SOLVED QUESTION PAPER
Income tax (2016)
a) Write ‘True’ or ‘False’: 1×4=4
a) Income Tax is calculated on the basis of residential status of assessee. True
b) Salary is taxable on due basis or on receipt basis, whichever is earlier. True
c) House or property used by the political party is exempted from House Property Tax. True
d) An Income Tax Inspector is appointed by the Central Government. True
(b) Fill in the blanks: 1×4=4
a) According to Income-Tax Act, 1961, the previous year is that year in which year income is earned to be taxable in the next year.
b) Gross total income of an assessee consists of income from salaries, income from house property, profits and gains of business or professions, capital gains and from other sources
c) As per the Income Tax Act, 1961, agriculture income in India is exempted to tax.
d) Capital Gain arises from the transfer of any capital asset.
2. Write a short note on any four of the following:
As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise requires, the term “assessee” means a person by whom any tax or any other sum of money is payable under this Act, and includes-
(a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
(b) every person who is deemed to be an assessee under any provision of this Act;
(c) every person who is deemed to be an assessee in default under any provision of this Act.
b) Agricultural Income
In India, agricultural income refers to income earned or revenue derived from sources that include farming land, buildings on or identified with an agricultural land and commercial produce from a horticultural land. Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961. According to this Section, agricultural income generally means: (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). (d) Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.
Examples of Agricultural Income
The following are some of the examples of agricultural income:
- Income derived from sale of replanted trees.
- Income from sale of seeds.
- Rent received for agricultural land.
- Income from growing flowers and creepers.
- Profits received from a partner from a firm engaged in agricultural produce or activities.
- Interest on capital that a partner from a firm, engaged in agricultural operations, receives.
Person includes :
- an Individual;
- a Hindu Undivided Family (HUF) ;
- a Company;
- a Firm
- an association of persons or a body of individuals, whether incorporated or not;
- a local authority; and
- every artificial juridical person not falling within any of the preceding sub-clauses.
- Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons shall be deemed to be a person whether or not, such persons are formed or established or incorporated with the object of deriving profits or gains or income.
The word person is a very wide term and embraces in itself the following :
- Individual. It refers to a natural human being whether male or female, minor or major.
- Hindu Undivided Family. It is a relationship created due to operation of Hindu Law. The manager of HUF is called “Karta” and its members are called ‘Coparceners’.
- Company. It is an artificial person registered under Indian Companies Act 1956 or any other law.
- Firm. It is an entity which comes into existence as a result of partnership agreement between persons to share profits of the business carried on by all or any one of them. Though, a partnership firm does not have a separate legal entity, yet it has been regarded as a separate entity under Income Tax Act. Under Income Tax Act, 1961, a partnership firm can be of the following two types
- a firm which fulfil the conditions prescribed u/s 184.
- A firm which does not fulfil the conditions prescribed u/s 184.
e) Tax Evasion and Penalties
Income tax evasion is an crime and can attract severe penalties in India. With advancement in technology, the compliance with respect to income tax payment is being tracked more accurately by the Income Tax Department. Further, penalties for non-compliance has also been increased to widen the tax base and increase tax revenue. Hence, income tax compliance must be taken seriously by all individuals and entrepreneurs. In this article, we will throw light on the different penalties tax payer will have to pay under the income-tax act.
Failure to Pay Tax as per Self-Assessment
As per section 140 A (1) if the tax payer fails to pay either wholly or partly self-assessment tax or interest then the tax payer will be treated as a default person.
Failure to Pay Tax as per Demand Notice
If a demand notice is sent to the tax payer asking for payment of tax then the tax payer has to pay that amount in 30 days to the department and the person mentioned in the notice. Failure to make the payment will incur further penal provisions as well as the taxpayer will be treated as a default assesses for defaulting in the payment of tax.
Failure to Comply with Income Tax Notice
If the tax payer fails to comply with the notice issued under section 142(1) or 143(2) then the assessing officer can issue a notice to the tax payer asking (a) to file the return of income (b) ask the tax payer to furnish in writing all the details of assets and liabilities.
Q.N.3(a). from the following information of Mr. Ashok, compute his taxable income for the assessment year, 2015-16: 14
a) Basic Salary @Rs. 20,000 p.m.
b) Arrears of Salary Rs. 10,000.
c) Dearness allowance @ Rs. 8,000 p.m.
d) Employer is paying insurance premium of Rs. 20,000p.a. on his life.
e) Bonus Rs. 30,000.
f) Education allowance for his two children @ Rs. 600 p.m.
g) Cash gift Rs. 40,000.
h) City compensatory allowance @ Rs. 2,000 p.m.
i) Medical expenses paid by employer Rs 18,000.
j) He contributes 15% of his salary to a recognized provident fund and his employer also contributes the same.
k) He is provided with a moil phone, the bill of which is paid by the company Rs. 6000.
l) He is giving lunch allowance @ Rs. 100 per day 250 days during the previous year.
Ans: Computation of income under the salaries of Mr. Ashok for the AY 2015-2016.
Less: Exempted upto Rs. 100 per month per child for a maximum of 2
Less: Exempted upto
Less: Exempted upto 12% of salary
Less: Deduction u/s 16
Less: Deduction under sec. 80 C (Maximum deduction Rs. 1,50,000)
3.b) Explain how the following items are treated under Income Tax Act,1961
Tax treatment of gratuity :- For the purpose of exemption of gratuity under sec.10 (10) the employees are divided under three categories:
1. Any death cum retirement gratuity received by Central and State Govt. employees, Defence employees and employees in Local authority shall be exempt.
2. Any gratuity received by persons covered under the Payment of Gratuity Act, 1972shall be exempt subject to following limits:-
3. In case of any other employee, gratuity received shall be exempt, subject to the following exemptions
b) House rent allowance
Ans: Employees living in hired (rented) houses. Sometimes the employee does not provide rent free accommodation but instead makes a provision to pay some amount in cash, so that the employee may be compensated to some extent as far as rent is concerned. The amount of cash paid is known as House Rent Allowance. Out of the total H.R.A. received, an amount equal to the minimum of the following three items is exempted from tax u/s 10(13A) read with Rule 2A and balance, if any, be added in the salary of the employee for tax purpose.
The three items are:
Residential accommodation provided by employer can be calculated in the following two ways and categories.
a. For govt. employee: License fees fixed by government + 10% of cost of furniture or hire charges – amount recovered from employee.
b. For non- Government employee:
d)Encashment of earned level
Leave encashed during service: fully taxable in which it is encashed
2. Leave encashed at the time of retirement
For govt. employee: fully exempted
For other employees: exempted upto minimum of the following
Ø Notified limit Rs. 300000
Ø Average salary x 10 months
Ø Actual amount received
Ø Average salary x no. of months leave due
Average salary = salary (Same as PF) for 10 months including the month of retirement / 10
Leave due is to be calculated taking one month leave or actual entitlement whichever is less
4. (a) Mr. Bimal owns a residential house property. It has two equal residential units, Units-I and Unit-II write Unit-I is self-occupied by Mr. Bimal for his residential purpose, Unit-II is let out (rent being Rs. 6,000 per month, rent of two months could not be recovered). Municipal value of a property is Rs. 1,30,000, standard rent is Rs. 1,25,000 and fair rent is Rs. 1,40,000. Municipal tax is imposed @ 15%which is paid by Mr. Bimal. Other expenses for the previous year 2014-15 being repairs Rs. 800, insurance Rs. 1,500, income of Mr. Bimal for the assessment year 2015-16. 14
Ans: Computation of income from house property of Mr. Bimal for the assessment year 2015-16.
ii. How would you determine the annual value of let-out house and self-occupied house(as per Income Act,1961)
b) i. Annual value-
The term annual value is very important as calculation of income from property depends upon correctly annual value. It takes into consideration not only the rent received but also the expected rent a house can fetch under the given situation and only once but from year to year.
Annual value as under:
In case of a let out house properly, section 23(1) has defined this term as follows:
1. Where the house property or any part of it is let out, any sum of money received or receivable in the previous year or form year to year shall be treated as annual value.
2. When any house property is let out and the rent received or receivable is in excess of the sum referred above, the sum of money so received or receivable shall be treated as annual value.
3. Where a let out property remains vacant during the previous year or during any part of the previous year and due to vacancy the actual rent received or receivable is less than the sum of money referred above in point(1), the sum of money so received or receivable shall be treated as annual value.
ii) Annual Rental Value
The Annual Rental Value, or ARV, is the amount for which the space your business occupies will typically rent. The ARV does not necessarily equal the rent actually paid for the space; it is representative of prevailing rents for similar space in the rental market.
The ARV is equal to the net rent per square foot (derived from market transactions) plus the costs of comfortable occupancy, multiplied by the square foot area of the premises occupied. Occupancy costs include the estimated cost of providing heat and other services necessary for the comfortable use or occupancy of the premises.
Determination of Annual value
The annual value of house property can be determined in following manner in different type of situations. These situations is :
(a)If rent actually received or receivable is more than ERV;
(b)If rent actually received or receivable is less than ERV.
3. House property is let out and there is unrealised rent:
(a)If rent actually received or receivable is more than ERV;
(b)If rent actually received or receivable is less than ERV;
4. House property is let out, there is vacancy also and there is unrealised rent.
5. House property is let out for a party of the year because it is either purchased or constructed during the previous year.
5a) What do you mean by ‘Tax Holiday’ in a trade zone? Write a note on industry which are under the previous of Tax Holiday Scheme in the North-Eastern Region. 5+9= 14
Tax holiday is a government incentive program that offers a tax reduction or elimination to businesses. Tax holidays are often used to reduce sales taxes by local governments, but they are also commonly used by governments in developing countries to help stimulate foreign investment.
“Tax holiday” for industrial units established in Special Economic Zones and export-oriented undertakings:
Section 10A of the Income-tax Act relates to special provision in respect of newly established industrial undertakings in free trade zones, export processing zones, electronic hardware technology parks, software technology parks or special economic zones notified by the Central Government. The section exempts the profits and gains of such undertakings derived from the export of articles or things or computer software.
(1) Assessees who are eligible to claim exemption
The benefit of exemption under this section is available to all categories of assessees who derive any profits or gains from an undertaking engaged in export of articles or things or computer software. The profits and gains derived from on-site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.
(2) Conditions to be satisfied for claiming exemption
This section applies to any undertaking which fulfills the following conditions:
(i) It has begun manufacture or production (include the cutting and polishing of precious and semi-precious stones) of articles, things or computer software during the previous year relevant to the:
(a) A.Y.1981-82 or thereafter in any FTZ; or
(b) A.Y.1994-95 or thereafter in any electronic hardware technology park (EHTP) or software technology park (STP); or
(c) A.Y.2001-2002 or thereafter in any SEZ.
(ii) It is not formed by the splitting up, or reconstruction, of a business already in existence. However, this condition shall not apply to an undertaking which is formed as a result of re-establishment, reconstruction or revival of the business of any undertaking falling under section 33B.
(iii) It is not formed by the transfer of machinery or plant previously used for any purpose. For the purposes of this clause, any machinery or plant used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled:
(a) Such machinery or plant was not, at any time previous to the date of installation by the assessee, used in India;
(b) Such machinery or plant is imported into India from any country outside India; and
(c) No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person prior to the date of installation of the machinery or plant by the assessee.
(d) Further, where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business, and the total value of the machinery, etc. transferred does not exceed 20% of the total value of the machinery and plant used for the business.
(iv) The sale proceeds of articles, things or computer software exported out of India must be brought into India in convertible foreign exchange within six months from the end of the previous year, or such further period as the competent authority may allow. For this purpose, “competent authority” means the RBI or such other authority as is authorized for regulating payments and dealings in foreign exchange. Further, where the sale proceeds are credited to a separate account maintained by the assessee with any bank outside India with the approval of the RBI, such sale proceeds shall be deemed to have been received in India.
(v) In order to claim deduction under this section, the assessee should furnish an audit report from a chartered accountant in Form No.56F, along with the return of income, certifying that the deduction has been correctly claimed. However, no deduction u/s 10A shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under section 139(1).
(b)What do you mean by Special Economic Zone? State 10 income which are not from a part of total income (as per Section 10 of the Income Tax Act ,1961).
Special Economic Zone.
Special Economic Zone Policy was first announced in April, 2000 with a view to attract foreign investment in India. Initially, SEZ functioned under the provisions of Foreign Trade Policy, however, gradually, SEZ Act and SEZ rules were formed and made effective from the year 2006. Income tax benefit or Section 10AA deduction is available to SEZ and the provisions for the same are contained under section 10AA of the Income Tax Act. Present article highlights various conditions for claiming the deduction, amount of income tax benefit/deduction and other applicable provisions.
Eligibility for Section 10AA Deduction
1. Agriculture Income [Section 10(1)]
As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means:
2. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section 10(2)]
As per section 10(2), amount received out of family income, or in case of impartible estate, amount received out of income of family estate by any member of such HUF is exempt from tax.
As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the partner. Further, share of profit received by a partner of LLP from the LLP will be exempt from tax in the hands of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and remuneration received by the partner from the firm/LLP.
4. Interest paid to Non-Resident [Section 10(4)(i)]
As per section 10(4)(i), in the case of a non-resident any income by way of interest on certain notified securities or bonds (including income by way of premium on the redemption of such bonds) is exempt from tax.
5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)]
Any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India shall be exempt from tax in case of an individual who is a person resident outside India or is a person who has been permitted by the RBI to maintain the aforesaid account. The person residing outside India shall have the same meaning as defined under Foreign Exchange Regulation Act, 1973, FEMA, 1999. This exemption shall not be available on any income by way of interest paid or credited on or after 1-4-2005.
6. Interest paid to a person of Indian Origin and who is Non-Resident [Section 10(4 B)]
This exemption shall be allowed only if the individual has subscribed to such certificates in Foreign Currency or other foreign exchange remitted from a country outside India in accordance with the provisions of the Foreign Exchange Act, 1973, FEMA, 1999 and any rules made there under.
7. Leave Travel Concession or Assistance (LTC/LTA) to an Indian Citizen Employee [Section 10(5)]
The employee is entitled to exemption under section 10(5) in respect of the value of travel concession or assistance received by or due to him from his employer or former employer for himself and his family, in connection with his proceeding—
8. Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB) and (6C)]
10. Perquisites and Allowances paid by Government to its Employees serving outside India [Section 10(7)]
Any allowances or perquisites paid or allowed, as such, outside India by the Government to a citizen of India, for rendering services outside India, are exempt.
The following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India:
6(a) What are the legal provisions to be made in computing taxable income from income from capital gain? How are taxes chargeable in short-term capital assets and long-term capital assets?
Capital gains shall be chargeable to tax if following conditions are satisfied:
a) There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;
b) It should be transferred by the taxpayer during the previous year;
c) There should be profits or gain as a result of transfer.
Capital Asset is defined to include:
a) Any kind of property held by an assessee, whether or not connected with business or profession of the assessee.
b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.
However, the term ‘capital asset’ shall exclude the following:
a) Stock-in-trade, consumable stores, raw materials held for the purpose of business or profession;
b) Movable property held for personal use of taxpayer or for any member of his family dependent upon him. However, jewellery, costly stones, and ornaments made of silver, gold, platinum or any other precious metal, archaeological collections, drawings, paintings, sculptures or any work of art shall be considered as capital asset even if used for personal purposes;
c) Specified Gold Bonds and Special Bearer Bonds;
d) Agricultural Land in India, not being a land situated:
e) Deposit certificates issued under the Gold Monetisation Scheme, 2015
Types of Capital Assets
1. Short-term capital asset An asset held for a period of 36 months or less is a short-term capital asset. The criteria of 36 months have been reduced to 24 months for immovable properties such as land, building and house property from FY 2017-18.
For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.
2. Long-term capital asset An asset that is held for more than 36 months is a long-term capital asset. The reduced period of the aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).
The assets are:
a. Equity or preference shares in a company listed on a recognized stock exchange in India
b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
c. Units of UTI, whether quoted or not
d. Units of equity oriented mutual fund, whether quoted or not
e. Zero coupon bonds, whether quoted or not
When the above-listed assets are held for a period of more than 12 months, they are considered as long-term capital asset.
In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.
Tax on Short-Term and Long-Term Capital Gains
6(b)Write short notes on: 3.5 X 4=14
Apart from income that cannot be classified under any other heads, there are certain types of incomes which are always taxed under income from other sources. Such incomes are as under:
b)Deemed income and Deemed ownership.
As per sec 59 of Income Tax Act where assessee had claimed any Deduction or allowance in any previous years but in current financial year Asseessee Received any amount of allowance or Deduction shall be deemed to be Income of Asseessee under Head Income from Other Sources in Current Financial Year.
Deemed Income for Non Satisfactory Explanation for Cash Credit
As per Sec 68 of Income Tax Act where any amount credited in the books of accounts of Asseessee for any previous years and Asseessee unable justify such transactions with proper explanation to assessing officer shall be deemed be Income of Asseessee under Head Income from Other Sources in Current Financial Year.
Deemed Income on Basis of Purchase of Shares from Unexplained Source of Fund
As per sec 68 of Income Tax Act where any Company other than Company in which Public is Interested credit any sum of money against Share Application Money or Share Capital or Securities Premium or any other etc.
A deemed owner is an owner by implication, although he may not be the owner in the real sense of the word. However, such a person is treated as an owner and is liable to tax in the same manner any owner. Specific provisions have been made under the Income Tax Act that deal with tax on income from a residential property.
The property should be a building or land adjacent to one The assessee must own the property The property must not be used for the purpose of business or profession of the assessee. It must be only rented out so as to derive rental income.
c. Tax deducted at source.
TDS stands for tax deducted at source. As per the Income Tax Act, any company or person making a payment is required to deduct tax at source if the payment exceeds certain threshold limits. TDS has to be deducted at the rates prescribed by the tax department.
The company or person that makes the payment after deducting TDS is called a deductor and the company or person receiving the payment is called the deductee. It is the deductor’s responsibility to deduct TDS before making the payment and deposit the same with the government. TDS is deducted irrespective of the mode of payment–cash, cheque or credit–and is linked to the PAN of the deductor and deducted.
TDS is deducted on the following types of payments:
The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963. The officials of the Board in their ex-officio capacity also function as a Division of the Ministry dealing with matters relating to levy and collection of direct taxes.
The Central Board of Revenue as the apex body of the Department, charged with the administration of taxes, came into existence as a result of the Central Board of Revenue Act, 1924. Initially the Board was in charge of both direct and indirect taxes. However, when the administration of taxes became too unwieldy for one Board to handle, the Board was split up into two, namely the Central Board of Direct Taxes and Central Board of Excise and Customs with effect from 1.1.1964. This bifurcation was brought about by constitution of two Boards u/s 3 of the Central Board of Revenue Act, 1963.
The Central Board of Direct Taxes consists of a Chairman and following six Members: –