IGNOU SOLVED ASSIGNMENT: ECO - 11 (2015 - 2016)

Answer of Q.N.1.

Residential Status of an Individual

Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year. An individual or HUF assessee who is resident in India may be further classified into

a)      Resident and ordinarily resident and

b)      Resident but not ordinarily resident.

Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident and lowest on a non-resident. Therefore, it is in the assessee advantage that he claims nonresident status if he satisfies the conditions for becoming a non-resident.

Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies any one of the following basic conditions:-

Where an individual, who is a citizen of India, leaves India in any year for the purpose of employment (or where an individual, who is a citizen of India, leaves India as a member of the crew of an Indian ship), he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.

Where an Indian citizen or a person of Indian Origin, who has settled abroad, comes on a visit to India in the previous year, he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.

A resident individual may either be an “Ordinarily Resident” OR “Not Ordinarily Resident” in India for a given previous year. In order to determine whether a resident individual is ordinarily resident (ROR) or not ordinarily resident (RNOR), the tests laid down under section 6(6) have to be applied. A resident individual is treated as ROR in India in a given previous year if he satisfies the following additional conditions:-

In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of basic conditions and both the two additional conditions. An individual who is resident in India but does not satisfy both the additional conditions is RNOR for that previous year.

The following points are very important in determining the residential status of an assessee:-

Residential Status of a Hindu Undivided Family (HUF)

The status of HUF depends upon the manager i.e. Karta. Since Karta is an Individual Same conditions as mentioned above for individual is applied.

Residential Status of company, AOP, Firm

The status of all the above categories of Person is determined on the basis of Control & management of the affairs of the organization. It can be explained as under:

Residential Status of Other Person:

[Sec-6(4)] Every other person i.e. BOI, Local authority & Artificial Juridical Person is said to Resident in India in P.Y., where the control & Management of its situated wholly or partly in India.

SCOPE OF TOTAL INCOME/ INCIDENCE OF TAX

                The residential status of an assessee determines the scope of total income. The total income liable to tax vary according to the residential status The incidence of tax is highest on resident, a little lower on not ordinarily resident and lowest on nonresident assessee.

Answer of Q.N.2.

Computation of Income from Salary of Shri A.K. Rana for the assessment year 2014-15 (previous year 2013-14)

Answer of Q.N.3.

Annual Value (Section 23)

The Annual Value of a house property is the inherent capacity of the property to earn income and  it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.

The following four factors have to be taken into consideration while determining the Gross Annual Value of the property:

1. Rent payable by the tenant (actual rent)

2. Municipal valuation of the property.

3. Fair rental value (market value of a similar property in the same area).

4. Standard rent payable under the Rent Control Act.

The Annual Rental Value is the municipal value, the actual rent (whether received or receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the gross annual value cannot exceed the standard rent under the Rent Control Act, or the actual rent, whichever is higher.

Steps for determination of Annual rental Value or Gross annual value: -

Municipal valuation or fair market value. ‘Which ever is higher’, subject to standard rent. If,

i)        Actual rent received / receivable is more than option (a) then select option (b) (i).

ii)       (Actual rent received / receivable- unrealized rent) is less (due any reason other than vacancy) than option (a) then select option (b)-which ever is high

iii)     (Actual rent received / receivable-unrealized rent-vacancy) is less (due to reason of vacancy) than option the select option (iii)-which ever is less.

iv)     (AR-UR-V) is less (due to partly reason of vacancy) then [option (a) - vacancy]

Deduction of Municipal Taxes from Annual Value

From the annual value municipal taxes are to be deducted if the following conditions are fulfilled:-

(a)    The property is let out during the whole or any part of the previous year,

(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.

(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.

Deductions allowable under section 24 of the income tax act

Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-

(a)    Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.

(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.

Conditions for deduction:-

i)        Interest on borrowed capital for Construction, repair, renewal, re-construction.

ii)       Interest certificate is required to be furnished along with the return to avail the deduction.

iii)     The construction must be completed within 3 years from end of financial year in which the capital is borrowed.

iv)     If fresh loan has been raised for repayment of old loan then interest on such loan is also deductible.

Limit of deduction u/s 24(b)

There is no limit in case of Let-out or Deemed to be let-out house property. The limit for self-occupied is determine on basis of date of borrowing which is as under:-

For self occupied, the interest limit is Rs. 30000 if, the borrowed amount is before 1^st Apr. 99.

For self occupied, the interest limit is Rs. 150000, if the amount borrowed after 1^st Apr. 99 and the acquisition or construction completed within 3 years.

Calculation of Interest:

1.  The interest consists of two parts.  Interest = Current Year + Pre-Construction period

2.  Pre-construction period means the period when the property is not owned by the assessee as it is under construction. But though property is not owned, the interest is charged from the date of borrowing. So the benefit of the interest of this pre-construction period is available in after the assessee is owner of the property.

3.  Calculation of Pre-construction Period & deduction of interest available

Pre construction period = Date of borrowing to. 31^st march preceding the date of completion or acquisition, which ever is earlier OR Date of repayment which ever is earlier.

Calculate the total pre construction interest with monthly or daily basis: - From the date of borrowing to the date [(a) or (b)] which is earlier.

Pre construction period Interest deduction

Pre construction period interest = Total pre-construction Interest

                                                                                                5 Years.

If the house property is sold out only interest is allowed as a deduction u/s-24(b).

Sec-25: - Interest on loan payable outside India is disallowed if tax on it is not deducted.

Answer of Q.N.4.

Computation of Income from other sources’ of Dr. Ashish Agrawal for the assessment year 2014-15 (previous year 2013-14)

Answer of Q.N.5.

(a) Exempted Incomes

Exempt income refers to income which is not to be added to the total income of the assessee for a particular assessment year. Even though the income is earned and received during the year, it is not liable to tax and is not considered a part of the total income. Section 10 of the income tax act, 1961 contains provision regarding exempted incomes.

Section-wise summary of some exempted incomes: -

(b) Perquisite

The term perquisite is defined to signify some benefit in addition to the amount that may be legally due by way of contract of services rendered. Section 17(2) gives an inclusive definition of perquisites. As per the Terms of Section 17(2), Perquisites Includes:

    The value of rent free accommodation provided to the assessee by his employer

     The value of concession in matter of rent respecting any accommodation provided to assessee by his employer

     The value of any benefit or amenity granted or provided free of cost or at concessional rate to the employee -directors and specified employees, with some exceptions

     Sums paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee

     Sums payable by the employer to effect an assurance on the life of the assessee-employee or to effect a contract for an annuity

     Value of any fringe benefit or amenity (excluding the fringe benefits chargeable to tax in the hands of the employer, known as ‘Fringe Benefit Tax) as may be prescribed

What do you mean by Benefits and Amenity?

     Benefits: It can be taken as profit, advantage, reward, or subsidy. For example - provision of personal car, etc.

     Amenity: It covers any personal conveniences or facilities granted or provided to the employee by an employer. For example - provision of domestic servants. 

(c) Exempted Capital Gains

                Exemption of capital gains on compensation received on compulsory acquisition of agricultural land situated within specified urban limits [Section 10(37)]: The capital gains arising to an individual or a Hindu undivided family from transfer of urban agricultural land shall be exempt if  —

Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt provided—

(d) Deduction of interest on loan taken for higher education (80E)

Eligible Assessee: Individual

Eligible investment or contribution:  Any amount paid towards interest on loan borrowed from below entity for pursuing higher education shall be allowed as a deduction

The higher education shall be pursued either by the assessee or any relative of his family. The amount shall be actually paid out of income chargeable to tax during the previous year.

Period of deduction: Interest shall be allowed as deduction during the initial year and immediately succeeding 7 year

or

Until the interest is repaid by the assessee in full Whichever is earlier.

Meaning of Higher education

Higher education means any of the study course persuaded: