2018 (May)
COMMERCE (General)
Course: 601 (Income Tax)
Time: 3 hours
The figures in the margin indicate full marks for the questions
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
1. (a) Fill in the blanks: 1x4=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 – Specified Deductions u/s 24.
(b) Write True or False: 1x4=4
1) Tax is 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): 4x4=16
a) Assessment Year.
b) Ordinary Resident.
c) Special Economic Zone.
d) Education Allowance.
e) Municipal Valuation.
Ans: a) Assessment Year: [Sec. 2 (9)]: “Assessment Year” means the period of 12 months commencing on the 1st day of April every year. In India, the Govt. maintains its accounts for a period of 12 months i.e. 1st April to 31st March every year. As such it is 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 a person relating to 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 whole of this process is under taken is called Assessment Year. At present the Assessment Year 2019-2020 (1-4-2019 to 31-3-2020) is going on.
b) Resident and Ordinarily Resident: An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.
Basic conditions:
a) He is in India in the previous year for a period of 182 days or more
OR
b) He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.
Note: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:
(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.
(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).
Additional Conditions:
(i) He has been resident in India in at least 2 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year.
AND
(ii) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
c) Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. The category 'SEZ' covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign investment.
One of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years. Following the Chinese examples, Special Economic Zones have been established in several countries, including Brazil, India, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland, Russia, and Ukraine.
SEZ AT INDIA
India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.
This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.
d) Children Education Allowance: This allowance is paid by the employer to employees to meet the cost of education of the employee’s children. If an employee is children education allowance from employer then he is eligible to claim a tax exemption under the Income Tax Act. However, the maximum amount exempted is Rs. 100 per month or Rs. 1200 per annum for maximum of up to 2 children. Along with this, an employee can also claim deductions for fees paid for his children under section 80C.
e) Municipal rental value: Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3. (a) Write a note on history of Income tax in India. 14
Ans: Tax System in India: Taxes are important instruments of Government for raising resources and reducing disparities in the society. As such, the role of income tax in a developing country like ours is very vital. The Government of India has embarked upon economic planning to raise the standard of living of the masses, to reduce disparities and regional imbalances for national integration. Taxes can be used for economic growth in the following ways.
1. Helps in mobilization of resources : It is an instrument by the use of which developmental finance for the public sector can be mobilized.
2. Helps in reduction in equalities : As income tax rates are progressive it can be used to reduce inequalities in the distribution of income.
3. Reduces conspicuous consumption : A progressive tax on income arrests the purchasing power of rich people and thereby tends to reduce the demand for conspicuous consumption.
4. Creation of demand for economic development : A progressive taxation tends to change the allocation of income into consumption and savings with the objectives of increasing consumption and reducing the propensity to save.
Meaning and Definition of Tax
A tax is a fee charged (levied) by a government on a product, income or activity. If tax is levied directly on person or corporate income, it is called direct tax. If tax is levied on the price of a good or service, it is called indirect tax. The purpose of taxation is to finance government expenditure.
According to Hugh Dalton, “A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the tax payer in return and not imposed as penalty for any legal offences.” In general, tax is a levy or other type of a financial charge or fee imposed by state or central governments on legal entities or individuals. Local authorities like local governments, like panchayats or municipal corporations also have right to impose taxes.
Brief history of Income tax in India
In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of 1857. Thereafter; several amendments were made in it from time to time. In 1886, a separate Income tax act was passed. This act remained in force up to, with various amendments from time to time. In 1918, a new income tax was passed and again it was replaced by another new act which was passed in 1922.This Act remained in force up to the assessment year 1961-62 with numerous amendments. 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. The law commission submitted its report-in September 1958, but in the meantime the Government of India had appointed the Direct Taxes Administration Enquiry Committee submitted its report in 1956.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.
Central Board of Direct Taxes: CBDT is the apex body of Income Tax Department. It has the power to frame rules under the control of the Central Government.
Income Tax Law in India
The income tax law in India consists of the following components:
1. Income tax Acts
2. Income tax rules
3. Finance Act
4. Circulars, notifications etc
5. Legal decision of courts.
Income tax Act, 1961: At present the law of income tax in India is governed by the Income Tax Act, 1961 which extends to whole of India, including the Sates of Jammu and Kashmir and Sikkim. It as administered along with other direct taxes by the Central Board of Direct Taxes (C.B.D.T.) The Board has framed various rules for the administration of income tax, which are known as the Income Tax Rules, 1962. They are amended and modified from time to time, as required by the amending Income tax Act. The Income Tax Act, 1961 is having 298 sections and many more subsections and twelve schedules.
Income-tax Rules: The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962.
Finance Act: Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President of India, it becomes the Finance Act.
Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessee.
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: Residential Status and Tax Incidence
Tax incidence on an assessee depends on his residential status. The residential status of an assessee is determined with reference to his residence in India during the previous year. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship.
Residential Status of an Individual
As per section 6, an individual may be (a) resident and ordinarily resident in India, (b) resident but not ordinarily resident in India, or(c) non-resident in India. The following are the two sets of conditions for determining the residential status of an individual:
Basic conditions:
a) He is in India in the previous year for a period of 182 days or more
OR
b) He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.
Note: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:
(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.
(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).
Additional Conditions:
(i) He has been resident in India in at least 2 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year.
AND
(ii) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
RESIDENT: An individual is said to be resident in India if he satisfies any one of the basic conditions.
Resident and Ordinarily Resident: An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.
Resident but Not Ordinarily Resident: An individual is said to be resident but not ordinarily resident in India if he satisfies any one of the basic conditions but not satisfies both of the additional conditions.
Non-Resident: An individual is a non-resident in India if he satisfies none of the basic conditions.
Residential Status of a Hindu Undivided Family
As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
HUF: Resident or Non-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. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.
A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b).
Additional condition (i) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in immediately preceding the relevant previous year)
Additional condition (ii) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.
If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
Residential Status of Firm and Association of Persons
As per section 6(2), a partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.
Residential Status of A Company
As per section 6(3), an Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.
4. (a) Explain in brief any fourteen incomes which are exempted u/s 10 of the Income-tax Act, 1961. 14
Ans: Income Exempted from tax under Sec. 10:
1. Agricultural Income: Income from agriculture is exempt. However, if the net agricultural income exceeds Rs.5,000, it is taken into account for determining the rates of income-tax on incomes liable to tax. [Sec.10 (1)]
2. Receipt from Hindu Undivided Family: Any sum received by an individual as a member of Hindu Undivided Family where such sum has been paid out of the income of the family or in the case of any impartibly estate, where such sum has been paid out of the income of the estate belonging to the family, irrespective of whether tax is payable or not by the HUF on its total income. However, certain receipts from HUF are liable to be clubbed in the hands of an individual member u/s 64(2). [Sec.10 (2)]
3. Partner’s Share in the Firm’s Income: In the case of a person being a partner of a firm which is separately assessed as such, partner’s share in the total income of the firm is exempt. Share of a partner of the firm shall be computed by dividing the total income of the firm in the profit sharing ratio mentioned in the Partnership Deed. [Sec.10 (2A)]
4. Value of Leave Travel Concession: Value of any leave travel concession or assistance received by or due from the employer to employee (including noncitizens) and his family (spouse, children and dependent- father, mother, brother, sister dependent on him) in connection with his proceeding on leave or after retirement or termination of his service to any part of India. [Sec.10(5)]
5. Leave Encashment : Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits. For details see ‘Receipts Exempt from Income Tax’ in the chapter ‘Salary’. [Sec.10(10AA)]
6. Compensation to Employee: Any compensation received by a workman under Industrial Disputes Act or under any other Act or rules, order or notification issued there under or under any standing order or under any award, contract of service or otherwise at the time of his retrenchment is exempt to the extent such compensation is in accordance with Section 25F (b) of Industrial Disputes Act, subject to a maximum of Rs.5,00,000.
7. Payment from Provident Fund: Any payment (including interest) from a provident fund under Provident Fund Act, 1925 or Public Provident Fund Scheme, 1968. [Sec.10(11)]
8. Payment from Sukanya Samriddhi Account: Any payment from an account under the Sukanya Samriddhi Account Rules, 2014 [Sec.10(11A)]
9. Accumulated Balance of Recognised Provident Fund: Any accumulated balance due and becoming payable to an employee from a recognised provident fund, on fulfillment of any of the following conditions:
(i) If he has rendered a continuous services of five years or more; or
(ii) If his service, though not as stated in (i) above, has been terminated due to his ill-health or by the contraction or discontinuation of his employer’s business or any other cause beyond his control; or
(iii) If on cessation of his employment, his accumulated balance is transferred to recognised provident fund maintained by his new employer;
10. House Rent Allowance: Any special allowance granted to an assessee by the employer to meet expenditure incurred on payment of rent for residential accommodation subject to prescribed limits and conditions. [Sec.10(13A)]
11. Allowances of MPS and MLAs:
(a) Any daily allowance received by Members of Parliament or any State Legislature.
(b) Any allowance received by any Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986.
(c) Any constituency allowance received by any member of any State Legislature under any Act or rules made by it. [Sec.10(17)]
12. Income of a Professional Association set up for the control, supervision, regulation or encouragement of the professions of law, medicine, accountancy, engineering, architecture or other notified profession (i.e. Company Secretary, Chemistry, Materials Management and Town Planning), subject to specified conditions. [Sec.10(23A)]
13. Income of a New Agency [i.e. Press Trust of India Ltd.] set up in India, which applies its income or accumulates it for application solely for collection and distribution of news and does not distribute its income in any manner to its members. [Sec.10(22B)]
14. Income of a Minor Child liable to be included in income of his parent u/s 64(1A) is exempt up to a maximum of Rs.1,500 per minor child. [Sec.10(32)]
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 PROVISION IN RESPECT OF NEWLY ESTABLISHED UNITS IN SPECIAL ECONOMIC ZONE [SECTION 10AA]:
1. CONDITIONS TO BE SATISFIED: The following conditions should be satisfied to claim deduction u/s 10AA:
Condition 1 : Assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005. Entrepreneur is a person who has been granted a letter of approval by the Development Commissioner to set a unit in a Special Economic Zone.
Conditions 2 : The Unit in Special Economic Zone who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006.
Conditions 3 : It is not formed by the splitting up, or reconstruction, of a business already an existence.
Conditions 4 : It not formed by the transfer to a new business, of old plant and machinery. However, it can be formed by transfer of old plant or machinery to the extent of 20%.
Condition 5 : The assessee has income from export of articles or thing or from services from such unit. In other words, the assessee has exported goods or provided services out of India from the Special Economic Zone by land, sea , air, or by any other mode, whether physical or otherwise.
Conditions 6 : Books of Accounts of the taxpayer should be audited. The Tax payer should submit Audit Report in Form No.56F along with the return of income.
2. AMOUNT OF DEDUCTION: Deduction depends upon quantum of Profit derived from Export of Articles or things or services (including computer software). It is calculated as under: (Profit of the Business of the undertaking X Export turnover)/Total Turnover of the business
Deduction for First 5 Assessment Years – 100% of Profits and Gains derived for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services.
Deduction for 6th Assessment Year to 10th Assessment Years: 50% of such Profits and Gains for further five assessment years and thereafter;
Deduction for 11th Assessment Year to 15th Assessment Year: Amount not exceeding 50% of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be created and utilized for the purposes of the business of the assessee.
3. CONSEQUENCES FOR MERGER AND DEMERGER: Where any undertaking is transferred, before the expiry of the period specified in this section, to another undertaking, under a scheme of amalgamation or demerger, no deduction shall be admissible under this section to the amalgamating or the demerged Unit for the previous year in which the amalgamation or the demerger takes place.
5. (a) Mr. X is an employee of Ranchi (population 15 lakhs) based on company. He provides the following particulars of his salary income:
1) Basic salary – Rs. 12,000 per month.
2) Profit bonus – Rs. 12,000.
3) Commission on turnover achieved by Mr. X – Rs. 42,000.
4) Entertainment allowance – Rs. 2,000 per month.
5) Club facility – Rs. 6,000.
6) Transport allowance – Rs. 1,800 per month.
7) Free use of car of more than 1.6 litre capacity for both personal and employment purposes; expenses are met by employer.
8) Rent-free house provided by employer; lease rent paid by employer – Rs. 6,000 per month.
9) Free education facility for three children of the employee (bills issued in the name of employer) – Rs. 22,500.
10) Gas, water and electricity bills issued in the name of the employee but paid by employer – Rs. 16,800.
Compute income under the head salary for the Assessment Year, 2017-18. 14
Computation of salary income of Mr. X for the Assessment year 2018-19
Particulars | Rs. | Rs. |
1. Salary 2. Profit Bonus 3. Commission 4. Entertainment Allowance 5. Club facility – Taxable 6. Transport Allowance Less: Exempted upto Rs. 1,600 p.m. 7. Car Perquisite – 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 = 2,24,400]) | 21,600 19,200 | 1,44,000 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 | 3,32,160 Nil | |
Income from Salaries | 3,32,160 |
Note. The perk of car and club facility both are taxable as FBT has been abolished.
Or
(b) Explain in brief the following items as per the Income-tax Act, 1961: 3 ½ x4=14
1) Profits in lieu of salary.
2) Recognized Provident Fund.
3) Dearness allowance.
4) Leave encashment.
Ans: a) Profit in Lieu of salary: The amount of any compensation due to or received by an assessee from his employer or former employer or in connection with the termination of his employment. [Sec.17 (3)]. These payments include the following.
(1) Terminal compensation
(2) Payment from an unrecognized provident fund or an unrecognized superannuation fund
(3) Payment under Keyman Insurance Policy
(4) Any amount due or received before joining or after cessation of employment
(5) Any other sum received by the employee from the employer.
b) Recognized Provident Fund (RPF): This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for government approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in specified manner. The income of the trust shall also be exempt from income taxes.
Taxability of Recognised Provident Fund
Particulars | Treatment |
1. Employee's/ assessee's contribution | Deduction u/s 80C is available from gross total income subject to the limit specified therein |
2.Employer's contribution | Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary. |
3. Interest on Provident Fund | Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary |
4.Repayment of lump sum amount on retirement / resignation /termination | Exempt if the employee has rendered minimum 5 years of continuous service |
c) Dearness Allowance (DA): Dearness Allowance is cost of living adjustment allowance which the government pays to the employees of the public sector as well as pensioners of the same. DA component of the salary is applicable to both employees in India and Bangladesh.
Dearness Allowance can be basically understood as a component of salary which is some fixed percentage of the basic salary, aimed at hedging the impact of inflation. Since, DA is directly related to the cost of living, the DA component is different for different employees based on their location. This means DA is different for employees in the urban sector, semi-urban sector or the rural sector. Dearness allowance and dearness pay is fully taxable
d) Leave encashment: Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits.
1. 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
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: 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.
Computation of annual value: Computation of Annual Value for the determination of Income from House property requires three steps.
Ø STEP 1 Determine the Gross Annual Value(GAV)
Ø STEP 2 Determine the value of Municipal taxes
Ø STEP 3 Compute the Net Annual Value
STEP 1- Determine the Gross Annual Value (GAV):
Calculation of GAV based on the following factors:
1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.
2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.
4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.
5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:
a) Tenancy is in good-faith.
b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.
c) The defaulting tenant doesn't continue to occupy any other property of the assessee.
d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use.
6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.
7) Unoccupied property: The House property which cannot be occupied by its owner by reason of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.
It should be noted that the procedure for determination of Gross Annual Value is not same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:
1) Property is let out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.
2) Let out property is vacant for a part of the year (Section 23(1) (c)): If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV. If the ARR < ERV for any other reason, GAV = ERV. If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let out period only and the ERV is for whole year as usual.
3) Self-occupied or Unoccupied property (Section 23(2)): GAV = Nil
4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)): GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)
5) Deemed to be let out property (Section 23(4)): This case arises when the assessee has more than two Self-occupied properties in a previous year. In such case, only two of such properties are treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.
6) A portion of the property is let out and the remaining portion is self-occupied: GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.
Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.
Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.
STEP 2 - Determine the value of Municipal taxes:
The municipal tax or the property tax paid is allowed as deduction from the Gross Annual Value if the following two conditions are satisfied.
(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.
STEP 3 - Compute the Net Annual Value:
Gross Annual Value ++++++
Less: Municipal Taxes ++++++
Net Annual Value ++++++
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.
Limit of deduction u/s 24(b)
A. In case of Let out/ deemed to be let out house property: Interest on Money borrowed is allowed as deduction without any limit. Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP) interest. PCP started from the date of borrowing and ended on 31st mar immediately preceding (Before) the year of completion.
B. In Case of Self Occupied House Property: Max. Rs. 2,00,000 is allowed as deduction if the following conditions are satisfied:
Ø Loan taken after 1 – 4 – 99
Ø For construction/purchase (Capital expenditure) of house
Ø Construction completed within 5 years from the end of financial year in which loan is borrowed.
Ø Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000
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 – 1: Unit – 2: Unit – 3: Municipal rental value Fair rental 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) |
1. Municipal Rental Value 2. Fair Rental Value 3. Standard Rental Value 4. Expected Rental Value (MRV or FRV whichever is higher but limited upto SRV) 5. Actual Rent received or receivable (Less unrealised rent) 6. Gross Annual Value (higher of 4 or 5) 7. Less: Municipal taxes paid (1/3) | 40,000 44,000 36,000 36,000 31,500 36,000 4,800 | |
8. Net Annual value (6-7) Less: Deduction under section. 24 (a) Standard Deduction @ 30% (b) 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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