2014 (May)
COMMERCE (Speciality)
Course: 601
(Direct Tax - II)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. (a) Write True or False: 1x4=4
a. Business outside India and business in India stand on the same footing for the purpose of computation of income from business and profession u/s 28 of the Act. False
b. Indexation of cost of capital asset is a must for all types of capital assets in computing income from capital gains. False
c. Short-term capital loss can be set off from short-term as well as out of long-term capital gains. True
d. Assets belonging to assesses on the valuation date are taxable under the Wealth-tax Act.
(b) Name four expenses which are not allowed as deduction in computing capital loss. 1x4=4
Ans: Expenses not allowed as deduction
1) STT or Securities Transaction Tax is not allowed as a deductible expense.
2) Expenditure incurred primarily for some other purpose but which has helped in effecting the transfer does not qualify for deduction. For instance, salary of an employee who helps in maintenance of capital assets, carries out works in connection with transfer, maintains accounts for the capital assets and capital gains, etc., is not deductible.
3) Any expenses claimed as deduction under any other provisions of the Income tax Act cannot be claimed as deduction.
4) Expenses on repairs and maintenance of depreciable assets.
2. Write short notes on the following: 4x4=16
a. Substantial interest.
Ans: ‘Substantial Interest’ in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power. Therefore, in An individual holds 20% voting rights in case of a company or is entitled to not less than 20% of the profits in case of a concern other than a company, at any time during the previous year, he is said to have substantial interest in the company.
b. Corporate assesses.
Ans: Any company registered under the Companies Act, 2013 is called corporate assessee. In case of corporate assessee, firstly we have to compute Gross Total Income (GTI) by combining four heads of income. i.e. Income from House Property, Profit and Gains from Business, Capital Gains and Income from Other Sources. From the above GTI various deductions u/s 80G, 80GGA, 80GGB, 80IA, 80IAB, 80IB, 80IC, 80ID, 80IE, 80JJA, 80JJAA & 80LA are available to corporate assessee.
a) DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE INSTITUTIONS, ETC. [SEC. 80G]
Conditions for claiming deduction:
(i) The donation should be of a sum of money and not in kind.
(ii) The donation should be to specified funds/institutions.
(iii) Amount paid by any mode of payment other than cash and if paid in cash the amount should not exceed Rs10,000.
b) DEDUCTION IN RESPECT OF CERTAIN DONATIONS FOR SCIENTIFIC RESEARCH OR RURAL DEVELOPMENT [SEC. 80GGA]. In computing the Total Income of accompany whose Gross Total Income does not include income from “Profits and Gains of Business or Profession”, deduction shall be allowed of an amount paid by him to:
(a) an approved scientific research association or University or College or other institution to be used for scientific research, research in social science or statistical research.
(b) an approved association or institution to be used for carrying out any approved programme or rural development,
(c) an approved institution or association which has the object of training of persons for implementing programmes of rural development [Sec. 35CCA]
(d) public sector company or local authority or an approved association or institution for carrying out any eligible project or scheme u/s 35AC.
c) DEDUCTIONS BY COMPANIES TO POLITICAL PARTIES [SEC. 80GGB]
Condition: Amount should be contributed by a company any mode other than cash. Amount of Deduction:100% of sum contributed during a Previous Year to any political party, registered u/s 29A of Representation of the People Act, 1951.
d) DEDUCTIONS IN RESPECT OF PROFITS & GAINS FROM INDUSTRIAL UNDERTAKINGS OR ENTERPRISES ENGAGED IN INFRASTRUCTURE DEVELOPMENT [SEC. 80IA]
The deduction under this Section is applicable to all assessees whose Gross Total Income includes any profits and gains derived from any business of an industrial undertaking or an enterprise.
c. Perquisites.
Ans: Perquisites (Sec. 17[2]):
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:
(i) The value of rent-free accommodation provided (used or not) to the assessee by his employer;
(ii) The value of any concession in the matter of rent respecting any accommodation provided (used or not) to the assessee by his employer;
(iii) The value of any benefit or amenity granted or provided (used or not) free of cost or at concessional rate in any of the following cases (specified employee):
(a) By a company to an employee, who is a director thereof;
(b) By a company to an employee being a person who has a substantial interest in the company;
‘Substantial Interest’ : In relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power.
(c) by any employer (including a company) to an employee to whom the provision of clause (a) and (b) do not apply and whose income under the head of Salaries (whether due from, or paid or allowed by, one or more employer), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000.
(iv) Any sum actually paid by the employer in respect of any obligation on behalf of the employee;
(v) any sum payable (not necessarily paid) by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity;
(vi) the value of any other fringe benefit or amenity as may be prescribed.
Since the term “salary” includes basic salary, bonus, commission, fees and all other taxable allowances for the purpose of valuation of perquisite in respect of rent free house, it would be advantageous if an employee goes in for perquisites rather than for taxable allowances. This will reduce valuation of rent free house, on one hand, and, on the other hand, the employee may not fall in the category of specified employee. The effect of this ingenuity will be that all the perquisites specified u/s 17(2)(iii) will not be taxable.
d. Depreciation.
Ans: DEPRECIATION ON ASSETS (Section 32): Depreciation means diminution in value of an asset on account of wear and tear and obsolescence. It is debited to profit and loss account and is an allowed expenditure. Depreciation is provided on all tangible and intangible assets except land, animals and goodwill on block of asset basis.
Block of assets: Block of assets means a group of assets falling within a class of assets and on which same rate of depreciation is charged. Class of assets comprised of:
(i) Tangible assets being building, machinery, plant and furniture.
(ii) Intangible assets being know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature.
METHODS OF DEPRECIATION AND WHICH METHOD IS TO BE ADOPTED:
Depreciation under income tax is calculated by using the following methods:
1) Written down value method;
2) Straight line method.
Diminishing Balance Method/Written down value method: Under this method the depreciation is charged every year at a fixed rate on the book value of the block of assets. Book value of asset is calculated by deducting yearly depreciation from the cost of assets.
Straight line method: Under this method the depreciation is calculated at a fixed rate every year on the amount of actual cost of the asset. Block of assets concept is not applicable in this case. This method is applicable on certain assets of power generating units referred to in section 32(1)(i).
Depreciation under Income tax Act is calculated under written value method except in case of an undertaking engaged in generation and distribution of power which have the option to choose the straight line method of charging depreciation.
3. (a) Write about the different expressly admissible deductions allowed under Section 30 – 36 of the Income-tax Act, 1961 in computing income from ‘business and profession’. 11
Ans: EXPENSES DEDUCTIBLE FROM INCOME FROM BUSINESS/PROFESSION: All the expenses relating to business and profession are allowed against income. Following are few examples of expenditures which are allowed against income: (ALLOWED EXPENSES)
1. Rent of Business Premises (Sec. 30): Rent of the business premises is allowed as deduction. In case of own premises rent cannot be debited. In property is partly for business and partly for personal purpose, then rent relating to business is allowed as deduction. Rent paid to a partner of the firm for using premises is also allowed as deduction. (Sec. 30)
2. Expenses relating to machinery, plant and furniture [Sec.31] : According to Sec.31 the following expenses are deductible: (a) Current repairs (b) Insurance premium. However, any repair expenditure of capital nature shall not be allowed as deduction under this section.
3. Depreciation (Sec. 32): Depreciation on buildings, machinery, plant or furniture, being tangible assets; know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession are allowed as deduction as per rate specified in income tax act.
4. Development rebate (Sec. 33): In respect of a new ship or new machinery or plant which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with and subject to the provisions of this section and of section 34, be allowed a deduction as development rebate to the extent of 40%, 35% or 25% of the actual cost as the case may be.
5. Tea Development Account, Coffee Development Account and Rubber Development Account (Sec. 33AB): This deduction is allowed only to an assessee who is engaged in the business of Tea, coffee and rubber production. The amount of deduction will be 40% of PGBP or amount deposited in site restoration accounts whichever is less.
6. Site restoration fund (Sec. 33ABA): This deduction is allowed only to an assessee who is engaged in the business of extraction and production of petroleum, natural gas or both and entered into an agreement with central government in this respect. The amount of deduction will be 20% of PGBP or amount deposited in site restoration accounts whichever is less.
7. Conditions for Allowance of depreciation (Sec. 34): This section deals with the conditions under which depreciation is allowed under the Sec. 32 and Sec. 33 of the Income tax Act, 1961.
8. Expenditure on Scientific research (Sec. 35): Expenditure on scientific research is divided into two categories:
a) Expenditure on research carried on by assessee himself.
1. Revenue Expenditure: Any revenue expenditure incurred by an assessee in a research which is helpful in his business is fully allowed as deduction.
2. Capital Expenditure: Any expenditure of capital nature on scientific research carried on the assessee himself and related which assessee’s business or profession shall be allowed as deduction in full.
3. Expenditure on in-house research and development: Weighted deduction @ 150% of the expenditure incurred on in-house research by a company engaged in the business of bio-technology or in any business of manufacture or production of any article is allowed.
b) Expenditure on research carried on by outsiders whether or not research is related to assessee’s business:
1. Contribution to an approve research association, university, college or other institutions:
A) If Amount is given to an approved research association, university, college or other institutions for research which is unrelated to assessee’s business, a weighted deduction @ 150% of actual expenditure shall be allowed. W.e.f A/y 20121 – 22, no weighted deduction shall be allowed.
B) If amount is given to an approved research association, university, college or other institutions for research in the field of social science or statistical research which is unrelated to assessee’s business, a deduction upto actual expenditure shall be allowed.
2. Contribution to National Laboratory: A higher weighted deduction @ 150% of actual amount shall be allowed if amount is given to a national laboratory or a university or an Indian institute of technology for undertaking scientific research programme approved by the prescribed authority.
3. Contribution to a company for scientific research: In case any assessee provides money to an Indian company engaged in the scientific research and approved for this purpose, a weighted deduction @ 100% of the amount paid shall be allowed.
9. Other Deductions (Sec. 36)
a) Insurance premium of stock and employees.
b) Salary, bonus, commission to employees.
c) Salary, interest and remuneration to working partners subject to certain conditions.
d) Contribution to recognised provident fund or approved superannuation fund.
e) Contribution to an approved gratuity fund
f) The amount of bad debt which is irrecoverable and written off from books of accounts.
g) Communication, Traveling and conveyance expenses.
h) Advertisement expenses in respect of promotion of business products.
i) Discount allowed to customers.
j) Interest on loans (Whether Private or Institutional).
k) Bank Charges/Bank Commission expenses.
l) Entertainment/Business Promotion expenses
m) Discount on zero coupon bonds.
n) Banking cash transaction paid during previous year.
o) Securities transaction tax.
p) Staff Welfare expenses.
q) Festival/Puja Expenses.
r) Printing and stationery expenses
s) Postage expenses.
t) All other expenses relating to business/profession
Note: The above expenditures are allowed on the basis of actual payment as well as on accrual basis at the date of finalization accounts.
Or
(b) From the Profit and Loss Account of Mr. Porag for the year ending 31.03.2013, compute his business income:
Profit & Loss A/c
| Dr | Rs. | Cr | Rs. |
| To General expenses To Bad debts To Provision for bad debts To Insurance (house) To salary to staff To salary to Porag To Interest on bank overdraft To Interest on loan taken from Mrs. Porag To Interest on capital of Porag To Depreciation on building To Advertisement expenses To Contribution to employee RPF To Net profit | 63,400 22,000 21,000 600 36,000 22,000 62,000 4,000 13,000 60,000 8,000 12,000 50,600 | By Gross profit By Commission By Brokerage By Sundry receipt By Bad debt recovered (earlier disallowed as deduction) By Interest on deposit with a trust By Interest on units of UTI By Rent from house property | 2,65,500 18,600 27,000 22,500 1,000 15,000 13,000 12,000 |
| 3,74,600 | 3,74,600 |
Other information:
a. The amount of depreciation allowable under the Income-tax Act is Rs. 40,200
b. Advertisement expenses include Rs. 5,000 being cost of advertisement in new-papers.
c. Income of Rs. 10,000 accrued during the year but not recorded in Profit and Loss Account.
d. Porag pays Rs. 12,000 as premium on his own life.
e. General expenses include Rs. 4,500 given to Mrs. Porag for arranging a party in honour of her friend.
f. Employers contribution to provident fund for last two months @ Rs. 1,000 per month has not been paid to appropriate authority within due date.
g. Mr. Porag has spent Rs. 8,000 during the year in attending a marriage party.
4. (a) What do you mean by capital assets as defined by the Income-tax Act, 1961? What are its types? Discuss how short-term and long-term capital gain is computed. 2+3+7=12
Ans: Meaning of Capital Assets under Sec. 2(14): 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 Jewellery
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.
7. Deposit Certificates issued under the Gold Monetization Scheme, 2016 w.e.f. Assessment year 2017-18
Types of Capital Assets: Capital assets are of two types
a) Short-term capital asset
b) Long-term capital asset
a) Short-term capital asset [Section 2(42A)]: A capital asset held by an assessee for not more than 36 months immediately preceding the date of its transfer is known as a short term capital asset. However, the following assets shall be treated as short-term capital assets if they are held for not more than 12 months (instead of 36 months mentioned above) immediately preceding the date of its transfer:
(a) A security and shares of companies listed in a recognised stock exchange in India.
(b) A unit of an equity oriented fund.
(c) A zero coupon bonds.
The following assets shall be treated as short term capital assets if such assets are held by the owner (before transfer) for not more than 24 months:
(a) Unlisted shares of companies.
(b) An immovable property being land and building or both.
b) Long-term capital asset [Section 2(29A)]: It means a capital asset which is not a short-term capital asset i.e. the assets which are held by the assessee for a period exceeding 36 months/24months/12 months, as the case may be, immediately preceding the date of transfer, are called “long term capital assets”.
Capital Gain: Capital gain is the gain which arises from the transfer of a capital asset. Any profit or gain, which arises during a previous year, is chargeable under the head "capital gains" under Section 45. For a gain to be charged under the head "capital gain," it should arise due to a transfer of a capital asset. Such a profit or gain should not be exempt from tax under sections 54, 54B, 54D, 54EC, 54ED, 54FD, and 54G of Income Tax Act.
TYPE OF CAPITAL GAINS
a) Long term capital gains: When a capital asset is transferred by an assessee after having held it for 36 months/24months/12 months, as the case may be, the capital gains arising from this transfer is known as Long Term Capital Gains.
b) Short term capital gain: If the period of holding of capital asset before transfer is less than 36 months/24months/12 months, as the case may be, the capital gains arising from such transfer are known as Short Term Capital Gains.
Mode of Computation of Capital Gain [Sec. 48]
| Computation of Short-term Capital Gains A. Full value of consideration Less:(a) Expenditure incurred in such a transfer ( b)Cost of acquisition (c) Cost of improvement B. Gross short-term capital gains (A – (a) – (b) – (c)) C. Less: Exemption, if available, u/s 54B/54D/54G/54GA D. Taxable Short-term capital gains (B – C) | Computation of Long-term Capital Gains A. Full value of consideration Less:(a) Expenditure incurred in such a transfer ( b)Indexed Cost of acquisition (c) Indexed Cost of improvement B. Gross short-term capital gains (A – (a) – (b) – (c)) C. Less: Exemption, if available, u/s 54B/54D/54G/54GA D. Taxable Long -term capital gains (B – C) |
Note: No deduction shall be allowed on account of securities transaction tax. (Sec. 48)
Basis of Charge of Capital Gains
Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA. The following are the essential conditions for taxing capital gains:
a) there must be a capital asset;
b) the capital asset must have been transferred;
c) there must be profits or gains on such transfer, which will be known as capital gain;
d) such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA.
Or
(b) During the year ended on 31st March, 2013, Mr. A sold the following assets:
a. Shop purchased in 1985 – 86 (cost inflation index 133) for Rs. 18,000 was sold for Rs. 1, 70,000.
b. Machinery purchased in 1983 – 84 (cost inflation index 125) for Rs. 50,000 (written down value on 1-4-12 Rs. 35,000) was sold for Rs. 60,000.
c. Furniture purchased on 1-5-2012 for Rs. 1,000 was sold for Rs. 1,300.
d. Machinery purchased on 1-5-2012 for Rs. 10,000 was sold for Rs. 12,000.
e. Agricultural land in Agra purchased in 1979 – 80 for Rs. 10,000 [(fair market value on 1-4-81 (cost inflation index 100) being Rs. 15,000] was sold for Rs. 1, 60,000.
f. One residential house purchased in 1987 – 88 (cost inflation index 150) costing Rs. 30,000 was sold for Rs. 2, 20,000.
During the year, he bought another house for his residence for Rs. 4, 00,000. Compute the amount of taxable capital gain for the assessment year 2013-14. 12
Computation of CG for the Assessment year 2013-14
Computation of STCG
| 1. Furniture: Sale Consideration Less: WDV | 1,300 1,000 |
| STCG | 300 |
| 2. MACHINERY Sale price (b) Sale price (d) | 60,000 12,000 |
| Less: WDV (10,000+35,000) | 72,000 45,000 |
| STCG | 27,000 |
| Total STCG (27,000 +300) | 27,300 |
(Note: In case of depreciable asset, only WDV in the beginning is considered. No depreciation in the year of sale)
Calculation of Long term Capital Gain
| Particulars | Shop | Agricultural | Residential |
| Sale Consideration Less: Index cost of acquisition | 1,70,000 1,01,504 (18,000 x 750/133) | 1,60,000 1,12,500 (15000 x 750/100) | 2,20,000 2,25,000 (30,000 x 750/100) |
| Capital Gains Less: Exempted under Sec. 54F (Fully exempted as the sum invested in purchase of another house is Rs. 4,00,000 which is more than the sale consideration of shop and agricultural land (1,70,000+1,60,000 = 3,30,000) | 68,496 68,496 | 47,500 47,500 | Nil - |
| | Nil | Nil | Nil |
Capital Gains:
STCG = 27,300
LTCG = Nil
Total = 30,000
5. (a) Define the term ‘asset’ for the purpose of computation of net wealth. Name the assets that are excluded from it. 6+5=11
Or
(b) What is wealth tax? Who is required to pay it? How is wealth tax computed? 2+2+7=11
6. (a) Explain the provisions of the income-tax Act, 1961 regarding carry forward and set-off of losses. 11
Ans: Set-Off of Losses: After computing the income under five heads one by one and after taking the clubbing of income under Sec.60 to 64, we have to aggregate all these incomes to get Gross Total Income. But before arriving at the gross total income, we have to adjust losses either in the same head or against other heads under Sec.70 to 80. First we have to set off the losses within the same head and if it cannot be adjusted, against income of other heads. The adjustment of losses from one head against the income, profits or gains of any other head of income during the same tax year is called set-off of losses.
A) Set off of loss under the same head of income.(Sec.70: Inter-source set off): The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called inter-source adjustment, e.g. Adjustment of loss from business A against profit from business B.
Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many but yet they could be classified under the same head. For instance, an individual may have a dual employment, yet the income would be classified under the head ‘Salaries’. However, given the mechanism of computing taxable salary income, it would be safe to say that an individual cannot incur losses under this head of income. Some of the inter-source adjustable incomes are given below:
a. Speculative Business Losses: An Assessee can set off the Losses incurred in speculation Business only against the profits of any other speculation Business. It is not permissible to set off speculative Loss against any other Business or Professional Income. An Assessee has an Opportunity to set off any other Business Loss with the profits of speculation Business.
b. Long Term Capital Losses: A long term Capital Loss can be set off only against the profits of any other long term capital gains, but short term capital loss can be set off against both short term and long term capital gains.
c. Loss from owning and maintaining race horses: This loss can be set off only against the income from owning and maintaining race horses.
d. Loss of specified Business under section 35AD: Specified Business loss can be set off only against profit from such specified business, but loss from other business can be set off against the profit of the specified business.
B) Set off Loss from one head against Income from another Head (Sec. 71: Inter head set off): After making inter-source adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.
A person may have various sources of income computed under different heads of income. Loss under one head of income is generally allowed to be set off against income under another head. Some of the inter-head adjustable incomes are given below:
a. House Property Losses: House Property Losses can be set off against profits from other heads. It can be set off against salary income, Business income, Income from capital gain, and income from other sources except casual income.
b. Non Speculative Business Losses: Non speculative Business Losses can be set off under any other head except income from salary. Means it can be set off from income from house property, income from capital gain and Income from other sources except casual income.
In the following cases losses cannot be set off under inter-head adjustments. Speculative Business Losses. Specified Business Losses. Capital Gain Losses.(Both short term capital loss and long term capital loss). Losses from owning and maintaining race Horses.
C) Carry forward of losses: Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un- adjustable losses to the next year is known as carry-forward of losses. Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. Carry forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the status of carry forward of loss of previous years.
Rules regarding carry forward of losses of various heads are given below
1. Loss under head House Property: The loss under the head house property, let out or self occupied, can be carried forward to the subsequent years subject to a limit of 8 assessment years. The loss is to be set off against the income from house property only. Loss under the head `house property’ may be et off against income under any other head upto a maximum of Rs.2,00,000 [Sec.71(3A)].
2. Business Loss: It can be carried forward for subsequent years subject to a limit of 8 assessment years and it is to be set off against profit from under head business only. In set off and carry forward of business losses the following important points are to be considered:
(a) The person who has incurred the loss, alone has the right to carry it forward. The successor except succession by inheritance (business passing from father to son) cannot claim to carry forward the loss incurred by his predecessor in business. However, where a company merges with another under the scheme of amalgamation, the past loss of the amalgamating company can be carried forward by the new company.
(b) The unabsorbed business loss of an industrial undertaking which was discontinued due to natural calamities shall be carried forward and set off against the profit of the reconstructed, re-established business upto a period of 8 assessment years as reckoned from the previous year in which the business is re-started.
(c) The business loss could be carried forward for 8 assessment years to be set off from income under the head ``profits and gains of business or profession.’’
(d) Loss from any asset held as stock-in-trade can be set off from any income from such asset even if it is taxable under the head other sources.’
(e) To carry forward business losses, continuity of same business is not necessary.
3. Speculation Loss: The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year. But if speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to claim as a set off in the subsequent year, but only against the income of any speculation business. Such loss is also allowed to be carried forward for 4 assessment years immediately succeeding the assessment year for which the loss was first computed.
It may be observed that it is not necessary that the same speculation business must continue n the assessment year in which the loss is set off. It can be carried forward for succeeding 4 assessment years. But the loss is to be set off against the speculation profit only. A company whose principal business is that of trading in shares has been excluded from the purview of the explanation to Sec.73. Consequently, such activity shall not be regarded as speculation activity and any los arising there from shall be treated as normal business loss and not as speculation loss.
4. Unabsorbed Depreciation [Sec. 32(2)]: If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation.
The assessee should set off brought forward losses in the following manner:
a) First of all current year depreciation will be adjusted.
b) Then brought forward business losses will be set off (speculative or non-speculative)
c) Then unabsorbed depreciation will be set-off against business income.
d) Unabsorbed depreciation can be carried forward for indefinite number of years.
e) Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.
5. Loss under the head “Capital Gain’: Where in respect of any assessment year, the net result of the computation under the head `Capital gains’ is a loss to the assessee, whether short-term or long-term such short-term and long-term capital losses shall be separately carried forward. Further, such carried forward short-term capital loss can be set off in the subsequent assessment year from income under the head capital gains whether short-term or long-term. But brought forward long-term capital loss shall be allowed to be set off only from long-term capital gain. Such capital losses can also be carried forward to a maximum of 8 assessment years, immediately succeeding the assessment year for which the loss was first computed.
6. Expenses incurred on maintenance of race horses: Loss from Owning and maintaining race horses: (Section 74A) An Assessee can carry forward these losses up to 4 years immediately succeeding the Assessment year in which the loss has incurred. It can be set off only against that income and an Assessee must file the Income Tax Return within due date prescribed under section 139(1).
Or
(b) Mr. R. furnishes the following particulars of his income for the previous year 2012 – 13:
a) Salary income – Rs. 68,000.
b) Income from house A – Rs. 36,000
c) Loss from house B – Rs. 24,000
d) Loss from house C – Rs. 22,000
e) Profit from business A – Rs. 60,000
f) Profit from Business B – Rs. 70,000
g) Profit from share business (speculative) – Rs. 82,000
h) Loss from silver business (speculative) – Rs. 94,000
i) Long-term capital gain on sale of shares on which security transaction tax has been paid – Rs. 22,000
j) Short-term capital loss on sale of land – Rs. 44,000
k) Income from card games – Rs. 22,000
l) Winning from lotteries (gross) – Rs. 60,000
m) Income from horse race (gross) in Dibrugarh – Rs. 40,000
n) Loss from horse race in Jorhat – Rs. 21,000
Compute gross total income of Mr. R for the assessment year 2013 – 14.
Solution: Computation of Gross total income of Mr. R for the assessment year (2012-13)
| Particulars | Amount | Amount |
| 1. Income From Salary Less: Loss under the head house property (set-off) | 68,000 10,000 | 58,000 |
| | | |
| 2. Income From House Property House A House B House C | 36,000 (24,000) (22,000) | |
| | (10,000) | |
| Less: Set off from salary | 10,000 | Nil |
| 3. Income from Business (Non-Speculative Business) Business A Business B | 60,000 70,000 | |
| | 1,30,000 | 1,30,000 |
| Profit from share business (Speculative) Less: Loss from silver business (Speculative) | 82,000 (94,000) | |
| C/F of Speculative business loss | (12,000) | Nil |
| 4. Capital Gain LTCG (Share) – Long term capital gains from share are fully exempted STCG (C/F) | Exempt (44,000) | |
| Carry forward of STCL | (44,000) | Nil |
| 5. Income from other sources Winning from card games Winning from lotteries Income from horse races | 22,000 60,000 40,000 | 1,22,000 |
| Total Income (1+2+3+4+5) | | 3,10,000 |
Note: Any loss of casual nature such as loss from horse race, card games, crossword puzzles, lotteries cannot be setoff and carried forward from any income.
7. (a) What is tax avoidance? Discuss the differences between tax avoidance and tax evasion. 3+8=11
Ans: Tax Avoidance: Tax Avoidance refers to the legal means so as to avoid or reduce tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law. Thus, in this case tax payer tries to reduce his tax liability but here the arrangement will be legal, but may not be as per intent of the law. Thus, in this case, tax payer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or otherwise. For example: misinterpreting the provisions of the IT Act.
Differences between tax avoidance and tax evasion:
Tax Evasion: It refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant laws. Under direct tax laws provisions have been made for imposition of heavy penalty and institution of prosecution proceeding against tax evaders. The tax evaders reduce his taxable income by one or more of the following steps:
a) Non-disclosure of capital gains on sale of asset.
b) Non-disclosure of income from ‘Binami transactions’.
c) Willfully unrecording or partial recording of incomes. E.g.: sales, rent, fees, etc.
d) Charging personal expenses as business expenses. E.g.: car expenses, telephone expenses, medical expenses incurred for self or family recorded in business books.
e) Submission of bogus receipts for charitable donations under section 80 G.
Although tax Evasion may lead to lower cash outflow on account of taxes yet such saving of money may not be real and absolute. In fact, tax evaded remains a liability of the evader. If trapped, he will have to pay the tax evaded. Moreover, the additional tax outflow on account of penalties and unnecessary mental tension and due to fear of action and prosecution may prove heavy on tax evader. From the above discussion, we found the following differences between tax avoidance and tax evasion:
| TAX AVOIDANCE | TAX EVASION |
| It is a Legal mean to reduce tax liability. | It is Illegal and attract penalty. |
| Tax avoidance is done taking benefit of loopholes of law. | Tax evasion is done by Misstatement and falsification of accounts, incomes and expenses. |
| Tax avoidance does not attract any Penalty/ Prosecution | Tax evasion Attracts penalty/prosecution. |
| Planning for avoidance before tax liability arises. | Tax evasion involves avoidance of payment of tax after the liability of tax has arisen. |
| Tax avoidance can be curbed by introducing anti-avoidance provisions or clubbing provisions. | Tax evasion can be curbed by implementing the law effectively. |
Or
(b) Write note on the following: 5+6=11
1. Gross qualifying amount.
Ans: Amount of Deduction : The amount of deduction under Sec. 80C to be given is as follows :
(i) Qualifying amount; or
(ii ) 1,50,000 - whichever is less.
Gross Qualifying Amount: The amount of deduction shall be actual amount paid or deposited during the previous year in prescribed savings schemes stated below. This amount is called as gross qualifying amount. According to Section 80 CCE the amount of deduction under section 80 C, 80 CCC, and 80 CCD should not exceed 1,50,000.
Deduction under Sec.80C is to be given only to Individuals and Hindu Undivided Families. The following are the investments eligible for qualifying amount under this section. The following amounts are qualified getting deduction under Sec.80C.
(i) Life Insurance Premium : Actual amount paid towards Life Insurance policy premium subjects to a maximum of 10% of capital sum assured (20% for policy is taken before 1-4-2012) to himself, spouse or children (minor or major, married or unmarried). It also includes step or adopted children. Sum assured shall not include bonus or any premium agreed to be returned. In case of HUF actual amount of premium paid in the name of any or all the co-parceners of the HUF also eligible for deduction.
(ii) Annuity : Amount contributed towards a contract for a deferred annuity; not being an annuity plan.
(iii) Statutory Provident Fund : Any contributions by an individual to any provident fund to which Provident Funds Act, 1925 applies;
(iv) Other Provident Funds : Contribution to public provident fund to himself, spouse or children.
(a) Contribution by an employee to a recognized provident fund;
(b) Contribution by an employee to an approved superannuation fund;
(v) As subscriptions to any notified security of the Central Government;
(vi) Investments in National Savings Certificates VI, VII and VIII Series;
(vii) Any amount invested by a person with UTI or LIC under unit linked insurance plan.
(viii) Contribution to Unit linked Insurance Plan of the LIC, Mutual Fund notified under section 10(23D).
2. Tax planning for senior citizens.
Ans: The age limit for a senior citizen is 60 years or more for A.Y. 2016-17 & 2015-16. The age limit for very senior citizens is 80 years or more for A.Y. 2016-17 & 2015.16. The category of senior citizens has been under the purview of income tax from a very long time. However, there has been certain relief that has been provided to them when it comes to imposing taxes on their income. A person is regarded as a senior citizen if the person is above the age of 60 years. Some of the tax planning tips for senior citizens is as follows:
1) Basic Exemption Limit: When it comes to determining the basic limit for computing tax liability, the senior citizen section enjoys a freedom upto Rs. 3,00,000 per year (A.Y.2016-17) and same for A.Y. 2015-16. Any income which is within the prescribed limit shall necessarily be exempted from the purview of taxation. A very senior citizens can claim up to Rs. 5,00,000. Senior citizens (60 years or above) not having any income from business or profession shall not be liable to pay advance tax.
2) Permissible Deductions:
a) Investments: Deduction in respect of life insurance premium, provident funds, repayment of housing loan etc. up to a maximum of Rs.1,50,000/-[Sec. 80C]. Additional deduction of Rs. 50,000 (maximum) for contribution to notified Pension Scheme.
Senior Citizens Savings Scheme (SCSS): The SCSS is an effort made by the Government of India for the empowerment and financial security of senior citizens. So, if a person is over 60 years old, he is eligible to invest in this scheme; while if he has attained 55 years of age and have retired under a voluntary retirement scheme, he is also eligible to enjoy the benefits of this scheme subject to certain conditions being fulfilled.
The minimum investment in this scheme is Rs 1,000 while the maximum amount has been restricted to Rs 15,00,000. Again, the deduction is limited to Rs 1,50,000. Investments in SCSS have tenure of 5 years and earn a return of 9.20% p.a. The interest payouts are made on a quarterly basis every year. After one year from the date of opening the account, premature withdrawals are permitted. If amount is withdrawn between 1 and 2 years, 1.5% of the initial amount invested will be deducted. In case if amount is withdrawn after 2 years, 1.0% of the initial amount is deducted.
Investments upto Rs 1,50,000 in SCSS are entitled for a deduction under Section 80C. The interest income is charged to tax, which is deducted at source. If assessee have no tax liability on the estimated income for the financial year, he can avoid the Tax Deduction at Source (TDS) by providing a declaration in Form 15-H or Form 15-G as applicable.
b) Investment in health policies: Just like the benefits which accrue to the ordinary residents, even senior citizens are entitled to receive a deduction of Rs. 30, 000 (only for senior citizens) (A.Y.2016-17)/ Rs.20,000 (A.Y.2015-16). When they invest in medical policies under the section 80D. One more deduction related to mediclaim added from A.Y.2016-17 i.e. expenditure on medical treatment of resident very senior citizen (80 years or above) not having medical insurance cover, shall also be deductible within the aforesaid limit of Rs.30,000.
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