m solved taxation question papers

8/2/2019 M Solved Taxation Question Papers

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Mgmt study material created/ compiled by - Commander RK Singh [email protected]

Year 2004

Q. No. 1 Mr. Ramlal the general manager of Y ltd. Retired on December 31,2003

after 30 years of service. The particulars of his income are as follows:

(a) Salary Rs. 8,000 per month from January 1, 2003. House rent allowance Rs.3,000 per month from January 1, 2003.

(b) Medical expenses reimbursed by the employer Rs. 21,000 for the period from

April 1, 2003 which includes Rs. 5,000 paid to a Government hospital.

(c) The employer provides him a car of less than 1.6 litres capacity and driver

for official and personal use.

(d) Ramlal contributes 22% ( 12% regular and 10% additional voluntary

contribution) to a recognized provident fund and the company matches

his regular contribution of 12%

(e) He lives in a rented house in Delhi and pays Rs. 4,000 per month as rent.

(f) Ramlal received Rs. 1,50,000 as gratuity. He is not covered by the payment

of Gratuity Act.1972.

(g) He received Rs. 1,60,000 for encashment of leave, being 10 months leave not

availed of.

(h) In addition to the above he is provided with the other benefits and facilities

such as

(i) Free gas and water for his domestic use Rs. 4,000

(ii) A domestic servant ( Salary paid by the employer ) 3,500

(iii) Free lunch outside office Rs.5,000.

(iv) Education allowance of Rs. 6,000.

Compute Mr. Ramlals Income for the assessment year 2004-2005.

Solution: (Kindly beware of the dates in such questions. Given data pertains to

Calendar Year, where as IT Act mandates accounting on only Financial Year basis ie01 Apr to 31 Mar. Therefore all income/expenditure from 01 Jan to 31 Mar 2003 have to be

disregarded in calculation).

Assessment Year - 2004-05Name - Mr Ramlal

Computation of Income

Salary (Apr 03-Dec 03) = Rs 8000 x 9 months 72000

House Rent Allowance = Rs 3000 x 9 months 27000

Less: Exempted Amount (Refer Note 1 for calculations) 27000 NIL

Medical Expenses Reimbursement 21000

Less: Exempt amount as per IT Act 15000 6000

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J amna l a l B a j a j I n s t it u t e o f Mgm t S t ud i e s


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Car Perquisites = 1200 PM x 9 months 10800

Add: Drivers salary valuation 600 x 9 months 5400 16200

Gratuity (Refer Note 3 for calculation) 30000

Leave Salary (Refer Note 4 for calculation) 80000

Other Perquisites

(a) Free Gas and Water 4000(b) Domestic Servant 3500

(c) Lunch Outside office premises 5000

(d) Education Allowance 6000

Less: Exempt = 2 (100 x 9) for 2 children 1800 4200

Income From Salary 220900

NOTES:

Note 1: House Rent Allowance Calculation

(a) 50% of Salary = x 8000 = 4000

(b) Actual HRA received 3000(c) Rent Paid minus 10% of Salary = 4000 800= 3200

Least of the above three amounts eligible for tax exemption. So, Rs 3000 PM is exempted.

Note 2: Recognised Provident Fund

Employer Contribution = 12% of Salary. This is the maximum Tax Free employerscontribution permitted by the Act. So, it is fully exempted.

Note 3: Gratuity

(a) Admissible gratuity by law

= month salary x years of service = 4000 x 30= 120000

(b) Specified Amount by Central Govt 350000(c) Actual Gratuity received 150000

Least of the above 3 amounts is the tax exempted gratuity amount = 120000

Balance amount = 150000 -120000 = 30000 is taxable

Note 4: Leave Encashment

(a) Entitlement as per law = Max 30 days accumulation per year of service

= 8000 x 30 years 240000(b) 10 months salary at average rate = 8000 x 10 = 80000

(c) Max Amount specified by Central Govt = 300000

(d) Actual amount received by Ram Lal 160000

Least of the above four amounts is tax exempted amount = 80000Balance amount = 160000 80000 = 80000 is taxable.

Q. No.2 . Following is the Profit and Loss account of SS. Ltd. For the year ended

31-03-2004.


J amna l a l B a j a j I n s t it u t e o f M gmt S t ud i e s


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Particulars Rs. Particulars Rs.

To Opening Stock

Finished goods 5,00,000Work-in-progress 1,00,000

To Raw material consumedTo Salaries, Wages and bonus

To Power and fuel

To StoresTo Administrative expenses

To sales expenses

To Depreciation

To Interest to:Supplier for late payment

Unsecured lenders

Bank

DebenturesFinancial Institutions

To Provision for income taxTo Transfer to:

General reserve

Debenture redemptionTo Interim dividend

To Proposed dividend

To Balance C/fd

6,00,000

44,00,00016,00,000

4,00,000

10,00,0005,00,000

10,00,000

15,00,000

1,00,000

4,00,000

2,00,000

3,00,0005,00,000

25,00,000

30,00,000

15,00,00010,00,000

15,00,000

5,00,000

2,25,00,000

By Sales

By CommissionBy Excess provision no

Longer needed:

For income taxFor expenses

By Closing Stock:

Finished goodsWork-in-progress

1,80,00,000

30,00,000

5,00,0002,00,000

7,00,0001,00,000

_________

2,25,00,000

You are informed that (a) Sales expenses included Rs. 50,000 being entertainment expenses.

(b) Money borrowed through debentures was used for new plant and machinery

costing Rs. 30,00,000.

(c) Depreciation allowable as per Income Tax rule is Rs. 25,00,000

(d) Administrative expenses include Rs. 20,000 paid for carrying on scientificresearch

(e) Out of interest debited to Profit and Loss account the following is unpaid:

(i) To suppliers for late payment Rs. 10,000

(ii) To financial institutes Rs. 50,000

The above amounts were unpaid till 31 October 2004, the due date for filing

the return of income for SS ltd.

Shri Jash, The Managing Director asks you to compute profits and gains of business for

the assessment year 2004-2005. (20)

Solution: Assessment Year 2004-05




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Income from Business/Profession

Net Profit as per Profit and Loss Statement (Balance C/F) 500000

Add: Inadmissible Items

Depreciation charged off 1500000

Interest unpaid to FI (U/s 43 B)(Note 3) 50000Provision for Income Tax 2500000

Transfer to Reserves (3000000 + 1500000) 4500000

Interim Dividend 1000000

Proposed Dividend 1500000 11050000

11550000

Less: Admissible Expenses

Depreciation as allowed by IT Rules 2500000

Weighted Deduction for Scientific Research 5000

Excess Provision (500000 + 200000) 700000 3205000

Total Taxable Income 8345000

NOTES

Note 1: Weighted deduction towards scientific research = 125%

= 20000 x 125% = 25000Balance amount admissible = 25000 20000 = 5000

Note 2: Entertainment expenditure are considered as Business Expenses and therefore fullyexempt from tax.

Note 3: Owings to Financial Institutions/Duty payment to Govt, etc are not allowed on

accrual basis. These are admissible only on payment basis.

Note 4: Interest on debentures is considered as revenue expense since date of expense vis avis date of production is not given in the question paper. Thus capitalization of

expense for pre-production period is not possible.

Note 5: Dividend is not allowed as business expenses. Transfer to reserves is also notallowed as an expenses. Any provisions are also not allowed. Income Tax payment is

specifically disallowed as business expense.




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Q. No.3 . Write Short notes on (any three) (5 X 3 = 15)

(a) Exempt Income

(b) Expenditure on Scientific Research

(c) Deduction of Export profits

(d) Speculation losses

(e) Entertainment allowance

Ans:

(a) Exempt Income: Income Tax Act exempts certain incomes from levy of income tax.

Most of these incomes are listed under Chapter VI A. Following are some of them:

(i) Agricultural Income: Entire agricultural Income is exempt fromtax. However, if the assessee has other incomes also, agricultural income is to

be accounted while calculating the tax liability. It means that in case of

agricultural income together with other incomes, other incomes will moveinto the higher tax brackets.

(ii) Payment from HUF at the time of Partition of HUF: Since HUF

property is a shared property of all members, its division is only re-

distribution of assets among the existing owners and not an income in thehands of the assessees. Thus, it is exempt from levy of income tax.

(iii) Share Profit of a Partnership Firm: Share of profit from a

Partnership Firm in the hands of a partner is nothing but income from

business and profession on which tax has already been paid. Further taxwould amount to double taxation. Thus it is exempt from tax.

(iv) House Rent Allowance: IT Act allows HRA as a tax free allowance

with certain restriction imposed on maximum amount payable tax free based

on city criteria, basic salary, etc.

(v) Leave Salary: Leave salary when paid as the terminal benefit isallowed as tax free payment with some limitations imposed on the maximum

Tax free amount.

(vi) Provident Fund Contribution by Employer/Interest Accrued onPF Deposits: These payments are allowed as tax free.

(b) Expenditure on Scientific Research: Act provides for weighted deductionfor investments made in scientific research.

Expenditure on In-House Research 150%Sponsorship to IIT or other Govt Laboratories 125%.

(c) Deduction for Export Profits: From current assessment year, old section on

export profits has been deleted. However, following sections are still available forclaiming exemption of export income: -

Sec 10 A If a company is in Free Trade Zone Income is exempt from

tax for 10 years.




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Sec 10 AA Special provisions in respect of newly established Units in

Special Economic Zones. 100 % profit exempted for 5 years and50 % profits exempted for next 5 years

Sec 10 B Income from 100% Export Oriented Units is exempted from

tax for 10 years irrespective of location of factory.

Sec 10 BA Special provisions in respect of export of certain articles orthings. 100% deduction allowed.

(d) Speculation Losses:

(i) Speculation Losses can be set off against profits from speculation businesses

only and no other businesses.(ii) Speculation losses can be carried forward up to next 4 years for setting off

against gains from speculation business in future.

(e) Entertainment Allowance: Entertainment allowance is allowed only to Govt

Servants to meet the hospitality expenses on official visitors. It is a flat allowance with no

strings of actual expenditure incurred. It is allowed as least of the following:(i) 20% of the basic salary

(ii) Rs 5000/-

(iii) Actual amount received as Entertainment allowance.

Note: This benefit is not allowed to private sector salaried persons.

Q. No. 4 (a) How will you determine the income from house property under the

Income Tax Act? (7)

Ans: Method to Compute Income from House Property.Step 1 : Compute Gross Annual Value of the House. Find out Expected Rent by

comparing Municipal Valuation, Fair Rent and Standard Rent. Higher of Municipal

Valuation and Fair Rent is to be taken provided it does not exceed the Standard Rent. Elsetake Standard Rent.

Step 2: Compare the expected rent with actual rent received/receivable. Whichever is

higher, will be selected as Gross Annual Value.

Note: Rent received/ receivable does not include rent of the period for which the property

remains vacant and unrealized rent.

Chart to Compute Gross Annual ValueMunicipal Value

V/s Higher of the two

Fair Rent V/s Lesser of the two

Standard Rent V/s Higher of the twoActual Rent

Step 3. Put various values in table below and find the Income from the House

Property.




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1. Gross Annual Value

2. Less : Municipal Taxes

3. Net Annual Value

4. Less: Deductions U/S 24

(a) Standard Deduction @ 30% Net Annual Value

(b) Interest on Borrowed Capital

5. Income from House Property

Note: In case of Self Occupied Property-

(a) Gross annual value is NIL.

(b) No Standard Deduction is allowed.

(c) Deduction on account of Interest on Borrowed Capital is limited to Rs 150000

per year only.

(d) No other deductions like insurance cost, water and electricity charge,

collection charges are allowed.

Q. No. 4 (b) Discuss briefly the specific deductions allowed while computing incomefrom House property. (8)

Ans. In case of House Property only two deductions are allowed:

(a) Standard Deduction

(b) Interest on borrowed Capital

No other deductions on any account, whatsoever, like insurance cost, water and

electricity charge, collection charges, maintenance charges, etc, are allowed.

Standard Deduction: Standard Deduction @ 30% of Net Annual Value is allowedin case of Let Out Property only. It is not allowed in case of Self Occupied property.

Interest on Borrowed Capital: Interest on capital borrowed only from Banks andFinancial Institutions (not from friends and relatives and private financiers) is

allowed as deduction on accruedbasis (payment may or not have been made). While

there is no limit on amount of interest in case of Let Out Property, there is a limit ofRs 150000 in case of Self Occupied House Property financed post 01 Apr 1999.




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Q. No.5 . What are the different categories of persons according to their legal

status? Give an illustration of each. (15)

Ans: There are 7 categories of Persons defined in the IT Act. This definition is inclusive

and therefore further additions at the discretion of IT officer are possible.

(a) An Individual (defined as a natural person living human being) Say aGovt Servant, a Businessman. A self employed person

(b) A Hindu Undivided Family (HUF) If inherited property is not divided

among claimants and put in a separate pool with joint ownership of pool, such

an arrangement is called HUF. Senior most among the owners of jointproperty is called Karta.

(c) A company Tata, Reliance, Sahara

(d) A Firm a partnership firm like Ram Lal Chhagan Lal Enterprises having

two or more partners in business.

(e) An association of person or a body of individuals, whether incorporated ornot. Like Housing Societies.

(f) A local authority Municipal Corporation of Mumbai

(g) Every artificial judicial person not falling within any of the preceding

categories. Like Thirumala Devsthanam Trust.

Q. No.6 (a) Briefly discuss any 5 incomes, which are exempt under section 10 of IncomeTax Act. (8)

Ans: Exempted incomes are listed under Chapter VI A. Some of these have been discussedin Question 3 (a) above.

Q. No.6 (b) What do you mean by depreciation under Income Tax Act. Briefly explain the

calculation of depreciation for Income Tax Act. (7)

Ans. Capital Expenses are not allowed to be charged off as business expense in the year of

expenditure. Instead, capital investments are allowed to be charged off gradually as businessexpenses in the form of Depreciation at laid down WDV rates.

Conditions for Claiming Depreciation U/S 32

(a) Asset must be owned by assessee

(b) It must be used for the purpose of business/profession

(c) It should be used during the relevant previous year

(d) Depreciation is available on tangible as well as intangible assets.

Other Salient Points




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(a) Registered ownership is not necessary.

(b) If an asset is used for less than 180 days (i.e. purchased after 02 Oct of theprevious year), only 50% depreciation is allowed.

Calculation of Depreciation: Depreciation is calculated on the basis on Block of Assets.

Different item have different rates of depreciation allowed by the IT Act. A group of assetsallowed same rate of depreciation is called Block of Assets. In case of Income Tax,depreciation is calculated on WDV basis and not SLM basis.

Different Situations to Compute Depreciation

(a) When the Written Down Value of a Block is Reduced to Zero:Depreciation is allowed on cumulative WDV of assets in a block. In case the

WDV of any block falls to Zero or negative due to say spectacular profits onsale of any old asset, no depreciation would be admissible for that block of

asset even though other assets with individual WDV are still there. Stated in

other words no depreciation is admissible if net WDV of a particular block of

assets is reduced to Zero, though the block of assets does not cease to exist.(b) If the Block of Assets Ceases to Exist: If a block of assets

ceases to exist i.e. If all the assets of the block have been transferred and the

block of assets is empty on the last day of the previous year, no depreciation

is admissible in such case.

Q. No.7(a) Enumerate the provisions of set-off and carry forward losses as

contemplated under the Income Tax Act in respect of different types of business

activities. (10)

Ans. Many Person have more than one source under a head of income or even more than

one head of income. While some sources and heads may have positive income, there could

be some heads or sources where there could be loss as well. There are limitations placed onintra-head and even intra-source adjustments of profits and loss. The process of setting off of

losses and their carry forward may be covered in the following steps: -

Step 1: Inter-source adjustment under the same head of income.

Step 2: Inter-head adjustment in the same Assessment Year. Step 2 is applied only if

a loss cannot be set off under Step 1.

Step 3: Carry forward of loss. Step 3 is applied only if a loss can not be set off understeps 1 and 2.

Inter-Source Adjustment: If the net result for any Assessment Year in respect of any

source, under any head of income, is a loss, the assessee is entitled to have the amount ofsuch loss SET OFF against his income from any other source under the same head of

income for the same Assessment Year.

Exceptions:




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(a) Loss from Speculation Business: Set off allowed from gain from

speculation businesses only.

(b) Long Term Capital Loss: Set off allowed from Long Term Capital Gain

only.

(c) Loss from Activity of Owning and Maintaining Race Horses: Set offallowed from profits of same business only.

(d) Loss from Business: Can not be set off against income under the headSalaries.

(d) Loss from Lotteries, Cross Word Puzzles, Etc.: No set off of loss is

allowed.

Other than above 4 cases, any other loss can be set off against any other income within the

same head of income.

Inter - Head Adjustment: When the net result of computation made for any Assessment

Year in respect of any head of income is a loss, such loss can be set off against the incomefrom other heads with the exception of heads noted above.

In case the loss can not be adjusted in the same year, CARRY FORWARD OF LOSSESis allowed to be set off against profits of subsequent years.

(a) Loss from Let Out House Property in 8 subsequent years against gains from

House property only

(b) Loss from Self Occupied Property From any head

(c) Pre construction period interest 5 years in equal instalments

(d) Loss from Business/Professions 8 years against gains from business profits(e) Loss from Speculation business 4 years against gains from same business

(f) Loss from Capital transfer 8 years against Capital gains only

Q. No.7(b) Discuss the scope of the head Income from other Sources and explain

the deductions available under the head. (5)

Ans: Income from Other Sources is the last and residual head of income and covered

under Section 56. Any income which does not specifically fall under any of the other four

heads of income (Viz Salary, Income from House Property, Profits and Gains from Business

or Profession or Capital Gains) is to be computed and brought to charge under Section 56

under the head Income From Other Sources. Although the list of such incomes is very

long, following 8 incomes are always charged under this head: -

(a) Dividend

(b) Winnings from lotteries, races gambling or betting etc.




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(c) Interest on deposits/securities

(d) Any sum of money exceeding Rs 25000 is received without any considering

(Gift) by Individual or HUF after 31 Aug 04.

(e) Income from machinery plant or furniture let on hire

(f) Income from letting of plant, machinery, furniture etc along with the buildingand letting of building is inseparable from plant/machinery etc.

(g) Sum received by employer from his employees as contribution towards any

Staff Welfare Scheme

(h) Any sum received under a Keyman insurance policy including the bonus if

not taxed as salary or business income.

Deductions from Income from Other Sources (Section 57):

Only following deductions are available: -

(a) Expenses for the purpose of realizing dividend/interest.

(b) Family pension:

(i) Rs.15000 or

(ii) 33.33% of such income,

whichever is lower

(c) From Income from machinery, plant or furniture let on hire: Repairs,

Insurance premium, and depreciation are deductible.

Q. No.8 (a) Explain Long Term Capital Gains. How do you calculate Long Term

Capital Gains? (8)

Ans: Long Term Capital Gains arise out of transfer of capital assets which have been

owned for 36 months or more. In case of share market instruments like shares, debentures,

Units of UTI, Mutual Funds, etc, qualifying holding duration is only 12 months. That is tosay: if a stock market instrument was held for 12 months or more prior to transfer, it is to be

computed under Long Term Capital Gains. Long Term Capital Assets are generally taxed at

lower rate. They also get the benefit of indexation which reduces the tax incidence further.

Method to Compute Long Term Capital Gain

Step Amount

1. Find out full value of sale/consideration xxxx

2. Deduct the following: -

(a) Expenditure incurred wholly and exclusively

in connection with such transfers xxxx




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(b) Indexed Cost of acquisition xxxx

(c) Indexed Cost of Improvement xxxx xxxx

Gross Capital Gain XXX

3. From the resulting sum, deduct various exemptionsprovided

by Sections 54, 54B, 54EC, 54AD, 54F, 54G xxxx4. The Balance amount is Long term Capital Gain XXX

Computation of Indexed Cost of Acquisition:

Fair market value as on 01 April 1981 or X Cost inflation index for the year in

Cost of acquisition whichever is more which the asset is transferred.

Cost inflation index for 1981-82

Q. No.8 (b) Briefly explain the deductions with respect to Long Term Capital Gains. (7)

Ans: Income Tax Act grants total or partial deduction of capital gains under sections 54,54 B, 54D, 54 EC, 54 ED, 54 F, 54 G and 54H.

Section 54: Capital Gains Arising From the Transfer of Residential House

Property: If such capital gains are reinvested in another house property

within a period starting 1 year before the gains to 3 years after the gains.

Section 54 B: Capital Gains from transfer of Agricultural land purpose are reinvestedin another agricultural land.

Section 54 D: Capital gains due to compulsory acquisition of land and building of

Industrial Undertaking.

Section 54 EC: Capital Gains on investment in certain bonds if it is reinvested areanotherspecifiedasset.

Section 54 ED: Capital Gains from investment in certain listed securities/units.

Section 54 F: Capital gains on transfer of a long term capital asset other than a

House Property, and amount must be invested in house property. When

the gains arising out of transfer of assets other than House Property are re-

invested in House Property, such amount is exempted from Capital Gains tax.

Section 54 G: Capital gains arising out of shifting of industrial undertaking fromurban area.

*********




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Year 2003

Q.1 . Write Short Notes on any of the FOUR: (4X5=20)

(a) Dividend received by individuals(b) Concept of income accrued or arising(c) Depreciation allowable u/s 32

(d) Payment/s made in cash

(e) Concept of indexed cost of acquisition(f) Capital Asset and Transfer

(g) Annual value

Ans: (a) Dividend Received by Individuals: Dividend income after 01 Jun 1997, with

the exception of FY 2002-03, is not taxable in the hands of the shareholder.

The company will pay dividend distribution tax on such dividends. It means

that dividend is exempt from taxation in the hands of the individual.

(b) Concept of Income Accrued or Arising: Concept of Accrual or Arising of

Income means right to receive the payment. Once the right to receive the

payment is established, like raising of invoice, or due date of payment in case

of time bound payments, income is considered as Accrued. It has norelation to actual receipt of such income. This concept is important because it

forms the basis of charge for majority of income.

(c) Depreciation Allowable under Section 32: Refer to Q. No.6 (b).

(d) Payment/s Made in Cash: Income Tax Act stipulates that all payments inexcess of Rs 20000 should be paid by cheque to the extent feasible. There is

no limit on number of such small payments. However, in case of payment incash exceeding Rs 20000, 25% of such payment would be disallowed as

business expenses. Which means that, against a business expense ofRs 1 lakh paid in cash, only Rs 75000 would be admissible as business

expense.

(e) Concept of Indexed Cost of Acquisition: The purchasing power of rupee

keeps falling due to inflation and consequently, the value of asset keepsappreciating in rupee terms. Such appreciation in rupee term is not a gain or

profit for the assessee and therefore not taxable. To offset such inflation

caused appreciation, and find net gain over and above the inflation, the govtprovides an inflation index for each year. This index is used to find the

inflation adjusted current cost of capital asset. This practice of indexation wasstarted from FY 1981-82, Assessment Year 1982-83. Therefore, all capitalassets purchased prior to 01 Apr 1981 are to be indexed on the market value

basis on that date or original cost, at the discretion of the assessee.

(f) Capital Asset and Transfer: These are the terminologies used with

reference to Income from Capital Gains. All assets which are purchased bya company to assist in business and not as stock in trade, are termed as




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capital assets. Therefore, a particular item say a Truck is capital asset for an

assessee in Transport businesses, but stock in trade for a company like Telcoor its dealer. However, such capital assets are also required to be disposed off

at various points of time. Such disposal transactions are technically called

Transfer. Since most capital assets enjoy benefit of liberal depreciation

rates, often the market or disposal value of the asset exceeds thedepreciated/residual/book value. Such gains when accrued are taxable subject

to certain exemptions and conditions.

(g) Annual Value: This terminology is used with reference to Income fromHouse Property. House property is assessed for its annual income generation

capacity by way of rent on the basis of Municipal valuation/Fair Rent/

Standard Rent. The rent so arrived at is called Expected Rent. Expected Rentis then compared with the actual rent received. Rent so finalized is called

Gross Annual Value. Municipal taxes are deducted from Gross Annual Value

to arrive at Net Annual Value.

Q.2 Win Win Ltd provides you with the following details to compute its income from

business for the Assessment year 2003-04: (20)

(a) Net Profit for the financial year 2002-03 amounted to

Rs.10,00,000/-

(b) Income Tax paid for the financial year 2002-03 amounted to

Rs.7,00,000/-

(c) Dividend Income received during the financial year 2002-03

amounted to Rs.2,00,000/-

(d) Depreciation allowable u/s 32, though provided in the profit andloss account amounted to Rs.4,50,000/- is Rs.3,00,000/- only.

(e) Amounts received not taxable under the Act not credited to P & L

A/c amounted to Rs.5,00,000/-

(f) Salary paid amounted to Rs.25,75,000/- was duly accounted before

arriving at the net profit of Rs.10,00,000/- for the financial year 2002-03.

(g) Discount paid amounted to Rs.2,00,000/- was duly accounted

during the financial year 2002-03 before arriving at the Net Profit

mentioned above.

(h) The disallowances u/s 43B amounted to Rs.4,50,000/- during thefinancial year 2001-02 subsequently duly paid.

Ans: Assessment Year - 2003-04

Net Profit as per Profit and Loss Statement 1000000

Add: Inadmissible Items




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Income Tax 700000

Depreciation (taken separately) 450000 1150000

2150000

Less: Dividend Income 200000

Depreciation Allowed by IT Act 300000

Expenses U/s 43 B 450000 9500001200000

NOTES

Note 1: Dividend income is considered business income from other sources.

Note 2: No treatment is required for serials e, f and g since these have already been taken

care of and therefore information is superfluous and unnecessary.

Q.3. Discuss any three sections under the Act which provide for exemption or

deduction in respect of export earnings. (15)

Ans. Refer to answer at Question 3(c) of 2004 Question Paper.

Q.4. Explain briefly the exemptions available u/s 10 with reference to any 5 items.

Ans. Incomes exempt under Section 10: -

(a) Agricultural Income. Agricultural income has been exempt from Income tax byan Act of Parliament.

(b) Leave Salary on termination /Retirement of job.

(c) Death cum retirement gratuity.

(d) Commuted Value of Pension.

(e) Leave travel concession/travel assistance on retirement

(f) Any sum received under a life insurance policy

(g) Workman Compensation on termination of job.

(h) Amount received as part of share on dissolution of HUF.

(i) Share of profits received by partners from a partnership firm. Since the profits

have already been taxed in the hand of the partnership firm and thereforetaxing it again would amount to double taxation.

(j) Any allowances or perquisites paid or allowed as such outside India by the

Government to a citizen of India for rendering service outside India;




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Q.5. Mr A receives Salary of Rs.6,00,000/- during the financial year 2002-03. He

claims the Standard Deduction amounting to Rs.20,000/- and profession tax of

Rs.3,000/-

Mr A also receives income from other sources consisting of dividend income and

income from bank deposits amounting to Rs.50,000/- and Rs.5,000/- respectively. He

also informs of claim u/s 88 amounting to Rs.10,000/-You are advised to compute the taxable income of Mr A. (15)

Ans. Accounting Year 2005-06

Income From Salary 600000

Less: Professional Tax (-) 3000

Income from Other Sources

Dividend 50000 6000

Less : Exemption 50000 NIL

Interest on bank deposits 5000

Gross Total Income 602000Less: Deduction under chapter VI A

U/s 80L 5000

Taxable Income 597000

Note 1. No Standard Deduction is allowed since total income is over Rs 500000.

Note 2. Dividend is tax free in the hands of share holder.

Q.6. (a) Distinguish between Taxable profit and Commercial profit (5)

Ans. Distinction between taxable profits and commercial profits arise because different setof rules followed by company law board as per which balance sheet is to be prepared andIncome Tax Act. Many business expenses which are disallowed by IT Act are allowed to be

charged off in balance sheet and vice versa. Take the case of expenditure on research which

is allowed on weighted deduction basis by Income Tax Act but not in Balance Sheet. Thus,Taxable profit is one which is calculated by applying IT Act regulations and used for levying

Income Tax. Commercial profit is one which is calculated by the rules of Company Law

Board and reflected in the balance sheet for projection to the stake holders.

Q.6. (b) Any three specific disallowances under the head Income from business

or profession (10)

Ans. Specific disallowances under the head Income from Business or Profession are

given by Sections 40, 40A and 43B. These are: -

(a) Interest, Royalty, /fees for technical services payable to a non resident(Sec 40(a)(i) if the amount is payable outside India or to a non resident or

foreign company within India if the tax is not deducted.

(b) Fringe Benefit tax [Sec 40(a)(ic)}




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(c) Income Tax [Sec 40(a)(ii)] Any sum paid as Income Tax is not deductible.

Similarly any interest penalty or fine levied by IT department for any delay orother infringement is also not deductible.

(d) Wealth Tax

(e) Salary Payable outside India without tax deduction.(f) Payments made to relatives if expenditure is considered to be xcessive or

unreasonable having regard to fair market value.

Q.7. (a) Explain the concept of capital and revenue expenditure. (5)

Ans. Capital Expenditure - Broadly speaking, expenditure on the acquisition of a fixed

asset or expenditure which extends the life or value of an existing fixed asset is called CapitalExpenditure or CAPEX. In other words, it is an expenditure that is recorded as an asset

because it is expected to benefit more than the current period or an expenditure intended to

benefit the future activities of a business, usually by adding to the assets of a business, or byimproving an existing asset.

An expenditure made for purchase of goods with useful lives of more than one year isclassified as CAPEX. Such expenditures are not deducted in the year they are paid, even if

they are paid in connection with a trade or business. In other words, they are capitalized and

generally may be depreciated or amortized.

Revenue Expenditure - The cost of resources consumed or used up in the process of

generating revenue are generally referred to as revenue expenses. In other words, it is an

expenditure that is expected to provide a benefit for only a specific accounting period.

Q.7. (b) Give five examples of expenditure incurred wholly and exclusively for the

purpose of business. (10)

Ans.

(i) Cost of Raw Material

(ii) Salary and perquisites paid to the employees

(iii) Commission paid to selling agents

(iv) Interest paid on finance raised from banks or other sources.

(v) Litigation expenses paid to protect trade or business

(vi) Royalty paid for using trade mark of another company

(vii) License fee for carrying on the trade.

(viii) Annual Listing Fee paid to Stock Exchanges

(ix) Stamp and registration charges for entering into any contract.

(x) Rent of the premises




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Q.8. Write Short Note on any three: (3X5=15)

(a) Agricultural Income

(b) AOP and BOI

(c) Mediclaim

(d) Speculation losses

(e) Stock options

Ans.

(a) Agricultural Income: Entire agricultural Income is exempt fromtax. However same is to be accounted while calculating the tax liability. It

means that in case of agricultural income together with other incomes, other

incomes will move into the higher tax brackets.

(b) AOP and BOI: AOP and BOI are abbreviations for Association ofPersons and Body of Individuals. The difference between the two lies in the

definition of person in the Income Tax. In the Income Tax Act, a Person is

defined as any entity, living or just legal, which earns income. Where as anyliving human being is defined as Individual. Thus, an Association of

Persons (AOP) is a heterogeneous group of any number of entities from the

list of 7 Persons as defined in the IT Act. A BOI will consist of onlynatural persons.

(c) Mediclaim : Medical premium payment (Mediclaim) is covered

under section 80D and deducted from gross total income. The maximum

amount of premium paid to be considered for deduction is Rs 10,000.However in the case of senior citizens, the maximum amount eligible for

deduction is Rs 15,000.

(d) Speculation Losses:

(i) Speculation Losses can be set off against profits from speculation

businesses only and no other businesses.

(ii) Speculation losses can be carried forward up to next 4 years forsetting off against gains from speculation business in future.

(e) Stock Options (ESOP): "Employees Stock Option Scheme"under which a company grants option to its employees to buy a specified

number of shares at a specified price during a specified period. In some cases

it is also termed as Employee Stock Ownership Plan" whereby anemployee of the company is given option to acquire shares of the company at

a pre-determined price after a certain period, directly or indirectly through atrust. Benefits under an ESOP are not taxable as a perquisite.


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