat is a AOP.2. AOP stands for association of panchayat.3. HUF stands for human undivided family.


4. Thane Municipal Corporation is a local authority.5. Previous year is always of 12 months.6. Assessment year is always of 12 months.7. Only individuals can be member of body of individuals.8. Gift received on occasion of marriage is always taxable as income.9. Every receipt is an income.

10. All person do not have to pay tax.11. In assessment year, income of previous year is assessed.12. Income can be in cash or kind.13. Pin money is taxable.14. Income can be real or fictional.15. According to section 2(8), assessment include reassessment.16. The definition of income is inclusive definition.17. Reliance Industry Ltd. is a person as per Income Tax Act 1961.18. Income is calculated on the basis of receipt only.19. Any income receivable through unlawful means is not chargeable to tax.20. Distribution of surplus arising from mutual activity is not chargeable to tax.

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