income tax theory for the ay 12 13
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Income tax theory for the ay 12 13TRANSCRIPT
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Chapter 1. Introduction.
1. What is Direct Tax & Indirect Tax?
‘Income Tax’ is a Direct Tax law, as the liability to pay tax and the actual payment of tax is on the same person. Examples of Direct Taxes are ‘Income Tax’ and ‘Wealth Tax’.
In case of Indirect tax, the tax burden is on one person, but it is actually suffered by other person. E.g., in the case of Excise duty, the manufacturer is liable to pay the duty, but ultimately, it is included in the final bill price of the consumer. Same is the case of Sales Tax, Customs Duty etc.
2. What do you mean by ‘Income Tax’?
‘Income Tax’ is the tax or duty on income of a person. ‘Income Tax’ is charged when a person’s income exceeds the specified sum during the year. On such income, tax is levied on at the specified rate as per the Finance Act.
Webster defines ‘Income Tax’ as “a tax upon a person’s income, especially on income over and above a specified sum.”
Parliament is the only authority to enact law on ‘Income Tax’. ‘Income Tax Act’ was passed in parliament in 1961 and it came in to force with effect from 1st April 1962.
‘Income Tax’ is one of the major revenue of the Central Government. It tends to collect tax on income at the specified rates applicable to the previous year as per the ‘Finance Act’.
‘Income Tax’ is levied and administered by the Central Government and is collected by the officers appointed by the Central Government and the State governments on the basis of the recommendations of the ‘Finance Commission’.
3. Explain Evolution of Income Tax law in India. State the year in which the present income tax act was passed. (2007 B.com)
In India ‘Income Tax’ was introduced for the 1st time in 1860 by Sir James Wilson in order to meet the losses sustained by the Government on account of the ‘Military Mutiny of 1857’. Thereafter several amendments were made in it from time to time.
At last, in 1886, a separate ‘Income Tax Act’ was passed. This Act remained in force up to 1917, with various amendments from time to time. In 1918, a new ‘Income Tax Act’ was passed & again it was replaced by another new Act, which was passed in 1922.
The ‘Income Tax Act’ of 1922 had become very complicated on account of innumerable amendments. The Government of India therefore appointed the ‘Direct Taxes Administrative Enquiry Committee’ to suggest measures to minimize
inconveniences to assess and to prevent ‘evasion of tax.’ This committee submitted its report in 1959. In consultation with the ministry of law finally the ‘Income Tax Act’ - 1961 was passed.
The ‘Income Tax Act’ - 1961 has been brought in to force with effect from 1st April 1962. It applies to the whole of India. This Act is administered by the board set up by the Central Government namely CBDT (Central Board Of Direct Taxes.)
The tax rate is not specifically mentioned in the ‘Income Tax Act’, but it is determined for each assessment year as per the rate specified in the Annual ‘Finance Act’. (Budget)
Further for the administration & procedure for the ‘Income Tax Act’, there is ‘Income Tax rule 1962’, which has also amended till date as per the Annual ‘Finance Act’. Further there are a number of judicial guidelines for the proper administration of the Act by various courts, in decided cases. Hence the present ‘Income Tax Act’ is the ‘Income Tax Act- 1961 as amended up to date.
‘Income Tax’ is levied and administered by the Central Government and is collected by the officers appointed by the Central Government and the State governments on the basis of the recommendations of the ‘Finance commission’.
4. What are the Laws relating to Income Tax in India? (2003 M.com)
The law of ‘Income Tax’ is contained in:
1. The ‘Income Tax Act’ 1961, as amended up to date.
2. The ‘Income Tax’ Rules 1962, as amended up to date.
3. ‘Finance Act’ passed by the Parliament every year.
‘Income Tax Act’ of 1961 came in to force with effect from 1-4-62 and extends to the whole of India. It is the main enactment. It contains provisions relating to computation of total income under different heads, procedure of assessment, appeals, penalties, prosecution, and rectification proceeds.
‘Income Tax - Rules 1962’ have been made to carry out the purposes of I.T. Act. Rules are framed by Central Board of Direct Taxes (C.B.D.T.), the top most tax authority. Rules are equal to provisions of I.T. Act and have full legislative backing.
‘Finance Act’ is passed by the parliament every year. It fixes the rates of ‘Income Tax’ for a current Assessment Year and rates for ‘Deduction of Tax at Source’ (T.D.S.) as well as ‘Advance Payment of Tax’ for the financial year.
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5. What do you mean by Assessment?
Every person who is liable to pay ‘Income Tax’ should file return of income on prescribed dates. These returns are processed by the ‘Income Tax’ department Officers. This processing is called ‘Assessment’.
6. Define Assessee? (2004 B.com) (2003 M.com) (2006 B.com) (2009 B.com) ( 2011 B.com)
Assessee means a person who is liable to pay tax or any other sum of money payable under the act. ‘Other sum of money’ includes fine, Interest, penalty etc.
If the assessing officer takes any proceedings against any person, he will also become an ‘Assessee.’
Some times a person may have to pay tax not in respect of his income, but in respect of the income of some other person. In such a case, he is known as ‘Deemed Assessee.’
A person is deemed to be an ‘Assessee In Default’ if he does not comply with his statutory duties.
7. Who is a ‘Deemed Assessee’ or ‘Representative assessee’? (2003 B.com) (2003 M.com) (2004 M.com) (2003 B.com)(2007 B.com)
Sometimes a person may have to pay tax not in respect of his income but in respect of income of some other person. In such a case he is known as ‘Deemed Assessee’. E.g.,
1. Legal heirs will have to pay tax for income of a deceased person.
2. A person representing minor is treated as an Assessee for the Income of the minor.
8. What do you mean by ‘Assessee in Default’? (M.com - 02)
A person will become Assessee in default if he does not comply with his statutory duties.
E.g.,
1. The Assessee shall be considered to be an ‘Assessee in default’ if he fails to pay tax within the time allowed originally or extended & to the person & place mentioned in the notice.
2. A person who disburses income is liable to deduct tax there on at prescribed rate. But if he does not deduct tax at source, he will become an ‘Assessee in Default’.
9. What is Assessment Year? (2003 M.com)
Assessment year means the period of 12 months commencing on the first day of April every year. In India, the Government maintains its accounts for a period of 12 months.
i.e., 1st April to 31st March every year. It is also known as Financial Year. The ‘Income Tax’ Department has also selected same year for its assessment proceeds.
The Assessment year is the financial year of the Government of India during which income of a person relating to the relevant previous year is assessed to tax.
Current A. Y. is 2012-2013 (1-4-2012 to 31-3-2013)
10. What is Previous Year?
(2010 B.com) & (2003 B.com) (M.com - 02) (2003 M.com)
Previous year is the Financial Year preceding the A. year. E.g., for A. year 2008-2009, the previous year is 2007 - 2008.
Current P. Y. is 2011-2012 (1-4-2011 to 31-3-2012)
It is the income earned during the previous year is taxed in the Assessment year.
Previous year in the case of newly set up business (2003 M.com)
The P.Y. in the case of a newly started business shall be the period between commencement of business and 31st March of the following year.
E.g., in case of newly started business commencing its operation on 1 - 8 - 2009, the previous year is the period between 1 - 8 - 2009 to 31 - 3 – 2010.
11. What are the Situations where income earned during a P.Y. are taxed in that year itself?
a) Income of a Non - Resident from shipping business.
Income earned by a Non - Resident from a shipping business at a port in India, will be taxed in the year of earning itself.
b) Income of persons leaving India
An individual who is going to leave India in any A.Y. with the intention of not returning to India in the near future, the income of such individual will be assessed in the same year itself.
c) Transfer of property to avoid tax.
If in the opinion of the Assessing officer, an Assessee is likely to transfer his property to avoid tax, the total income of such person will be taxed in the current year it self
d) Discontinuance of a Business or Profession.
The income of discontinued business/ profession will be taxed in the year in which such business or profession is discontinued.
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12. Define ‘Person’. (Sec. 2 (31)? (2002 B.com) (M.com – Dec 02, Dec 05) (2005 B.com)
The tern ‘Person’ includes:1) An individual2) A HUF3) A company4) A firm5) An Association of persons (A.O.P) or Body of
Individuals (B.O.I)6) A Local authority. (Panchayath, Municipality, Port
trust etc)7) Every Artificial Juridical Person (LIC, University
Etc.)
13. What do you mean by ‘Association of persons’ (AOP)
Co-operative societies, NAFED etc are examples of association of persons. When persons combine together to carry on a joint enterprise & they do not constitute partnership under the ambit of law, they are assessable as AOP.
Receiving income jointly is not the only feature of an AOP. There must be common purpose & common action to achieve the common purpose. i.e. to earn income.
14. What are the Differences between ‘AOP’ & ‘BOI’
An A.O.P can have Firms, Companies, Associations and individuals as its members.
But a ‘Body of Individuals’ cannot have non-individuals as its members. Only natural human beings can be members of a Body of individuals.
(Whether a particular group is AOP or BOI is a question of fact to be decided in each case separately.)
15. Define ‘Income’ (Sec.2 (24)?
It includes:
1. Profits & gains
2. Voluntary contribution received by a trust created for charitable and religious purpose
3. Any special allowance for meeting expenses for performance of duty
4. Allowances to the Assessee to meet the increased cost of living
5. Dividend
6. The value of any perquisite or Profit in lieu of Salary
7. Capital gains
8. Casual income namely winnings from lotteries, crossword puzzles, races including horse races, card games.
9. Sum received by an employer as contribution to any fund for the welfare of employees.
16. What is Tainted Income?
Tainted income means ‘Illegal Income’. Income earned legally or illegally remains ‘income’ & it will be taxed according to the provisions of the act. In addition to being taxed, the Assessee may also be prosecuted for the offence.
But normal Expenses incurred in earning an illegal income are deducted in computing the taxable illegal income.
17. What is ‘Income Deemed to be received’ or what is deemed income? (2004 M.com) (2003 M.com)
It means that, although the income is not already actually received by the Assessee, it is considered to have been received by him under this Act.
Such incomes are:
1. Income of other persons which are included in the income of the Assessee
2. Tax deducted at source
3. Annual Accretion
4. Transferred balance of any unrecognized provident fund to a recognized provident fund
5. Transfer of income without transfer of assets will be treated as the income of the transferor
18. What is Casual Income? (2003 B.com) (M.com - 02) (2004 B.com) (2003 M.com)
Certain incomes are of casual nature. It arises without any stipulation or contract & cannot be calculated in advance. But they are taxable under the head ‘income from other sources’. E.g.,
1. Winnings from crossword puzzles
2. Races including horse races
3. Card games and other games of any sort or
4. Betting of any nature.
Tax @ 30% is deducted at source from casual incomes.
19. What is Total Income (Sec. 2 (45)? (2001 B.com), (M.com - 02), (2003) (2010 B.com) (2009 B.com)
Income of a person is computed in five parts and each part is known as ‘head of income’. These heads are:
1. Salaries
2. Income From House Property
3. Profits & Gains Of Business Or Profession
4. Capital Gains
5. Income From Other Sources
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Total of incomes computed under these heads is called ‘GROSS TOTAL INCOME’ (G.T.I.) and Out of this, deductions u/s 80 are allowed. The resultant figure is called ‘TOTAL INCOME’ on which tax rates are applied.
20. What do you mean by rounding-off of total income?
The taxable income computed shall be rounded off to the nearest multiple of 10 rupees before applying tax rate. E.g, Rs. 7, 80,514.99 would become Rs. 780,510 & Rs. 7, 80,515 becomes Rs. 780,520.
21. What do you mean by rounding-off of tax?
The amount of tax (including tax deductible at source or payable in advance) shall be rounded off to the nearest multiples of ten rupees and for this purpose any part of a rupees consisting of paise shall be ignored.
22. What is the Tax Rate for the A.Y.12-13?
Women Senior citizen
Others Rate
1. First Rs. 1, 90,000 of total income
2,50,0001,80,000
-
2. Next 3,10 ,000 2,40,0003,20,000
10%
3. Next 3,00,000 3,00,0003,00,000
20%
4. Balance total income Balance Balance 30%
23. What is Maximum Marginal Rate?
It means the rate of Income tax (including surcharge on Income Tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or body of individuals as specified in the Finance Act of the relevant year.
(The rate of income tax for the highest slab of income for the assessment year 2011– 12 is 30%.
24. What is Average Rate of Tax? (M.com - 02)(2003. M.com) (2007 B.com) (2010 B.com) (2009 B.com)
Average rate of tax is defined u/s. 2 (10) to mean the rate arrived at by dividing the amount of tax calculated on the total income, by such Total Income.
Average rate of tax = Tax payable
Total income
25. What is Agricultural Income? (2003, 2005. M.com)
U/s 2(1) Agricultural income includes:
Any rent or revenue derived from land, which is situated in India and is used for Agri. Purposes.
Any income derived from land by agriculture.
Income derived from the performance of a process ordinarily employed by a cultivator or receiver of rent-in-kind to make such produce or rent-in-kind marketable
Any income from sale of produces or rent in kind.
Any income from agricultural house property which is situated on or in the vicinity of agricultural land and is used as own residence, tenant’s residence, go down or shed for implements. (House property must not be situated in city limits.)
26. What is Partly Agricultural Income?
When an Assessee performs agricultural operations & manufacturing process simultaneously, his total income would consist of agricultural income & Non-agricultural income. Agricultural income is exempt & non-agricultural income is taxable.
E.g., 60% of the income derived from the sale of coffee grown & manufactured by the seller in India is deemed to be an agricultural income & the remaining 40% is taken as business income.
27. How do you Integrate Agricultural Income With Non-Agricultural Income?
Agri. Income is fully exempted from tax u/s 10(1) of the ‘income Tax Act’; but from A. Y. 1974-75 it is integrated with ‘Non-Agricultural Income’ in certain cases only.
1. Integration is done only in the case of:
a) Individuals
b) HUF
c) Association of persons
d) Body of individuals
e) Artificial juridical persons
2. Integration is done only if non-Agricultural income of above mentioned persons exceed Rs.1,60, 000 in that previous year.
3. Integration is done only if Agricultural income exceeds Rs.5, 000 in such previous year.
How To Integrate?
1. Add Agricultural income with non-Agri. Income
2. Compute tax on this total at current rates.
3. Add agricultural income with exempted limits i.e., Rs.1, 60,000
4. Calculate tax on this total at current rates.
5. Deduct tax at (4) out of tax at (2) above
6. Add education cess @ 2% on total of tax payable including surcharge.
7. The total is tax payable.
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Chapter 2. Residential Status.
28. How do you determine Residential Status of an individual? (2002 B.com), (2010 B.com), (M.com - 02), (2003 B.com), (2004 B.com), (2004 M.com) (2003 M.com), (2005 B.com)
The scope of total income is determined by the Residential Status of the Assessee. To determine whether an Assessee is liable to pay tax on income earned in India, outside India or on both, we have to determine his Residential Status.
There can be 3 Residential Status. Viz,
1. Resident & Ordinarily Resident in India
2. Resident but not Ordinarily Resident in India.
3. Non- Resident in India.
Basic conditions Additional conditions
1) He is in India in the P.Y. for a period or periods amounting in all to 182 days or more;
1) He has been Resident in India in at least 2 out of 10 P.Years preceding the P.Y.
2) He has been in India for a period or periods amounting in all to 365 days or more during the 4 years preceding the P.Y. and has been in India for 60 days or more in the P.Y.
2) He has been in India for a period or periods amounting in all to 730 days or more during the 7 P.Years preceding the P.Y.
Note: To be a ‘Resident’ in 2/10 years, an individual should have fulfilled at least one of the basic conditions in each of those 2 years.
a. Resident & Ordinarily Resident in India
An individual is said to be Resident & Ordinarily Resident in India in any P.Y, if he satisfies any one basic condition and both the additional conditions.
b. Resident but Not ordinarily resident in India
(2005 B.com)
An individual is said to be N.O.R. when he satisfies any one of the basic conditions or one of the basic conditions plus one additional condition.
c. Non- Resident . (2006 B.com)
If an individual does not satisfy any of the basic conditions, he is said to be a Non - Resident.
Summary
a) 1 basic + 2 additional
- Resident & Ordinarily Resident in India
b) 1 basic only or
1 basic + 1 additional
-Resident but not ordinarily resident
c) No basic-
Non- Resident
29. To whom 2nd Basic Condition for determining Residential status is not applicable?
1. An Indian citizen who leaves India during the Previous year as a member of the crew of an Indian ship
2. An Indian citizen who leaves India during the previous year for the purpose of employment outside India.
3. An Individual, Who is citizen of India or a ‘person of Indian origin’, who being outside India, comes on a visit to India during the Previous year.
30. How do you determine the Residential Status of H. U. F. U/s. Sec. 6 (2)? (M.com –02)(2007 B.com) (2010 B.com)
Basic condition Additional conditions
1) The control & management of its affairs is situated at least partly in India.
1) The Kartha should be a Resident in India in at least 2 out of 10 P.Y preceding the P.Y.
2) The Kartha should be in India for a period or periods amounting in all to 730 days or more during the 7 P.Y preceding the P.Y.
a) Resident & Ordinarily Resident in India
An H.U.F is said to be Resident & Ordinarily Resident in India in any P.Y, if it satisfies the basic condition and both the additional conditions.
b) Resident but Not ordinarily resident in India
An H.U.F is said to be N.O.R. when it satisfies the basic condition, but does not satisfy both the additional conditions
c) Non- Resident.
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If the HUF does not satisfy the basic condition, it is said to be a Non - Resident.
31. How do you determine the Residential Status of Firm, Association of Person, & Body of Individuals? (2003 B.com) (2010 B.com) (2009 B.com)
Firms, AOP, BOI may be either Resident Or Non - Resident.
1. They are resident in India, if control and management of their affairs are situated wholly or partly in India.
2. They are Non - Resident in India, if control and management of their affairs is situated wholly outside India.
32. How do you determine the Residence of a Company Sec. 6(3)? (2001 B.com) (M.com 2005) ( 2011 B.com)
A Company can be either Resident or Non - Resident.
1) A company is said to be Resident in any P.Y., if:
It is an Indian company or during that year the control and management of its affairs is situated wholly in India.
2) If a company is neither an Indian company nor, the control and management of its affairs is situated wholly in India, it is said to be a Non- Resident company.
(Control and management of affairs are situated at the place where Director’s meetings are held)
33. How do you determine the Residence of Every other person? Sec. 6(4)?
Every other person is ‘Resident’ in India if control & management of his affairs is, wholly or partly, situated within India during the relevant Previous year.
On the other hand every other person is ‘Non-Resident’ in India if control & management of its affairs is wholly situated outside India.
34. What is the relation ship between Residential status & Incidence of tax? (2003 B.com) (2003 B.com) (2004 B.com) (M.com 2005) (2010 B.com) 2011 bcom
Or‘The incidence of income tax depends upon the residential status of the Assessee. ’ Discuss fully. (2003 M.com)
OrExplain the relationship between residential status and tax liability.1) Incidence of tax in the case of a resident &
ordinarily resident:
A resident & ordinarily resident is assessable to tax in respect of:
a) Income received or deemed to be received in India
b) Income accrued or deemed to be accrued in India
c) Income, which accrues or arises to him outside India.
2) Incidence of tax in the case of a resident but not ordinarily resident:
A resident but not ordinarily resident is assessable to tax in respect of:
a) Income received or deemed to be received in India
b) Income accrued or deemed to be accrued in India
c) Income from a business, which is controlled from a place within India, or income is from a profession, which is set up in India.
(Thus it is clear that in the case of a resident & not ordinarily resident assessee, income is not chargeable to tax if it satisfies all the following conditions:
a) Income is neither received or deemed to be received in India
b) Income is neither accrued or deemed to accrued in India
c) Income is received from a business controlled or profession set up out side India.)
3) Incidence of tax in the case of a Non-Resident:
A non -resident is assessable to tax in respect of:
a) Income received or deemed to be received in India
b) Income accrued or deemed to be accrued in India
The Residential Status of an assessee determines the ‘Scope of his total income’. The incidence of tax is highest on Resident and Ordinarily Resident, a little lower on Resident but Not Ordinarily Resident and lowest on Non - Resident assessee.
Tax Incidence in brief.
IncomeWhether tax
incidence arises?
R &
OR
R but not OR
NR
1. Income received in India Yes Yes Yes
2. Income accrued in India Yes Yes Yes
3. Foreign income:
A. From an Indian controlled business.
Yes Yes No
B. From any other source Yes No No
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4. Untaxed foreign Income received or accrued outside India In earlier years, but later on remitted to India during the P.Y 06- 07
No No No
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Computation of income for an Assessment Year.
1. Income from salaryBasic xAllowances xPerquisites x
Gross Salary x(-) Deduction u/s. 16:
16 (ii) Entertainment Allowance x16 (iii) Professional Tax x x
Income from Salary x
2. Income from house property Gross annual value x
(-) Municipal Taxes x
Net annual value x(-) Deduction u/s. 24: x
1. Standard deduction - 30% of net annual value. x
2. Interest on borrowed Capital x xIncome / Loss from house property x
3. Profits & gains of business Net profit as per profit & loss a/c x
(+) Expenses debited to profit & loss a/c ; but not allowed as per income tax x(+) Incomes which are not credited to profit & loss a/c ; but to be credited in the profit & loss a/c
x
(-) Incomes credited to profit & loss a/c ; but to be shown under other heads x(-) Incomes credited to profit & loss a/c ; but which are exempt from tax x(-) Expenses not debited to profit & loss a/c; but are allowable as deduction under the act
x
Profits & gains of business x
4. Capital gainFull value of consideration x
(-) Expenses for sale xNet consideration x
(-) Indexed cost of acquisition x(-) Indexed cost of improvement x x
Capital gain/ loss x
(-) Exemption for long term capital gain u/s. 54 xTaxable capital gain x
5. Income from other sources x
Gross total income x(-) Deduction u/s. 80 C to 80 U x
Total income/ net income (rounded off in multiples of Rs. 10) x
Computation tax liabilityTax on total income x
(+) Surcharge x(+) Education cess(-) Relief u/s. 86, 89, & 91 x
x
Tax payable x(-) Prepaid taxes x(-) Tax paid on self assessment x(-) Tax deducted at source x(-) Tax paid in advance x x
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Tax liability (rounded off in multiples of Rs. 10) x
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Chapter 3.Incomes, which are exempt from Tax
35. List any 15 incomes, which are exempt from tax? (2001 B.com, 2003 B.com) (2003 B.com) (2007 B.com) (2006 B.com) (2004 B.com) (2005 B.com) (M.com 2005)f
IncomesWho is entitled to
exemption
1. Agricultural income - All assessees
2. Share of income from H.U.F - Member of H.U.F
3. Share of income of a partner from his firm
- Partners
4. Payment under Bhopal Gas leak Disaster act
- Individual
5. Life insurance policy money - All assessees
6. Educational scholarship - Individual
7. Daily allowances - Member of parliament or legislature
8. Awards made by the Govt. in public interest
- All assessees
9. Annual value of 1 palace of rulers of Indian states
- Individual
10. Income of housing authority - Housing authority e.g. State Housing Board
11. Income of Scientific research association
- Scientific research association
12. Income of news agency - News agency
13. Income of scheduled tribes - Individual
14. Income of newly established industries in free trade zone
- All assessees
15. Profits of newly established 100% export oriented undertakings.
- All assessees
16. Dividend from Indian Company
- All assessees
Chapter 4.Income from Salary.
36. Define ‘Salary’
‘Salary’ is the first head of income while computing the taxable income of an individual .Any remuneration paid by an employer to his employee in consideration of his services.
U/s. 17(1) Salary includes:
Wages, Annuity, Pension, Gratuity, commission, fee paid to employee, Profit in lieu of Salary; leave Salary, Advance Salary and also amount transferred to Recognized Provident Fund.
37. What are the essential requirements to treat an income under the head ‘Salary’?
1. There must be an employer-employee relation. The employee has to provide personal services to the employer.
2. There may be more than one employer from whom the Salary may be due or received. All such amount is to be considered under this head.
3. Salary from former, present or prospective employers is taxable.
4. ‘Gross Salary’ is taxable. I.e., tax free Salary received + the tax paid & amount deducted by the employer is the Gross Salary which is taxable.
38. How do you Compute Salary income?
1. Basic Salary x
2. Allowances x
3. Perquisites x
4. Profit in lieu of Salary x
Gross Salary x
Deduction u/s 16:
16 (ii) Entertainment Allowance X
16 (iii) Profession tax X x
Taxable Salaryx
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39. What is Profit in lieu of Salary Sec.17 (3)? (2001 B.com) (2004 B.com) (2005 B.com)
‘Salary’ includes Profits in lieu of Salary. It includes the following
:
1. Amount of compensation received by an Assessee from his employer or former employer in connection with -
a) The termination of his employment; or
b) Modification of terms and conditions.
2. Any payment due to or received bay an Assessee from an employer or former employer or from provident fund or any other fund or any sum received under ‘keyman insurance policy’
3. Any amount due to or received by an Assessee from any person before joining any employment with that person or after cessation of his employment with that person.
40. What are the Deductions u/s. 16 From Gross Salary? (2005 B.com)
There are 2 deductions from gross salary.
16 (ii) Entertainment Allowance
16 (iii) Employment Tax.
41. How will you treat Employment Tax paid by an employee? 16 (iii)
Employment tax levied under any law and paid by any employee during the P.Y. will be allowed as deduction from gross salary.
42. Explain deduction for Entertainment Allowance.16 (ii)
This deduction is allowed only to central & state government employees. E.A. is first included in Gross Salary, and then deduction is allowed under this section to the following extent:
Least is allowed as deduction:
a) Actual E.A. Received
b) 1/5 of (Basic) Salary
c) Rs.5000
43. State any 12 Allowances & explain its treatment under the income tax act?
1) Dearness Allowance (D.A)
This allowance is given by an employer to employee to meet the high cost of living on account of inflation. This is included in Salary income and always taxable.
2) City Compensatory Allowance. (C.C.A)
In big cities, the cost of living will be high. To compensate this employer allows this allowance. This is fully taxable.
3) Helper Allowance.
Is exempted up to actual amount spent on engaging a helper required to perform the official duties
4) Uniform Allowance.
It is also exempted up to actual expenditure incurred on acquiring or maintaining of the official uniform. Excess, if any, will be taxable
5) Academic Research Allowance
It is exempted up to actual expenditure incurred for research. Excess if any, is taxable
6) Conveyance Allowance
It is exempted up to actual expenditure incurred in performance of official duties. In case amount received is more than actual expenditure, excess, if any, will be taxable
7) Traveling allowance
It is also exempted up to actual expenditure incurred for the purposes of employment. Excess if any, will be taxable
Any allowance (by whatever name it may be called) granted to meet the cost of travel on tour or on transfer shall be exempted
Any allowance granted to employee (while on tour or for the period of journey in connection with transfer) to meet the ordinary daily charges incurred by such employee on account of absence from his normal place of employment shall also be exempted (such allowance shall include any sum paid in connection with transfer, packing & transportation of personal effects on such transfer.)
8) Transport allowance
Any allowance given under the name of Transport allowance to any employee whether Govt or private shall be exempted up to Rs. 800 p.m. excess if any, shall be taxable (But in the case of handicapped with
12
Goodwill.
disability of lower extremities or a blind employee it shall be exempted up to Rs 1,600 p.m.)
9) House Rent Allowance. (H.R.A)
Employee will have to incur expenses relating to housing accommodation. In big cities rents are generally high. To compensate this, employer allows HRA to employees. HRA is exempt u/s.10 (13 A) to some extent:
1. Employees living in rented house:
Least is of the 3 is exempt:
1. Actual H.R.A Received
2. Rent paid by the employee – 10% of ‘salary’
3. 40% of ‘salary’
(50% of ‘salary’ in the case of Delhi, Chennai, Mumbai & Kolkata.)
2. Employees living in their own houses or in a house for which they are not paying any rent.
H.R.A received is fully taxable
3. H.R.A received by judges of High Court and Supreme Court.
Fully exempted
Definition of ‘Salary’
=
1. Basic
2. D.A (which enters in to pay for service or retirement benefits)
3. Commission as fixed % on turnover.
10) Children Education Allowances.
If any amount is given by employer to employee as education allowance for the education of own children in India, it shall be exempted up to a maximum of Rs. 100 p.m. per child for 2 children only.
11) Hostel expenditure allowance.
Any allowance granted by employer to meet the hostel expenditure of employee’s children, it shall be exempted up to a maximum of Rs. 300 p.m. per child for 2 children only
12) Foreign Allowance.
If given by Govt to it’s employees posted abroad, under whatsoever name, it is fully exempted
44. What is Annual Accretion?
Annual Accretion is taxable under the head ‘salary’ Annual Accretion will consist of:
1. Employer’s contribution to R.P.F in excess of 12% of employee’s ‘Salary’
(Salary = Basic + D.A (if enters in to pay) +commission on turnover basis)
2. Interest credited to RPF in excess of 9.5 % of the balance standing to the credit of employee.
45. What is Transferred Balance? (2003 M.com)
An organization maintains unrecognized provident fund. The organization has obtained recognition to its P.F. with existing balances during the previous year. The amount transferred from U.R.P.F to R.P.F is ‘Transferred Balance’.
How much of the Transferred balance is taxable?
It will be assumed that U.R.P.F was R.P.F since the time it was created. If the employer’s contribution towards PF was in excess of 12% of salary & or interest credited was in excess of 9.5% p.a, for all those years, then the excess amount shall be taxable in the year in which U.R.P.F is accorded recognition. Out of the ‘Transferred Balance’, the aforesaid amount is taxable.
1346. Explain tax treatment of Gratuity. Sec 10 (10)?
It is the lump sum amount paid by the employer to the employee for the service rendered by the latter. It is paid at the time of retirement or death of the employee whichever is earlier.
Gratuity is exempt u/s. 10(10) to the extent of the following:
For Govt., Semi. Govt. Employees or employees of local authority
For employees covered under payment of Gratuity Act-1972
For other employees
Amount of gratuity received is exempt.
Least of the following 3 is
exempt .
Least of the following 3 is
exempt .
1. Actual gratuity received
1. Actual gratuity received.
2. Rs.10,00,000 2. Rs.10,00,000
3. 15/26 x ‘salary’ x years of service
3. ½ x ‘Average Salary’ x completed year of service (months to be ignored)
‘Salary’ means last drawn salary
‘Salary’ includes basic+ D.A
• If he had worked for more than 6 months, it should be taken as 1 year.
• 15 days will be substituted by 7 days in the case of employees working in seasonal factories
a) ‘Salary’ includes basic, D.A & Commission on turnover basis
b) ‘Average Salary’ means 10 month’s average Salary preceding the month of retirement.
47. Explain treatment of leave encashment 10 (10 AA)
Govt employee
Private sector employee
1. If received during
- Full taxable
Full taxable
service
2. If received at the time of retirement
- Fully exempted
Least of the following 4 is exempt .
Actual amount received
Rs. 3,00,000
10 months x Average salary
(1 month’s leave for every 1 years of service - leave already availed of) x Average salary
Note :
a) ‘Average Salary’ means last 10 month’s average Salary (including the month of retirement)
b) ‘Salary’ includes:
Basic.
D.A. (if it enters)
Commission on turnover basis
48. How do you treat Pension received by an employee Sec. 10 (10 A)?
Pension is the monthly payment made by the employer after retirement. It is taxable under the head Salary.
1. Un commuted pension (monthly pension) received per month is fully taxable in the hands of both govt. and non-govt. employees
2. Sometimes, the employee may commute whole or part of his periodical pension and receive a lump sum amount. It is called ‘commuted pension’.
Commuted pension is exempt as per Sec. 10(10 A).
Exemption of commuted pension u/s. 10 (10 A)
a) Government employees, employees of local authorities & employees of statutory corporations:
b) Other employees:
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Commuted pension received is fully exempted.
1) Who receives gratuity:
1/3 of the commuted value of pension, which he is ‘normally entitled to receive’ is exempt
2) Who does not receive gratuity:
1/2 of the commuted value of pension, which he is ‘normally entitled to receive’ is exempt
49. Who is a Specified Employee? (M.com - 02) (M.com 2005) ( 2011 B.com)
The employees who fulfill any of the following 3 conditions are called ‘Specified Employee.’
1. An employee, who is also a director in the employer Company.
2. Employee having ‘Substantial Interest’ in the employer Company. (M.com - 02)
(An employee is said to have ‘substantial interest’ in the employer Company if he is the owner of Equity shares carrying not less than 20% of voting power.)
3. Any other employee whose income under the head “salary” exceeds Rs. 50,000 p.a.
• ‘Salary’ for this purpose, shall include all taxable monetary payments like Basic Salary, D.A., Bonus, Commission, Taxable Allowances etc.)
• For determining the limit of Rs. 50,000 p.a., the deductions which are allowable u/s. 16 will be deducted and the balance only will be considered.
50. Define Perquisites? (M.com – 02)
Perquisite means monetary benefits, facilities or other advantages provided by the employer to the employee in addition to the Salary.
It may be a casual emolument, fee or profit attached to a position or employment. It is something, which goes in to employee’s own pocket.
Perquisites may be provided either in cash or in kind. Examples are free accommodation, free education of children, free car for personal use etc.
51. How do you find out the perquisite value of Rent Free Accommodation (M.com 2005) (2007 B.com)
Or
Accommodation provided at concessional rate.
Unfurnished accommodation
Valuation
Accommodation provided by the Govt
The ‘ Annual License Fees’ determined as per Govt rules as reduced by the rent actually paid by the employee
Accommodation provided by any other employer
1. If the accommodation is owned by the employer:
1. if the population in the city exceeds 25 lakhs – 15 % of ‘salary’
2. ‘’ is between 10 lakhs & 25 lakhs – 10% of ‘salary’
3. ‘’ is below 10 lakhs 7.5 % of salary
2. If the accommodation is taken on rent by the employer:
Actual amount of rent paid by the employer or 15 % of salary, whichever is less.
If employer deducts an amount from employee’s salary, perquisite value should be reduced by that amount & balance is called ‘accommodation provided at concessional rate.’
Furnished accommodation
Determine the value as if the accommodation is unfurnished accommodation. Such value shall be increased by 10% of the cost of the Furniture.
If the furniture is hired from a 3rd party, the hire charges shall be added. The value shall be
15reduced by any charges paid for the furnishing by the employee.
(‘Furniture’ includes TV, radio, refrigerator, air conditioner & other household appliances)
Hotel accommodation Least is perquisite:
1. 24% of salary or
2. Actual bill paid to that hotel
(If the following 2 conditions are satisfied, hotel accommodation is not chargeable to tax:
a) If it is provided for a period not exceeding 15 days in aggregate &
b) Such accommodation is provided in connection with transfer of employee from one place to another place.)
‘Salary’ includes: ‘Salary’ does not include:
a. Basic salary
b. D.A., if terms of employment so provide
c. Bonus
d. Commission
e. Fees
f. All other taxable allowances (excluding amount not taxable)
g. Any monetary payment which is chargeable to tax (by whatever name called)
a. D.A., if not taken in to A/c while calculating retirement benefits, like provident fund, gratuity etc or terms of employment so provide
b. Employer’s contribution to P.F. A/c of the employee
c. All allowances which are exempt from tax
d. Value of perquisites.
e. Arrears of salary
f. Advance salary received
52. What are the different Types of Provident Funds?
1. Statutory P.F. (2003 B.com) (2004 M.com) (2006 B.com)
It is that P.F. to which the Indian P.F. Act – 1925 applies. Generally, this P.F. is maintained by Govt or Semi-Govt offices, like local authorities, universities & other recognized educational institutions
2. Recognized P.F. (2009 B.com)
It is that P.F. which is recognized by the chief commissioner of income tax. He recognizes this fund only if he is satisfied that this fund fulfills the conditions set out in Para 4 of part A of Schedule iv of the income tax act – 1961.
It includes that P.F. also which is established under a scheme framed under the Employee’s P.F. act – 1952. Generally, scheduled banks, factories & several business houses maintain this fund.
3. Un - recognized P.F.
It is that P.F. which is neither statutory nor recognized. Any institution or organization can maintain this fund.
4. Public P.F.
This is a scheme, which is covered under P.P.F act 1968. Any member of the public, whether in employment or not, may contribute to this fund. In other words, it is a scheme where there is assessee's own contribution only.
The employee can deposit money under PPF A/c in addition to his contribution to other P.F schemes. The contributions made to the scheme along with interest are repayable after 15 years, unless extended.
53. Explain the tax treatment of different Types of Provident Funds.
Name of fund
Employee’s contributio
n
Employer’s contributio
n
Interest credited
to the fund
What qualifies
for rebate under
section 88
1. S.P.F. Included in the salary income
Not included in the salary income
Not included in the salary income
Own contribution
2. R.P.F. Included in the salary income
Only excess over 12% of the salary included in the salary income
Only excess 9.5 % of the rate included in the salary income
Own contribution
163. U.R.P.F Included in
the salary income
Not included in the salary income year to year
Not included in the salary income year to year
Own contribution is taxable nothing qualifies for rebate
4. P.P.F Included in the total income
Question does not arise
Not included in the total income
Own contribution
54. List any 10 allowances, which are fully taxable.
55. List any 10 allowances, which are partially taxable.
1. Fully exempted allowances:
1. Allowance to government employees outside India
2. Foreign allowance given by govt to it’s employees posted abroad
3. HRA given to judges of high court and supreme court
4. Sumptuary allowance given to judges of high court and Supreme Court.
2. Fully taxable allowances: (M.com 2005) (2004 B.com)
1. Dearness allowance
2. City compensatory allowance
3. Medical allowance
4. Lunch/Tiffin allowance
5. Overtime allowance
6. Servant allowance
7. Wardenship allowance
8. Non – practicing allowance
9. Family allowance
10. High cost of living allowance.
11. marriage allowance
12. deputation allowance
13. project allowance
14. water and electricity allowance
15. entertainment allowance (if non - govt employees)
3. partially taxable allowances:
1. HRA
2. Entertainment allowance (if govt employees)
4. Specific or special allowances – Section 10 (14)
1. When exemptions depends upon actual expenditure by the employee:
1. Traveling allowance- to meet cost of travel on tour
2. Transfer allowance – to meet cost of travel on transfer
3. Daily allowance – to meet expenditure on tour
4. Conveyance allowance – to meet expenditure on conveyance in performance of duties of an office.
5. Helper allowance
6. Academic allowance
7. Uniform allowance
8. Research allowance
2. When exemptions does not depends upon actual expenditure by the employee:
1. Children education allowance - 100 p.m. per child up to a maximum of 2 children
2. Hostel expenditure allowance - 300 p.m. per child up to a maximum of 2 children.
3. Tribal area allowance - 200 p.m.
4. Composite hill compensatory allowance or high altitude allowance etc - Exemption varies from Rs. 300 to Rs. 7,000 p.m.
5. Border area, remote area, disturbed area allowance - Exemption varies from Rs. 200 to Rs. 1,300 p.m
6. Transport allowance - If for the purpose of commuting between the place of his residence & the place of his duty, exempt up to Rs. 800 p.m. (If the employee is blind or orthopaedically handicapped with disability of lower extremities, is exempted up to Rs. 1,600)
7. Underground allowance - 800 p.m.
8. Allowance allowed to employees working in any transport system -70% of such allowance or Rs. 6,000 p.m. whichever is less
1756. List any 10 tax-free perquisites. (2001 B.com), (2002
B.com),( 2003 B.com) (2009 B.com)
1. Free refreshments
2. Free recreational facilities
3. Cost of refresher course attended by employee met by employer
4. Provision of free subsidized food if given to all employees
5. Payment of telephone bills by the employer for telephone installed at the residence of the employees
6. Free use of lap top/ computer
7. Free ration received by members of armed forces
8. Perquisites allowed by govt to its employees posted abroad
9. Free conveyance provided by employer to employees for going to or coming from place of employment
10. Conveyance facilities to judges of Supreme Court and high court
11. Scholarship paid by employer to the children of employees
12. Employer’s contribution to staff group insurance scheme or pension scheme
13. Shares or debentures issued under ‘stock option plan’
57. List perquisites, which are taxable for all employees. (2007 B.com) ( 2011 B.com)
1. Rent free accommodation provided by employer to employees
2. Residential accommodation provided by employer to employee at concessional rate.
3. Any obligation of the employee met by employer e.g. employee’s club bill paid by employer
4. Any life insurance premium on the life of the employee or any member of his family paid by employer.
58. List any 10 perquisites, which are taxable for specified employees only. (2003 M.com)
1. Domestic servants (watchman, gardener, sweeper, personal assistant)
2. Supply of gas, electricity or water for household consumption
3. Education facility
4. Transport facility allowed by transport undertakings (other than railway employees)
5. Medical facility
6. Any other perquisites If bills are not issued in the name of employee, and paid by employer
Chapter 5.Income from House Property.
59. What are the important points to be remembered before including an income under the head ‘income from house property’?
1. The property should consist of any building or land appurtenant there to.
2. The Assessee should be the owner of the property.
3. For the tax incidence actual receipt of the income by the Assessee is not required.
4. If the House Property is used by the owner for the purpose of his business or profession, it is not taxable under this head.
60. When income from house property is not taxable?
1. Income from agricultural building
2. Annual Value of 1 palace of the Ex- Indian Ruler
3. Income from house property owned by:
1) Local authority
2) Development authority
3) Scientific research association
4) Games or sports association
5) Register Trade union
6) Trust wholly for Charitable & religious purpose
7) Political party
8) Income of a statutory authority set up for marketing of commodities, from letting of godowns or ware houses for storage etc of the commodities meant for sale.
9) Income from property used for assessee’s own business or profession
10) Income from self-occupied house
11) Income from house property of a mutual concern (club)
61. How do you treat property occupied by the owner for his own business or profession?
Annual value of property, occupied by the owner for the purpose of his own business or profession, is not assessable under the head income from house property, if profit of such business or profession is chargeable to tax. This rule is applicable even if in a particular year, income from business or profession is nil or there is loss.
62. How do you treat income from a house property in a foreign country?
18A resident & ordinarily resident Assessee is taxable
under the head income from house property in respect of annual value of a property situated in a foreign country.
A resident but not ordinarily resident or a non- resident is however, chargeable to tax under this head in respect of income of a house property situated abroad, provided income is received in India during the Previous year.
63. How do you treat ‘income from subletting’?
Income from subletting is not taxable as income from house property. For instance, X owns a house property. He lets it out to Y (rent being Rs. 10,000 p.m.). Y sublets it to Z on monthly rent of Rs. 40,000. Rental income of X is taxable under the head ‘income from house property.’
Since Y is not the owner of the house, his rental income from Z is not taxable under the head ‘income from house property,’ but is taxable as business income u/s. 28 or as income from other sources u/s. 56.
64. Define Annual Value? (2003 B.com) (2003 B.com) (2004 B.com) (2004 M.com) ( 2011 B.com)
The subject matter of computing income under this head is the ‘Annual Value’ of the property. The expression ‘Annual Value’ has been defined in Section 23 (1) of the Income tax as:
The sum for which property might reasonably be expected to let from year to year, or
Where the property or any part of property is let & the actual rent received or receivable by the owner is in excess of the reasonable rent, the amount of rent received or receivable; or
Where the property or any part of the property is let & was vacant during the whole or any part of the P.Y. & Owing to such vacancy the actual rent received or receivable by the owner in respect there of is less than the sum referred in (a), the amount as received or receivable
65. How do you compute Gross Annual Value?
While computing the Annual Value of a house property, the following 4 factors are to be considered.
1. Rent received or Receivable
2. Municipal valuation of the house property.
3. Fair rental value (i.e., Rent received or receivable for similar property in the same or similar locality.)
4. Standard rent (i.e., Rent fixed according to rent control act.) (2010 B.com) (2009 B.com)
Abbreviation:
1. M.R.V = Municipal Rental Value
2. F.R.V = Fair Rental Value
3. S.R. = Std Rent
4. E.R.V = Expected rental value
5. A.R.V. = Annual rental value
6. U.R. = Unrealized rent
7. G.A.V = Gross Annual Value
M.R.V F.R.V
higher S.R.
Lower(E.R.V)
A.R.V _
( rent for the period of self occupation)
higher
(-) loss due to vacancy
= GAV
66. How do you compute income from house property? What is the standard deduction allowed for a let out house. (2006 B.com)
Gross annual value (GAV) xx
- Municipal tax paid xx
- Unrealized rent
Net Annual Value xx
- Deductions u/s. 24:
1. 30% of the Net Annual Value(std deduction)
xx
2. Interest on loan xx xx
Income from house property xx
67. What is unrealized rent? How is it treated for income tax act purpose ? (2007 B.com) (M.com 2005.)
The amount of rent which the owner cannot realise from the tenant is called unrealized rent. It is deducted from rent receivable for determining gross annual value.
Where the assessee cannot realise rent from a property let to a tenant and subsequently the assessee has realized any amount in respect of such rent, the amount so realized shall be deemed to be 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 assessee is the owner of that property in that previous year.
19
68. What are the deductions allowed u/s. 24 in computing income from house property? (2001 B.com) (2002 B.com) (2003 M.com)
(a) Standard deduction
30 % of net annual value is deductible irrespective of any expenditure incurred by the taxpayer
(b) Interest on borrowed Capital
Interest on borrowed Capital is allowed as deduction on accrual basis, if Capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the house property.
69. How do you treat Interest for Pre- Construction or Pre- Acquisition Period? (2001 B.com) (2004 M.com)
Pre-construction period’ means the period commencing on the date of borrowing & ending on -
1. March 31 immediately prior to the date of completion of construction / date of acquisition or
2. Date of repayment of loan,
Whichever is earlier.
Interest for pre-construction period is deductible in 5 equal installments. The first installment is deductible in the year in which construction of property is completed or in which property is acquired.
70. What are the Deductions from net annual value in the case of a let out house? (Sec: 24)? (2003 M.com)
1. Standard deduction
- 30% of the net annual value every year whether claimed or not
2. Interest on loan taken to purchase, construct or repair or renovation of the house
- Interest on borrowed Capital (Total of current year & pre-construction period) is deductible (there is no maximum limit).
Interest on mortgage is not allowed as deduction unless purpose of loan is connected with house.
71. What is the treatment of house property used for own residence? And What are the Deductions from Net Annual value in the case of a Self occupied house: (Sec: 24)?
The net annual value of a self-occupied house is taken as nil. Deductions are:
1. Standard deduction
-
nil
2. Interest on loan taken to purchase, construct or repair or renovation of the house
- Interest on borrowed Capital (Total of current year & pre-construction period) is deductible up to Rs. 30,000
But if the following 3 conditions are satisfied it is deductible up to Rs. 1, 50,000
1. Capital is borrowed on or after 1.4.99
2. Construction or acquisition is completed between 1-4-99 & 31-3-2002.
3. Capital is borrowed for acquisition or construction only (not for reconstruction, repairs or renewals etc. )
72. What is Real Rental Value?
Some times the owner takes upon himself the burden of providing certain facilities to the tenant,
e.g., a) Lift and pump maintenance
b) Salary of common gardener and watchman,
c) Vehicle parking
d) Lighting of common stairs and corridors
e) Payment of Water and electricity bills. (Only if it is 0mentioned that rent includes them)
f) Swimming pool expenses
Such costs can be deducted out of actual rent received and the balance is called ‘Real Rental Value’. Then to find out Gross Annual Value instead of ‘rent received’, ‘real rental value’ is considered.
But in case the cost of facilities is charged separately by owner i.e. over & above the rent, it is treated as a separate source of income. The expenses incurred on such facilities are deducted out of amount so collected & balance (income of loss) is taxable under the head ‘Income from other sources’
20
73. What are the important points to be remembered while calculating Income from house property?
a) The assessee has only one Self occupied property
- The net annual value of the self occupied house shall be taken as nil if the following conditions are full filled:
House is used by an individual for the residential purpose only
House or any part of the house is not actually let during the P.Y. or part of that P.Y.
No other benefit is derived from such a house
b) If the assessee has More than 1 house under own occupation
- Annual value of 1 house is taken as nil & other house/ houses are deemed as let out
c) House property consists of various independent units & 1 is under own occupation & others are let out
- Annual value of 1 unit is taken as nil & other unit / units are treated as let out
d) If the house property is self-occupied for a part of the year & let out for remaining part of the year
- It will be deemed to be let out for the whole year.
e) If the House property is used for own business or profession
- It is not treated under the head house property
f) If the house property is not actually occupied by the owner owing to employment or business/profession, carried on at any other place
- It will be treated as a self occupied house & net annual value is nil. Only one deduction i.e. Interest on Capital is allowed.
Chapter 6.Profits & Gains of Business.
74. What are the incomes taxable under the head ‘Business Income.’?
This is the third head of income of the Assessee. The business may be trading, manufacturing, service-providing business. It may be registered, unregistered, legal, illegal etc. Even though, the profits and gains are taxable under this head.
Here profit mans the income earned from main activities or main object of the business. Gain means any other revenue income generated during the business.
Under this head, the profits and gains of any type of business or profession and also from vocation is taxable.
75. Why Capital & Revenue items are differentiated while calculating business income?
The total business transactions may be classified in to transactions of capital nature or revenue nature according to their characteristics. Capital transactions may be further classified in to:
• Capital expenditure
• Capital receipts (M.com 2005)
Capital expenditure means expenditure for purchasing fixed assets and long-term securities.
Capital receipts means the amount realized on sale, transfer etc of the capital or fixed assets.
While computing the business income of an Assessee, the capital expenditure and capital receipts are not to be considered.
76. What is capital expenditure? State any 4 examples of capital expenditures: - (2002 Dec. M.com) (2005 B.com) (2007 B.com) (2006 B.com) ( 2011 B.com)
• Any expenditure incurred to acquire a fixed asset or in connection with the installation off fixed asset. E.g., purchase of land & amount spent for registration are Capital expenditures.
• A payment made by a person to discharge a capital liability. E.g, amount paid to a contractor for cancellation of contract to construct a factory building
• Expenditure incurred to acquire a source of income E.g, purchase of patent to produce picture tubes of TV sets.
• Amount spent on increasing the earning capacity of an asset. E.g, acquisition of additional plants.
2177. What are Revenue transactions? (2003 Dec. M.com)
While computing the business income all revenue income (i.e., the income from day to day activities of the business) to be considered as income and from which all revenue expenses are to be deducted.
78. What are the Deductions Expressly Allowed While Computing Income from Business?
1. Expenditure in respect of business premises; it’s rent, repairs, insurance, land revenue, local taxes, Depreciation etc.
2. Expenditure in respect of machinery, plant & furniture: its repairs, insurance, Depreciation etc.
3. Expenditure on acquisition of patent rights
4. Expenditure on acquisition of know-how
5. Expenditure to obtain license to operate telecommunication services
6. Payments to associations for approved rural development programmes
7. Amortization of preliminary expenses
8. Payment to associations for carrying out programmes of conservation of natural resources
79. What are the Deductions Expressly Disallowed While Computing Income from Business? (2001 B.com, 2003 B.com) (2003 B.com) (2006 B.com)
1. Expenditure for advertisement in any souvenir etc published by a political party.
2. Wealth tax
3. Tax on profits & gains e.g. income tax
4. Salaries payable outside India (if tax has not been deducted at source)
5. Payments to P.F. (unless it is ensured that tax shall be deducted at source from any payments from such fund.)
80. What is ‘Block of assets’ or what is ‘block system’ of Depreciation? (2001 B.com) (2003 M.com) (2003 M.com) (M.com 2005) (2010 B.com)
According to Income Tax rules the Depreciation is to be computed on ‘Block of Assets’.
‘Block of assets’ means a group of assets falling within a class of assets comprising:
1. Tangible assets, being buildings, machinery, plant or furniture
2. Intangible assets, being patents, copy rights, trade marks, licenses,
in respect of which the same % of depreciation is prescribed.
81. How do you compute business income if you are given a Profit & Loss A/c?
Net Profit As Per P & L A/C. xx
(+) Inadmissible expenses (recorded in Profit & Loss A/c)
xx
(-) Expenses allowed (not recorded in Profit & Loss A/c)
xx
(+) Incomes not recorded in Profit & Loss A/c xx
(-) Incomes to be shown under any other head xx
(-) Income exempted from tax xx
Profits From Business xx
82. What is the treatment of expenditure on technical know- how?
Expenditure incurred on or before 1-4-98 for acquisition of any know-how for the purpose of business will be allowed as deduction in 6 equal annual installments commencing from the year in which such expenditure is incurred.
If such know-how is developed in a lab owned or financed by the government or a university, deduction will be allowed in 3 equal annual installments.
83. Explain the treatment of patent right: - (2002 M.com.)
Any expenditure, incurred in acquiring patent rights used for the purpose of the business, is allowable as business expenditure in equal installments over a period of 14 years. If this expenditure is incurred on or after April 1, 1998, then one can claim depreciation @ 25%.
84. How do you Compute Business Income?
Net profit as per Profit & Loss A/c x
Add: Expenses debited to Profit & Loss A/c, but not allowed:
1. All provisions & reserves except creation of reserve by financial corporations u/s. 36
x
2. All taxes (i.e. income tax, advance income tax, wealth tax etc.) except sales tax, excise duty & local taxes of premises used for business.
x
3. Rent paid to self x
4. All Capital expenses except on scientific research
x
5. All Capital losses x
6. All charities & donations x
7. All expenses relating to other heads of income (e.g. taxes on house property)
x
8. Cultivation expenses x
229. Any Interest on Capital unless the
amount is borrowedx
10. All personal expenses (drawings etc) x
11. Any depreciation if wrongly debited x
12. Gifts & presents (non advertisement) x
13. Any type of fine or penalty x
14. Any payment to a partner (in case of firms only by way of salary, Interest, bonus, commission or remuneration excess over specified limits)
x
15. Any salary or Interest payable outside India unless tax is deducted at source or is paid according to the law
x
16. Past losses (loss of the past years) x
17. Any other expenditure which is not incurred according to the provisions of law
x
18. Salary paid to self or any other member of family for casual help
x
19. Personal life insurance premium x
20. Any amount invested in savings such as NS, NSC, PPF etc
x
21. Rent for residential portion x
22. Speculation loss x
23. Bad debt still recoverable x
24. Legal expenses on criminal case or a personal case of employee
x
25. Legal expenses on acquiring an asset x
26. Legal expenses on curing title of asset x
27. Loss by theft from residence x
28. Expenses on illegal business x
29. Employer’s contribution to URPF x
30. Difference in Trial Balance x
31. Difference due to under crediting of stock
x
32. Cost of patent rights being Capital expenditure
x
33. Cost of technical know-how being Capital expenditure
x
34. Preliminary expenses being Capital expenses
x x
Less: Expenses not debited to Profit & Loss A/c but allowed:
1. Actual bad debts (not charged in Profit & Loss A/c)
x
2. Depreciation (not charged in Profit & Loss A/c)
x
3. Any other expenditure incurred according to provision of law
x
4. Difference due to under debiting of stock
x x
1. 2.
Less: Incomes credited to Profit & Loss A/c but exempted from tax
1. Post office savings bank Interest x
2. Agricultural receipts x
3. Gifts from relatives x
4. Income tax refund x
5. Bad debts recovered – disallowed earlier
x
6. Life insurance maturity amount x
7. Any Capital receipt x
8. Withdrawal from P.P.F x x
Less: Incomes credited to Profit & Loss A/c but taxable under other heads
1. Part time salary x
2. Interest on securities x
3. Rent from house property let x
4. Capital gain x
5. Dividend, bank Interest, winnings from lotteries, racings etc
x x
Income from business x
Chapter 7.Capital Gains
85. What is a Capital Asset? (2002 B.com) (M.com - Dec02) (2003 B.com) (2004 B.com)
Capital asset means property of any kind held by an assessee whether or not connected with his business or profession.
Thus any asset whether used for business or not, whether tangible or intangible, movable or immovable, is capital asset. For example, land, buildings, P & M, vehicles, shares, goodwill, patents, goodwill etc.
Following are not ‘Capital Assets’:)
1. Any stock in trade, raw materials, consumable stores held by any assessee for the purpose of his business or profession.
2. ‘Personal Effects’ including wearing apparel, motor car, electrical appliances, refrigerator, furniture etc. (Jewellery is excluded from personal effects)
3. Agricultural land situated in rural area
234. Gold Bonds 1977, 1980 or National Defense Gold
Bonds-1980 Issued By the Central Govt.
5. Special Bearer Bonds 1991
6. Gold Deposit Bonds Issued Under Gold Deposit Scheme.
86. Explain the procedure for computation of Capital gain under Income Tax act 1961: - (2002 B.com.)
87. What do you mean by Capital Gains? (2003 Dec. M.com)
Any profits & gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head ‘Capital Gains’ & shall be deemed to be the income of the previous year in which the transfer took place.
An income, to be charged under the head ‘Capital Gains’, should satisfy the following conditions:
1. There should be a capital asset
2. The capital asset should be transferred
3. Transfer should result in profit or gains.
88. What are the different Types of Capital Assets?
The capital assets have been divided in to:
1. Short-term capital asset &
2. Long-term capital asset
89. What is Short-Term Capital Asset & Short-Term Capital Gain? (2003 M.com) (2004 M.com) (2002 Dec. M.com) (2005 B.com)
Short-term capital asset means a capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer.
In the case of the following assets, the period of 36 months shall be substituted by 12 months.
Shares in a Co.
Any other security listed in a recognized stock exchange in India
A unit of the UTI
A unit of the Mutual Fund
Capital Gain arising from the transfer of Short-term capital asset is called Short-Term Capital Gain.
90. What is Long-Term Capital Asset & Long-Term Capital Gain? (2001 B.com) (2003 M.com) (2004 M.com) (M.com 2005) (2006 B.com) (2010 B.com)
Long term Capital asset means a capital asset, which is not a Short-term, capital asset. Capital
Gain arising from the transfer of long-term capital asset is called Long-Term Capital Gain.
91. Discuss the difference in treatment of short term & long term Capital gain? (2001 B.com) (2007 B.com)
At the time of calculation of tax liability, long term capital gain is taxed separately at a flat rate of 20%. Short term capital gain is taxed at normal tax rate.
92. Define ‘Transfer’?
Capital Gain arises only when capital asset is transferred. The term ‘transfer’ in relation to a capital asset includes:
1. Sale, exchange, or relinquishment of a capital asset
2. Extinguishments of any rights in a capital asset
3. Compulsory acquisition of a capital asset under any law
4. Conversion of capital asset in to stock in trade
(When the owner of an asset converts it into or treats it as stock in trade of a business carried on by him, such conversion is regarded as ‘Transfer’.)
93. How do you compute Long-Term Capital Gain?
STCG
=Full value of consideration
–(Cost of acquisition + cost of improvement + selling expenses)
94. How do you compute Short-term Capital Gain?
LTCG
=Full value of consideration
–
(Indexed cost of acquisition + indexed cost of improvement + selling expenses)
95. What is Cost Inflation Index?
This index is notified by central Government having regard to average rise in the consumer price index. It is used for the calculation of Long-term Capital Gain.
Year C.I.I. Chapter 1. Year C.I.I.
81-82 100 96-97 305
82-83 109 97-98 331
83-84 116 98-99 351
84-85 125 99-00 389
85-86 133 00-01 406
86-87 140 01-02 426
87-88 150 02-03 447
2488-89 161 03-04 463
89-90 172 04-05 480
90-91 182 05-06 497
91-92 199 06-07 519
92-93 223 07-08 551
93-94 244 08-09 582
94-95 259 09-10 632
95-96 281 10-11 711
INDEXING AT A GLANCE
Asset How indexed.
1. Short Term Capital assets
No indexing
2. Bonds or debentures ’’
3. Depreciable assets ”
4. Assets acquired before 1-4-81
Cost or F.M.V (higher) x 711100
5. Improvements made before 1-4-81
No indexing, because not considered
6. Assets acquired after 1-4-81
Cost x 711
Index for the year of acquisition
7. Improvements made after 1-4-81
Improvement cost x 711
Index for the year of improvement
8. Inherited before 1-4-81
Cost to the previous owner or F.M.V (higher) x 711
Index for the year in which the Assessee became the owner of
the property
9. Inherited after 1-4-81
Cost to the previous owner x 711
Index for the year in which the Assessee became the owner of
the property
96. Explain the capital gain exempt from tax: -, explain the provisions of Income Tax relating to capital gain exempt from tax: - (2004 M.com)(2005 B.com) (M.com 2005)
Go through the next 4 questions.
97. What is Section: 54?
(Sale of Residential House Property.)
That part of Capital Gain of individual & H.U.F from sale of such house property which is long-term capital asset, is exempted which is invested in –
1. Purchase of another house within 1 year before or 2 years after the sale.
2. Construction of another house within 3 years after the sale.
98. What is Section: 54 B?
(Sale of self-cultivated agricultural land)
That part of Capital Gain from the sale of land is exempted which is reinvested in purchase of another piece of land within 2 years after sale.
99. What is Section: 54 EC?
(Sale of any long-term capital asset.)
Investment of Long-term Capital Gain within 6 months from date of sale in Bonds issued:
By National bank for Agriculture & Rural Development (NABARD) or
By National Highways Authority Of India
By Rural Electrification Corporation Ltd.
By National housing Bank or
By small industries development bank of India (SIDBI)
is exempted. The new bonds cannot be sold or transferred for a period of 5 years.
100.What is Section: 54 F?
Capital Gain on transfer of a long-term capital asset other than a house property.
The provisions of this section are:
The Assessee is an individual or a H.U.F
The asset transferred is any Long-term capital asset other than a residential house.
The Assessee has purchased 1 year before or 2 years after the date of transfer or constructed within 3 years after the date of transfer, a residential house.
The amount of exemption is the net consideration from sale of capital asset invested in new house.
• If whole amount of net consideration is invested, the whole amount of Capital Gain is exempt.
• If only a part of net consideration is invested, Capital Gain will be exempt proportionately as follows:
25Capital Gain x Cost of new house
Net consideration
Chapter 8.
Income from Other Sources.
101.Which is Residuary Head’ of income?
The head ‘income from other sources’ is known as residuary head of income. Because, An income which does not come under the 1st 4 heads is to be charged under this head.
102.List incomes chargeable under the head ‘Income From Other Sources’: - (2001 B.com, 2003 B.com) (2004 B.com) (2006 B.com)
1. Dividends
2. Winnings from lotteries, crossword puzzles, races including horse races, card games, gambling etc.
3. Any sum received by the assessee from his employees as contribution to staff welfare schemes.
4. Interest on securities.
5. Income from machinery, plant, or furniture let on hire
6. Income from letting of plant, machinery, or furniture along with the building
7. Income from sub-letting
8. Agricultural income from land situated outside India
9. Examinership fees received by college teachers
10. Interest on deposit received from bank & other financial institutions
11. Director’s fees
12. Salary received by an M.P.
13. Income from undisclosed sources
14. Insurance commission
15. Family pension received by family members of deceased employee.
16. Ground rent received.
103.What are the Deductions permissible from ‘Income from Other Sources’? (2003 M.com)
1. Commission paid to a banker for collecting dividend or Interest on securities
2. In the case of income by way of letting of plant, machinery, furniture, or buildings, the following expenses are deductible:
• Current repairs of buildings
• Insurance premium paid in respect of insurance against risk of damage or destruction of the premises
• Repairs & insurance of machinery, plant & furniture.
• Depreciation
3. In the case of income by way of family pension (2007 B.com) (2009 B.com) ( 2011 B.com)
Rs. 15,000 or 1/3 of pension, whichever is less.
4. Any other expenditure incurred wholly & exclusively for the purpose of earning that income. E.g. Interest on money borrowed to purchase
104.What is Tax Deducted at Source (T.D.S) or deduction of tax at source?. What is the object of deduction of TDS? (2003 B.com) (2002 B.com) (2003 B.com)(2005 B.com)(2006 B.com) (2007 B.com) (M.com 2006) (2010 B.com) 2011 bcom.
Income tax act makes it obligatory for certain persons to deduct tax & surcharge from certain payments at prescribed rates & to pay the tax so deducted to the credit of Central Govt within the prescribed time.
• Tax should be deducted at source from the following payments:
1. Salary
2. Interest on securities
3. Winnings from lotteries
4. Winnings from horse races
5. Payment to contractors
6. Payment of insurance commission etc.
105.What is Bond-Washing Transactions? (Sec. 94)?(2003 B.com) (2003 B.com) (2004 B.com) (2004
M.com) (2005 B.com)
A bond washing transaction is one, which consists of selling securities to a friend or relative who does not have any taxable income.
This transfer is done some time before the payment of Interest. After payment of Interest, the securities will be purchased back. This is to evade tax because Interest income will be included in the income of the transferee, (friend or relative) who may, not have taxable income.
To prevent evasion of tax in this manner, section 94 provides that where a security owner transfers the securities some time before payment of Interest & reacquires them, the Interest received by the transferee will be deemed as income of the transferor & accordingly, it will be included in the total income of the transferor & not of the transferee.
106.Explain different types of securities & treatment of income received from those securities.
Securities can be classified in to:
1. Securities of the Central Govt or a State Govt
262. Tax-free Commercial securities
3. Less tax Commercial securities
1. Govt. Securities.
Such securities are issued either by the Central Govt or a state Govt. No tax is deductible on such securities. Hence, the Interest on such securities will not be grossed up. The amount received or declared as the case may be, will be added in the income.
2. Tax-free Commercial Securities. (2004 M.com) (2003 M.com)
Such securities are issued by the companies. In fact these securities are not tax-free. These securities are called tax-free from the point of view of the investor. The investor is not liable to pay tax on the Interest on such securities.
The investee Company pays Interest at a Fixed rate as mentioned on the face of the security to the investor & the tax to the Govt from it’s own pocket on behalf of the investor.
While computing the income of investor the gross amount (Interest received plus the tax paid by the company to the Govt) is included in the income of the investor. However, the amount of tax paid by the company on this Interest is deducted from the total tax payable by the Assessee & the balance of amount left is payable by the Assessee as tax.
3. Less Tax Securities: (2003 M.com) (2007 B.com)
All securities if they are not tax free, are less-tax securities whether the word ‘less-tax’ is mentioned on the face of the security or not. Generally, ‘less tax’ signifies that before making the payment of Interest, the tax at the rate in force shall be deducted at source & deposited in the treasury on behalf of the investor.
In the case of these securities, income tax is deducted at source on the amount of Interest calculated at the percentage stated on the securities & the balance of amount of Interest left after deduction of the afore said income tax is paid to the security holder.
Where the rate percentage of Interest is given it is not grossed up, as it is already the gross amount of Interest & Income Tax is to be deducted there from. If in
the case of these securities the net amount of Interest received is given, it has got to be grossed up.
In any case, it is the gross amount of Interest that is included in the total income of the Assessee.
107. What is Grossing-up of Interest?
If the securities are held by an assessee as a fixed asset, Interest received on them will be taxable under the head ‘Income From Other Sources’.
It is the ‘Gross Interest’, which is taxable. That is net Interest + tax deducted at source Co.
If net Interest is given, it should be grossed up by the following formula:
Net Interest x 100100 - Rate of TDS
108.What are the rules for Grossing up of Interest on securities?
1. Govt securities - The Interest is not grossed up.
2. Tax-free commercial securities
- Interest is always grossed up
3. Less tax securities - If Interest received is given, it is always grossed up
4. Less tax securities
(If the rate of Interest & amount of investment on the basis of face value of security are given)
- Not grossed up, as it is already the gross amount of Interest.
Rate of TDS
1. Interest on security issued by statutory bodies or local authority
- 10. %
2. Listed debentures - 10. %
3. Unlisted debentures - 10. %
4. Casual incomes - 30. %
a) Gross Interest =
Net Interest
x 100
100 – TDS rate
Chapter 9
Assessment.
109.What is Best Judgment Assessment (BJA) u/s. Sec 144 (Ex-Parte Assessment)? (2002 B.com) (2003 M.com) (2004 M.com)
In the following cases the A.O. is under an obligation to make an Assessment of the Total Income of the Assessee:
271. If the assessee has not filed the return or belated
return or revised return.
2. If the assessee fails to comply with all the terms of a notice issued requiring the assessee to:
a) File a return or produce accounts or furnish information called for
b) Get the accounts audited & furnish the audit report
c) Ensure his attendance or produce evidence supporting the return filed.
• The BJA can be made only after giving the assessee an opportunity for being heard.
• It is known as BJA, as the A.O., in spite of non – compliance & non – cooperation of the assessee is expected to make the Assessment to the best of his judgment.
• It is known as Ex-Parte assessment since the Assessment is made without the Cooperation of the party concerned.
110.What is Income-Escaping Assessment? (2002 B.com) (2004 M.com)
If the A.O. has reason to believe that any income has escaped assessment for any Assessment year, he may reassess such income.
In the following cases it shall be deemed that income chargeable to tax has escaped assessment.
1) Where no return of income has been furnished by an assessee although the income is above the non – taxable limit.
2) Where a return of income has been furnished but no assessment has been made & the Assessee is found to have understated hiss income or claimed excess deduction etc., in return.
3) Where an assessment has been made but-
a. Income chargeable to tax has been under assessed or
b. Such income has been assessed at too low a rate; or
c. Excessive loss/ Depreciation allowance or any other allowance under the act has been computed.
If Re-Assessment is made the tax shall be chargeable at the rate at which it would have been charged had the income not escaped Assessment.
111.What is Self-Assessment? (Sec- 140 A) (2003 B.com.) (M.com 2006)
Where any tax is payable on the basis of any return required to be furnished, (u/s. 139, 142, 148 or 158 BC), after taking in to A/c the amount of tax, if any, already paid (as advance tax, TDS), the assessee shall be liable to pay such tax together with Interest payable for any delay in furnishing the return or any default in payment of advance tax before furnishing
the return & the return shall be accompanied by proof of payment of such tax & Interest.
It follows that the assessee shall have to first pay the amount of tax & Interest before furnishing the return of income.
It means that even if amount of tax & Interest is payable on the basis of return (after adjusting tax already paid) is very low, that shall have to be paid first before furnishing the return of income.
Explanation:
Where the amount paid by the assessee on self assessment falls short of the aggregate of tax & Interest payable, the amount so paid shall first be adjusted towards the Interest payable & the balance, if any, shall be adjusted towards the tax payable.
If any assessee fails to pay the whole or any part of such tax or Interest or both he shall be deemed to be an ‘Assessee In Default.’
112.When is a return of income regarded as defective? What are the consequences of a defective return of income? (M.com 2006)
A return of income can be regarded as defective by the A.O. under the following circumstances:
a) Annexure, statements & columns in the return of income has not been duly filled
b) Return of income has not been accompanied by –
I. Statement showing computation of tax on returned income.
II. Proof of tax deducted at source, advance tax paid & self-assessment tax paid
III. Tax audit report or copy of such report together with proof of furnishing the report on earlier date.
c) Where regular book of A/c are maintained, the copies of manufacturing A/c or trading A/c or Profit & Loss A/c or Income & expenditure A/c or any other similar A/c & the B.S. has not been furnished. Similarly where no copies of personal A/c of the proprietor, partner or member a A.O.P. / B.O.I has been filed;
d) If accounts are audited & copies of audited copies of A/c & auditor’s report have not been filed.
e) Where regular books are not maintained, a statement indicating the amount of turnover or gross receipts, Gross profit, expenses, & net profits & the basis there of together with the amount of total sundry Debtors, sundry Creditors stock in trade, & cash balance at the end of the Previous year have not been filed.
113.What is Permanent Account Number? (PAN) Sec. 139 A. Explain the procedure for the allotment of this number & its use? (M.com - 03) (2003 B.com) (2003 M.com)
This is a number allotted by the Income Tax Department to a person who files return of income. This
28helps the department to identify returns subsequently & enables quick disposal of Assessment.
Every person:
1) Whose Total Income exceeds non taxable limit or
2) Any other person carrying on business or profession whose total sales or gross receipts are likely to exceed Rs. 5,00,000 in any Previous year & has not been allotted any pan, is obliged to obtain PAN within such time, as, may be prescribed.
Every person should:
a) Quote such number in all his returns or correspondence with Income Tax authorities,
b) Quote such number in all challans for payment of any sum,
c) Quote such number in all documents pertaining to such transactions as may be prescribed by the board.
A person who has not received PAN may quote General Index Register Number (GIR). New series PAN contains ten alphanumeric characters & is issued on a laminated card.
114.What is Advance Payment of Tax? ‘Pay As You Earn’ (PAYE). (2002 B.com) (2003 B.com) (2004 B.com)) (2005 B.com)(2006 B.com) ) (2007 B.com) (2004 M.com) (M.com 2006) (2010 B.com) (2009 B.com) ( 2011 B.com)
The scheme of advance payment of tax is also known as ‘pay- as you earn scheme’. (PAYE). Under this scheme, an assessee pays tax in a particular financial year, preceding the Assessment year on the basis of his estimated income.
Every person is liable to pay advance tax if advance tax payable is Rs. 5,000 or more. All items of income are liable for payment of advance tax.
An assessee who is liable to pay advance tax is required to estimate his current income & pay advance tax there on.
If the last day of payment of any installment of advance tax is a day on which the receiving bank is closed, the assessee can make the payment on the next immediately following working day.
The date of payment of advance tax is as follows:
Corporate assessee Non-corporate assessee
Date of payment
1. Up to 15% of advance tax payment
-On or before June 15 of P.Y.
2. Up to 45% of advance tax payable
Up to 30% of advance tax payable
On or before Sept 15 of P.Y.
3. Up to 75% of Up to 60% of On or before Dec. 15
advance tax payable
advance tax payable
of P.Y.
4. Up to 100% of advance tax payable
Up to 100% of advance tax payable
On or before March 15 of P.Y.
115.Explain the circumstances in which a claim for refund of tax may arise. What is the time limit for claiming refund of tax ? (2006 B.com)
Describe in brief the procedure for claiming refund.
Under what circumstances the A.O. can withhold the refund? (M.com - 03) (2003 B.com) (2004 B.com) (2005 B.com)
If the amount of tax paid by an assessee in any year exceeds the amount, which he is properly chargeable for that year, he is entitled to a refund of the excess tax so paid. Thus a refund of tax arises in the following cases:
1) Deduction of tax at source at a higher rate
2) Excess payment of advance tax
3) When relief for double taxation is due
4) Where tax liability is reduced either on A/c of rectification of mistake or by an order passed in an appeal.
Person entitled to claim refund:
Normally refund claim can be made only by a person who has made excess payment of tax. How ever, where the income of a person is included in the total income of another person u/s. 60 to 64, the refund can be claimed by the latter & not by the former.
For example, a minor child, whose income is clubbed with that of the father, is not entitled to any refund in respect of that income- it should be claimed by the father.
If a person is unable to claim any refund due to him because of his death, incapacity, insolvency or any other cause, his legal representative/ trustee/ guardian/ receiver as the case may be entitled to receive such refund.
Claim on refund should be made in form no. 30 & verified in the prescribed manner. The refund should be claimed within 1 year from the last day of the Assessment year. However refund claim submitted after the expiry of 1 year may be considered by the A.O. if the following conditions are satisfied:
1) Amount refund does not exceed Rs. 1 lakh
2) Refund claimed is not supplementary in nature
3) Income of Assessee is not assessable in the hands of any other person under any of the provisions of the act.
Where refund arises as a result of any order passed in appeal or other proceeding under the act, the assessee need not file any formal application.
29With holding of refund:
Where an order giving rise to a refund is the subject matter of an appeal or where any other proceeding under this act is pending & the A.O. is of the opinion that grant of the refund is likely to adversely affect the revenue, the A.O. may, with previous approval of the commissioner, with hold the refund till such time as the commissioner may detain.
116.What is Tax Clearance Certificate? (2003 B.com) (2003 B.com)(2006 B.com) (2010 B.com)
No person (a) who is not domiciled in India or (b) who is domiciled in India at the time of his departure, but:
1) Intends to leave India as an emigrant or
2) Intends to proceed to another country on a work permit with the object of taking up any employment or other occupation in that country or
3) Any person as Income Tax authority may deem it necessary,
Shall leave the territory of India, unless he obtains a certificate from the duly authorized officer that he has no liabilities under the Income Tax act.
If the owner or charterer of nay ship or air craft carrying person from any place outside India allows any person to travel by such ship or air craft without satisfying himself that the person possesses the tax clearance certificate, he shall be personally liable to pay the amount of tax, if any, payable by such person as the A.O. may determine.
117.What is Tax Avoidance?
Tax avoidance is the process by which the Assessee reduces his tax liability by availing of certain loopholes in the law. He acts legally & does not commit any fraud, concealment & other illegal measures.
E.g. the Assessee can avail of rebate of income u/s. 88 by means of specified saving like LIC premium, NSC, PF etc.
118.What is tax planning? (M.com - 03) (2004 M.com) (2003 M.com) (2003 Dec. M.com) (M.com 2006)
Tax planning is an arrangement of one’s financial affair in such a way that without violating in any way the legal provisions of an Act, full advantage is taken of all exemptions, deductions, rebates & reliefs permitted under the act, so that the burden of the taxation of an Assessee, as far as possible, the least. Tax planning reduces taxability, minimizes litigation, enables productive investment & reduces cost.
119.What is Tax Evasion?
An assessee may show his Total Income at a reduced figure so that his tax liability is reduced. This is known as tax evasion. This is done by making false claims or by withholding the information regarding his real income.
It is an illegal, immoral, anti social & anti-national practice. It attracts heavy penalty & prosecution proceedings.
Examples are unrecorded sales, claiming bogus expenses & bad debts & losses, recording personal expenses as business expenses, non-disclosure of incomes etc.
120.Distinguish between Tax Planning & Tax Evasion. (M.com - 03) (2003 M.com) (2004 M.com)
Tax planning Tax Evasion
1. It is a legal right & social responsibility
1. It is a Leal offence coupled with penalty & prosecution
2. It is an act within the 4 corners of the act to achieve certain social & economic objectives
2. It is a deliberate attempt on the part of tax payer by misrepresentation of facts, falsification of accounts, fraud etc
3. It requires thorough knowledge of the relevant acts & social, economic & political situation of the country
3. It requires no such knowledge; but the boldness to infringe the law.
121.What are the classes of Income Tax authorities? (2004 M.com)
Classes Income Tax authorities are:
1. The Central Board Of Direct Taxes (CBDT)
2. Directors- General of Income Tax Or Chief Commissioners of Income Tax
3. Directors of Income Tax Or Commissioners of Income Tax Or Commissioners Of Income Tax (Appeals)
4. Additional Directors Of Income Tax, Additional Commissioners Of Income Tax (Appeals)
5. Joint Directors Of Income Tax Or Joint Commissioners Of Income Tax.
6. Deputy Directors Of Income Tax Or Deputy Commissioners Of Income Tax Or Deputy Commissioner Of Income Tax (Appeals)
7. Assistant Directors Of Income Tax Or Assistant Commissioners Of Income Tax.
8. Income Tax Officers (I.T.O)
9. Tax Recovery Officers
3010. Inspectors Of Income Tax.
122.What are the general powers of Income Tax authorities? (M.com 2006) (WRITE ANSWER OF Questions no. 123 to )
123.What are the Powers of C.B.D.T?
CBDT is constituted under the central board of revenue Act – 1963. It is the top most executive authority with regard to direct taxes.
C.B.D.T is given powers to issue such orders, instructions & directions to other Income Tax authorities for the proper administration of the act.
But;
1. The board cannot issue any instruction to any Income Tax authority to make a particular assessment or to dispose of a particular case in a particular manner.
2. The board cannot issue any instruction so as to interfere with the discretion of deputy commissioners (appeals) of the commissioners (appeals) in the exercise of his appellate functions.
124.What are the powers of Director General or Director?
The director general is appointed by the central Govt. he is required to perform such functions as may be assigned by the CBDT. His powers are:
1. Giving instructions to the Income Tax officers
2. Enquiry or investigation in to concealment
3. Search & seizure
4. To requisite books of A/c
5. Power of survey
6. Power to make any enquiry
125.What are the powers of commissioners of Income Tax (CIT)?
Commissioners of Income Tax are appointed by the central Govt. they are appointed to administer the Income Tax departments of a specified area. CIT enjoys both administrative & judicial powers. Some of his powers are:
1. Search & seizure
2. Granting registration
3. Appointment of class ii Income Tax officers & inspectors
4. Assigning jurisdiction to inspecting assistant commissioners & I.T.OS
5. To authorize the ITO to recover any arrear of tax due from an assessee by sale of his moveable property
6. Reduction or waiver of penalty in some cases
7. To award & withdraw recognition to provident funds
8. Transfer cases from one ITO to another
9. Revision of orders passed by ITO, which is prejudicial to the revenue
10. Reference to the high court.
126.What are the Powers of commissioners? (Appeals)
Commissioner (appeals) is an appellate authority. He is appointed by the central Govt to head a specified area. His judicial powers are:
1.Acceptance & disposal of appeals
2.Power to call for information or production of evidence
3.Power to inspect registers of companies
4.Set off refunds against tax remaining payable
5.Imposition of penalty
127.What are the powers of Income Tax officers?
There are class (i) I.T.Os & class (ii) I.T.Os. Former is appointed by central Govt & the latter by the C.I.T. They perform their functions in respect of such areas or of such persons or classes of incomes as the commissioner may direct. If a question arises as to whether I.T.O. has jurisdiction to assess any person, the question is determined by the commissioner.
His powers & functions are:
1. Power regarding discovery, production of evidence etc
2. Search & seizure
3. To requisition books of A/c
4. To issue notice for furnishing return & extend time therefore
5. To allot permanent A/c numbers
6. To impose penalty for default in payment of tax
7. To make assessment
8. To Re- Assess escaped income.
9. Rectification of mistake
10. To demand advance payment of tax & to grant refunds.
128.What are the powers of inspector?
The commissioner appoints inspectors. They are subordinate to I.T.O. Inspectors perform such functions as are assigned to them by the commissioner. They have no fixed jurisdiction or particular powers or functions. They are assist the I.T.O. or other Income Tax authority, under whom they are attached or placed.
129.What are the powers of assessing officer (A.O.)? (2002 B.com)
31Assessing Officer means an Income Tax officer,
assistant commissioner or a deputy commissioner who is vested with powers to assess.
A.O. is the first & foremost officer of the Income Tax department who comes in contact with the Assessee. He is both an administrator & a quasi- judicial officer.
Where the Assessing Officer has been vested with jurisdiction over any area, within the limits of such area, he shall have jurisdiction in respect of any person carrying on a business or profession if the place is situated within the area.
Assessing Officer has wide powers under various sections of the act. E.g.
1. Call for information
2. Permanent A/c Number allotment
3. He can ask the Assessee to get his accounts audited
4. Order for search & seizure
5. Grant refunds
6. He can re-open assessment etc.
Chapter 10.Carry Forward & Set Off.
130.What is set off of losses? (2002 B.com)
Income tax is levied on the total income of the previous year of an assessee. The total income cannot be correctly computed unless a loss from a source of income is set off against any other income.
Suppose there is a loss of Rs. 250 from a house and from another house the income is Rs. 1000, the loss of Rs. 250 can be set off against income of Rs. 1000 and the net income will be Rs. 750.
131.What are the Rules for set off and ‘Carry Forward & Set Off’? (M.com - Dec 02) (2003 M.com) (M.com - 03) (2004 M.com) (M.com 2005)
Set off against income of:
C/f and set off against
income of:
C/f for:
1. Loss from house property
Any income except casual income
H.P.8
years
2. Business loss:
a) Speculative business loss (2003 Dec. M.com)
Speculative business profit
Speculative business profit
4 years
b) Non speculative business loss
Any income except salary and casual income
Both speculative and non speculative business profit
8 years
3. Capital loss:
a) Long term capital loss
Long term capital gain
Long term capital gain
8 years
b) Short term capital loss
Any capital gain
Any capital gain
8 years
4. Other sources:
(Loss from maintaining horses
Against same business income
Against same business income
4 years
5. Unabsorbed depreciation
N.A. Any incomeNo limit
132.What is Unabsorbed Depreciation? (M.com 2005)
Some times, the full amount of allowable Depreciation cannot be debited to Profit & Loss A/c due to inadequacy of profit. The balance amount of Depreciation, which cannot be so debited, is called unabsorbed Depreciation.
E.g. If the businesses profit of an assessee before charging Depreciation is Rs. 30,000 & allowable Depreciation is Rs. 50,000 then unabsorbed Depreciation is Rs. 20,000 (50,000 – 30,000).
Unabsorbed Depreciation relating to the Previous year can be set off against profit of other business & balance, if any, can be set off against his income chargeable under any other head for that year. If still some part of such allowance remains unabsorbed, it can be carried forward.
No time limit is fixed for the purpose of carrying forward of unabsorbed Depreciation. It can be set off against any income. In the matter of set off, priority is:
1. Current Depreciation
2. Brought forward businesses loss
3. Unabsorbed Depreciation.
133.What is clubbing of income? (2003 Dec. M.com) (M.com 2005)
An assessee is liable to pay tax in respect of income earned by him in the previous year. He may try to
32reduce his tax by transferring his income in the name of a person who is related to him.
To counteract this, sections 60 to 64 are included where by income belonging to some other person will be taxed in the hands of the Assessee. This is called ‘Clubbing’ of income.
E.g. Income of a minor child will be treated as the income of that parent who has greater Total Income before clubbing of such income.
Chapter 11.Deductions from Gross Total Income
1. What are the deductions allowed u/s. 80 while computing Total Income? (2003 Dec. M.com)
In computing the Total Income of an assessee, deductions shall be allowed u/s. 80 C to 80 U.
The aggregate amount of deductions under this chapter shall not exceed the Gross Total Income of the assessee.
1. Sec. 80 C
The assessee is allowed a deduction of Rs. 1,00,000 or Gross qualifying amount whichever is lower.
Gross qualifying amount is the aggregate of the following:
1. Life insurance premium paid by an individual for insurance on his own life, life of spouse or any child. (Premiums will be qualified for the purpose of this section, even if a person other than the assessee has taken an insurance policy provided the assessee pays insurance premiums & fulfils the other conditions of this section.) Payment made by Govt employees to the ‘Central Govt employee’s insurance scheme’ is also included for this purpose.
2. Payment made by a person in respect of ‘non-commutable deferred annuity’
3. Any sum deducted from salary payable by or on behalf of the Govt to an individual for the purpose of securing him a deferred annuity or making provision for his wife or children provided the sum so deducted does not exceed 20 % of salary.
4. Contribution made by an individual to:
a. R.P.F
b. S.P.F.
c. P.P.F
5. Contribution by an individual towards an approved super Annuation fund
6. Any sum deposited in a 10 year or 15 year A/c under the post office savings bank rules
7. Any sum paid as subscription to national savings certificate vi & vii & viii issues.
8. Contribution made by an individual for participating in the ‘Unit Linked Insurance Plan’ of UTI
9. Contribution for participation in ‘Unit Liked Insurance Plan’ of LIC mutual fund (Dhanaraksha plan of LIC mutual fund)
10. Payment by a person to notified annuity plan of the LIC (i.e. Jeevan Dhara, Jeevan Akshay, New Jeevan Dhara & New Jeevan Akshay)
11. Any subscription (not exceeding Rs. 10,000) to any units of any mutual fund under section 10 (23 D) or the UTI
12. Contribution to notified pension fund set up by a Mutual Fund notified u/s. 10 (23 D) or by UTI (retirement benefit unit scheme of UTI & ‘Kothari Pioneer Pension Plan’ Of Kothari Mutual Fund)
13. Any sum paid as subscription to ‘Home Loan A/c Scheme’ of the national housing bank or contribution to any notified pension fund set up by the national housing bank
14. Any sum paid as subscription to any such scheme of –
a. Public sector companies engaged in providing long-term finances for construction or purchase of houses in India for residential purposes. Or
b. Any authority constituted in India for the purpose of dealing with housing accommodation or for the purpose of planning, development or improvement of cities, towns, villages or for both
15. Any payment towards the cost of purchase/ construction of a new residential house property. The deduction will be available in respect of payments made up to Rs. 20,000 during the Previous year for the purpose of purchase or construction of residential house
16. Any amount invested in debentures of & equity shares in, a public Company engaged in infrastructure including power sector or units of a Mutual Fund proceeds of which are utilized for the developing, maintaining etc of a new infrastructure facility.
2. Sec. 80 CCC – Contributions to certain pension funds
Eligible Assessee. – Individuals
Contribution made to annuity plan of LIC of India or any other approved insurer for receiving back pension from a fund is deductible up to a maximum of Rs. 100,000.
3. Sec. 80 D – Medical insurance premia (2001 B.com).
Eligible Assessee – individuals & HUF
Premium paid by Cheque under a medical insurance scheme of the General insurance corporation (GIC) approved by the central Govt or any other approved insurer is deductible up to Rs. 15,000.
Where the insurance is on the health of a senior citizen, Rs. 20,000 shall be the limit for deduction.
I. Individuals: insurance can be made on the health off the assessee, spouse, dependent & children
33II. HUF: insurance on the health of any family
member.
4. Sec. 80 DD – Maintenance & medical treatment of handicapped dependent.
Eligible Assessee- maintenance & medical treatment of handicapped dependent
Deduction of a flat amount of Rs. 50,000 (100000 if disability is over 80 %) is allowable in respect of:
a. An expenditure incurred for the medical treatment, training & rehabilitation of handicapped or mentally retarded dependent relative in the case of an individual / member in the case of HUF or
b. An amount paid or deposited by the assessee under any scheme of LIC or any other approved insurer for the maintenance of handicapped dependent relative / member.
5. Sec 80 DDB – Medical treatment of certain specified disease or ailment
Eligible Assessee – individuals & HUF, resident in India.
Deduction of flat amount of Rs. 40,000 is permissible if any expenditure is actually incurred for the medical treatment of the assessee himself or his dependent relative or any dependent member of the HUF In respect or specified disease or ailment. (Where the expenditure incurred is in the case of a senior citizen, deduction of Rs. 60,000 shall be allowed.)
The specified diseases are:
• Neurological diseases• Cancer• Full blown AIDS• Chronic renal failure• Hemophilia• Thalasemia
6. Sec. 80 E – Repayment of loan taken for higher education:
Eligible Assessee – individual
Any repayment of loan taken from any financial institution or any approved charitable institution for the purposes of pursuing higher education or towards Interest on such loan is deductible.
‘Higher education’ means full-time studies for any graduate or post graduate course in engineering, medicine, management or for postgraduate course in applied science or pure sciences including mathematics & statistics.
7. Sec. 80 GG - Rent paid
Eligible Assessee – individual
Rent paid is allowable as deduction to the extent of the least of the following:
1. Rent paid – 10 % of ATI
2. 25% of ATI
3. Rs. 2,000 p.m.
• ATI = Gross Total Income – (LTCG & all other deductions except 80 GG)
Conditions:
1. The assessee should not be in receipt of H.R.A.
2. The Assessee, his spouse, or minor child or the HUF in which he is a member should not own any residential accommodation at that place.
3. No claim for self- occupied property should be made in respect of any accommodation.
8. Sec.80 GGA- Donations for scientific research, rural development:
Eligible Assessee – all assessees not having any income under the head ‘Profits & Gains of business or profession’
Donation to the following is fully eligible for deduction:
a.Approved scientific research association, university, college or institution for scientific research, statistical research, research in social science or to the national fund for rural development
b. Approved association or institutions for carrying on a programme of conservation of natural resources or rural development or for afforestation
c.‘National Urban Poverty Eradication Fund’ set up & notified by the Govt.
9. Sec. 80 U – (For physically disabled or mentally retarded assessee)
If the case of a resident individual who –
• Suffers from a permanent physical disability (including blindness) or Is subject to mental retardation;
Deduction of Rs. 50,000 (75000 if disability over 80 %) shall be allowed, if it has the effect of reducing considerably his capacity for normal work or engaging in a gainful employment or occupation.
10. Sec. 80 G – Donation to certain funds, charitable institution etc. (M.com – Dec 02 ) (M.com 2006)
Eligible assessee – any Assessee
Gross qualifying amount:
The amount of contributions made to the following eligible funds shall be aggregated to arrive at the amount of gross qualifying amount:
No limit donations: (2004 M.com)
1. P.M.’ s national relief fund
2. P.M’s Armenia earthquake relief fund
3. The Africa fund
4. The national foundation for communal harmony
5. A university or any educational institution of national eminence as may be approved
346. The national illness assistance fund
7. Any Zila Saksharatha Samiti for improvement of primary education in villages & towns & for literacy activities
8. National blood transfusion council or to any state blood transfusion council
9. Any fund set up by state Govt for medical relief to the poor
10. The army central welfare fund or the Indian naval benevolent fund or the air force central welfare fund established by the armed forces of the union for the welfare of the past & present members of such forces or their dependents
11. The chief ministers relief fund or the lieutenant governor’s relief fund in respect of any state or union territory, as the case may be
12. The national sports fund to be set up by the central Govt
13. The national cultural fund set up by the central Govt
14. The fund for technology department & application set up by the central Govt
15. The national defence fund
16. Any fund set up by the state Govt of Gujarat exclusively for providing relief to the victims of earthquake in Gujarat.
17. Any sum paid during the period beginning with 26-1-2002 & ending on 30-9-2002 to any trust, institutions or fund recognized under Sec 80 G for providing relief to the victims of earthquake in Gujarat.
18. National trust for welfare of persons with autism, cerebral palsy, mental retardation & multiple disabilities constituted under the relevant act of 1999
19. P.M’s drought relief fund
20. The national children’s fund
21. Jawaharlal Nehru memorial trust
22. Indira Gandhi memorial trust
23. Rajiv Gandhi foundation
With limit Donations: (2004 M.com)
1. Contribution by a Company as donation to the Indian Olympic association or to any other association notified by the central Govt u/s. 10 (23)
2. Govt or local authority or approved institutions/ association for promotion of family planning.
3. Any approved fund or institution established for charitable purposes
4. Govt or local authority to be used for charitable purposes
5. Any authority set up for providing housing accommodation or town planning
6. Any corporation established by Govt for promoting Interest of scheduled caste/ scheduled tribe / backward classes
7. Renovation of notified temple mosque, church, or Gurudwara or any other notified place of national importance.
1) Calculation of deduction for No limit donation:
a. For items 1to18 – 100 %
b. For items 19 to 23 – 50 %
2) Calculation of deduction for With - Limit donation:
a.NQA = total with limit donations or 10 % of ‘ATI; whichever is less
b. Out of NQA,
1) For items 1 & 2 - 100%
2) For balance NQA - 50 %
ATI =
Gross Total Income
–(LTCG & al l other deduct ions except 80 G)
End
35
Chapter 12.
Assessment of H.U.FWhat is the proof for existence of H.U.F?
1. Existence of common ancestral property; &
2. Existence of Hindu Coparcenary
(A husband & wife without any children, but having common ancestral property can form H.U.F & there is no need for more than 1 male coparcener to form H.U.F)
What are the important points to be remembered while computing total Income of HUF?
1. H.U.F cannot have any income under the head ‘salary’.
2. Any Salary received by its members is their individual income.
3. Any income from house property received by its members is their individual income
4. Any Salary, commission or remuneration given by H.U.F out of its profits, to any of the members of H.U.F is allowed as business expenditure.
5. Director’s remuneration received by Kartha:
a) If received by his personal qualification or shares held by him, it would become his individual income.
b) If received when he is a director in a representative capacity, it is H.U.F income.
6. Income from an asset acquired out of H.U.F funds, & in the name of any member of H.U.F is H.U.F income.
7. Income from a business carried on by any member of H.U.F is his individual income even if capital is supplied by H.U.F
8. Income from a self-acquired asset of individual converted in to common pool of H.U.F property is his individual income.
9. Income from an asset gifted out of H.U.F property to Kartha’s wife is her individual income.
10. Income from an asset acquired by ladies of the family out of their Stridhan (Dowry & other property received from parents) is their individual income.
11. Any share of income received by any member of H.U.F out of the H.U.F income is fully exempted U/s. 10 (2)
12. Income from Impartiable estate is the income of that person on whose name the property stands
13. Who is a coparcener? (M.com - Dec02 )
Members of HUF who acquire by birth an Interest in joint family property are called Co-parcener. They also enjoy right to enforce partition of family property. Coparceners include sons, grand sons, and great grand sons of the holder of joint family property. The right to enforce partition is enjoyed only by male members of a HUF. Female members are entitled only for maintenance out of family property.
14. Explain various types of Capital Gains exempt from tax? (M.com - Dec 02)
15. If a Return of Loss is not filed within the due date, what are its consequences? (M.com - 03)
Basically assessment is an estimation for an amount assessed while paying Income Tax. It is a compulsory contribution that is required for the support of a
36government. It is generally of the following types.
Self assessmentThe assessee is required to make a self assessment and pay the tax on the basis of the returns furnished. Any tax paid by the assessee under self assessment is deemed to have been paid towards regular assessment.
Regular assessmentOn the basis of thereturn of income chargeable to tax furnished by the assessee an intimation shall be sent to the assessee informing him about the tax or interest payable or refundable to him.
Best judgement assessmentIn a best judgement assessment the assessing officer should really base the assessment on his best judgement i.e. he must not act dishonestly or vindictively or capriciously. There are two types of judgement assessment :
1. Compulsory best judgement assessment made by the assessing officer in cases of non-co-operation on the part of the assessee or when the assessee is in default as regards supplying informations.
2. Discretionary best judgement assessment is doen even in cases where the assessing officer is not satisfied about the correctness or the completeness of the accounts of the assessee or where no method of accounting has been regularly and consistently employed by the assessee
Income escaping assessment or re-assessment If the assessing officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year assess or reassess such income and also nay other income chargeable to tax which has escaped assessment and which comes to his notice in course of the proceedings or any other allowance, as the case may be.
Precautionary assessmentWhere it is not clear as to who has received the income, the assessing officer can commence proceedings against the persons to determine the question as to who is responsible to pay the tax.
16. Write a note on Regular Assessment (M.com - 03)
17. What is Revision of orders passed by ITO, which is prejudicial to the revenue (M.com - June 03)
18. Discuss the concept of Revised Return under the Income Tax act? Can a return filed belatedly be revised? (M.com - June 03)
19. What are the different types of Assessment? (M.com - June 03) (M.com 2006)
20. What is Gross Maintainable Rent (M.com - June 03)
21. Compare & contrast the powers exercisable by the Assessing Officer under section 142 (1) & section 143 (2) An Assessing Officer makes the best judgment Assessment for failure to comply with a notice under sec 143 (2), without any further notice to the assessee. What are the remedies available to him?
22. State any 4 examples of Capital expenditure? (2003 Sept.)
23. What is the tax treatment of preliminary expenses? (2003 Sept.)
24. What is provisional assessment?
134.What do you mean by deemed profits? (2003 April.)
Distinguish between Tax Planning & Tax management?
2. What do you mean by revocable transfer? (M.com 2004)
135.Explain Rebate of Income Tax? (2003 B.com) (2003 M.com) (2004 M.com)
A salaried person can claim rebate under sections 88, 88 B 88 C and 88 D. These rebates are deductible from tax liability. However, rebate u/s. 88 is not deductible from tax on Long Term Capital Gain .The rebate u/s. 88 is calculated under the following 3 steps:
Step 1 – Computation of Gross Qualifying Amount
Step 2 – Net qualifying amount
Step 3 – Amount of tax rebate
Step 1 – Computation of Gross Qualifying Amount
Note:
371. The aggregate of the aforesaid sums cannot exceed the
total income chargeable to tax for the previous year.
2. The aforesaid sums are qualified for the purpose of this section on ‘payment basis’
Step 2 – Net Qualifying Amount
Rebate u/s. 88 is available on the basis of net qualifying amount that is determined as under: let
1. Investment in schemes mentioned in points 1 to 15 above
= (a)
2. Investments in shares, debentures or units of infrastructure sector. (Point 17 above)
= (b)
Total
If (a) exceeds Rs. 70,000, then (a) is taken as Rs. 70,000. If (a + b) exceeds Rs. 1, 00,000, then (a+b) is taken as Rs. 1, 00,000.
In other words, the net qualifying amount cannot exceed Rs. 1, 00,000; a minimum investment of Rs. 30,000 is required in infrastructure sector. i.e. (b). If investments in (b) are less than Rs. 30,000, then the net qualifying amount will be lower than Rs. 1, 00,000
Example for calculation of NQA
(Rs. In thousands)
1. All investments except in 17 above
2. Investments in 17 above
3. Gross qualifying amount (a+b)
4. NQA [(a) can not exceed Rs. 70,000; a+b can not exceed Rs. 1,00,000]
Step 3 – Amount of Tax Rebate
If Gross Total Income;
1. Does not exceed Rs. 1, 50,000
2. Exceeds Rs. 1, 50,000 but does not exceed Rs. 5, 00,000
3. Exceeds Rs. 5, 00,000 -
Note:
If the following 2 conditions are satisfied, tax rebate is available @ 30 % of the Net Qualifying Amount:
1. Income chargeable under the head ‘salaries’ (before giving deduction u/s. 16) does not exceed Rs. 1,00,000 ; &
2. Income chargeable under the head ‘salaries’ is not less than 90 % of Gross Total Income.
Rebate U/s.88 B
This rebate is available to senior citizens (above 65 years of age). They are entitled to a rebate of Rs 20,000 for the previous year.
Rebate U/s. 88 C
This rebate is available to female assesses ( only to those are less than 65 years of age). They are entitled to a rebate of Rs 20,000 for the previous year.
Rebate U/s. 88 D
This rebate is available to all employees.
If net income is less than Rs 1,00,000: the rebate amount is tax on net income.
If net income exceeds Rs. 1,00,000: rebate amount is tax on net income – (net income – Rs. 100,000.)
1. How Transfer of capital asset by a partner to a firm treated [Sec.45 (3)]?
When a partner of a firm or a person who becomes a partner in a firm, transfers a capital asset to the firm by way of capital contribution or otherwise, the Capital Gain is chargeable to tax in the previous year in which such transfer took place.
The amount recorded in the books of A/c of the firm as the value of capital asset shall be taken as full value of consideration.
2. How Distribution of capital Asset on dissolution treated [Sec. 45 (4)]?
When a firm transfers a capital asset to its partner on the dissolution of the firm or otherwise the Capital Gain is taxable in the hands of the firm in the year in which the transfer takes place.
For this purpose, F.M.V. of the asset on the date of transfer is taken as full value of consideration.
3. How Capital Gains in case of compulsory acquisition of asset [Sec.45 (5)] is treated?
When the transfer of a capital asset is by way of compulsory acquisition under any law or capital asset consideration is determined by the central Govt, or RBI, such compensation is taken as sales consideration.
38Capital Gain is chargeable to tax in the
previous year in which such compensation is 1st
received & not in the year in which transfer took place.
4. How Capital Gain in the case of self-generated assets is computed?
A self-generated asset is one, which does not cost anything to the Assessee in terms of money in its creation or acquisition.
Self generated asset
Cost of acquisition
Cost of improvement
Expenses on
transfer
1. Goodwill Nil Nil Actual
2. Tenancy rights, route permit
Nil Actual Actual
3. Right to manufacture, produce or process any article.
Nil Nil Actual
1. But if goodwill is purchased, the purchase price will be taken as cost of acquisition & cost of improvement is taken as nil. Same rule applies to the right to manufacture any article purchased & later on transferred.
2. Transfer of any other self-generated asset is not chargeable to tax. E.g: goodwill of a person, a new formula patented by the inventor to grow seedless oranges.
5. How do you find out the Cost of Acquisition of bonus shares?
Case Cost of acquisition
Original shares Bonus shares
1. If original shares & bonus shares are acquired before 1-4-1981
Actual cost or F.M.V. on 1-4-1981 whichever is more
F.M.V. on 1-4-1981
2. If original shares are acquired before 1-4-1981 but bonus shares are allotted after 1-4-1981
Actual cost or F.M.V. on 1-4-1981 whichever is more
Nil
3. If original shares & bonus shares are acquired after 1-4-1981
Actual cost Nil
6. What is Capital Gain A/c Scheme?
If the amount of capital gain is not utilized by the Assessee for purchase or construction of the new residential house before the due date of filing of return of income, it shall be deposited in CGAS with a public sector bank.
The amount already utilized for purchase or construction of the new house together with the amount so deposited shall be deemed to be the amount utilized for the purchase of a new house.
(If the amount deposited in CGAS is not utilized fully for purchase or construction of new house within the stipulated period, then the amount not so utilized shall be treated as long-term capital gain of the previous year in which the period of 3 years from the date of transfer of original asset expires.)
Is it taxable if the employee is a
Specified employe
e
Non – specified employe
e
1. Rent free / concessional accommodation
- Yes Yes
2. Car/ conveyance:
(a) If car / conveyance is owned by employee & bills are paid by employer
- No No
(b) Otherwise - No No
3. Domestic servants (watchman, gardener, sweeper, personal assistant)
(a) If domestic servant is engaged by employee & salary is paid by him
- Yes Yes
(b) Otherwise - Yes No
4. Supply of gas, electricity or water for household consumption
(a) If connection is in the name of employee & bills are paid by employer
- Yes Yes
(b) Otherwise - Yes No
5. Education facility
(a) If bills are issued in the name of employee but paid
- Yes Yes
39by employer
(b) Otherwise - Yes No
6. Transport facility allowed by transport undertakings (other than railway employees)
- Yes No
7. Interest free or concessional loans
- Yes Yes
8. Holy day home facilities - Yes Yes
9. Free meals during working hours
- No No
10. Gifts on ceremonial occasions or otherwise
- No No
11. Credit card facility (including add on card)
- No No
12. Club facility - No No
13. Use of employer’s computer/ laptop
- No No
14. Use of employer’s other movable assets
- Yes Yes
15. Transfer of employer’s movable assets
- Yes Yes
16. Telephone (including mobile phone)
- No No
17. Medical facility
(a) If bills are issued in the name of employee but paid by employer
Yes Yes
(b) Otherwise Yes No
18. Leave travel concession No No
19. Stock option - No No
20. Any other perquisites -
(a) If bills are issued in the name of employee, but paid by employer
Yes Yes
(b) Otherwise Yes No
• What are the ways of recovery of tax (2007 B.com) • What is the treatment of bad debt recovered (2006
B.com) • Who is responsible for tds from salaries (2006 B.com) •