Income Tax 2018 – SOLVED QUESTION PAPER – DIBRUGARH UNIVERSITY – Semester 6 – B.Com

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INCOME TAX
COMMERCE (General)

Dibrugarh University

Time: 3 hours

Full Marks: 80

Pass Marks: 24


1. (a) Fill in the blanks:¬†¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬†¬†1×4=4

1) Assessee means a person by whom
any tax or any other sum of money is payable under the Income-tax Act.

2) Agricultural income from land situated in India is fully exempted under Section 10 (1) of the Income-tax Act.
3) Statutory Provident Fund is the oldest type of fund.

4)¬†House Property Income = Annual Value of Building ‚Äď Specified Deductions u/s¬†24.


(b) Write True or False:¬†¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬† ¬†¬†1×4=4

1) Taxis levied on total income of assessee.                     False, Taxable income

2) The full form of EPZ is Export Promotion Zone.           False, Export Processing Zone   

3)House rent allowance is a fully taxable allowance.    False     

4) Actual rent is the rent which is actually received by the owner of the house from the
tenant.              True


2. Write short notes on (any four):¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†4×4=16

a)Assessment Year:

Ans: ‚ÄúAssessment year‚ÄĚ means the period of 12 months commencing on the 1st day of the April every year.

In India, the govt. maintains its accounts for a period of 12 months i.e. from 1st April to 31st March every year. As such it known as financial year. The income tax department has also selected same year for its assessment procedure.

The Assessment year is the financial year of the govt. of India during which income of a person relating to the relevant previous year is assessed to tax. Every person which income of a person the year relating of the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act. Files return of income by prescribed dates. These returns are processed by the income tax department officials and officers. This processing is called assessment. Under this income returned by the assessee is checked and verified.Tax is calculated and compared with the amount paid and assessment order is issued. The year in which of this process is undertaken is called assessment year.

 

b) Ordinary Resident.

Ans: To determine the residential status of an individual, section 6(1) prescribes two teats. An individual who fulfil any one of the following two tests is called Resident under the provision of this Act. These tests are:

If he is in India during the relevant previous year for a period amounting in all to 182 days or more.

Or

If he was is India for a period or periods amounting in all to 365 days or more during the four years preceding the relevant previous year and he was in India for a period or periods amounting in all to 60 days or more in that relevant previous year.

After fulfilling one of the above two tests, an individual become resident of India but to become an ordinary resident of India an individual has to fulfil both the following two conditions:

He has been resident of India in at least 2 previous years out of 10 previous years immediately prior to the previous year in question.

He has stayed in India for at least 730 days in 7 previous year immediately preceding the previous year in question.

This means that an individual will not become an ordinary resident of India by simply staying in India for a period of 182 days or more is a previous year. He will become ordinary resident only if he fulfil one of these two tests and was also fulfilling one of the tests in a least 2 previous years preceding the relevant previous years and did stay in India for at least 730 days in 7 previous years preceding the relevant previous year

While calculating number of days for stays in India, day of departure was not included. But now as per decision of Authority for Advance Rulings, both, day of departure from India and day of arrival in India are to be counted as stay in India.

c) 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

In order to claim deduction under section 10AA of the Income Tax Act, SEZ units are required to satisfy the following conditions:

Entrepreneur should be covered within the provisions of section 2 (j) of the Special Economic Zone Act, 2005;

SEZ unit should have commenced its manufacturing activity or provision of service, as the case may be, during the previous year relevant to any assessment year commencing on or after 1st April, 2006;

SEZ unit is not formed by any splitting up, or the reconstruction of the business that is already in existence.

SEZ unit is not formed by any transfer of plant or machinery, previously used for any purpose, to a new business.

Units who have already enjoyed benefit of deduction under section 10A of the Income Tax Act for a continuous period of 10 years are not eligible to claim deduction under section 10AA of the Act.

d) Education Allowance.

Ans: If any amount is given by employer to employee as education allowance for the education of own children in India, it shall be exempted upto Rs.100 p.a. per child for two children only.

Example. Mr. X is employed by an MNC and is paying him Rs.500 p.a. as children Education Allowance to all the three children who studying in a school at Bangalore.

Note. Exemption is allowed for any two children of the employee. The term ‚Äėchild‚Äô includes all the legal children including a step child and a legally adopted child but does not include grand children.

Exemption shall be allowed irrespective of the actual expenditure incurred by the employee on the education of the children.

In case employee is getting both education as well as hostel allowance; he is allowed separate exemption for education for education and hostel allowance but for only two children.s

e) Municipal Valuation.

Ans: The local authority makes a survey of all the properties that come under their survey, the value of the property is determined which is called Municipal Value. The amount of municipal tax to be levied is calculated bases on the municipal value of the property.

The Municipal Tax paid on a house property is allowed to be deducted from Gross Annual Value (GAV) of the House Property.

It is important to note that:

Deduction of Municipal Tax is allowed only on payment basis. It means that you would be allowed to claim municipal tax paid only after you have paid it to the local authority. If it has not been paid, it cannot be claimed.

Municipal Tax must be paid by the owner of the property and not the tenant of the property. If it is paid by the tenant, it cannot be claimed.


3. (a) Write a note on history of Income tax in India.                                        14

In India, the system of direct taxation as it is known today has been in force in one form or another even from ancient times. In this article, we are discussing how the Income Tax evolved over the time in India.

1860-¬†The Tax was¬†introduced for the first time by Sir James¬†Wilson. India‚Äôs First ‚ÄúUnion Budget‚ÄĚ Introduced by Pre-independence finance minister, James Wilson on 7 April, 1860. The Indian Income Tax Act of 1860 was enforced to meet the losses sustained by the government on account of the military mutiny of 1857. Income was divided into four schedules taxed separately:

(1) Income from landed property;

(2) Income from professions and trades;

(3) Income from Securities;

(4) Income from Salaries and pensions.

Time to time this act was replaced by several license taxes.

1886- Separate Income tax act was passed. This act remained in force up to, with various amendments from time to time. Under the Indian Income Tax Act of 1886, income was divided into four schedules taxed separately:

(1) Salaries, pensions or gratuities;

(2) Net profits of companies;

(3) Interests on the securities of the Government of India;

(4) Other sources of income.

1918- A new income tax was passed. The Indian Income Tax Act of 1918 repealed the Indian Income Tax Act of 1886 and introduced several important changes.

1922- Again it was replaced by another new act which was passed in 1922. The organizational history of the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. The Income Tax Act of 1922 remained in force until the year 1961.

The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent the evasion of tax

1961‚Äď In consultation with the Ministry of Law finally the Income Tax Act, 1961 was passed.¬†¬†The Income Tax Act 1961 has been brought into force with 1¬†April¬†1962.It¬†applies¬†to the whole of India (including Jammu and Kashmir).

Since 1962 several amendments of far-reaching nature have been made in the Income Tax Act by the Union Budget every year which also contains Finance Bill. After it is passed by both the houses of Parliament and receives the assent of the President of India, it becomes the Finance act.

At present, there are five heads of Income:

(1) Income from Salary;

(2) Income from House Property;

(3) Income from Profits and Gains of Business or Profession;

(4) Income from Capital Gains;

(5) Income from Other Sources.

or


(b) Mention the different categories of assessee according to their residential status. How would you determine the residential status of an individual and a firm?

Ans: The different categories of assessee according to their residential status are as follow:

Ordinary assessee. It includes

Any person against whom some proceedings under this Act are going on.

Any person who has sustained loss and has filed return of loss.

Any person by whom some amount of interest, tax or penalty is payable under this Act.

Any person who is entitled to refund of tax under this Act.

Representative assessee or deemed assessee.

A person may not be liable only for his own income or loss but also on the income or loss of other persons e.g. guardian of minor or lunatic , of a non- resident etc.

In case of a deceased who dies after writing his will the executors of the property of deceased are deemed as assesses.

In case a person dies intestate his eldest son or other legal heirs are deemed as assessee.

In case of a minor, lunatic or idiot having income taxable under income tax act, their guardian is deemed as assessee.

Assessee ‚Äďin- default

If he fails to deduct tax at source or deducts tax but does not deposit it is the treasury, he is known as assessee-in-default.

Residential Status of Individual

[Section 6]

There are two types of residents

Resident, it is further divided into resident and ordinary resident and resident, but not-ordinarily resident.

Non-resident.

Individual is Resident in India

[Section 6(a)]

An individual is said to be resident in India, if he satisfy any of the following two basic conditions

He is in India for a period of 182 days or more in the relevant previous year.

He has been in India for at least 365 days during the 4 years immediately preceding the previous year and is in India for at least 60 days during the previous year.

Exceptions to above Rule (b)

An individual, who is a citizen of India and leaves India in any previous year for purpose of employment or as a member of the crew of an Indian ship, shall be called resident only, when he satisfies the condition number (a) mentioned above i.e., condition number (b) is not applicable to him.

In case of an individual, who is a citizen of India, or is a person of Indian origin, who being outside India, come on a visit to India in any previous year, the condition number (b) mentioned above in his case shall not be applicable.

Individual is Resident and Ordinarily Resident in India

[ Section 6(6)(a)]

Individual to become ordinarily resident in India, he is to satisfy both the following additional conditions besides satisfying any one of the above mentioned basic condition (a) (b)

Additional Condition

He has been resident in India in at least 2 out of the 10 previous years preceding the relevant previous year.

He has been in least 730 days in all during the 7 previous years preceding the relevant previous year.

Individual is not Ordinarily Resident in India

[Section 6(6)(a)]

If an individual satisfies any one of the above basic condition (a)and (b), but does not satisfy the aforesaid two additional conditions, he is said to be ‚ÄėNot Ordinarily Resident‚Äô.

Individual is Non-resident

If an individual satisfies none of the aforesaid basic conditions (a) and (b) stated under Section 6(1), he is said to be non-resident. In this case, additional conditions are irrelevant.

Residential Status of a Hindu Undivided Family

[Section 6(2)]

A Hindu undivided Family (HUF)is either resident in India or non-resident in India. A resident Hindi Undivided Family (HUF) is either ordinarily resident or not ordinarily resident.

Resident

A Hindu undivided family is said to be resident in India , if control and management of its affairs is wholly or partly situated in India.

Non-resident

A Hindu undivided family is non-resident in India, if control and management of its affairs is wholly situated outside India.

In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta of the family during the previous years is not relevant.

Resident Hindu Undivided Family is Ordinarily Resident in India

A resident Hindu undivided family is ordinarily in India, if the karta or manager of the family (including successive Karta) satisfies the following 2 additional conditions as laid down by section 6(6)(b).

Additional Conditions

He has been resident in India (according to the rules applicable to an individual) in 2 out of the 10 previous years preceding the relevant previous year i.e., he fulfilled at least 1 of the basic conditions to become resident for at least 2 years.

He has been in India for at least 730 days in all during the 7 previous years preceding the relevant previous years.

 

4. (a) Explain in brief any fourteen incomes which are exempted u/s 10 of the Income-tax Act, 1961.                       14

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:

Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.

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.

Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.

 

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.
3.  Share of Income from the Firm [Section 10(2A)]

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)]

In case of an individual, being a citizen of India or a person of Indian origin, who is nonresident, any income from interest on such savings certificates issued by the Central Government, as Government may specify in this behalf by notification in the Official Gazette, shall be fully exempt. The exemption under this section shall not be allowed on bonds or securities issued on or after 1-6-2002.

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.

For this purpose, a person shall be deemed to be of Indian origin if he or either of parents or any of his grandparents, was born in India or in undivided India.

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‚ÄĒ

on leave to any place in India.

to any place in India after retirement from service or after the termination of his service.

8.    Tax paid by Government or Indian concern on Income of a Foreign Company [Section 10(6A), (6B), (6BB) and (6C)]

Where a foreign company renders technical services to Government of India or to a State Government or to an Indian enterprise and for such services a foreign company is paid income by way of royalty or fees.

Such fees or royalty is paid by an India concern in pursuance of an agreement entered into before 1-6-2002 and such agreement is approved by Government of India and it is in accordance with the Industrial Policy of the Government of India.

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:

Income should be chargeable under the head ‘Salaries’;

The payer should be Government of India;

The recipient should be an Indian citizen ‚ÄĒ whether Resident or Non-Resident;

The services should be rendered outside India.

11. Employees of Foreign Countries working in India under Cooperative Technical Assistance Programme [Section 10(8)]

The persons who are working in India under co-operative technical assistance programmes in accordance with an agreement entered into by the Central Government and the Government of a foreign State, the following incomes of such individuals shall be exempt provided the terms of agreements provide for such exemption

the remuneration received by him directly or indirectly from the Government of the foreign State for such duties rendered in India ; and

any other income of such individual which accrues or arises outside India and is not deemed to accrue or arise in India, in respect of which individual is required to pay any income or social security tax to the Government of that foreign State.

12. Income of a Consultant [Section 10(8A)]

Any remuneration or fee received by a consultant from an international organisation who derives its fund under technical assistance grant agreement between such organisation and the Foreign Government, and any other income accruing or arising to him outside India (which is not deemed to accrue or arise in India) and which is subject to income-tax or social security tax in foreign country, shall be fully exempted. The agreement of the service of consultant must be approved by the competent authority. 

13. Gratuity [Section 10(10)]

Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity received by an employee on his retirement is taxable under the head “Salary” whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head “Income from other sources”. However, in both the above cases, according to section 10(10) gratuity is exempt upto a certain limit. Therefore, in case gratuity is received by employee, salary would include only that part of the gratuity which is not exempt under section 10(10).

 


Or


(b) Enumerate the special provisions in respect of newly established units in Special Economic Zone as per the Income-tax Act, 1961.                                                            14

Ans: Special Economic Act 2005 has inserted special provisions in respect of newly established units in Special Economic Zones. These special provisions have been inserted w.e.f. 10-2-2006 and are as follow.

Exemption under this section shall be allowed to all units established in Special Economic Zones and which have started manufacturing or producing articles or things or computer Software w.e.f. 1-4-2005 and onwards.

Exemption under this section shall be allowed to all type of assesses, may be individuals firms, companies, etc.

Exemption under this section shall be allowed for 15 consecutive years as given below :

For first 5 assessment years 100% of profits from exports of goods or

articles manufacture in SEZ’S

For first 5 assessment years 50% of profit from exports.

For first 5 assessment years 50% of profit from exports provided such

Profits is credited to the special EconomicZones

Reinvestment Reserve Account.

Profit from exports= Profit of the year* Export Turnover
Total Turnover

The amount creditor of a Special Economic Zones Re-investment Reserve Account is required to be utilized to be or acquire and also put into use new plant and machinery within period of 3 years shall be continued from the end of the previous year in which reserve was created.

The amount of the reserve can be utilized for any purpose of the business of the assessee except for distribution of profit or declaration within the 3 years of period of 3 years.

In case the amount of the reserve is not utilized within 3 years, it will be taxable in 4th year. In case the amount of reserve is misutilised, it will be taxable in the year in which it is misutilised.

The assesse is required to submit the particulars of the new plant and machinery to the Assessing Officer along with the return of Income of that year.

The assesse must claim this exemption correctly and a report from a chartered Accountant is also to be submitted in the prescribed form certifying that the exemption has been correctly claimed.

In case unit was located in any Free Trade Zone or Export Processing Zone, the period of exemption shall be counted from the assessment year relevant to the previous year in which unit began to manufacture or produce goods or article in the Free Trade Zone or export Processing Zone. In case unit has already completed 10 consecutive years then no exemption shall be allowed under this section.

In case of amalgamation or demerger, the exemption will continue to be allowed to the amalgamated or resulting company but exemption shall be allowed only for the remaining years.

Losses under Business had or Capital loss relating to the assessment year 2006-2007 onwards are allowed to be C/F as provided under carry forward and set of losses.

In case assessee has claimed exemption under this section then no deduction shall be allowed u/s 80-I, 80-IA or 80-IB.

Q.N.9. Mr. X is an employee of Ranchi (population 15 lakhs) based on company.

He provides the following particulars of his salary income:

Basic salary – Rs. 12,000 per month.

Profit bonus – Rs 12,000.

Commission on turnover achieved by Mr. X ‚Äď Rs 42,000.

Entertainment allowance ‚Äď Rs. 2,000 per month.

Club facility – Rs. 1,800 per month.

Transport allowance – Rs. 1,800 per month.

Free use of car of more than 1.6 litre capacity for both personal and employment purpose; expenses are met by employer.

Rent-free house provided by employer; lease rent paid by employer ‚Äď Rs. 6,000 per month.

Free education facility for three children of the employee (bills issued in the name of employer ‚Äď Rs. 22,500.

Gas, water and electricity bills issued in the name of the employee but paid by employer ‚Äď Rs 16,800.

Compute income under the head salary for the Assessment year, 2017-18.

Particular

Rs.

Rs.

1.Salary

2. Profit Bonus

3. Commission

4. Entertainment Allowance

5. Club facility ‚Äď taxable

6. Transport Allowance

Less: Exempted upto Rs. 1,600 p.m

7. Car perquisite ‚Äď Big car @Rs. 2,400 p.m

8. Education facility for children

9. Gas, water and electricity bill paid by employer

10.Value of rent free house; 15% of employee’s salary i.e. Rs. 33,660

Or rent paid by employer Rs. 72,000, whichever is less

(salary for this purpose [1,44,000+12,000+42,000+24,000+2,400=2,24,000])

 

1,44,00

0

12,000

42,000

24,000

6,000

2,400

28,800

22,500

16,800

33,660

Gross salaries

Less: Deduction u/s 16

 

3,32,16

0

Nil

Income from Salaries

 

3,32,16

0


Or


(b) Explain in brief the following items as per the Income-tax Act, 1961:¬† ¬† ¬† ¬† ¬† ¬† ¬† 31/3×4=14

1)      Profits in lieu of salary.

2)      Recognized Provident Fund.

3)      Dearness allowance.

4)      Leave encashment

Ans:

Profits in lieu of salary.

Profits in lieu of salary‚ÄĚ includes‚ÄĒ

(i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;

(ii) any payment (other than any payment referred to in clause (10) [, clause (10A)] [, clause (10B)], clause (11), [clause (12) [, clause (13)] or clause (13A)] of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund, to the extent to which it does not consist of contributions by the assessee or  interest on such contributions or any sum received under a Keyman insurance :

2) Recognized Provident Fund

As the name suggests, it is a fund to which the commissioner of Income Tax has given the recognition as required under the Income Act. Generally this fund is maintained by industrial undertakings, business houses, banks, etc The employer’s contribution over and above 12% of employee’ salary, will be included in employee’s salary income for tax purposes. The employee’s contribution towards this fund will fully quality for deduction u/s 80C. Interest on provident Fund credit balance upon prescribed rate (9.5%) is exempted, but interest credited over and above such rate is deemed to be employee’s salary income and is included in salary income of that previous year.

policy including the sum allocated by way of bonus on such policy.

3)      Dearness allowance.

All public sector employers pay basic salaries to their employees according to the respective pay scale. Several other components are then calculated added in respect to the basic salary and are then added to it to calculate the take-home amount. One such important component is Dearness Allowance or DA.

Meaning

Dearness Allowance is paid by the government to its employees as well as a pensioner to offset the impact of inflation. The effective salary of government employees requires constant enhancement to help them cope up with the increasing prices.

Despite several measures by the government to control the rate of inflation, only partial success has been achieved because the prices move according to the market. It, therefore, becomes essential for the government to shield its employees from the adverse effects of inflation. As the impact of inflation varies according to the location of the employee, dearness allowance is calculated accordingly. Thus, DA varies from employee to employee based on their presence in the urban, semi-urban or rural sector.

4)      Leave encashment.

Every salaried person as per labour law is entitled to minimum number of paid leave every year. However, it is not necessary that an individual employee utilises all the leave he is entitled for in a year. In fact, most employers allow the employees an option of carrying forward such unutilised paid leaves. This would invariably leave the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company as the case may be. This compels the employer to compensate the unutilised paid leave of the employees. This concept is better known as leave encashment.

Leave encashment received during service

Accumulated leave can either be encashed during service or at the time of retirement or resignation. Any leave encashed during service is fully taxable and forms part of ‚Äėincome from Salary‚Äô.

Leave encashed at the time of retirement or resignation

Leave encashment received at the time of either retirement or resignation is either fully or partially exempt depending upon the category that an employee falls under. This has been elaborated further below:

Leave encashment received by Central or State Government employee at the time of  retirement or resignation is fully exempt

Leave encashment received by legal heirs of deceased employee is fully exempt

Leave encashment received by¬†Non-Government employee¬†is exempt based on the computation provided under Section 10(10AA)(ii) and balance amount if any is taxable as ‚Äėincome from salary

6. (a) Define annual value. How is it determined? What deductions are allowed from the annual value in computing taxable income from house property?                   2+7+5=14

Ans Definition of annual value:

The sum which for the property might reasonable be expected to let from year to year; or

Where the property or any part of the property is let and actual rent received or receivable by the owner in respect there of is in excess of the sum referred to in clause(a) the amount so received or receivable; or

Where the property and any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause(a), the amount so received or receivable.

Determination of Annual Value

Annual Value of Let out House Property

House property is let out for full year and there is no vacancy or unrealised rent;

House property is let out and there is vacancy:

If rent actually received or receivable is more than ERV;

If rent actually received or receivable is less than ERV.

House property is let out and there is unrealised rent:

If rent actually received or receivable is more than ERV;

If rent actually received or receivable is less than ERV.

House property is let out, there is vacancy also there is unrealised rent.

Annual Value of Self-Occupied House property

Only one house under own occupation.

More than one house under own occupation.

House property consists of various independent units and one is under own occupation and other are let out.

House property is partly let out and partly self under own occupation.

House property is used for own business or profession.

Rental income received by taxpayer is taxable under ”¬†Income from House Property”. However Income Tax Act, 1961 has provided some expenditures under Section 24 which can be claimed as deduction.

There are 2 deductions eligible to be deducted from Net Annual Value of house property namely:

a) Standard Deduction of 30% of NAV.

b) Interest on housing loan.

Standard Deduction

There might be various expenses that are spent to maintain the house property such as repairs, maintenance, depreciation, etc. To cover all these expenses, the Income-tax Act provides a standard deduction of 30% from Net Annual Value of house property. It is presumed that all the expenses (excluding Interest on housing loan) are covered in this 30% limit and no deduction or expenses in addition to this limit is available to taxpayer even if actual expenses are higher than standard deduction.

(Note- This standard deduction is available to the owner taxpayer even if no expenses are incurred by him or all the expenses are incurred by the tenant).

   2.  Interest on housing loan-

If the taxpayer has borrowed a housing loan to purchase or to construct a house property, then he is required to pay EMI to bank or any other lender. This EMI consists of 2 parts namely Interest & principal. Deduction of interest part can be claimed from income of house property whereas deduction of principal amount in case of residential house property can be claimed U/s. 80C.

Deduction for housing loan interest depends upon type of house property. Amount available for deduction in each type as follows-

i) Self occupied house property

If the housing loan is taken to purchase or construct the property, then maximum interest of Rs. 2,00,000/- can be claimed by taxpayer during a financial year.

Further if the loan is taken to renovate or repair the property, then maximum interest of Rs. 30,000/- can be claimed by taxpayer during a financial year.

ii) Let out or deemed to be let out property:

There is no ceiling limit for claiming deduction of interest on housing loan on let out property.

Pre-construction interest:-¬†The interest paid on housing loan when the house property is under construction is known as¬†‚ÄúPre-construction Interest‚ÄĚ.¬†The deduction of such pre-construction¬†¬†interest is allowed in 5 equal instalments starting from the year when construction completes.

Or
b) Mr. A owns a house property in Cochin. It consists of three independent units and information about the property is given below:

Unit ‚Äď 1:

Unit ‚Äď 2:

Unit ‚Äď 3:

Municipal rent value

Fair rent value

Standard rent

Actual rent

Unrealized rent

Repairs

Insurance

Interest on money borrowed for the construction of house property

Municipal taxes

Date of completion of construction

Own residence

Let out

Own business

Rs. 1,20,000 p.a.

Rs. 1,32,000 p.a.

Rs. 1,08,000 p.a.

Rs. 3,500 per

Month

For three months

Rs. 10,000

Rs. 2,000

Rs. 96,000

Rs. 14,400

01.11.2011

Calculate total income or loss under the head house property.

4+6+4=14

Ans: Computation of income from house property of Mr. A for the assessment year 2013-14 (previous year 2012-2013)

Particulars

Unit I

Own

Residence

Unit II

(Let out)

Municipal Rental Value

Fair Rental Value

Standard Rental Value

Expected Rental Value (MRV or FRV whichever is higher but limited upto SRV)

Actual Rent received or receivable (Less unrealised rent)

Gross Annual Value (higher of 4 or 5)

Less: Municipal taxes paid (1/3)

 

40,000

44,000

36,000

36,000

31,500

36,000

4,800

Net Annual Value (6-7)

Less: Deduction under section 24

Standard Deduction @30%

Interest on money borrowed

Nil

32,000

31,200

9,360

32,000

Income/ (Loss from house property)

(32,000)

(10,160)

Note: 1. It is assumed that all the three units are independent units and thus are being treated as separate houses.

2. Interest on loan taken to construct the house being used in own business shall be treated as business expenditure.

 

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