Sunday, May 05, 2019

Dibrugarh University B.Com 6th Semester: Direct Tax II Solved Papers (May' 2018)


2018 (May)
COMMERCE (Speciality)
Course: 601 (Direct Tax - II)
Time: 3 hours
The figures in the margin indicate full marks for the questions
 (NEW COURSE)
Full Marks: 80
Pass Marks: 24
1. (a) Write True or False:                            1x4=4
1)      Preliminary expenditure incurred after 31.03.2008 are allowed deduction in 10 equal installments.   False, Under Sec. 35D preliminary expenses are allowed deduction in 5 equal installments.

2)      Conversion of debentures into shares shall not be regarded as transfer for capital gain purpose.       True      
3)      If no system of accounting is followed, interest on securities is taxable on receipts basis.       (Note: Interest on securities may be taxed on due or receipts basis depending upon the system of accounting. If the assessee follows cash system of accounting, interest is taxable on receipts basis, otherwise it shall be taxable on due basis. If no system of accounting is followed, it will always be taxable on “due” basis.)           
4)      Loss on account of owning and maintaining the racehorse can be carried forward indefinitely.            False (Note: According to provisions of section 74A(3), the losses incurred by an assessee from the activity of owning and maintaining race horses can be set-off against the income from the activity of owning and maintaining race horses only. Such loss can be carried forward for a maximum period of 4 assessment years for being set-off against the income from the activity of owning and maintaining race horses in the subsequent years.)

(b) Fill in the blanks:                                      1x4=4
1)      Short-term capital loss on particular assessment year can be set off in the same assessment year from STCG and LTCG only.
2)      For claiming exemption under Section 54, the assessee should construct the residential property within 3 years after the date of transfer.
3)      Interest on units of a Mutual Fund on or after April 1, 2003 shall be exempt.  [According to Sec. 10(35), any income from units of mutual funds are exempted from]
4)      Where a part of the block of assets is sold for a price less than the opening WDV plus cost of assets, if any, acquired during the year, the balance amount shall be treated as WDV at the end for charging depreciation.
2. Write short notes on any four of the following:                                           4x4=16
a)      Block of assets.
Ans: 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.
b)      Chargeability under the head ‘Profits and gains of business or profession’.
Ans: 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) 

c)       Long-term and short-term capital gains.
Ans: 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.
Differences between short-term and long-term capital gain:
Short term capital gains
Long term capital gains
STCG is included in the Gross total income of the assessee and taxed as per rate applicable to that assessee.
LTCG is in Gross total income and is taxed on the flat rate of 20% (10% in certain case or Nil in certain cases).
Deductions under sections 80C to 80U are available.
Deductions under sections 80C to 80U are not available.
Set-off of minimum exemption limit is available from all STCGs for resident as well as Non-resident.
Set-off of minimum exemption limit is available only for resident.
STCL can be set-off against STCG and LTCG.
LTCL can be set-off against only LTCG.
Cost of acquisition & Cost of improvement are not indexed in case of STCG.
Cost of acquisition & Cost of improvement are indexed in case of long-term capital gains.

d)      Not allowable deductions from ‘income from other sources’.
Ans: Deductions Not allowed from income from other sources (Sec. 58)
The following are not allowed as deduction in computing income form other sources .
1. Personal expenses : Any personal expenses of the assessee are not deductible.
2. Interest : Any interest chargeable under the Act which is payable outside India on which tax has not been deducted at source is not deductible.
3. Salary without TDS : Any payment chargeable under the head ``Salaries’’ and payable outside India is not deductible if tax has not been paid or deducted there from.
4. Wealth Tax : Any sum paid on account of wealth tax is not deductible.
5. Amount specified by Section 40A : Any amount specified by section 40A under the head profit or gain from business or profession is not deductible while calculating income under the head ``Income from other sources’’.
6. Expenditure in respect of Royalty and Technical fees received by a foreign company : In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.

e)      Carry forward of business losses.
Ans: 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.
3. (a) What do you understand by the term ‘depreciation’? What are the rules regarding grant of deduction for depreciation?                                   4+10=14
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.
CONDITIONS FOR CLAIMING DEPRECIATION
a)      Depreciation is allowed on all tangible or intangible assets except land, animals or goodwill.
b)      Asset must be owned (wholly or partly) by the assessee and must be used for the purpose of business or profession.
c)       If an asset is partly used for the purpose of business or profession and partly for personal purpose then, proportionate depreciation is to be provided.
d)      No depreciation is charged on the hired asset but if any capital expenditure is incurred on hired building then depreciation can be claimed on such capital expenditure.
e)      Asset must be used during the relevant previous year. It is not necessary that asset must be used throughout the year, even use during any part of the year would be sufficient to claim depreciation.
f)       Depreciation is calculated on the last day of accounting year and only on those assets which are in use on that day.
g)      Depreciation shall be allowed on WDV of Block of asset at a prescribed rate. Under section 2(11), “Block of assets” means a group of assets falling within a class of assets comprising
(i)      Tangible assets, being buildings, machinery, plant or furniture.
(ii)    Intangible assets, being know-how, patents, copyrights, Trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.
h)      Total depreciation in the life of an asset cannot exceed its actual cost.
i)        Depreciation on stand-by assets or assets which are not used during previous year is not allowed except in case generator.
j)        No depreciation is allowed in the year in which the assets is sold or demolished or discarded or destroyed.
k)      When a new asset acquired during previous year, full depreciation is allowed if assets used for 180 or more than 180 days and half year’s depreciation is allowed if installed and used for less than 180 days.
ACTUAL COST SECTION 43(1):
Actual cost means the actual cost of the assets to the assessee as reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
Items to be included in cost of fixed assets.
(1) Cost of fixed asset.
(2) Interest on money borrowed for purchase of the assets till the asset is put to use.
(3) Carriage inward, loading or unloading charges.
(4) Installation charges.
(5) Cost of repair and modification prior to the use of asset.
(6) Commission paid to banker for giving guarantee to supplier of the asset.
Items not to be included in cost of fixed assets:
(i) Excise duty and additional duty leviable thereon in respect of which credit is claimed and allowed.
(ii) Amount of subsidy, grant or reimbursement by the Central Govt. of State Govt. or any authority established under any law or any other person towards a portion of cost of asset.
(iii) Expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs.10,000, such expenditure shall be ignored for the purposes of determination of actual cost.
RATE OF DEPRECIATION FOR THE ASSESSMENT YEAR 2019 – 2020 (WDV BASIS)
BLOCK
NATURE OF ASSET
RATE
Building
Block-1
Residential building other than hotels and boarding houses
5
Block-2
Office, factory, godowns or building-not mainly residential purpose
10
Block-3
Temporary erection such as wooden structures
100
Furniture
Block-4
Furniture-Any furniture/fitting including electrical fittings
10
Plant and machinery
Block-5
Any plant or machinery (not covered by block 6, 7,8,9,10,11 or 12) and motors cars (other than those used in a business of running them on hire) acquired or put to use on or after April 1, 1990
15
Block-6
Ocean-going ships, vessels ordinary operating on inland waters Including speed boats
20
Block-7
Buses, lorries and taxies used in business of running them on hire, machinery used in semi-conductor industry, moulds used in rubber and plastic goods factories
30
Block-8
Aero planes, life saving medical equipment
40
Block-9
Containers made of glass or plastic used as refill, new commercial vehicle which is acquired during Jan 1, 2009 and Sept 30, 2009 and is put to use before Oct 1, 2009 for the purpose of business / profession
50
Block-10
Computers including computer software. Books (other than annual
Publication) owned by a professional.
60
Block-11
Energy saving devices; renewal energy devices; rollers in flour mills,
Sugar works and steel industry
80
Block-12
Air pollution control equipments; water pollution control equipments; Solid waste control equipments, recycling and resource recovery System; (being annual publication) owned by assesses Carrying on a profession or books (may or may not be annual Publication) carrying on a business in running lending libraries
100
Intangible Assets
Block-13
Intangible assets (acquired after March 31, 1998) – know-how, Patents, copyrights, trademarks, licenses, franchises another business or commercial rights of similar nature
25
CONDITION WHEN ONLY 50% DEPRECIATION IS ALLOWED
If any particular asset is purchased during the year and it has been put to use for less than 180 days during the year, in that case, depreciation is allowed at half the normal rate. If it is purchased during the year and is not at all put to use, depreciation shall not be allowed. But in the subsequent year whenever the asset is put to use, full depreciation shall be allowed irrespective of period of use.
“Put to use” does not mean putting the asset to actual use rather it means making an asset ready for use. So the all following conditions should be fulfilled:
a) An asset is acquired in the previous year and
b) It is put to use in this previous year and
c) Such put to use is for a period less than 180 days
ADDITIONAL DEPRECIATION.  Section 32(1)(iia)
In the case of any new machinery or plant which has been acquired and installed after the 31.03.2018, by an assessee engaged in the business of manufacture or production, or in the business of generation or generation and distribution of power, additional depreciation at the rate of 20% of the actual cost of such machinery or plant shall be allowed if all of the following conditions must be fulfilled:
Ø  Asset must be new and it has not been used earlier. 
Ø  It must be for manufacturing or production
Ø  Power Generation and Distribution companies are also eligible for Additional Depreciation.
Ø  It is allowed in addition to normal depreciation and shall be taken into consideration for calculating normal written down value.
Or
(b) The following are the fixed assets owned and used by a firm in its business of manufacturing articles for the assessment year, 2016-17:
Block of Assets
WDV on 01.04.2015
Addition during the year
Rate of
Depreciation
(a) Factory  Building
10,00,000
2,00,000 (Completed on 01.01.2016)
10%
(b) Residential  Building
5,00,000
1,00,000 (Completed on  01.05.2015)
5%
(c) Plant and  Machinery
45,00,000
15,00,000 (installed on  15.06.2015)
15%
(d) Furniture  and Fittings
2,00,000
50,000 (Put to use on 13.04.2016)
10%
Calculated the total amount of depreciation.                                  14
Ans: Calculation of Depreciation for the assessment year 2016-2017 (Previous year 2015-16)
Particulars
Factory
Building
(10% Block)
Residential
Building
(5% Block)
P/M
(15% Block)
Furniture
and fittings
(10% Block)
WDV as on 1-4-2015
Add: Cost of new asset (use>180 days)
Add: Cost of new asset (use<180 days="" o:p="">
10,00,000
------------
2,00,000
5,00,000
1,00,000
----------
45,00,000
15,00,000
-----------
2,00,000
----------
----------

WDV as on 31-3-2016
12,00,000
6,00,000
60,00,000
2,00,000

Depreciation:
Assets acquired during the year but used for less  than 180 days:

Additional depreciation on new P/M @ 20%

Remaining asset for full year


10,000
(2,00,000*10%*1/2)
---------------

1,00,000
(10,00,000*10%)


-----------------------

----------------------

30,000
(6,00,000*5%)


---------------

3,00,000
(15,00,000*20%)
9,00,000
(60,00,000*15%)


------------

------------

20,000
(2,00,000*10%)

Total Depreciation
1,10,000
30,000
12,00,000
20,000

Note: Since newly purchased furniture is not put to use during previous year 2015-16, therefore no depreciation is provided on newly purchased furniture. Depreciation on newly acquired furniture in provided for full year during previous year 2016-17 whether or not asset is used for less than or more than 180 days.
4. (a) Explain, in detail, capital gain exempted from tax.                                               14
Ans: Capital Gains Exempted from tax
1. Capital Gains from Transfer of a Residential House: [Sec.54]: Any long-term capital gains arising on the transfer of a residential house (including self-occupied house), to an individual or HUF, will be exempt from tax if the assessee has within a period of one year before or two years after the date of such transfer purchased, or within a period of three years constructed, one residential house in India.
Amount of exemption: The amount of exemption available is equal to the amount so utilised or the amount of capital gain, whichever is less. If the whole or any part of the capital gain cannot be so utilised for acquisition of a residential house before filing the return, the same should be deposited in Capital Gains Account Scheme, 1988 in order to claim exemption, before the due date for furnishing the return.
For availing this exemption, the assessee must not transfer the new house, within a period of three years from the date of its purchase or construction, as the case may be. Otherwise the exemption allowed under this section shall be reduced from the cost of the new house, in computing the capital gains arising therefrom.
2. Capital Gains from Transfer of Agricultural Land : [Sec.54B]: Any capital gain (both short-term and long-term) arising to an individual or H.U.F. from transfer of any land, which was used by the assessee or his parent (in case of individual assessee) for agricultural purpose in the immediately preceding two years, shall be exempt from tax, if the assessee purchases within 2 years from the date of such transfer, any other land (to be used for agricultural purposes). Other-wise, the amount can be deposited under Capital Gains Account Scheme, 1988 before the due date for furnishing the return.
Amount of exemption: The amount of exemption allowable is equal to the amount of capital gain or the cost of new agricultural land purchased (including the amount deposited in Capital Gains, Account Scheme), whichever is less. The new land is not to be transferred for a period of three years from the date of its purchase, otherwise the amount of exemption allowed earlier shall be withdrawn, by reducing this amount from the case of the new land, in computing the capital gains arising from its transfer.
3. Capital Gains from Compulsory Acquisition of Industrial Undertaking: [Sec. 54D]: Any capital gain arising from the transfer by way of compulsory acquisition of land or building of an industrial undertaking, shall be exempt, if the assessee purchases/ constructs within three years from the date of compulsory acquisition, any land or building forming part of industrial undertaking. Otherwise, the amount can be deposited under the ‘Capital Gains Accounts Scheme, 1988’ before the due date for furnishing the return.
Amount of exemption : The amount of capital gain exempt shall be equal to the capital gain or the cost of new land or building purchased or constructed (including the amount deposited under the CGA scheme), whichever is less. The new land or building purchased or constructed, as the case may be, is not to be transferred for a period of three years from its purchase or construction, otherwise the exemption allowed shall be withdrawn, by reducing it from the cost of the new land or building, in computing the capital gains arising from their transfer.
4. Capital Gains invested in Certain Bonds: [Sec.54EC]: Any long-term capital gain arising from transfer [of land or building or both] that takes place on or after 1.4.2000, shall be exempt if the whole of the amount of such capital gain is invested in long-term specified assets i.e. bonds issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd., or any other notified bonds within a period of six months from the date of transfer. The amount of investment in long-tem specified assets by an assessee during a financial year shall not exceed Rs.50 lakhs.
5. Capital Gains invested in Units of a Notified Fund for Financing Start-Ups: [Sec.54EE]: Any long-term capital gain shall be exempt if the whole of the amount of such capital gain is invested, within a period of six months from the date of transfer, in long-term specified assets i.e. units issued up to 31.3.2019 by a notified fund set up for financing start ups. The amount of investment in long-term specified assets by an assessee during a financial year shall not exceed Rs.50 lakhs.
6. Capital Gains from an Asset other than Residential House: [Sec. 54F]: Any long-term capital gain arising to an individual or HUF, from the transfer of any asset, other than a residential house, shall be exempt if the whole of the net consideration is utilised within a period of one year before or two years after the date of transferor for purchase, or within 3 years in construction, of one residential house in India.
Amount of exemption : If, however, only a part of net consideration is so utilised, the amount of exemption shall be equal to: (Capital Gains × New Residential House)/ Amount of Net Consideration
Further, if the amount cannot be so utilised before filing the return, then in order to avail of the exemption, it may be deposited under the Capital Gains Accounts Scheme, 1988 before the due date for filing the return u/s 139.
7. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to Rural Area [Sec.54G] : Any capital gains arising from transfer of machinery, plant, land or building or any rights therein, in the course of shifting of an industrial undertaking in urban area, shall be exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer, purchased new plant or machinery, acquired or constructed land or building, shifted the original asset and transferred the establishment, to a rural area.
Amount of exemption : The amount of exemption shall be equal to the amount so utilised or the amount of capital gain, whichever is less.
8. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to SEZ: [Sec.54GA]: Any capital gains arising from transfer of machinery, plant, land or building or any rights therein, in the course of shifting of an industrial undertaking in an urban area, to any Special Economic Zone, shall be exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer, purchased new plant or machinery, acquired or constructed land or building, shifted the original asset and transferred the establishment, to the SEZ, or incurred expenses on purposes specified in a scheme framed by the Government in this regard.
Amount exemption : The amount exempt shall be equal to the amount so utilised or the amount of capital gain, whichever is less. If the capital gain cannot be so utilised, then it should be deposited under Capital Gains Accounts Scheme, to avail the benefit, before the due date of filing the return.
9. Capital Gain from Transfer of a Residential Property invested in a manufacturing small or medium enterprise: [Sec. 54GB]: Any long-term capital gain arising to an individual or HUF, from the transfer of a residential property (house or plot of land) effected upto 31.3.2017 (up to 31.3.2019 in case investment is made in an eligible start-up), shall be exempt if the net consideration is invested in the equity of a new start-up SME company or in an eligible start-up in the manufacturing sector or in an eligible business, which is in turn utilised by such company for the purchase of new plant and machinery.
10. Capital Gain on Compulsory Acquisition of Agricultural Land: [Sec. 10(37)]: Any capital gain arising to an individual/HUF on compulsory acquisition of an agricultural land situate in urban areas, where the compensation/consideration is received by the assessee on or after 1.4.2004, provided, the land was being used for agricultural purposes by the HUF/individual or his parent(s), during the period of two years immediately before acquisition. The exemption would be allowed even if agricultural land was not cultivated by the assessee himself but by hired labourer or through his family member.
Or
(b) Mr. S submits the following particulars about the sale of assets during the year, 2014-15:                     14

Jewellery (Rs.)
Land (Rs.)
Gold (Rs.)
Sales Price
Expenses on sales
Cost of acquisition
Year of acquisition
CII
5,00,000
-
60,000
1987-88
150
18,50,000
50,000
2,10,000
1984-85
125
3,50,000
-
1,00,000
1999-2000
389
Calculate the amount of capital gain chargeable to tax for the assessment year 2015-16 if CII for 2014-15 is 1024.  

5. (a) Explain the provisions of the Income-tax Act regarding carry forward of losses.    14
Ans: 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. A furnishes the following particulars of his income for the assessment year 2016-17. You are required to deal with set-off and carry forward of losses:                         14

(Rs.)
Profit from wholesale business
Income from an agency business
Speculation income
Short-term capital gain
Long-term capital gain
50,000
4,000
1,000
6,000
12,000
The carry forward items from the assessment year, 2015-16 are:

(Rs.)
Loss from retail business(now discontinued)
Loss in agency business
Loss from wholesale business
Speculation loss
Short-term capital loss
Long-term capital loss
5,000
6,000
5,000
6,000
7,500
9,000
Current year’s depreciation for wholesale business is Rs. 2,500.
Ans: Calculation of Gross Total Income
Particulars
Amount

Amount
A. Business Income
I. Profit for wholesale business (Non-speculative)
Less: Depreciation for the year

50,000
2,500



Less: Brought forward losses of wholesale business
Less: Brought forward losses of retail business
47,500
5,000
5,000



37,500
37,500


(2,000)


II. Income from Agency business
Less: Loss brought down (2015-16)

4,000
6,000


35,500

III. Speculative Income
Less: Loss brought down (2015-16)

1,000
6,000


Carry forward Speculation Loss
(5,000)

Nil

B. Capital Gains
I. Short term Capital Gain
Less: Loss Brought down (2015-16)


6,000
7,500




(1,500)

3,000

STCL set off against LTCG
II. Long Term Capital Gain
Less Loss Brought down (2015-16)

12,000
9,000


1,500
Total Taxable Income


37,000

6. (a) Explain the important areas where tax planning may be attempted.                           14
Ans: Areas where tax planning can be done
Tax planning can be done under different heads of income which are stated below:
A) Tax Planning of Salaried Assessee
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.
Tax planning regarding salary is relevant for both the employer as well as the employee.
A.      From Employer’s Point of View: Whatever payments the employer is giving to his employee, the same he would like to debit to his Profit and Loss account so that his taxable business income comes to minimum and he has to pay a lesser amount of tax. In case he is unable to debit such payments to his Profit and Loss Account, then he will be required to pay tax from his own pocket on such payments or remunerations given to employees. Hence every businessman would like to make only type of payments which are deductible while calculating business income.
B.      From Employee’s Point of View: Salary received or receivable by the employee whether in cash or in kind is taxable in employee’s hands. Employee would be interested to get all type of benefits, allowances, perks etc. from his employer but at the time, he will be keen to pay the minimum of tax. The scope of tax planning from the angle of employees is limited. The definition of salary is very wide and includes not only monetary salary but also benefits and perquisites in kind. The only deductions available in respect of salary income are the deduction for entertainment allowance and deduction for professional tax. 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.
6. Commission: Commission payable as per the terms of contract of employment at a fixed percentage of turnover achieved by an employee, falls within the expression “salary” as defined in rule 2(h). Consequently, tax incidence on house rent allowance, entertainment allowance, gratuity and commuted pension will be lesser if commission is paid at a fixed percentage of turnovers achieved by the employee.
7. Uncommuted / Commuted Pension: An uncommuted pension is always taxable; employees should get their pension commuted. Commuted pension is fully exempt from tax in the case of Government employees and partly exempt from tax in the case of non government employees who can claim relief under section 89.
8. Provident Fund: An employee being the member of recognized provident fund, who resigns before 5 years of continuous service, should ensure that he joins the firm which maintains a recognized fund for the simple reason that the accumulated balance of the provident fund with the former employer will be exempt from tax, provided the same is transferred to the new employer who also maintains a recognized provident fund.
Since employers’ contribution towards recognized provident fund is exempt from tax up to 12 percent of salary, employer may give extra benefit to their employees by raising their contribution to 12 percent of salary without increasing any tax liability.
9. Medical Allowances: While medical allowance payable in cash is taxable, provision of ordinary medical facilities is not taxable if some conditions are satisfied. Therefore, employees should go in for free medical facilities instead of fixed medical allowance.
10. Retirement Benefits: Since the incidence of tax on retirement benefits like gratuity, commuted pension, accumulated unrecognized provident fund is lower if they are paid in the beginning of the financial year, employer and employees should mutually plan their affairs in such a way that retirement, termination or resignation, as the case may be, takes place in the beginning of the financial year. An employee should take the benefit of relief available section 89 wherever possible. Relief can be claimed even in the case of a sum received from URPF so far as it is attributable to employer’s contribution and interest thereon. Although gratuity received during the employment is not exempt u/s 10(10), relief u/s 89 can be claimed. It should, however, be ensured that the relief is claimed only when it is beneficial.
11. Pension Received by Non Residents: Pension received in India by a non resident assessee from abroad is taxable in India. If however, such pension is received by or on behalf of the employee in a foreign country and later on remitted to India, it will be exempt from tax.
12. Leave Travel Concession: As the perquisite in respect of leave travel concession is not taxable in the hands of the employees if certain conditions are satisfied, it should be ensured that the travel concession should be claimed to the maximum possible extent without attracting any incidence of tax.
13. Free Gift of Assets: As the perquisites in respect of free gift of movable assets(other than computer, electronic items, car) by employer after using for 10 years or more are not taxable, employees can claim these benefits without adding to their tax bill.
14. Perquisites: 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.
B) Tax Planning – Income from House Property
The Annual value of a house property is taxable as income in the hands of the owner of the property. For tax purpose, properties may be classified as “Self Occupied Property” and “Let out Property”.
a) Self-occupied property: For two self-occupied house property, which has not been let out, the Annual Value is taken as nil. Where the house is self-occupied, the interest on capital borrowed after 01.04.1999 for acquisition / construction is allowed as deduction subject to a maximum of Rs. 2 lakhs, provided the construction/ acquisition is completed within 5 years from the end of the financial year in which the loan was borrowed. On all loans taken prior to the above date and also on loans taken for repairing, renewing or reconstructing the property, the ceiling is Rs. 30,000. However, in the case of self-occupied property, taxes levied by the local authority (i.e. municipal tax) cannot be claimed as deduction.
b) Let out property: Taxable value of the let out property shall be the higher of the following:
A. Amount for which property might reasonably expected to let ; or
B. Actual annual rent received / Receivable.
However, where the property was let out but vacant during the whole or part of the year, then taxable value will be the amount actually received. The municipal taxes actually paid during the financial year will be deducted from the taxable value to arrive at the Annual value of house property. From this, standard deduct ion @30% of Annual value of the property and Interest on borrowed capital for the purpose of acquisition, construction, reconstruction, repairs, renovation etc. are allowed as deduct ions, to arrive at the taxable income.
If there is a “Loss from House Property”, the same can be set off against income from any other head in the same assessment year. I f the loss cannot be set off against income from any other head in the same assessment year, the loss is allowed to be carried forward and set off in 8 subsequent years against income from house property only.
Following are some of the tax planning tips under the head Income from House Property.
1. If a person has occupied more than one house for his own residence, only one house of his own choice is treated as self-occupied and all the other houses are deemed to be let out. The tax exemption applies only in the case of two self occupied house and not in the case of deemed to be let out properties. Care should, therefore, be taken while selecting the house( One which is having higher GAV normally after looking into further details ) to be treated as self-occupied in order to minimize the tax liability.
2. As interest payable out of India is not deductible if tax is not deducted at source, care should be taken to deduct tax at source in order to avail exemption u/s 24(b).
3. As amount of municipal tax is deductible on “payment” basis and not on “due” or “accrual” basis, it should be ensured that municipal tax is actually paid during the previous year if the assessee wants to claim the deduction.
C) Tax-Planning – Profits and Gains from Business and profession
Business is any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. Profession is defined to include any profession or vocation, which calls for intellectual or manual skill. It covers doctors, lawyers, singers, musicians etc.
Profits and Gains from Business or profession, income received from providing services etc will be treated as Business or Professional income under this head. The following are some of the important expenses, those can be claimed as deductible expenses.
a) Rent , rates, Taxes, Repairs and Insurance of Premises/ Buildings (Taxes only on actual payment basis)
b) Repairs and Insurance of Plant &Furniture, machinery
c) Depreciation on Building, Plant &Furniture, machinery
d) Insurance premium paid for Stocks/ Stores/ Health Insurance of Employees
e) Interest paid on borrowed capital - from Public financial institution on actual payment
f) PF/Gratuity/ Superannuation Fund contribution etc. on actual payment
g) Bad Debts writ ten off
h) Salary, bonus, commission etc. to employees
i) Expenditure incurred on Entertainment, Traveling, Presentation articles, Advertisement, Maintenance of Guest House etc.
Every business has to follow either cash or mercantile system of accounting.
D) Tax – Planning – Capital Gains
1) Since long-term capital gains bear lower tax, taxpayers should so plan as to transfer their capital assets normally only 36 months after acquisition. It is pertinent to note that if capital asset is one which became the property of the taxpayer in any manner specified in section 49(1), the period for which it was held by the previous owner is also to be counted in computing 36 months.
2) The assessee should take advantage of exemption u/s 54 by investing the capital gain arising from the sale of residential property in the purchase of another house (even out of India) within specified period.
3) In order to claim advantage of exemption under sections 54B and 54D it should be ensured that the investment in new asset is made only after effecting transfer of capital assets.
4) In order to claim advantage of exemption under sections 54, 54B, 54D, 54EC, 54ED, 54EF, 54G and 54GA the tax payer should ensure that the newly acquired asset is not transferred within 3 years from the date of acquisition.
5) If securities transaction tax is applicable, long term capital gain tax is exempt from tax by virtue of section 10(38). Conversely, if the taxpayer has generated long-term capital loss, it is taken as equal to zero. In other words, if the shares are transferred, in national stock exchange, securities transaction tax is applicable and as a consequence, the long-term capital loss is ignored. In such a case, tax liability can be reduced.
Or
(b) What propositions may an employee consider for the purpose of tax planning under the head ‘Salaries’?
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.
Tax planning regarding salary is relevant for both the employer as well as the employee.
C.      From Employer’s Point of View: Whatever payments the employer is giving to his employee, the same he would like to debit to his Profit and Loss account so that his taxable business income comes to minimum and he has to pay a lesser amount of tax. In case he is unable to debit such payments to his Profit and Loss Account, then he will be required to pay tax from his own pocket on such payments or remunerations given to employees. Hence every businessman would like to make only type of payments which are deductible while calculating business income.
D.      From Employee’s Point of View: Salary received or receivable by the employee whether in cash or in kind is taxable in employee’s hands. Employee would be interested to get all type of benefits, allowances, perks etc. from his employer but at the time, he will be keen to pay the minimum of tax. The scope of tax planning from the angle of employees is limited. The definition of salary is very wide and includes not only monetary salary but also benefits and perquisites in kind. The only deductions available in respect of salary income are the deduction for entertainment allowance and deduction for professional tax. 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.
6. Commission: Commission payable as per the terms of contract of employment at a fixed percentage of turnover achieved by an employee, falls within the expression “salary” as defined in rule 2(h). Consequently, tax incidence on house rent allowance, entertainment allowance, gratuity and commuted pension will be lesser if commission is paid at a fixed percentage of turnovers achieved by the employee.
7. Uncommuted / Commuted Pension: An uncommuted pension is always taxable; employees should get their pension commuted. Commuted pension is fully exempt from tax in the case of Government employees and partly exempt from tax in the case of non government employees who can claim relief under section 89.
8. Provident Fund: An employee being the member of recognized provident fund, who resigns before 5 years of continuous service, should ensure that he joins the firm which maintains a recognized fund for the simple reason that the accumulated balance of the provident fund with the former employer will be exempt from tax, provided the same is transferred to the new employer who also maintains a recognized provident fund.
Since employers’ contribution towards recognized provident fund is exempt from tax up to 12 percent of salary, employer may give extra benefit to their employees by raising their contribution to 12 percent of salary without increasing any tax liability.
9. Medical Allowances: While medical allowance payable in cash is taxable, provision of ordinary medical facilities is not taxable if some conditions are satisfied. Therefore, employees should go in for free medical facilities instead of fixed medical allowance.
10. Retirement Benefits: Since the incidence of tax on retirement benefits like gratuity, commuted pension, accumulated unrecognized provident fund is lower if they are paid in the beginning of the financial year, employer and employees should mutually plan their affairs in such a way that retirement, termination or resignation, as the case may be, takes place in the beginning of the financial year. An employee should take the benefit of relief available section 89 wherever possible. Relief can be claimed even in the case of a sum received from URPF so far as it is attributable to employer’s contribution and interest thereon. Although gratuity received during the employment is not exempt u/s 10(10), relief u/s 89 can be claimed. It should, however, be ensured that the relief is claimed only when it is beneficial.
11. Pension Received by Non Residents: Pension received in India by a non resident assessee from abroad is taxable in India. If however, such pension is received by or on behalf of the employee in a foreign country and later on remitted to India, it will be exempt from tax.
12. Leave Travel Concession: As the perquisite in respect of leave travel concession is not taxable in the hands of the employees if certain conditions are satisfied, it should be ensured that the travel concession should be claimed to the maximum possible extent without attracting any incidence of tax.
13. Free Gift of Assets: As the perquisites in respect of free gift of movable assets(other than computer, electronic items, car) by employer after using for 10 years or more are not taxable, employees can claim these benefits without adding to their tax bill.
14. Perquisites: 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.

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