2017 – SOLVED QUESTION PAPER
INCOME TAX (New Course)
1.a) Write ‘True’ of ‘False’: 1×4=4
a) Body of individuals should consist of individuals only. True
b) A resident in India cannot become resident in any other country for the same assessment year. False
c) Casual income received by the assessee is fully exempt. False
d) Municipal tax due is allowed as deduction for computation of income from house property. False
(b) Fill in the blanks: 1×4=4
a) The status of Reserve Bank of India as a person is ROR as per the Income-tax Act.
b) Income which accrues or arises in London from a business controlled from India is taxable in the case of Resident (Ordinarily and not-ordinarily).
c) An income under the head capital gain to a trade union is taxable.
d) Employer-employee relationship is necessary to term any receipt as salary.
2. Write short notes on any four of the following: 4 X 4=16
a) Previous year.
Previous year” defined
For the purposes of this Act, “previous year” means—
(a) the financial year immediately preceding the assessment year; or
(b) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date; or
(c) in the case of any person or business or class of persons or business not falling within clause (a) or clause (b), such period as may be determined by the Board or by any authority authorised by the Board in this behalf; or
(d) in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession and—
(i) ending with the said financial year, or
(ii) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, ending on that date, or
(iii) ending with the period, if any, determined under clause (c), as the case may be; or
Perquisites is defined as a benefit which one enjoys or is entitled to on account of one’s job or position in the dictionary. Hence, perquisites are added to the head Salaries while filing income tax return. Under section 17(2) of the Income Tax Act, perquisites include:
- Value of rent free accommodation provided to the assessee by his employer.
- Value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer.
- Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
- By a company to an employee who is a director thereof.
- By a company to an employee being a person having substantial interest in the company; or
- By any employer, including a company, to any employee whose income under the head ‘salaries’ excluding the value of all benefits or amenities not provided for by way of monetary payments exceeds fifty thousand rupees.
However, use of any vehicle provided for journey by the assessee from his residence to his office or other place of work and back to his residence shall not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate.
- Amount paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee.
- Amount paid to affect an assurance on the life of the assessee or to effect a contract for an annuity otherwise through a specified or approved fund.
- Value of employee stock options or sweat equity shares allotted or transferred free of cost or at concessional rate to the employee.
c) Annual value.
Annual value of property is the sum for which a property is reasonably expected to be let from year to year. Hence, annual value of property is a notional rent which could have been derived, had the property been let. Annual value of property plays an important role in
Factors Determining Annual Value of Property
The following four factors play an important role in determining the annual value of a property:
Actual Rent Received
Actual rent received or receivable is an important factor in determining the annual value of property. The actual rent received could be dependent on various considerations. If the owner of the property agrees to bear certain obligations like water or electricity bill, the rent will be calculated by reducing the rent received by the amount spent by the owner on meeting such obligatory expenses.
Municipal value is determined by the municipal authorities for levying municipal taxes on house property. Municipal authorities normally charge house tax/municipal taxes on the basis of annual letting value of such house property, which is determined by it based upon many considerations.
Fair rent is the rent which is a similar property can fetch in the same or similar locality if it is let for a year. Fair rent can be easily ascertained for apartments based on prevailing rentals.
Standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control Act, the owner cannot be expected to get a rent higher than the standard rent fixed under the Rent Control Act.
d) Capital assets.
Capital asset means property of any kind held by assessee, whether or not connected with his business or profession. It includes plant and machinery, building – whether business premises or residential, all assets of business, goodwill, patent rights etc. but does not include the following.
1. Stock-in-trade, consumable stores or raw materials held for the purpose of business or profession.
2. Personal movable properties viz. furniture, motor vehicles, refrigerators, musical instruments etc. held for personal use of the assessee or his family. But personal property does not include the following:
Ø Residential house property
Ø Archaeological collections, drawings, paintings, sculptures, or any work of art.
3. Rural Agricultural land:
Ø Land within the jurisdiction of a municipality or cantonment board having population of 10,000 or more or
Ø Land situated within 8 kilometers from the local limits.
4. 6½ per cent Gold bonds, 1977 or 7 per cent Gold bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government.
5. Gold Bonds issued by Government of India including gold deposit bonds issued under the gold deposit scheme, 1999 notified by the central Government.
6. Special Bearer Bonds, 1991 issued by the Government of India.
3. (a) “ The incidence of the income tax depends upon the residential status of an assessee.”Explain in detail this statement.
Same as 3(b) 2018
(b) “Income tax is charged on the income of the previous year.” Do you fully agree with this statement ? If not, what are the exceptions?
The general rule is that the income earned during the previous year is taxed in its relevant assessment year. But there are certain exceptions to this general rule. In these cases income is taxed in the same year in which it is earned. These exceptions are :
- Shipping business income of non-resident ship-owners [section 172]
In case a non- resident shipping company, which has no representative in India , earns income by carrying passengers, livestock, mail or goods loaded from any Indian port, such ship will not be allow to leave the port till the tax on such income has been paid or alternative arguments to pay tax are made. As such income is assessed to tax at current year’s rates.
71/2% of the amount received or amount receivable by the ship-owners or characters as fare\freight shall be demanded to be the income accruing in India on account of such carriage.
- In case of persons leaving India [Section 174]
In case I.T.O has the reason to believe that an individual will leave India with no intention to return during the current assessment year, the total income of such individual for the period between the expiry of last previous year and till the date of his departure, will be taxable in the current assessment year.
- Assessment of any association of persons , body of individuals or Artificial Juridical persons formed or established only for a limited period [Section 174A]
In case an Assessment Officer finds that any associations of persons, body of individuals or Artificial Juridical person has formed or established only for a limited period or for particular event and it is more likely to be dissolved or discontinued in the same year after the accomplishment of such event or purpose , the assessment of such person can be made in the same year.
- In case of persons who are likely to transfer their assets to avoid tax [Section 175]
If it appears to the I.T.O. that any persons likely to sell, transfer, dispose of a part with any of his assets with the intension to avoid payment of any tax liability, he may commence proceeding to assess the income for the period between the expiry of last previous year and the date of commencement of such proceedings.
- In case of discontinued business [Section 176]
In case any business or profession is discontinued during an assessment year, the income of the period from the expiry of last previous year till the date of discontinuation will be assessed to tax in the current assessment year.
Mr. X has the following Income during the previous year, 2015-16;
a) Basic salary Rs. 2,60,000.
b) Dearness allowance (forming part of salary) Rs. 40,000
c) Education allowance (for three children) Rs. 60,000
d) Rent paid for a residential house at Guwahati Rs 60,000
e) House rent allowance Rs. 48,000
f) He has been provided with motorcar of 1.8 litre engine capacity for personal use. All expenses of the motorcars are borne by the employer.
g) He contributes 14% of his salary to a recognized provident fund and his employer also contributes the same amount.
h) Interest credited to recognized provident fund @ 13 % amounted to Rs, 13,000
i) Medical expenses paid by his employer Rs. 25,000
j) Mr. X paid Rs 2,500 for his professional tax.
Compute the income from salary for the assessment year, 2016-17.
Computation of salary income for the assessment year 2018-19
Less: Exempted @ Rs. 100 per month per child for a maximum of two children
Less: Exempted upto minimum of the following three points
Less: Exempted @ 12 of salaries (salaries= 2,60,000+40,000)
Less: Exempted upto @ 9.5%
Less Deduction u/s 16
(iii) professional tax paid
Income from salary
4.(b) Explain the provisions of the Income-tax Act,1961 with regard to different kinds of provident funds. 14
Ans: Provident Funds:
To encourage savings for the social security of employees, the Government has set up various kinds of provident funds. The employee contributes a fixed percentage of his salary towards these funds and in many cases employer also contributes. The whole contribution along with interest is credited to employee’s account. If the employee dies, his heirs will get the full payment.
Provident Funds are of four kinds:
- Statutory provident fund or the fund to which the act of 1925 applies(S.P.F)
- Recognized provident fund (R.P.F.)
- Unrecognized provident fund(U.R.E.F.)
- Public provident fund(P.P.F.)
- Statutory provident fund:
Statutory provident fund is the oldest type of fund. It was started in the year 1925. This fund was started promoting savings amongst government employees.
When the employee retires or leaves the service and receives any amount from the accumulated balance to his credit in the statutory provident fund, the amount so received will not be included in employee’s total income[section 10(11)] being exempted income.
- Recognized Provident Fund
As the name suggested, it is a fund to which the commissioner of Income-tax has given the recognition as required under the Income-tax Act. Generally this fund is maintained by industrial undertakings, business houses, banks, etc.
The employer’s contribute over and above 12% of employee’s salary, will be include in employee’s salary income for tax purpose.
The employee’s contribution towards this fund will fully qualify for deduction u/s 80c.
Interest on provident Fund credit balance up to prescribed rate (9.5%) is exempted, but interest credited over and above such rate is deemed to be employee’s salary income and is include in salary income of that previous year.
- Unrecognized Provident Fund
It is provident fund which is not recognized by the commissioner of Income tax. The employee and employer both contribute towards this fund.
The employee’s contribution is added in this salary and he will not be allowed any deduction u/s 80c regarding this contribution while computing the total income of the employee.
The employee’s contribution and interest on the accumulated credit balance of the fund are not to be included in employee’s salary income from year to year.
- Public Provident Fund
So far all these funds were for the salaried people. On July 1,1968 a new fund know as public provident fund was started so that self-employed people may also enjoy the benefit of deduction u/s 80c. Self-employed people are doctors, lawyers, accountants, acts, traders, pensioners. This fund can suit all types of pockets and its working is also very simple. The interest people can open their account in State bank of India and its subsidiaries. The subscription can be between rs. 500 and rs. 1,50,000 in one year. At one time one can deposit in multiples of 50 and in one month only one deposit is possible and in the year minimum subscription should be in rs. 500 and maximum rs. 1,50,000.
5. (a) Mr. Y is the owner of the house property from the following particulars, compute the income from his house property for the assessment year, 2016-17. 14
Standard rent fixed by the court
The house was let out w.e.f. 01.04.2015 for Rs. 10,000 per month which was vacated by the tenant on 30.09.2015. From 01.10.2015, it was again given to rent @ Rs. 12,000 per month.
Municipal tax paid Rs. 20,000 for the house.
Municipal tax due for the house 20% of municipal valuation
Repairs electricity etc, paid Rs. 7,500.
Interest on money borrowed for construction of house property Rs. 30,000
Ans: Computation of income from house property of Mr. Y for the assessment year 2016-17 (previous year 2015-16).
Less: Deduction under section 24
Income/ (Loss from house property)
5.(b) State the provisions relating to computation of ‘Income from House Property’ under different categories of house property as per the Income-tax Act’1961 14
When an assessee earns any income from a house property, it is taxed under the head ‘Income from house property’ as per the Income Tax Act. Tax calculation on such income varies depending on the type of house property & several other factors.
Computation of Income from House Property
The table given below shows how you can calculate Income from House Property:
Gross Annual Value
Less: Municipal taxes
Net Annual Value
Less: Deductions u/s24
Taxable income from house property
Total of income thus obtained from all the house properties owned by you will be treated as income from house property and added to your total income. If the income under the head house property is negative (loss) you can offset that loss against your other taxable income including salary. But Budget 2017 has put a cap of Rs. 2 lakh on the house property loss which can be adjusted against income from other heads in a financial year. So it means that starting 2017-18 you will be able to offset maximum Rs. 2 lakh house property loss against your other income and balance can be carried forward to next 8 assessment years to be adjusted against income under the same head.
When a property is used for the purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income from business and profession’ head. Expenses on its repair and maintenance are allowed as business expenditure.
a. Self-Occupied House Property
A self-occupied house property is used for one’s own residential purposes. This may be occupied by the taxpayer’s family – parents and/or spouse and children. A vacant house property is considered as self-occupied for the purpose of Income Tax.
Prior to FY 2019-20, if more than one self-occupied house property is owned by the taxpayer, only one is considered and treated as a self-occupied property and the remaining are assumed to be let out. The choice of which property to choose as self-occupied is up to the taxpayer.
For the FY 2019-20 and onwards, the benefit of considering the houses as self-occupied has been extended to 2 houses. Now, a homeowner can claim his 2 properties as self-occupied and remaining house as let out for Income tax purposes.
b. Let Out House Property
A house property which is rented for the whole or a part of the year is considered a let out house property for income tax purposes
c. Inherited Property
An inherited property i.e. one bequeathed from parents, grandparents etc again, can either be a self occupied one or a let out one based on its usage as discussed above.
Steps to Calculate Income From House Property
Here is how you compute your income from a house property:
- Determine Gross Annual Value (GAV) of the property:
The gross annual value of a self-occupied house is zero. For a let out property, it is the rent collected for a house on rent.
- Reduce Property Tax:
Property tax, when paid, is allowed as a deduction from GAV of property.
- Determine Net Annual Value(NAV) :
Net Annual Value = Gross Annual Value – Property Tax
- Reduce 30% of NAV towards standard deduction:
30% on NAV is allowed as a deduction from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and repairs can be claimed as tax relief beyond the 30% cap under this section.
- Reduce home loan interest:
Deduction under Section 24 is also available for interest paid during the year on housing loan availed.
- Determine Income from house property:
The resulting value is your income from house property. This is taxed at the slab rate applicable to you.
- Loss from house property:
When you own a self occupied house, since its GAV is Nil, claiming the deduction on home loan interest will result in a loss from house property. This loss can be adjusted against income from other heads.
6.(a) What is capital gain? Differentiate between short-term capital gain and long-term capital gain. Explain the procedure of computation of income from capital gains.
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.
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.
Computation of Short Term Capital Gains on Sale of Property
Gains arising at the time of sale of Short Term Capital Asset shall be computed in the following manner:-
Full Value of Consideration
Expenditure incurred wholly and exclusively in connection with such Transfer/Sale
Cost of Acquisition
Cost of Improvement
Gross Short Term Capital Gain
Exemption (if any) available u/s 54B/54D/54G/54GA
Net Short Term Capital Gain on Sale of Property
Tax as per the Income Tax Slab Rates shall be payable on the Short Term Capital Gain computed above.
Computation of Long Term Capital Gain
Gains at the time of sale of Long Term Capital Asset shall be computed in the following manner:-
Full Value of Consideration
Expenditure incurred wholly and exclusively in connection with such Transfer/Sale
Indexed Cost of Acquisition
Indexed Cost of Improvement
Exemption (if any) available u/s 54/54B/54D/54EC/54ED/54F/54G
Net Long Term Capital Gain on Sale of Property
(b) State any five items of income included under the head ‘income from other sources’. State five items not deductible in computing taxable income under the head ‘Income for other sources’. State any four items deductible in computing taxable income under the head ‘Income from other sources’. 5+5+4=14
All those incomes which are not exempt and are to be taxed and are at the same time not covered in any of the four heads of income namely salary, house property, capital gains and business and profession is included in the head of income from other sources. The income included here is taxable on cash or mercantile basis whichever method assessee follows. There are certain incomes, which are specifically mentioned in section 56 of the income tax act to be included in the head of income from other sources, but there are various other incomes, which are not specified in section 56 of the income tax act but are still included in the income from other sources.
The following income shall be chargeable to income tax under the head “Income from other sources”namely: –
2.Any annuity due or commuted value of any annuity paid under section 280D.
3. Any winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.
4. Any sum, received by the assessee from his employees as contributions to any provident fund or Superannuation fund or any fund set up under the provisions of the Employees State Insurance Act, 1948 (34 of 1948), or any officer fund for the welfare of such employees, if such income is not chargeable to income-tax under the head “Profits and gains of business or profession”;
5. Income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income — tax under the head “Profits and gains of business or profession”;
Tax Deduction That Cannot Be Claimed Under the Head ‘Income from Other Sources’
The deductions that cannot be claimed during computation of ‘Income from other sources’ are:
- Personal expenses
- Amount mentioned as per Section 40A is not deductible
- Taxable amount paid under the category ’salaries’ and payable outside India taxes have not been paid or deducted at source
- Sum paid towards Wealth Tax that is not deductible
- Interest that can be charged outside India on which taxes have not been paid or deducted at source.
Deductions [Sec. 57]:
The following expenditures are allowed as deductions from income chargeable to tax under the head ‘Income from Other Sources’:
Nature of Income
Dividend or Interest on securities
Any reasonable sum paid by way of commission or remuneration to banker or any other person for purpose of realizing dividend (other than dividends referred to in section 115-O) or interest on securities
Employee’s contribution towards Provident Fund, Superannuation Fund, ESI Fund or any other fund setup for the welfare of such employees
If employees’ contribution is credited to their account in relevant fund on or before the due date
Rental income letting of plant, machinery, furniture or building
Rent, rates, taxes, repairs, insurance and depreciation etc.
1/3rd of family pension subject to maximum of Rs. 15,000.
Any other income
Any other expenditure (not being capital expenditure) expended wholly and exclusively for earning such income
Interest on compensation or enhanced compensation
50% of such interest (subject to certain conditions)
Income from activity of owning and maintaining race horses.
All expenditure relating to such activity.