2016 (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) Interest on capital or loan received by a partner from a firm is taxable under the head ‘income from other sources’. False
b) Conversion of personal effect into stock-in-trade shall be subjected to capital gain. False
c) Winning from lotteries, cross-word puzzles, horse races and other races, card games, etc., are casual income and hence exempt. False
d) Loss under the head ‘income from house property’ can be carried forward even if the return is not furnished before the due date prescribed u/s 139 (1). True
(b) Fill in the blanks: 1x4=4
a) Salary, bonus, commission or remuneration due to or received by a working partner from the firm is taxable under the head Profits and Gains from Business and Profession.
b) Conversion of debentures into shares shall not be regarded as _Transfer_ for capital gain purpose.
c) If no system of accounting is followed, interest on securities is taxable on due basis.
d) Loss under the head ‘house property income’ can be carried forward for 8 years.
2. Write short notes on any four of the following: 4x4=16
a) Inadmissible deduction u/s 40.
Ans: Expenses disallowed in case of all assessee [Sec. 40 (a)]
(1) Any interest, royalty or technical fees paid to a NRI either in India or outside India on which tax is deductible is disallowed, if such tax has not been deducted or such tax after deduction has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed under law.
(2) Any interest, commission, brokerage, royalty or technical fees paid to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work on which tax is deductible at source shall be disallowed, if such tax has not been deducted or such tax after deduction has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed under law.
(3) Income Tax, Wealth Tax and Securities transaction tax are not deductible.
(4) Any tax payment borne by the employer on behalf of the employee in respect of non monetary perquisites provided to such employee, which is exempt in the case of the employee u/s 10(10CC).
Expenses disallowed in certain cases:
(1) Any payment made to a relative for services rendered or goods purchased shall be allowed only upto its fair market value. If assessing officer is satisfied that amount paid is more than its fair market value, then he can disallow the expense.
(2) Any payment exceeding Rs. 10, 000 (Rs.35000 in case of payment to a transporter engaged in plying, hiring, transporting etc.) in a day by an assessee will be allowed as a deduction only when payment is made by an account payee cheque. But there are certain exceptions to this rule. This rule is not applicable in the following cases:
Ø Payment is made to bank or financial institution,
Ø Govt. Under required law
Ø Payment on a Banking Holiday
Ø Payment to employees not exceeding Rs.50,000 – Payment in a village not served by a bank
Ø Book Adjustment
Ø Payment for purchase of agriculture produce, Poultry farm produce, Dairy items, cottage industry (working without aid of power.
(3) No deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
(4) Any contribution made by the assessee to unrecognized or non-statutory welfare fund accounts is not deductible.
Salary and Interest on Capital to Partners [Section 40(B)]
The section is applicable exclusively to partnership firms. According to the section Interest paid to a partner by a firm is not deductible if the following conditions are satisfied.
1. It should be authorized by and in accordance with the partnership deed.
2. It should relate to a period falling after the date of the partnership deed.
3. It should be not exceeding 12% p.a. simple rate of interest.
Payment made to working partner: Any amount paid by way of salary, bonus, commission or remuneration by a firm to a partner is not deductible in the computation of income of the firm unless the following conditions are fulfilled.
(a) It should be authorized by and in accordance with partnership deed.
(b) It should relate to a period falling after the date of the partnership deed
(c) It should be paid to a working partner
(d) It should be within the prescribed limits. It should be lower of amount specified in partnership deed or following amount:-On First Rs.300,000 Of Book – 90% of book profits or Rs.150,000 Profits whichever is more
On Balance Of Book Profits – 60% of book profits
On Balance Of Book Profits – 60% of book profits
b) Capital asset.
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
c) Carry forward of business losses.
Ans: 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.
d) Allowable deductions from ‘income from other sources’.
Ans: The following deductions are allowed from income from other sources:
A) Deductions for Interest on Securities, Dividends etc.:
(a) Collection charges [Section 57(i)]: Any reasonable sum paid by way of commission or remuneration to a banker, or any other person for the purpose of realizing the interest.
(b) Interest on Loan [Section 57(iii)]: Interest on money borrowed for investment in securities is allowed as deduction.
(c) Any other expenditure [Section 57(iii)]: Any other expenditure, not being a expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income is allowed as deduction.
B) Deductions permissible from letting out of machinery, plant or furniture and buildings [Section 57(ii) and (iii)]: The following deductions are allowable:
a. current repairs, to the premises
b. Insurance premium against risk of damage or destruction of the premises
c. Repairs and insurance of machinery, plant or furniture
d. Depreciation based upon lock of assets, in the same manner as allowed under section 32.
e. Any other expenditure not being a expenditure of a capital nature, laid out or expended wholly and exclusively for the purpose of making or earning such income is to be given as deduction
C) Deductions in respect of employee’s contribution towards staff welfare schemes [Section 57(ia)]:
Deduction in respect of any sum received by an employer as contribution from his employees towards any welfare fund of such employee is allowable only if such sum is credited by the employer to the employee’s account in the relevant fund before the due date.
D) Family pension payments received by the legal heirs of a deceased employee [Sec.57(iii)]
Family pension is taxable under the `Income from other sources’. On such family pension a standard deduction is to be allowed to the legal heir at 33 1/3% of such pension, or ` 15,000 whichever is less.
e) Tax planning in case of employee’s remuneration.
Ans: Existence of ‘master-servant’ or ‘employer-employee’ relationship is absolutely essential for taxing income under the head “Salaries”. Where such relationship does not exist income is taxable under some other head as in the case of partner of a firm, advocates, chartered accountants, LIC agents, small saving agents, commission agents, etc. Besides, only those payments which have a nexus with the employment are taxable under the head ‘Salaries’. Salary is chargeable to income-tax on due or paid basis, whichever is earlier. Any arrears of salary paid in the previous year, if not taxed in any earlier previous year, shall be taxable in the year of payment.
Following are the some of the tips of tax planning under the head salaries:
1. Salary Structure: The employer should not pay a consolidated amount as salary to the employee. If so paid entire amount is taxable. So split the salary as basic pay, allowances and perquisites in order to get exemptions and deductions available to allowance and perquisites. The employer has to make a careful study and fix the salary structure in such a manner that it will include allowances which are exempt.
2. Employees Welfare Schemes: There are several employees’ welfare schemes such as PF, approved superannuation fund, gratuity, etc. Payments received from such funds by the employees are totally exempt or exempt up to significant amounts. The employer is well advised to institute such welfare schemes for the benefit of the employees.
3. Insurance Policies: Any payment made by an employer on behalf of an employee to maintain a life policy will be treated as perquisite in the hands of employee. Further, payments received from the employer in respect of Key man Insurance Policies constitute income in the hands of the employees. But the premium paid by employer on accident insurance of employee will not be treated as perquisites.
4. Rent Free Accommodation/ House Rent Allowance: An employee should analyze the tax incidence of a perquisite and an allowance, whenever he is given an option. The employee should work out the taxability of HRA and taxability of RFA separately and select least taxable item.
5. Dearness Allowance, Dearness Pay: It should be ensured that, under the terms of employment, dearness allowance and dearness pay form part of basic salary. This will minimize the tax incidence on house rent allowance, gratuity and commuted pension. Likewise, incidence of tax on employer’s contribution to recognized provident fund will be lesser if dearness allowance forms a part of basic salary.
3. (a) Write down briefly the basic principles for arriving at Business income. 11
Ans: Business: “Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has defined the term as “ any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”. In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary.
The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession” (Chargeability - Sec. 28):
a. The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
b. Any compensation or other payment due to or received by,—any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
c. Income derived by a trade, professional or similar association from specific services performed for its members ;
d. The value of any perquisite or benefit arising from business or profession , whether convertible into money or not,;
e. Any interest, commission , salary, remuneration , or bonus due to, or received by, a partner of a firm from such firm :
f. Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
g. Income from speculative transactions.
h. Any sum, whether received or receivable, in cash or kind, under an agreement for:
a. not carrying out any activity in relation to any business; or
b. not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature
i. Any profit on the transfer of the Duty Free Replenishment Certificate
j. Any profit on the transfer of the Duty Entitlement Pass Book Scheme
k. Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947)
Business Income not Taxable under the head “Profits and Gains of Business or Profession”
In the following cases, income from trading or business is not taxable under Sec. 28, under the head “Profits and Gains of Business or Professions” :
Nature of Income | Head under which it is chargeable to Tax |
Rental income in the case of dealer in property | Rent of house property is taxable under Sec. 22 under the head “ Income from House Property” even if property constitutes Stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting properties on rent. |
Dividend from an Indian company, agricultural income, life insurance maturity amount etc. | These incomes are exempted from tax. |
Dividend on shares in the case of a dealer-in-shares. | Dividend on shares are taxable under section 56(2)(i), under the head “Income from other sources” , even if they are derived from shares held as stock in trade or the recipient of dividends is a dealer-in-shares. However, dividend received from an Indian company is not chargeable to tax in the hands of shareholders. |
Income for investments, race course, Winning from Lotteries, part time salaries etc. | Winning form Lotteries, races, etc. are taxable under the head “Income from Other Sources” ( even if derived as a regular business activity) |
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
2. Expenses relating to machinery, plant and furniture
3. Depreciation
4. Development rebate
5. Tea Development Account, Coffee Development Account and Rubber Development Account
6. Site restoration fund
7. Conditions for Allowance of depreciation
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.
EXPENSES WHICH ARE DEDUCTIBLE ON ACTUAL PAYMENT ONLY: Following expenses will be allowed if these expenses have been paid before or on due date or before filing of income tax return:
a) Any tax, duty, cess or fees by whatever name called.
b) Contribution to provident fund, ESI premium, gratuity fund or other funds for welfare of employees.
c) Bonus or commission or leave encashment payable to employees.
d) Interest on loan from public financial institutions, state financial corporation or from scheduled bank.
EXPENSES NOT DEDUCTIBLE FROM BUSINESS/PROFESSION INCOME (DISALLOWED EXPENSES)
a) Expenditure on any type of advertisement of political party.
b) Any interest, royalty, fees for technical services or other sums chargeable under this act, which is payable outside India or in India to non-resident or a foreign company on which tax has not been deducted or after deduction, not deposited in prescribed time.
c) Any interest, commission, rent, royalty, professional or technical fees paid or payable to any resident of India or payment to contractor or sub-contractor on which TDS is not deducted, or if deducted then not deposited before the due date of filing the return.
d) All provisions are reserves (Reserve for bad debts/ Depreciation/ Provision for tax)
e) All Taxes (i.e. Income Tax, Advance income Tax, Wealth Tax etc.) Except sales Tax, Excise Duty and Local Taxes of premises used for business and allowed on paid basis.
f) Any payment of salaries payable outside India or to a non-resident on which tax is not deducted.
g) Any tax actually paid by an employer on any income by way of perquisites, on behalf of the employee.
h) Any remuneration paid to non working partner.
i) Any remuneration paid to working partner other than specified in agreement or as per the specified limits by income tax act.
j) Any interest to partner if not specified in agreement and not more than 12%.
k) Any payment in cash or bearer cheque exceeding Rs.20000/=. (Rs.35000/= in case of payment made for plying, hiring or leasing goods carriages) except when payments are made under circumstance specified in Rule 6DD of Indian income tax act.
Or
(b) Mr. B, a businessman, submits the following Profit and Loss Account for the year ending 31.32015:
Particulars | Rs. | Particulars | Rs. |
Salaries Travelling expenses Rent & taxes Interest on capital Administrative charges Depreciation Income Tax Net Profit | 75,000 1,25,800 3,000 5,000 25,000 25,000 50,000 3,51,200 | Gross Profit Interest on company deposits Discount received | 6,50,000 8,500 1,500 |
6,60,000 | 6,60,000 |
The following additional information is furnished:
a) Salaries include a payment of Rs. 24,000 to Mrs. B, who is acting as supervisor of the quality control department. She does not have any other income during this year. Till February, 2014 she was employed in R Ltd., in a similar post for 10 years and was drawing a monthly salary of Rs. 1,500.
b) Mr. B had gone on a foreign tour in connection with business. The journey was for 15 days in which he spent 3 days on visiting tourist spots. Total expenses incurred, which were within RBI norms as well, in respect of this foreign tour was Rs. 75,000.
c) Administrative charges include expenses in respect of donation of Rs. 1,000 to the trade association for the purposes of advertisement in souvenir published by it.
d) Depreciation allowance as per Income Tax Rules, 1962 is Rs. 45,000.
e) Mr. B raised a loan from LIC of India on the security of his life insurance policy and used the same for the payment of expenses relating to repairs of machinery. Interest of Rs. 2,500 in respect of this loan was paid out of his drawings.
f) From the above particulars, compute the total income under the head Business/Profession of Mr. B for the assessment year, 2015-16. 11
3. (b) Calculation of Business Income
| Particulars | Amount | Amount |
| Net Profit for the year Add: Disallowed Expenses: Interest on Capital Depreciation Income-tax Donation Salaries (24,000 – 18,000) Travelling Expenses (75,000 x 3/15) | 5,000 25,000 50,000 1,000 6,000 15,000 | 3,51,200 1,02,000 |
| | | |
| Less: Expenses allowed but do not Shown in P/L A/c : Depreciation on T Interest on Loan | 45,000 2,500 | (47,500) |
| | | |
| Less: Income which are covered under different heads (Disallowed): Interest on Company deposits (Other sources) | | (8,500) |
| Business Income | | 46,000 |
4. (a) What is Transfer of Capital Asset? Discuss the procedure for computation of capital gains. 4+8=12
Ans: Transfer basically means the act by which a person conveys property to one or more persons. Transfer means effective conveyance of the capital asset to the transferee. As per Section 2(47), ‘transfer’ includes:
(i) Sale or exchange of the asset: A sale takes place when title in the property is transferred for a price. While an exchange takes place when title in one property is passed in consideration of the title in another property. A sale can be said to have taken place on the date of execution of the sale deed and not on the date of the agreement to sell.
(ii) Relinquishment of the asset: Relinquishment of a capital asset arises when the owner surrenders his rights in a property in favour of another person. For example, the renunciation of right to subscribe to shares in a company under a ‘Rights Issue’ to a third person.
(iii) Extinguishment of any right in the asset: This covers ever possible transaction which results in destruction, annihilation, extinction, termination, cessation, or cancellation of all or any bundle of rights in a capital asset.
(iv) Compulsory acquisition of the asset under any law;
(v) Conversion of the asset into stock-in-trade of a business carried on by the owner of the asset;
(vi) Maturity or redemption of a zero coupon bond issued by an infrastructure capital company/fund or a public sector company on or after 1.6.2005 and notified by the Central Government, in respect of which no payment or benefit is received or receivable before maturity/redemption;
(vii) Handing over the possession of an immovable property in part performance of a contract for the transfer of that property;
(viii) Transactions involving transfer of membership of a group housing society, company, etc., which have the effect of transferring or enabling enjoyment of any immovable property or any rights therein;
(ix) Distribution of assets on the dissolution of a firm, body of individuals or association of persons;
(x) Transfer of a capital asset by a partner or member to the firm or AOP, whether by way of capital contribution or otherwise; and
(xi) Transfer, under a gift or an irrevocable trust, of shares, debentures or warrants allotted by a company directly of indirectly to its employees under the Employee’s Stock Option Plan or Scheme of the company as per Central Govt. guidelines.
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.
Cost of acquisition is the amount for which the capital asset was originally purchased by the assessee. Expenditure incurred in connection with such purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expense, is added to price or value of consideration for the acquisition of the asset. Interest paid on moneys borrowed for purchasing the asset is also part of its cost of acquisition. In case of depreciable asset of an undertaking engaged in generation or generation and distribution of power, its written down value shall be taken as its cost of acquisition.
Cost of improvement: Cost of improvement means all capital expenditure incurred in making additions or alternations to the capital asset, by the assessee (or the previous owner). Betterment charges levied by municipal authorities also constitute cost of improvement. Compensation paid to tenants for getting vacant possession amounts to cost of improvement. However, only the capital expenditure incurred by the assessee on or after 1.4.2001, is to be considered and that incurred before 1.4.2001 is to be ignored. Improvement should be to the capital asset; expenditure incurred on improving the owner’s title to the asset is not being included in ‘cost of improvement’. In case of in tangible assets like goodwill, right to manufacture, etc. cost of improvement shall be nil.
Or
(b) Mr. A transfer the following capital assets:
Particulars | House Property | Gold | Shares |
Date of acquisition Date of transfer Sale consideration (in Rs.) Cost of Acquisition (in Rs.) Cost of improvement incurred in 2012-13 Expenditure on transfer (in Rs.) | 30.06.1984 31.01.2015 19,00,000 90,000 1,27,800 20,000 | 31.08.2013 28.02.2015 7,00,000 5,00,000 - 10,000 | 30.04.1987 15.03.2015 10,00,000 8,00,000 - 5,000 |
Determine the amount of capital gain chargeable to tax for the assessment year, 2015-16 considering CII of 1984-85, 2012-13 and 2014-15 at 125, 852 and 1024 respectively. 12
Solution: Calculation of Long Term Capital Gain
Particulars | House Property | Gold | Shares |
Sale Consideration Less: Expenses on sale | 19,00,000 20,000 | 7,00,000 10,000 | 10,00,000 5,000 |
Net Sale Consideration Less: Indexed Cost of Acquisition Less: Indexed cost of improvement | 18,80,000 7,37,280 (90,000*1024/125) 1,53,600 (1,27,800*1024/852) | 6,90,000 5,00,000 | 9,95,000 8,00,000 |
Tong Term Capital Gain | 9,89,120 | 1,90,000 (STCG) | 1,95,000 (Exempted) |
Note:
5. (a) Explain the assets exempted from Tax under the Wealth-tax Act. 11
Or
(b) Explain briefly the deemed assets under the Wealth-tax Act. 11
6. (a) (i) For the previous year ending March, 31, 2015, Mr. C (59 years) submits the following information:
1. Income from house property – Rs. 2, 50,000.
2. Loss from Business (non-speculative) – Rs. (-) 1, 00,000.
3. Bank fixed deposit interest – Rs. 50,000.
4. Deposit in public provident fund account – Rs. 1,25,000
5. Payment of life insurance premium on own life – Rs. 35,000
6. Mediclaim insurance premium on the life of C’s father – Rs. 30,000.
Determine the amount of net income and tax liability of Mr. C. 8
Solution: Computation of net income
I. Income from house property II. Loss from business III. Bank fixed deposit interest | 2,50,000 (1,00,000) 50,000 |
Gross Total Income Less: Deduction u/s 80C to 80U (a) 80C - PPF = 1,25,000 -Insurance premium = 35,000 (Max: 1,50,000 (b) 80D - Mediclaim insurance = Max 30,000 | 2,00,000 1,50,000 25,000 |
Total Income | 25,000 |
No tax liability |
Note: Mediclaim insurance Max. 30,000 for senior citizen.
(ii) Write briefly the provisions of carry forward and set off of loss from house property under the Income-tax Act.
(ii) Write briefly the provisions of carry forward and set off of loss from house property under the Income-tax Act.
Ans: 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.
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.
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.
Or
(b) (i) Loss under a head of income can be set off against income under any other head of income in the same assessment year. Is there any exception to this rule? 7
Ans: 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.
(ii) Show the order in which current and brought forward losses are to be set off. 4
Ans: 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.
7. (a) Distinguish between tax avoidance and tax evasion. What are the objectives of tax planning? 4+7
Ans: 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. |
Objectives of tax planning
Tax Planning is the honest and rightful activity to minimize tax burden of various persons. Needs and significances of tax planning were discussed below:
(a) Reduction of tax liability: The basic need of tax planning is to reduce tax liability by arranging his affairs in accordance with the requirements of law, as contained in the Income tax law. In many a cases, a taxpayer may suffer heavy taxation not due to high rate of tax, but, because of his lack of awareness of the legal requirements.
(b) Minimization of litigation: There is always struggle between taxpayers and tax administrators. Tax payers try to pay least tax and the tax administrators attempt to levy higher amount of tax. Where a proper tax planning is adopted by the tax payer in conformity with the provisions of the taxation laws, the incidence of litigation is minimized.
(c) Productive investment: Channelization, of taxable income to the various investment schemes is one of the prime purpose of tax planning as it is aimed to attain twin-objectives of: (i) mobilising the resources for socially productive projects, and, (ii) relieving the tax payer from the burden of taxation, converting the earnings into means of further earnings.
(d) Reduction in cost: The reduction of tax by tax planning reduces the overall cost. It results in more sales, more profit and more tax revenue.
(e) Healthy growth of economy: The growth of a nation’s economy is synonymous with the growth and prosperity of its citizens. In this context, a saving of earnings by legally sanctioned devices fosters the growth of both. Tax-planning measures are aimed at generating white money having a free flow and generation without reservations for the overall progress of the nation. On the other hand tax evasion results generation of black money, the evils of which are obvious. Tax planning thus assumes a great significance in this context.
(f) Economic stability: Tax planning results in economic stability by way of: (i) availing of avenues for productive investments by the tax payers and, (ii) harnessing of resources for national projects aimed at general prosperity of the national economy and (iii) reaping of benefits even by those not liable to pay tax on their incomes.
(g) Employment generation: Tax planning creates employment opportunities in different ways. Firstly, efficient tax planning requires some sort of expertise that creates job opportunities in the form of advisory services. Secondly, amount saved through tax planning is generally invested in commencement of new business or the expansion of existing business. This creates new employment opportunities.
Or
(b) Explain the methods commonly used by tax payers to minimize tax liability. 11
Ans: Tax Avoidance, Tax evasion, Tax Mitigation and Tax Management
The methods adopted to reduce the tax liability can be broadly put into four categories:”Tax Planning”, ”Tax Avoidance”; "Tax Evasion", "Tax Mitigation” and “Tax Management”. The difference between these three methods sometimes become blurred owing to the perception of the tax authorities and / or tax payer.
Tax Planning: In an organized society, tax is unavoidable because it is the price paid for administrative and political stability by the public to the Government. It is the duty of each citizen to pay due taxes in time and not to resort to any device to evade the payment of taxes. An effective tax strategy is vital for successful financial planning since payment of taxes reduces the disposable income of the tax payers. To solve the problem of tax burden, the concept of tax planning has been introduced in the Income Tax Act. Tax planning may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provisions, full advantage is taken of all tax exemptions, rebates, allowances and other reliefs or benefits permitted under the Act. This will reduce the burden of taxation on the assessee as far as possible. Tax planning may be regarded as a method of intelligent application of expert knowledge of planning one’s economic affairs with a view to securing the consciously provided tax benefits on the basis of national priorities in keeping with the legislative and judicial opinion. But it does not imply taking undue advantage of loopholes in tax laws or evading tax liability. Hence tax planning is defined as the methods used by a tax payer to reduce his burden of taxes in a legal manner. Tax planning may be legitimate provided it is within the frame work of tax laws. Hence tax evasion and tax avoidance must be understood as distinct from tax planning.
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.
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.
Tax evasion is considered as a white collar crime and is spreading like anything. It is the most serious and perpetual problem being faced not only by the India but by all most all the countries of the world. Tax evasion leads to generation of ‘black money’ which, with its all ills, is a matter of grave concern since it has adverse long lasting ill economic effects on the Society. Therefore, in order curb the practice of tax evasion, the Government all over the world has framed stringent provisions.
Tax Mitigation: "Tax Mitigation" is a situation where the taxpayer takes advantage of a fiscal incentive afforded to him by the tax legislation by actually submitting to the conditions and economic consequences that the particular tax legislation entails. A good example of tax mitigation is the setting up of a business undertaking by a tax payer in a specified area such as Special Economic Zone (SEZ).
Tax Management
Tax planning is a wider term and it includes tax management also. Tax management is an important aspect of tax planning. Planning which leads to filing of various returns in time, compliance of the applicable provisions of law and avoiding of levy of interest and penalties can be termed as efficient tax management. It is an exercise by which defaults are avoided and legal compliance is secured. The filing of returns with all proper documentary evidence for the various claims, rebates, reliefs, deductions and computation of income and tax liability would come under the purview of tax management. The assessee is exposed to certain unpleasant consequences if obligations cast under the tax laws are not duly discharged. Such consequences take shape of levy of interest, penalty, prosecutions, forfeiture of certain rights etc. Therefore any effort in tax planning is incomplete unless proper discharge of responsibilities is made. Tax management includes:
a. Compiling and preserving data and supporting documents evidencing transactions, claims etc.
b. Making timely payment of taxes.
c. TDS and TCS compliance.
d. Following procedural requirements.
e. Timely filing of returns.
f. Responding to notices received from the authorities.
g. Preserving record for the prescribed number of years.
h. Mentioning PAN, TAN etc. at appropriate places.
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