Direct Tax - I Solved Papers: Nov' 2017

(b) Choose the correct answer to the following:               1x4=4

2. Write short notes on any four of the following:                           4x4=16

Ans: Assessment Year: [Sec. 2 (9)]: “Assessment Year” means the period of 12 months commencing on the 1^st day of April every year. In India, the Govt. maintains its accounts for a period of 12 months i.e. 1^st April to 31^st March every year. As such it is known as Financial Year.  The Income Tax department has also selected same year for its Assessment procedure.

The Assessment Year is the Financial Year of the Govt. of India during which income a person relating to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act, files Return of Income by prescribed dates. These Returns are processed by the Income Tax Department Officials and Officers. This processing is called Assessment. Under this Income Returned by the assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is issued. The year in which whole of this process is under taken is called Assessment Year. At present the Assessment Year 2019-2020 (1-4-2019 to 31-3-2020) is going on.

Ans: Section 14: As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income.

Ans: Retrenchment compensation received by an assessee at the time of his retrenchment, shall be exempt to the least amount from the following:

(i) Actual amount received

(ii) An amount calculated in accordance with the provisions of section 256F(b) of the Industrial Disputes Act, 1947 which is equal to 15 days average pay for each completed year of continuous service or any part thereof in excess  of 6 months,  

(ii) Amount specified by the Central Government, i.e. Rs. 500,000

Ans: 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 is known as MRV. The local authority makes a survey of all the properties that come under their jurisdiction on a periodical basis. Based on this survey, the municipal rental value of the house property is determined. The amount of Municipal tax is calculated on the basis of municipal rental value and the municipal tax paid on a house property is allowed to be deducted from the Gross Annual Value (GAV) of the House Property.

Ans: The Central Board of Direct Taxes (CBDT) is the highest executive authority. It is sub­ject to the overall control of the Central Government. It is authorized to discharge all those functions prescribed in the Act and those which are entrusted to it by the Central Government. The Central Board of Direct Taxes consists of a Chairman and following six Members: -

3. (a) “Right to appeal is a statutory right under Income-tax Act, 1961.” Do you agree? Write an explanatory note in support of the above statement.             14

Ans: Meaning of Appeal

In general parlance, ‘appeal’ means ‘making a request’ and in legal parlance, it means ‘apply to a higher court for a reversal of the decision of a lower court’. In India, the taxpayer computes the tax payable on his total income and pays to the government. If the Income Tax department (the government) disagrees with the tax computed by the taxpayer, they can levy an additional tax. Under Income Tax Act, the liability is determined at the level of Assessing Officer (it can be Income Tax Officer (ITO) or Assistant/Deputy Commissioner of Income Tax). A tax payer aggrieved by various actions of Assessing Officer (say higher tax demand) can appeal before Commissioner of Income Tax (Appeals). Further appeal can be preferred before the Income Tax Appellate Tribunal. On substantial question of law, further appeal can be filed before the High Court and even to the Supreme Court.

Statutory right of appeal

Every law that provides for some form of adjudication also usually provides for appeal in one form or the other against orders passed by the lower authorities. This is based on the concept of equity and recognition that every authority is fallible. The mechanism of appeal provides safeguard against erroneous, unjust or invalid orders. The appeal proceedings ordinarily embrace all proceedings whereby an appellate authority is called upon to review, revise, affirm, reverse or modify the decisions of the lower or subordinate authority.

Under the scheme of the Income Tax Act, appeal can be preferred only against orders specified under the relevant act. It is pertinent to note that the right to appeal is conferred by the statute and that right to appeal cannot be assumed to be an inherent right. Therefore appeal against non-appealable orders can be dismissed as not maintainable. Being a privilege and not a right, every person seeking to file an appeal must take care to make sure that he fulfils every condition, procedure and restrictions provided under the law in order that his appeal be considered by the appropriate authority.

Though right of appeal is not inherent but a statutory right, it is a substantive right. Thus once the law provides for an appeal, a person who complies with the prescribed conditions gets a vested right to have the appeal dealt with under the law. Therefore the appellate authorities while construing right of appeal opt for liberal interpretation. It is for this reason that the courts have held appeal against levy of interest valid under the board category of denial of liability to be assessed. Similarly appeal against non-granting of interest on refund is also held to be valid.

Who can file an appeal?

Only a person aggrieved by an order would have a right to file an appeal. An assessee can said to be aggrieved when he is required to bear tax, legal burden or is denied some benefit to which he claims to be entitled. If an assessee who has been allowed an additional deduction or allowance such as depreciation or has been permitted a set off of loss which was not claimed can file an appeal.

Any partner of a firm or any member of AOP can file appeal against adverse order in case of firm or AOP as aggrieved persons. In case of adverse order passed in the matter of deceased person, his legal heirs can file appeal. In case of HUF, Karta can file appeal. The representative assessee as defined u/s 160 is eligible to file an appeal. Similarly a beneficiary though assessment is made on representative assessee is also eligible to file an appeal.

Pre-requisites for appeal

No appeal shall be admitted unless at the time of filing of the appeal:

Provided that, on an application made by the appellant in this behalf, the Deputy Commissioner (Appeals) may, for reason to be recorded in writing, exempt him from the operation of these provisions.

Or

(b) Write an explanatory note on residential status of an individual and an HUF.  8+6=14

Ans: 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.

4. (a) Shri Ratan, a manager of a Guwahati based Company. He submits the following particulars of his salary Income:

Compute Shri Ratan’s income under the head ‘income from salary’ for the assessment year, 2017-18.   14

Or

(b) What is Provident Fund? Explain different types of provident funds and their tax treatment.             4+10=14

Ans: A Provident fund is a compulsory retirement saving schemes for the government as well as non-government employees in which contribution is made both by the employer and the employees. It is a saving tool for the employees. This scheme is managed by under the Employee’s Provident Funds and Miscellaneous Provision Act, 1952. Under this scheme, employee has to pay a certain percentage from his salary and an equal amount is contributed by the employer. The employee gets a lump sum amount with interest at the time of his retirement.

Types of Provident Fund

At present there are 4 types of provident funds:

Taxability of Provident Funds

Transferred Balance of Provident Fund: The balance of unrecognised fund which is transferred to recognised fund is called transferred balance.

Points to remember:

5. (a) Mr. Kalyan owns a resident house property. It has to equal residential units – unit 1 and unit 2. While unit 1 is self-occupied by Kalyan for his residential purpose, unit 2 is let out (rent being Rs. 8,000 p.m., rent of 2 months could not be recovered). Municipal value of the property is Rs. 1,40,000, standard rent is Rs. 1,30,000 and fair rent is Rs. 1,45,000. Municipal tax imposed @ 12% which is paid by Kalyan. Other expenses for the previous year 2016-17 being repairs Rs. 250, insurance Rs. 600, interest on capital (borrowed during 1997) for constructing the property Rs. 63,000. Find the income from house property of Kalyan for the assessment year 2017-18.     14

Or

(b) Explain how to compute income from a let out house property. Write a short note on interest on borrowed capital. 10+4=14

Ans: Annual Value (Section 23)

The Annual Value of a house property is the inherent capacity of the property to earn income and  it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.

Computation of annual value: Computation of Annual Value for the determination of Income from House property requires three steps.

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                                            ++++++

Deductions allowable under section 24 of the income tax act

Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-

(a)    Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.

(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.

Limit of deduction u/s 24(b)

A. In case of Let out/ deemed to be let out house property: Interest on Money borrowed is allowed as deduction without any limit. Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP) interest. PCP started from the date of borrowing and ended on 31^st mar immediately preceding (Before) the year of completion.

B. In Case of Self Occupied House Property:  Max. Rs. 2,00,000 is allowed as deduction if the following conditions are satisfied:

For all other cases maximum allowed deduction is Rs. 30000

6. (a) Write a note on Income-tax Authorities. Explain the powers of Central Board of Direct Taxes.       4+10=14

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. The new feature of authorities has been properly depicted in a chart on the facing page. These authorities have been grouped into two main wings:

(i)  Administrative [Income Tax Authorities] [Sec. 116]

(ii) 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 Central Board of Direct Taxes:

Income tax department are totally operated under the control of central board of direct taxes (CBDT). It performs the function of administration, supervision and control of entire income-tax structure in our country. The Income tax Act provides the following specific power to the CBDT:

Or

(b) What do you mean by appeal to Appellate Tribunal? Write a note on procedure and powers of Appellate Tribunal.

Ans: Appeal before Income Tax Appellate Tribunal (ITAT): Appeal against an order of Commissioner (Appeals) lies with the Income Tax Appellate Tribunal (ITAT). The tribunal shall be constituted by the central government and shall consist of as many judicial and accountant members as it thinks fit. Both tax payer and the Assessing Officer can file appeal before ITAT.

Orders against which assessee can appeal to the appellate tribunal

An assessee may file an appeal to the Appellate Tribunal against the following orders:

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.

Powers of appellate tribunal:

The appellate tribunal shall form itself in benches constituted by its president and every bench comprised of one judicial member and one accountant member. The tribunal have powers to regulate its proceeding in its own manner. The tribunal shall have the same powers conferred upon different income tax authorities and the proceedings before the appellate tribunal shall be deemed to be judicial proceedings.

a) The tribunal has the power to allow the appellant to withdraw an appeal.

b) The appellate tribunal enjoys all the powers which any appellate court enjoys under the code of civil procedure.

c) The appellate tribunal has the power to pass such order as it thinks just in relation to the matters that arise in the appeal.

The ITAT may, at any time within 6 months from the end of the month in which the order was passed, rectify any mistake apparent from record, amend any order passed by it if the mistake is brought to its notice by the taxpayer or Assessing Officer. However, where such amendment has the effect of enhancing an assessment or reducing a refund or otherwise increasing a liability of the taxpayer, it shall not be made unless the Appellate Tribunal has given a notice to the taxpayer of its intention to do so and has allowed the taxpayer a reasonable opportunity

(OLD COURSE)

Pass Marks: 32

Time: 3 hours

1. (a) Write True or False:                             1x4=4

(b) Choose the correct answer to the following:                                            1x4=4

2. Write short notes on any four of the following:                                             4x4=16

3. (a) Explain the provisions relating to newly established units in special economic zone [Section 10AA] of the Income-tax Act, 1961.                            12

Or

(b) “Liability of an assessee is determined with reference to his residence.” Explain the statement in detail.        12

4. (a) Mention any eleven exempted incomes u/s 10 of the Income-tax Act, 1961.                            11

Or

(b) Write notes on the following:                              5 ½ x2=11

5. (a) Shri Swadhin Jyoti originally hail from Assam is working at Pune in a company. He provides the following information about his salary income:

Compute the taxable income from salary of Shri Swadhin Jyoti for the assessment year, 2017-18.                             11

Or

(b) What do you mean by the term perquisites under the head salary? Explain the following in terms of –

6. (a) From the information given below, find out the income under the head ‘Income from House Property’ for the assessment year, 2017-18:

The above property is let out throughout the previous year 2016-17.                                  11

Or

(b) Explain the procedure of computation of gross annual value in the case of let out house property.                                11

7. (a) Who is an assessing officer under income-tax department? Explain the power of assessing officer.                               11

Or

(b) State the authorities that are authorized u/s 132(1) of the Income-tax Act, 1961, to issue orders regarding search and seizure. What are the rules regarding retention of seized books and documents?             6+5=11