Wednesday, November 06, 2019

Direct Tax - I Solved Papers: Nov' 2016


2016
(November)
COMMERCE (Speciality)
Course: 504
(Direct Tax - I)
The figures in the margin indicate full marks for the questions
1. (a) Write True or False:                                            1x4=4
a)      Once a person is a resident in a previous year, he shall be deemed to be resident for subsequent previous year also.                       False
b)      Scholarship received by a student to meet the cost of education is casual income.  False
c)       Compensation received at the time of voluntary retirement is exempt to the maximum extent of    Rs. 5,00,000/-            True
d)      Municipal tax is a deduction from net annual value.                                 False, from Gross Annual value
(b) Choose the correct answer to the following:                                               1x4=4

a)      Total income of a person is determined on the basis of his:
(i)     Residential status in India.
(ii)    Citizenship in India.
(iii)   Both of the above.
b)      Where the income of an individual includes the income of minor children, such individual shall be entitled to an exemption of
(i)      Rs. 2,000/-
(ii)    Rs. 1,500/- per minor child.
(iii) Rs. 1,500/- per minor child or to the extent of income of the minor child included in the total income of the assessee, whichever is less.
c)       D owns a house in which he lives. His employer reimburses to him the electricity bill amounting to Rs. 6,000/-. It shall be a perquisite for
(i)      Specified employee only.
(ii)    Employee other than specified employees.
(iii) Both specified and other employees.
d)      Which of the following new Income Tax authorities has been provided w.e.f 01.06.2013?
(i)     Principal Chief Commissioner of Income Tax.
(ii)    Chief Commissioner of Income Tax.
(iii)   Joint Commissioner of Income Tax.
2. Write short notes on any four of the following:                                           4x4=16
a)      Concept of income.
Ans: Meaning of Income: Generally speaking the word `Income’ covers receipts in the shape of money or money’s worth which arise with certain regularity or expected regularly from a definite source. However, all receipts do not form the basis of taxation under the Act. According to Section 2(24) `Income’ includes the following
(i) Profits and gains;
(ii) Dividends (voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes.)
(iii) The value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17;
(iv) The value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director
(v) Any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59;
(vi) Any capital gains chargeable under section 45;
(vii) The profit and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society;
(vii) Any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever;
Explanation: for the purposes of this sub-clause:
a.       “lottery” includes winnings, from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme of arrangement by whatever name called;
b.      “card game and other game of any sort’ includes any game show, an entertainment programme on television or electronic made, in which people compete to win prizes or any other similar game;
(ix) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set-up under the provisions of the Employees’ State Insurance Act, 1948 (34 of 1948); or any other fund for the welfare of such employees;
(x) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
(xi) any sum referred to in clause (vii) of section 28.
(xii) receipts without consideration – any sum received u/s 56(2) (v) where any sum of money exceeding Rs. 50,000 is received by an individual or HUF from any person on or after 1.9.2009. However this clause is not applied if money received from relative or on occasion of marriage or under will.
b)      Method of accounting.
Ans: As per section 145, for income-tax purposes, only one of the following two methods of accounting can be followed:
a)      Mercantile system;
b)      Cash system.
Further, the profits from business and profession will have to be computed in accordance with accounting standards which may be prescribed by the Central Government from time to time. The Central Government has since notified the following two accounting standards to be followed by all assessee who are following mercantile system of accounting:
a)      Accounting Standard I relating to disclosure of accounting policies.
b)      Accounting Standard II relating to disclosure of prior period and extraordinary items and changes in accounting policies.
c)       Profit in lieu of salary.
Ans: The amount of any compensation due to or received by an assessee from his employer or former employer or in connection with the termination of his employment. [Sec.17 (3)]. These payments include the following.
(1)    Terminal compensation
(2)    Payment from an unrecognized provident fund or an unrecognized superannuation fund
(3)    Payment under Keyman Insurance Policy
(4)    Any amount due or received before joining or after cessation of employment
(5)    Any other sum received by the employee from the employer.
d)      Leave salary.
Ans: Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in case of other employees the exemption is available subject to specified limits.
1. Leave encashed during service: fully taxable in which it is encashed
2. Leave encashed at the time of retirement
For govt. employee: fully exempted
For other employees: exempted upto minimum of the following
Ø  Notified limit Rs. 300000
Ø  Average salary x 10 months
Ø  Actual amount received
Ø  Average salary x no. of months leave due
Average salary = salary (Same as PF) for 10 months including the month of retirement / 10
Leave due is to be calculated taking one month leave or actual entitlement whichever is less
e)      Exempted property income.
Ans: Properties exempted from tax under the head income from house property (Sec. 10)
1) Income from a farm house.
2) Annual value of one palace in the occupation of an ex-ruler.
3) Property income of a local authority.
4) Property income of an approved scientific research association.
5) Property income of an educational institution and hospital.
6) Property income of a registered trade union.
7) Income from property held for charitable purposes.
8) Property income of a political party.
9) Income from property used for own business or profession.
10) Annual value of two self occupied property.
f)       Income tax authorities.
Ans: Section 116 of the Income Tax Act, 1961 provides for the administrative and judicial authorities for administration of this Act. The Direct Tax Laws Act, 1987 has brought far-reaching changes in the organizational structure. The implementation of the Act lies in the hands of these authorities. The change in designation of certain authorities and creation of certain new posts in the structure are the main features of amendments made by The Direct Tax Laws Act, 1987. These authorities have been grouped into three main wings:
(i)  Administrative [Income Tax Authorities] [Sec. 116]
(a)    the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
(b)   Directors-General of Income-tax or Chief Commissioners of Income-tax,
(c)    Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
(d)   Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),
(e)   Joint Directors of Income-tax or Joint Commissioners of Income-tax.
(f)     Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
(g)    Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
(h)   Income-tax Officers,
(i)      Tax Recovery Officers,
(j)     Inspectors of Income-tax.
(ii) Judicial: Judicial section of income tax authorities includes the following:
(a) Commissioner of Income tax (Appeals)
(b) Appellate Tribunal
(c) High Court
(d) Supreme court
(iii) Assessing Officer [Sec. 2(7A)]
"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act;

3. (a) Discuss about the statutory obligation to file return in income by different persons under the Income-tax Act, 1961.                 14
Ans: Return of income [Section 139(1)]
Section 139(1) requires that every person:
a)         Being a company or a firm; or
b)         Being a local authority, if its total income during the previous exceeds the maximum amount which is not chargeable to income tax; or
c)          Being a person other than a company or a firm or a local authority, if – (1) his total income or (2) the total income of any other person in respect of which he is assessable under the Income-tax Act, during the previous year (without giving effect to provisions of Chapter VI-A i.e. sections 80C to 80U, exceeds the maximum amount which is not chargeable to income-tax.
Shall, furnish a return of his income or the income of such other person.
Mandatory and Voluntary Returns – provisions of Income Tax Act, 1961 relating to filing of return by different types of assessee
(1) Under Section 139(1), in the following cases the filing of Income Tax Return is Mandatory:
1.       Every person who has a total income that exceeds the exemption limit is liable to furnish Income Tax Return within the due date
2.       Any private, public, domestic or foreign country located and/or doing business in India
3.       Any firm including LLP (Limited Liability Partnership) or Unlimited Liability Partnership
4.       Any resident who has an asset located outside of India OR any resident who retains signing authority for an account based outside India – for all these cases Tax return needs to be filed mandatorily in the prescribed form irrespective of the amount of tax liability on those incomes
5.       Every HUF, AOP and BOI, if the total income of these bodies or entities exceeds the prescribed exception limit, are liable to file the Income Tax Return in the prescribed format with required documentation
(2) Voluntary return: If a person or entity has filed income tax returns should an event arise wherein the individual or the entity is not under any compulsion to file a Mandatory Return, then the income tax returns filed by the person or the entity in question will be deemed to be a Voluntary Return. Voluntary Returns are also considered to be valid returns.
Central Government empowered to exempt any person from the requirement of furnishing a return of income [Section 139(1C)]: Although as per section 139(1) it is mandatory to file a return of income but as per section 139(1C), the Central Government may, by notification in the Official Gazette, exempt any class or classes of persons from the requirement of furnishing a return of income having regard to such conditions as may be prescribed is that notification.
(3) Return of income of charitable trust and institutions [Section 139 (4A)]: Every person who is in receipt of the following income for which he is taxable must file a return of income, if such income exceeds the maximum amount not chargeable to tax:
a)         Income derived from property held under trust or other legal obligation wholly for or charitable purposes or religious purpose, or in part only for such purposes; or
b)         Income by way of voluntary contribution on behalf of such trust or institution.
(4) Return of income of political party [Section 139(4B)]: The Chief Executive Officer of every political party, shall, if the total income of the political party exceeds the maximum amount not chargeable to income-tax, furnish a return of such income. It must be submitted within the time period prescribed under section 139(1).
(5) Loss return: Section 139(3): There are five heads under which income can be classified. These are:
a)      Income From Salaries
b)      Income from House Property
c)       Profits & gains from Business or Profession
d)      Capital gains
e)      Income from other sources
When a loss is incurred under the heads “Profits & Gains from Business or Profession” or “Capital gains” during the financial year (period from April to March), the taxpayer has to file a Loss Return. The advantage of filing the loss returns is that it allows one to carry the loss forward which reduces the tax liability for the future years. If loss return is not filed, then loss under various heads cannot be carried forward.
(6) Due date of furnishing return of income: The return of income must be filed in a prescribed form / specified computer readable media and verified in the prescribed manner, on or before the due date mentioned below:
1. 31st July for individuals, HUF, AOP, BOI
2. 30th September for Business requiring audit
3. 30th November for business requiring TP (Transfer pricing report)
(7) Belated return [Section 139(4)]: If an assessee has not submitted his return of income on or before the due date mentioned under section 139(1); or within the time allowed under a notice issued by the Assessing Officer under section 142(1), he can still fie the return of income. Such a return is called belated / late return. Belated return can be field at any time:
a)         Before the expiry of one year from the end of the relevant assessment year, or
b)         Before the completion of the assessment, whichever is earlier.
(8) Revised return [Section 139(5)]: If an assessee, after furnishing the return of income under section 139(1), discovers any omission or any wrong statement in the return field, he may furnish a revised return. Such revised return can be field at any time:
a)         Before the expiry of one year from the end of the relevant assessment year, or
b)         Before the completion of the assessment, whichever is earlier.
(9) Defective return - Section 139(9): A return is considered as defective unless it is accompanied by all documents mentioned in the section. From 2016, return of income shall not be considered as defective even if self-assessment tax has not been paid.
Or
(b) Write an explanatory note on ‘residential status and tax liability’ of a person as per the provisions of the Income-Tax Act.        14
Ans: Residential Status and Tax Incidence
Tax incidence on an assessee depends on his residential status. The residential status of an assessee is determined with reference to his residence in India during the previous year. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship.
Residential Status of an Individual
As per section 6, an individual may be (a) resident and ordinarily resident in India, (b) resident but not ordinarily resident in India, or(c) non-resident in India. The following are the two sets of conditions for determining the residential status of an individual:
Basic conditions:
a) He is in India in the previous year for a period of 182 days or more
OR
b) He is in India for a period of 60 days or more during the previous year and has been in India for a period of 365 days or more during 4 years immediately preceding the previous year.
Note: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more in order to become resident in India:
(a) An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India or an Indian citizen leaving India during the previous year as a member of the crew of an Indian ship.
(b) An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grandparents was born in undivided India).
Additional Conditions:
(i) He has been resident in India in at least 2 out of 10 previous years [according to basic condition noted above] immediately preceding the relevant previous year.
AND
(ii) He has been in India for a period of 730 days or more during 7 years immediately preceeding the relevant previous year.
RESIDENT: An individual is said to be resident in India if he satisfies any one of the basic conditions.
Resident and Ordinarily Resident: An individual is said to be resident and ordinarily resident in India if he satisfies any one of the basic conditions and both of the additional conditions.
Resident but Not Ordinarily Resident: An individual is said to be resident but not ordinarily resident in India if he satisfies any one of the basic conditions but not satisfies both of the additional conditions.
Non-Resident: An individual is a non-resident in India if he satisfies none of the basic conditions.
Residential Status of a Hindu Undivided Family
As per section 6(2), a Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
HUF: Resident or Non-Resident
A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.
A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b).
Additional condition (i) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in immediately preceding the relevant previous year)
Additional condition (ii) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year.
If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
Residential Status of Firm and Association of Persons
As per section 6(2), a partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.
Residential Status of A Company
As per section 6(3), an Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.
Incidence of Taxes
As per Section 5 of the Income Tax Act 1961, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income.
 In order to understand the relationship between residential status and tax liability, one must understand the meaning of “Indian income” and “Foreign income”. An Indian income is one which satisfies any of the following conditions:
1)      If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year, or
2)      if income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year, or
3)      if income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
 Similarly, foreign income is one which satisfies both the following conditions:
1)      Income is not received (or not deemed to be received) in India; and
2)      Income does not accrue or arise (or does not deemed to accrue or arise) in India.
Indian income is always taxable in India irrespective of the residential status of the taxpayer. Foreign income of an individual and HUF from a business controlled or profession setup in India will be taxable in the hands of resident and ordinarily resident and resident but not ordinarily resident but not in the hands of a non-resident. However, Foreign income from a business controlled or profession setup outside India will be taxable only in the hands of resident and ordinarily resident and not in the hands of a resident but not ordinarily resident or a non-resident person.
Foreign income of any other taxpayer (Company, Firm, AOP, BOI etc.) will be taxable if the taxpayer is resident in India and will not be taxable in case the taxpayer is non-resident in India. 
Tax incidence of different taxpayers is as follows—
Particulars
ROR
RNOR
NR
Income received in India
Income deemed to be received in India
Income accruing or arising in India
Income deemed to accrue or arise in India
Income received/ accrued outside India from a business in India
Income received/ accrued outside India from a business controlled outside India
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
No
No

4. (a) Shri Hari is an employee of a Guwahati based company. He provides the following particulars of his salary income:
Basic Salary – Rs. 15,000/- per month.
Bonus – Rs. 15,000/-
Commission on turnover achieved – Rs. 40,000/-
Club facility – Rs. 7,000/-
Rent-free house provided for employer. Lease rent paid by employer – Rs. 7,200/-
Transport allowance – Rs. 2,000 per month.
Free education facility of three children (bills issued in the name of employer) – Rs. 24,000/-
Interest credited to recognized provident fund @ 12% amounted to Rs. 24,000/-
Free use of motorcar of 1.8. It capacity for both official and personal purposes – expenses are met by employer.
He paid – Rs. 3,000/- as professional tax.
Compute Shri Hari’s income under the head ‘income from salary’ for the assessment year, 2016-17.   14
Computation of salary of Mr. X for the Assessment Year (2019-2020)
Particulars
Amount
Amount
a) Basic Salary
b) Bonus
c) Commission on turnover
d) Transport Allowance (No Deduction from AY 2019-20)
e) Club facility
f) Free education
g) Value of car (2,400*12)
j) Value of Rent free house
15% of salary [salary = 1,80,000+15,000+40,000+24,000= 2,59,000]
Or Hire charges
Whichever is less
Interest on RPF @ 12%
Less: Exempted @9.5% (24,000*9.5/12)








38,850
7,200
7,200
24,000
19,000
1,80,000
15,000
40,000
24,000
7,000
24,000
28,800



7,200

5,000
Gross Salary
Less: Deduction U/S 16
(ia) Standard Deduction
(iii) Professional tax paid


40,000
3,000
3,31,000


43,000
Income from Salary

2,88,000
Or
(b) What is the meaning of the term ‘perquisites’ under the head ‘Salary’? Explain tax-free perquisites with suitable example.                                             4+10=14
Ans: Perquisites (Sec. 17[2]):
The term perquisite is defined to signify some benefit in addition to the amount that may be legally due by way of contract of services rendered. Section 17(2) gives an inclusive definition of perquisites.
As per the Terms of Section 17(2), Perquisites Includes:
(i) The value of rent-free accommodation provided (used or not) to the assessee by his employer;
(ii) The value of any concession in the matter of rent respecting any accommodation provided (used or not) to the assessee by his employer;
(iii) The value of any benefit or amenity granted or provided (used or not) free of cost or at concessional rate in any of the following cases (specified employee):
(a) By a company to an employee, who is a director thereof;
(b) By a company to an employee being a person who has a substantial interest in the company;
‘Substantial Interest’ : In relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power.
(c) by any employer (including a company) to an employee to whom the provision of clause (a) and (b) do not apply and whose income under the head of Salaries (whether due from, or paid or allowed by, one or more employer), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000.
(iv) Any sum actually paid by the employer in respect of any obligation on behalf of the employee;
(v) any sum payable (not necessarily paid) by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity;
(vi) the value of any other fringe benefit or amenity as may be prescribed.
Perquisites which are fully exempted (Tax Free):
Ø  Medical facility in employer’s hospital, clinic, dispensary (or) nursing home to the members of employee’s family (spouse, children, dependent parents, dependent brother and sister).
Ø  Medical facility in a government hospital paid or reimbursed by the employer.
Ø  Any medical expenses paid (or) reimbursed by the employer to the employee for treatment in a hospital for notified diseases.
Ø  Mediclaim insurance premium paid (or) reimbursed by the employer to the employees in respect of med claim insurance policy on his own life or life of members of his family.
Ø  Refreshment provided by employee to all during office hours.
Ø  Recreation facilities provided by employer to employees.
Ø  Amount spent on training of employees. Cost of refresher course attended by employee, met by employer including expenditure of higher education or training India or abroad.
Ø  Goods manufactured and sold by employer to his employees at concessional rates.
Ø  Free telephones including mobile phone provided by the employer for personal or official purpose or official purpose etc.
Ø  Free education facility provided to the children of employee in an institution owned/maintained by employer provided fair value of education does not exceed Rs 1000.
Ø  Interest-fee/concessional loan of an amount not exceeding or loan taken for medical treatment of member of the family of employee.
Ø  Computer/laptop given to an employee for official/personal use.
Ø  Transfer of movable assents (other than computer, car or electronic items) to employee after using them for 10 years or more.

5. (a) JP owns a residential house property. It has two equal residential units – Unit-I and Unit-II. While Unit-I is self-occupied by JP for his residential purpose, Unit-II is let out (rent being Rs. 6,000/- per month, rent of 2 months could not be recovered). Municipal tax is imposed @ 12% which is paid by JP. Other expense for the previous year 2015-16 being repairs: Rs. 2,500/-, insurance: Rs. 6,000/-, interest on capital, borrowed during 1998, for constructing the property: Rs. 63,000/-. Find the income from house property of JP for the assessment year, 2016-17.                14
 Ans: Computation of Income from house property of Mr. JP for the assessment year 2015-16
Particulars
Unit I (Self Occupied)
Unit II (Let – Out)
1. Municipal Rental Value
2. Fair Rental Value
3. Standard Rental Value
4. Expected Rental Value (MRV or FRV whichever is higher but limited upto SRV)
5. Actual Rent received or receivable (Annual rent less unrealised rent and loss due to
vacancy)
6. Gross Annual Value (higher of 5 or 6)[in case of vacancy only point 5 is considered)
7. Less: Municipal taxes paid (12% of MRV)

65,000
70,000
62,500
62,500
60,000

62,500
7,800
8. Net Annual value (6-7)
Less: Deduction under section. 24
(a) Standard Deduction @ 30%
(b) Interest on money borrowed
Nil


31,500
54,700

16,410
31,500
Income/ (Loss from house property)
Total Income from house property = (31,500) + 6,790 = (24,710)
(31,500)
6,790
Or
(b) Explain how to compute taxable income from self-occupied house property. Write a short note on deemed ownership. 10+4=14
Ans: Computation of Taxable income from self-occupied house property: There is no income from self occupied house property. In case of self occupied house, Net annual value will be zero. After that deduction under Sec.24 is allowed for interest on borrowed capital only.
Computation of Net Annual Value:
Computation of Annual Value for the determination of Income from House property requires three steps.
Ø  STEP 1 Determine the Gross Annual Value(GAV)
Ø  STEP 2 Determine the value of Municipal taxes
Ø  STEP 3 Compute the Net Annual Value
STEP 1- Determine the Gross Annual Value (GAV):
Calculation of GAV based on the following factors:
1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.
2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.
4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.
5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:
a) Tenancy is in good-faith.
b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.
c) The defaulting tenant doesn't continue to occupy any other property of the assessee.
d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use. 
6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.
7) Unoccupied property: The House property which cannot be occupied by its owner by reason of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.
It should be noted that the procedure for determination of Gross Annual Value is not same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:
1) Property is let out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.
2) Let out property is vacant for a part of the year (Section 23(1) (c)):  If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV.  If the ARR < ERV for any other reason, GAV = ERV.  If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let out period only and the ERV is for whole year as usual.
3) Self-occupied or Unoccupied property (Section 23(2)): GAV = Nil 
4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)):  GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)
5) Deemed to be let out property (Section 23(4)):  This case arises when the assessee has more than two Self-occupied properties in a previous year. In such case, only two of such properties is treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.
6) A portion of the property is let out and the remaining portion is self-occupied:  GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.
Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.
Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.
STEP 2 - Determine the value of Municipal taxes:
The municipal tax or the property tax paid is allowed as deduction from the Gross Annual Value if the following two conditions are satisfied.
(a)    The property is let out during the whole or any part of the previous year,
(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.
STEP 3 - Compute the Net Annual Value:
Gross Annual Value                                        ++++++
Less: Municipal Taxes                                     ++++++
Net Annual Value                                            ++++++ (Nil in case of Self occupied house property)

Deduction u/s 24: Deductions allowable under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a)    Statutory deduction: Not applicable for self occupied house property.
(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Limit of deduction u/s 24(b)
In Case of Self Occupied House Property:  Max. Rs. 2,00,000 is allowed as deduction if the following conditions are satisfied:
Ø  Loan taken after 1 – 4 – 99
Ø  For construction/purchase (Capital expenditure) of house
Ø  Construction completed within 5 years from the end of financial year in which loan is borrowed.
Ø  Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000
Deemed Ownership
Under Section 27 of the Income Tax Act the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property:-
(a)   If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes.
(b)   The holder of an Impartible Estate is deemed to be the owner of all the properties comprised in the estate.
(c)    A member of a co-operative society, company or association of persons, to whom a property or a part thereof is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property.
(d)   A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year.
6. (a) Who are the Income-tax authorities constituted under the Income-tax Act? What are the powers, functions and duties of the Income-tax Officers?          5+9=14
Ans: Income Tax Authorities
Section 116 of the Income Tax Act, 1961 provides for the administrative and judicial authorities for administration of this Act. The Direct Tax Laws Act, 1987 has brought far-reaching changes in the organizational structure. The implementation of the Act lies in the hands of these authorities. The change in designation of certain authorities and creation of certain new posts in the structure are the main features of amendments made by The Direct Tax Laws Act, 1987. These authorities have been grouped into three main wings:
(i)  Administrative [Income Tax Authorities] [Sec. 116]
(k)    the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963),
(l)      Directors-General of Income-tax or Chief Commissioners of Income-tax,
(m) Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals),
(n)   Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals),
(o)   Joint Directors of Income-tax or Joint Commissioners of Income-tax.
(p)   Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals),
(q)   Assistant Directors of Income-tax or Assistant Commissioners of Income-tax,
(r)     Income-tax Officers,
(s)    Tax Recovery Officers,
(t)     Inspectors of Income-tax.
(ii) Judicial: Judicial section of income tax authorities includes the following:
(a) Commissioner of Income tax (Appeals)
(b) Appellate Tribunal
(c) High Court
(d) Supreme court
(iii) Assessing Officer [Sec. 2(7A)]
"Assessing Officer" means the Assistant Commissioner or Deputy Commissioner or Assistant Director or Deputy Director or the Income-tax Officer who is vested with the relevant jurisdiction by virtue of directions or orders issued under sub-section (1) or sub-section (2) of section 120 or any other provision of this Act, and the Joint Commissioner or Joint Director who is directed under clause (b) of sub-section (4) of that section to exercise or perform all or any of the powers and functions conferred on, or assigned to, an Assessing Officer under this Act;
Powers of assessing officers and income tax officers are stated below:
The Assessing Office shall exercise the following powers:
1.       Powers of Civil Court. These authorities shall have the same powers, as are vested in a court under the Code of Civil Procedure 1908, when trying a suit in respect of the following matters:
1)      Discovery and Inspection;
2)      Enforcing the attendance of any person including any officer of a banking company and examining him under oath;
3)      Compelling a person to produce books of accounts and other documents; and
4)      Issuing commissions.
2.       Powers of Search and Seizure of assets and books of accounts. These authorities shall have the power of searching any building, place vessel, vehicle or aircraft and seize books of accounts, other documents, money, bullion, jewellery or other valuable articles or things. Identification marks shall be put on the seized assets. The assets so seized shall be retained by the Assessing Officer in his authority to recover the existing and estimated tax liability of the assessee. The books of accounts or the other documents seized shall not be retained by the authorities for a period exceeding 180 days from the date of seizure.
3.       Power of Assessment. As Assessing Officer or any other authority acting as Assessing Officer shall have following powers while performing his functions:
1)      Power regarding self-assessment.
2)      Power of making regular assessment and Best judgement assessment.
3)      Power to reopen an assessment.
4)      Power to reopen an assessment in case income has escaped assessment.
5)      Power to treat a person as an agent.
6)      Power to assess a person leaving India and trying to alienate his assets.
4.       Power to call for information. These authorities has the power to:
(a) can call any firm to provide him with a return of the addresses and names of partners of the firm and their shares;
(b) can ask any Hindu Undivided Family to provide him with return of the addresses and names of members of the family and the manager;
(c) can ask any person who is a trustee, guardian or an agent to deliver him with return of the names of persons for or of whom he is an agent, trustee or guardian and their addresses;
(d)  can ask an assessee to furnish a statement of names and addresses of all the persons to whom he has paid in any previous year rent, interest, commission, royalty or brokerage etc. amounting to more than Rs. 1,000 or such higher amount as may be prescribed together with particulars of all such payments.
5. Power of Survey. An Income-tax authority may enter any place where business or profession is carried on, if such place is within the limits of the area assigned to him or is occupied by any person is respect of whom the Assessing Officer exercises jurisdiction. The objectives of conducting Income Tax surveys are:
 To discover new assessees;
 To collect useful information for the purpose of assessment;
 To verify that the assessee who claims not to maintain any books of accounts is in-fact maintaining the books;
 To check whether the books are maintained, reflect the correct state of affairs.
6. Power to Inspect Registers of Companies: The above-mentioned authority, may inspect, if necessary, take copies or causes copies to be taken of any register of members, debenture holders, mortgagees of company or of any entry in such register.
7. Collection of Information: For the purpose of collection of information which may be useful for any purpose, the Income tax authority can enter any building or place within the limits of the area assigned to such authority, or any place or building occupied by any person in respect of whom he exercises jurisdiction.
Or
(b) Describe the procedure of an appeal to the Deputy Commissioner (Appeals). Give various orders against which the appeal can be preferred.             7+7=14
Ans: Procedure for filing an appeal
First Appeal before Commissioner (Appeals): Aggrieved tax payer can file appeal before the Commissioner (Appeals) having, jurisdiction over the tax payer. Appeal can be filed when a taxpayer is adversely affected by the Orders passed by Tax authorities. Every appeal to the Commissioner (Appeals) is to be filed in Form No. 35, signed by the taxpayer/director or his authorized representative. Appeal Fees to be paid depending upon total income determined by the Assessing Officer, subject to a maximum of Rs.1000.
Appeal is to be filed within 30 days of the date of service of notice of demand relating to assessment or penalty order or the date of service of order sought to be appealed against, as the case may be. The commissioner may admit an appeal after the expiry of 30 days, if he is satisfied that there was sufficient cause of not presenting the appeal within the period of 30 days.
On receipt of Form no. 35, Commissioner of Income-tax (Appeals) fixes date and place for hearing the appeal by issuing notice to the tax payer and the Assessing Officer, against whose order appeal is preferred. Commissioner of income tax is required to give opportunity of hearing to the assessee and to the assessing officer. The following shall have the right to be heard at the hearing of the appeal:
a)      The appellant either in person or by an authorised representative;
b)      Assessing Officer, either in person or by a representative.
Powers of commissioner
1)         The Commissioner shall have the power to adjourn the hearing of the appeal from time to time.
2)         The Commissioner, may before disposing off any appeal, make such further inquiries as they think fit or may direct the Assessing Officer to make further enquiry and report the result of the same.
3)         The Commissioner may, at the hearing of an appeal, allow the appellant to go into any ground of appeal, not specified in the grounds of appeal, the Commissioner (Appeals) is satisfied that omission of that ground from the form of appeal was not willful or unreasonable.
4)         The order of the Commissioner disposing of the appeal shall be in writing and shall state the points for determination, decision thereon and the reason for the decision.
5)         Limitation of period to decide the appeal by Commissioner (Appeals), the Commissioner (Appeals) may decide upon the appeal (where it is possible) within a period of One year from the end of financial year in which appeal is made.
6)         On the disposal of the appeal, the orders passed by them shall be passed on the assessee as well as to the Commissioner.
After the hearing is concluded, Commissioner (Appeals) passes order in writing and disposes the appeal. In disposing the appeal, the Commissioner (Appeals) as the case may be, has following powers:
1)         To confirm, reduce, enhance or annual the assessment;
2)         To confirm, cancel, enhance or reduce the penalty imposed; and
3)         In other cases to pass such orders in the appeal as he thinks fit.
The Commissioner (Appeals), as the case may be, will not pass any order enhancing the tax liability or a penalty or reducing the amount of refund without giving a reasonable opportunity to the appellant of being heard. He may pass orders on matters which may not have been referred to him.
Orders against which assessee can appeal to the appellate tribunal
An assessee may file an appeal to the Appellate Tribunal against the following orders:
a)      An order passed by Commissioner (Appeals).
b)      An order passed by a Principal Commissioner or Commissioner.
c)       An order passed by an assessing officer.
d)      An order imposing penalty by a Principal Chief Commissioner/Chief Commissioner,  Principal Director General/Director General or Principal Director/Director under Section 272A.
e)      Appeals against the rejection of approval of a religious/charitable institution.
f)       Appeals against the order of Dispute Resolution Panel.
Appeal is to be filed (in Form 36) before the Appellate Tribunal within 60 days of the date on which order appealed against is communicated to the taxpayer or the Commissioner, as the case may be. Appeal fee to be paid based on the taxable income subject to a maximum of Rs.10000. The Appellate Tribunal may admit an appeal after the period of 30 days if it is satisfied that there was sufficient cause for not presenting it within the prescribed time.
After admitting the appeal, the ITAT will fix the date of hearing along with the place of hearing the appeal and will also notify the parties. A copy of memorandum of appeal is to be sent to the respondent either before or along with such notice. The ITAT will hear the appeal on the date fixed. The appeal may be adjourned on other dates and in such a case the appeal will be heard on the respective dates. If the appellant is called by the ITAT but fails to appear before the ITAT either in person or through an authorized representative, the appeal may be disposed of by the ITAT on merits after hearing the respondent. Subsequent to ex parte hearing, if the appellant appears before the ITAT and satisfies the ITAT that there was sufficient cause in his case for non-appearance before the ITAT, then set aside the ex parte order and restore the appeal. Similar procedure is applicable where appeal is disposed of in the absence of respondent.
(Old Course)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
1. (a) Write True or False:                                             1x4=4
1)      Body of individuals should consist of individuals only.                              True
2)      No person other than individual or HUF can be ‘not ordinarily resident in India’.                         True
3)      Casual income received by assessee is fully exempt.                               False, taxed @30%
4)      Monthly pension received by a Government employee is taxable.   True
(b) Choose the correct answers to the following:                                              1x4=4
1)      Residential status is to be determined for
a)      Previous year.
b)      Assessment year.
c)       Accounting year.
2)      The daily allowance received by a Member of the Parliament is
a)      Taxable.
b)      Exempt.
c)       Included in total income for rate purposes.
3)      C is entitled to hostel expenditure allowance @ Rs. 600 p.m. per child for 3 children. It will be exempt to the extent of
a)      Rs. 1,800/-
b)      Rs. 900/-
c)       Rs. 600/-      p.m
4)      The ceiling limit of deduction u/s 24 (b) in respect of Interest of Loan taken on 01.06.2014 for construction of a self-occupied house is
a)      Rs. 1,50,000/-
b)      Rs. 30,000/-
c)       No limit.
2. Write short notes on any four of the following:                                             4x4=16
a)      Previous year.
b)      Agricultural Income.
c)       Capital Asset.
d)      House Rent Allowance.
e)      Special Economic zone.
f)       Composite Rent.
3. (a) Explain the provisions relating to newly established industrial undertaking established in free-trade zone u/s 10A of the Income-tax Act, 1961.                            14
Or
(b) “The incidence of income tax depends upon the residential status of an assessee.” Explain in detail this statement.                                                 14
4. (a) From the following information, compute the taxable income from salary of Shri Krishna for the assessment year 2016-17:
Basic Salary – Rs. 2,50,000/-
Dearness allowance – Rs. 50,000/- (enters into retirement benefit)
Rent paid for a residential house at Tinsukia – Rs. 72,000/-
House Rent allowance received by him – Rs. 68,000/-
Education allowance for two children – Rs. 5,000/-
Medical expenses paid by the employer – Rs. 24,000/-
He contributes 15% of his salary to a recognized provident fund to his employer who also contributes an equal amount.
Interest credited to recognized provident fund @ 11% amounted to Rs. 13,530.
He is given a free lunch worth Rs. 200/- per day.
He pays Rs. 2,500/- as professional tax.                                  14
Or
(b) Explain as to how the following items are treated to computing taxable income:            4+4+6=14
Recognized Provident Fund.
Communication of Pension.
Relief u/s 89 (1) of the Income-tax Act.
5. (a) State the provisions relating to computation of ‘Income from House Property’.                     14
Or
(b) From the information given below, find out the income under the head ‘Income from House Property’ for the assessment year 2016-17:

House – I (Rs. )
House – II (Rs.)
Municipal Valuation (MV)
Fair Rent (FR)
Standard Rent (SR)
Annual Rent
Unrealized Rent for the previous year, 2015-16
Interest on borrowed capital (per annum)
1,90,000
1,85,000
1,70,000
2,16,000
30,000
36,000
1,90,000
1,95,000
1,70,000
1,75,000
30,000
36,000
The above stated properties are let out throughout the previous year 2015-16. Municipal Tax (paid) is at the rate of 20%.                                                 14
6. (a) State the scope of power of commissioner of income tax. How does the same differ from the powers of commissioner of income tax (appeals)?                                 14
Or
(b) What are the powers of the commissioner of income tax in regard to search and seizure u/s 132 of the Income-tax Act?                                                 14

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