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Dibrugarh University B.Com 6th Semester: Direct Tax II Solved Papers (May' 2019)


2019 (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)         Any income arising from transfer of long-term capital asset, being shares and the transaction of sale of such securities is entered into a recognised Stock Exchange in India on or after 01.10.2004 shall be fully exempted.     False
2)         Reserve or Provision for bad and doubtful debt will be fully allowed to be debited u/s 36.   False
3)         From the Assessment Year, 2006-07, speculation loss shall be carried forward for 4 succeeding previous years.                           True
4)         Income by way of Interest on Securities held as stock-in-trade is taxable under the head income from other sources.         False, PGBP             
(b) Fill in the blanks:                                      1x4=4

1)         Income received as rent from sub-letting would be taxable under the head Income from other sources.
2)         Salary, bonus, interest, commission or remuneration received by a partner and allowed as deduction u/s 40(b) is taxable under the head PGBP.
3)         Long-term capital loss can be carried forward for 8 succeeding previous years to be set off only from long-term capital gains.
4)         All those assets to which one rate of depreciation is applicable are known as block of assets.
2. Write short notes on any four of the following:                                           4x4=16
a) Additional Depreciation [Sec. 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.
Additional depreciation is not allowed in the following cases:
(i)      Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person or
(ii)    Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house or
(iii)   Any office appliances or road transport vehicles or ships and aircraft
(iv)  Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year.
If the asset is purchased and put to use for less than 180 days, additional depreciation shall be allowed at 10% and remaining additional depreciation shall not be allowed in the subsequent year.
b) Capital Gains exempted from Tax: 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.
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.
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.
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.
c) Deemed Income: The following are the deemed incomes.
1. Cash Credits [Section 68] : Where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of Assessing Officer (A.O), satisfactory, the sum so credited may be charged to income-tax as the income of assessee of that previous year. Such cash credits may be assessed either as business profits or an income form other sources. In the case of business community it is normally considered as business profit.
2. Unexplained Investments [Section 69] : Where, in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of accounts and the assessee fails to furnish any satisfactory explanation as and from where this money came or if the Assessing Officer is not satisfied with the explanation the value of such unexplained investment may be deemed to be the income of the assessee of such financial year.
3. Unexplained Money etc. [Section 69A] : Where, in any financial year the assessee is found to be the owner of any money, bullion and jewellery or other valuable articles the assessee either does not furnish any explanation as to how he acquired these things or his explanation, if furnished is not up to the satisfaction of the Assessing Officer, the money, bullion, jewellery or other valuable articles may be deemed to be the income of the assessee for such financial year.
4. Investments, Jewellery etc. not fully disclosed in Books of Accounts [Section 69B] : In case the assessee acquired certain investments, jewellery, valuable article etc. and the actual money spent on these items is more than what is shown or recorded in his books of accounts and the assessee either does not furnish any explanation for this or with his explanation the A.O. is not satisfied, the excess amount under section 69B may be deemed to the income of the assessee for such financial year.
d) Specific Incomes [Sec. 56(2)]: Following incomes are the specific incomes which are chargeable to tax under the head “Income from other sources”
a)      Dividend : if such income is not chargeable to income-tax under the head "Profits and gains of business of profession.
b)      Winning from Lotteries , etc.: it includes any winning from lotteries, crossword puzzle, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.
c)       Interest on securities : Interest on Debentures, Government securities / bonds is taxable under the head “ Income from other sources”
d)      Rental income of machinery, plant or furniture: Rental income from machinery, plant, or furniture let on hire is taxable as income from other sources.
e)      Rental income of letting out of plant, machinery or furniture along with letting out of building and the two meetings are not separable.
f)       Sum received under Keyman Insurance Policy :
g)      Gift : if any sum of money is received during a previous year without consideration by an individual or a HUF from any person or persons exceeds Rs. 50,000 the whole of such amount is taxable in the hands of the recipient as income from other sources.
e) Difference between Tax Planning and Tax Avoidance: Differences amongst tax planning and tax avoidance
TAX PLANNING
TAX AVOIDANCE
It is an Ethical mean to reduce tax liability.
It is an Unethical mean to reduce tax liability.
Tax planning is done without any intention to defeat legal spirit.
There is an Intention to defeat legal spirit in tax avoidance.
Tax planning is done by taking legitimate benefits of Income tax law.
Tax avoidance is done taking benefit of loopholes of law.
There is no Litigation in courts
It Leads to litigation in courts.
Tax planning is Good for National Development/ Society and it creates employment etc.
It is an evil for Nation/Society.

3. (a) What is business as per the Income-tax Act, 1961? Explain charging provisions u/s 28 for the income taxable under the head profit and gains from business and profession.                              4+10=14
Ans: Business: “Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has defined the term as “ any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”. In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary. 
Profession: Section 2(36) defines “Profession’’ to include vocation. Therefore, even if a person carries on any activity, not on the basis of ability and knowledge acquired out of a carries on any activity, not on the basis of ability and knowledge acquired out of a professed study, degree or diploma but on account in inborn talent, skill and attributes, any income derived there from shall also be considered as professional income. Example, income earned by rendering services by C.A., Lawyer, Doctor, Engineer, Architect, photographer etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill.
The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession” (Chargeability - Sec. 28):
a)      The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year;
b)      Any compensation or other payment due to or received by,—any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto;
c)       Income derived by a trade, professional or similar association from specific services performed for its members ;
d)      The value of any perquisite  or benefit  arising from business or profession , whether convertible into money or not,;
e)      Any interest, commission , salary, remuneration , or bonus due to, or received by, a partner of a firm from such firm : 
f)       Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.
g)      Income from speculative transactions.
h)      Any sum, whether received or receivable, in cash or kind, under an agreement for:
a.       not carrying out any activity in relation to any business; or
b.      not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature 
i)        Any profit on the transfer of the Duty Free Replenishment Certificate
j)        Any profit on the transfer of the Duty Entitlement Pass Book Scheme
k)      Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947) 
Business Income not Taxable under the head “Profits and Gains of Business or Profession”
In the following cases, income from trading or business is not taxable under Sec. 28, under the head “Profits and Gains of Business or Professions” :
Nature of Income
Head under which it is chargeable to Tax
Rental income in the case of dealer in property
Rent of house property is taxable under Sec. 22 under the head “ Income from House Property” even if property constitutes Stock-in-trade of recipient of rent or the recipient of rent is engaged in the business of letting  properties on rent.
Dividend from an Indian company, agricultural income, life insurance maturity amount etc.
These incomes are exempted from tax.
Dividend on shares in the case of a dealer-in-shares.
Dividend on shares are taxable under section 56(2)(i), under the head “Income from other sources” , even if they are derived from shares  held as stock in trade or the recipient of dividends is a dealer-in-shares. However, dividend received from an Indian company is not chargeable to tax in the hands of shareholders.
Income for investments, race course, Winning from Lotteries, part time salaries etc.
Winning form Lotteries, races, etc. are taxable under the head “Income from Other Sources” ( even if derived as a regular business activity)
Or
(b) From the following Profit & Loss A/c of Mr. Anil, compute business income for the Assessment Year, 2018-19:   14
Particulars (Dr.)
Rs.
Particulars (Cr.)
Rs.
To Salaries
To Rent
To Discount
To Depreciation
To Legal Expenses
To Donations
To Municipal Taxes
To Insurance
To Entertainment
To Advertising
To Sales Tax
To Income Tax
To Travelling Expenses
To Provision for Bad Debts
To Net Profit
60,000
40,000
10,000
15,000
10,000
8,000
4,000
12,000
15,000
24,000
6,000
8,000
12,000
6,000
3,55,000
By Gross Profit
By Rent from House Property
By Interest on Bank Deposits
By Dividends from Indian companies
By Lottery Winnings
By Bad Debts Recovered
4,40,000
60,000
20,000
15,000
45,000
5,000

5,85,000

5,85,000
Additional Information:
1)         Salaries include Rs. 10,000 paid to proprietor’s son for his casual help.
2)         Rent was paid for the godown owned by the proprietor.
3)         Out of municipal taxes Rs. 3,000, out of insurance premium Rs. 2,000 relate to let out house property.
4)         Allowable depreciation Rs. 22,000.
5)         Donations were given to an approved institution.
6)         Advertizing bill was paid through bearer cheque.
Ans: Calculation of Business Income of Mr. Anil for the Assessment year 2018 - 2019
Particulars
Amount
Amount
Net Profit as per P/L
Add: Expenses Disallowed
Salaries to proprietor’s son
Rent of owned godown
Depreciation as per p/l a/c
Donations
Municipal taxes
Insurance premium
Advertising
Income tax
Provision for bad debt


15,000
40,000
15,000
8,000
2,000
1,000
24,000
8,000
6,000
3,55,000









1,19,000


4,74,000
Less: Tax Allowed but do not show in P/L :
Depreciation
Less: Income which are cover under different head (Disallowed)
Rent from house property
Interest on bank deposits
Dividends from Indian companies
Lottery winnings

22,000

60,000
20,000
15,000
45,000






1,62,000
Business Income

3,12,000

4. (a) Define ‘capital gain’. Discuss the procedure for computation of capital gain.           4+10=14
Ans: Ans: Capital Gain: Capital gain is the gain which arises from the transfer of a capital asset. Any profit or gain, which arises during a previous year, is chargeable under the head "capital gains" under Section 45. For a gain to be charged under the head "capital gain," it should arise due to a transfer of a capital asset. Such a profit or gain should not be exempt from tax under sections 54, 54B, 54D, 54EC, 54ED, 54FD, and 54G of Income Tax Act.
TYPE OF CAPITAL GAINS
a)      Long term capital gains:  When a capital asset is transferred by an assessee after having held it for 36 months/24months/12 months, as the case may be, the capital gains arising from this transfer is known as Long Term Capital Gains.
b)      Short term capital gain: If the period of holding of capital asset before transfer is less than 36 months/24months/12 months, as the case may be, the capital gains arising from such transfer are known as Short Term Capital Gains.
Mode of Computation of Capital Gain [Sec. 48]
Computation of Short-term Capital Gains
A. Full value of consideration
Less:(a) Expenditure incurred in such a transfer
b)Cost of acquisition
(c) Cost of improvement
B. Gross short-term capital gains (A – (a) – (b) – (c))
C. Less: Exemption, if available, u/s 54B/54D/54G/54GA
D. Taxable Short-term capital gains (B – C)
Computation of Long-term Capital Gains
A. Full value of consideration
Less:(a) Expenditure incurred in such a transfer
b)Indexed Cost of acquisition
(c) Indexed Cost of improvement
B. Gross short-term capital gains (A – (a) – (b) – (c))
C. Less: Exemption, if available, u/s 54B/54D/54G/54GA
D. Taxable Long -term capital gains (B – C)
Note: No deduction shall be allowed on account of securities transaction tax. (Sec. 48)
Basis of Charge of Capital Gains
Any profits or gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income-tax under the head 'Capital Gains' and shall be deemed to be the income of the previous year in which the transfer took place unless such capital gain is exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA. The following are the essential conditions for taxing capital gains:
a)      there must be a capital asset;
b)      the capital asset must have been transferred;
c)       there must be profits or gains on such transfer, which will be known as capital gain;
d)      such capital gain should not be exempt u/s 54, 54B, 54D, 54EC, 54F, 54G or 54GA.
Cost of acquisition is the amount for which the capital asset was originally purchased by the assessee. Expenditure incurred in connection with such purchase, exchange or other transaction e.g. brokerage paid, registration charges and legal expense, is added to price or value of consideration for the acquisition of the asset. Interest paid on moneys borrowed for purchasing the asset is also part of its cost of acquisition. In case of depreciable asset of an undertaking engaged in generation or generation and distribution of power, its written down value shall be taken as its cost of acquisition.
Cost of improvement: Cost of improvement means all capital expenditure incurred in making additions or alternations to the capital asset, by the assessee (or the previous owner). Betterment charges levied by municipal authorities also constitute cost of improvement. Compensation paid to tenants for getting vacant possession amounts to cost of improvement. However, only the capital expenditure incurred by the assessee on or after 1.4.2001, is to be considered and that incurred before 1.4.2001 is to be ignored. Improvement should be to the capital asset; expenditure incurred on improving the owner’s title to the asset is not being included in ‘cost of improvement’. In case of in tangible assets like goodwill, right to manufacture, etc. cost of improvement shall be nil.
Or
(b) Mr. Arindam owns two houses at Jorhat and Dibrugarh. He transfers the following long-term capital assets during 2017-18:

Residential House Property at Dibrugarh
Gold
Silver
Date of sale
Sale consideration (Rs.)
Indexed cost of acquisition (Rs.)
19.04.2017
9,00,000
4,00,000
20.04.2017
8,00,000
6,00,000
21.04.2017
5,00,000
1,50,000
Mr. Arindam purchases the following assets:

Date of purchase
Amount invested  (Rs.)
Residential house at Guwahati
Bonds of National Highway Authority
of India (NHAI) for the purpose of Section 54EC
20.10.2017


19.10.2017
7,50,000


2,50,000
Ascertain the amount of capital gain chargeable to tax for the Assessment Year, 2018-19. Can Mr. Arindam claim exemptions under Sections 54, 54EC and 54F?    14
Ans: Calculation of Taxable Capital Gain
Particulars
Residential House
Gold
Silver
Sale Consideration
Less: Index Cost of Acquisition
9,00,000
4,00,000
8,00,000
6,00,000
5,00,000
1,50,000
Long term Capital Gain

Exemption of U/S 54
(out of Rs. 7,50,000, Rs.5,00,000 is utilized for claiming exemption U/S 54)

Exemption U/S 54 EC
Bond of Nation Highway
Authority of India
5,00,000

5,00,000




-

2,00,000






2,00,000

3,50,000






50,000

Exemption U/S 54 F
[Rs. 2.5 lac being investment in residential house/ Rs.5 lac being sale consideration of silver x Rs. 3.5 lac]

Nil
-
Nil

3,00,000


1,75,000
Tong Term Capital Gain
Nil
Nil
1,25,000
5. (a) What are the provisions of the Income-tax Act, 1961 regarding set-off of losses? Discuss briefly the provisions of the Income-tax Act regarding the carry forward of loss from business income and capital gain.                         4+10=14
Ans: Meaning of Set off and Carry forward
Set-Off of Losses: After computing the income under five heads one by one and after taking the clubbing of income under Sec.60 to 64, we have to aggregate all these incomes to get Gross Total Income. But before arriving at the gross total income, we have to adjust losses either in the same head or against other heads under Sec.70 to 80. First we have to set off the losses within the same head and if it cannot be adjusted, against income of other heads. The adjustment of losses from one head against the income, profits or gains of any other head of income during the same tax year is called set-off of losses.
A) Set off of loss under the same head of income.(Sec.70: Inter-source set off): The process of adjustment of loss from a source under a particular head of income against income from other source under the same head of income is called inter-source adjustment, e.g. Adjustment of loss from business A against profit from business B.
Income of a person is computed under five heads. ‘Sources’ of income derived by an individual may be many but yet they could be classified under the same head. For instance, an individual may have a dual employment, yet the income would be classified under the head ‘Salaries’. However, given the mechanism of computing taxable salary income, it would be safe to say that an individual cannot incur losses under this head of income. Some of the inter-source adjustable incomes are given below:
a. Speculative Business Losses: An Assessee can set off the Losses incurred in speculation Business only against the profits of any other speculation Business. It is not permissible to set off speculative Loss against any other Business or Professional Income. An Assessee has an Opportunity to set off any other Business Loss with the profits of speculation Business.
b. Long Term Capital Losses: A long term Capital Loss can be set off only against the profits of any other long term capital gains, but short term capital loss can be set off against both short term and long term capital gains.
c. Loss from owning and maintaining race horses: This loss can be set off only against the income from owning and maintaining race horses.
d. Loss of specified Business under section 35AD: Specified Business loss can be set off only against profit from such specified business, but loss from other business can be set off against the profit of the specified business.
B) Set off Loss from one head against Income from another Head (Sec. 71: Inter head set off): After making inter-source adjustment (if any) the next step is to make inter-head adjustment. If in any year, the taxpayer has incurred loss under one head of income and is having income under other head of income, then he can adjust the loss from one head   against income from other head, E.g., Loss under the head of house property to be adjusted against salary income.
A person may have various sources of income computed under different heads of income. Loss under one head of income is generally allowed to be set off against income under another head. Some of the inter-head adjustable incomes are given below:
a. House Property Losses: House Property Losses can be set off against profits from other heads. It can be set off against salary income, Business income, Income from capital gain, and income from other sources except casual income.
b. Non Speculative Business Losses: Non speculative Business Losses can be set off under any other head except income from salary. Means it can be set off from income from house property, income from capital gain and Income from other sources except casual income.
In the following cases losses cannot be set off under inter-head adjustments. Speculative Business Losses. Specified Business Losses. Capital Gain Losses.(Both short term capital loss and long term capital loss). Losses from owning and maintaining race Horses.
C) Carry forward of losses: Many times it may happen that after making intra-head and inter-head adjustments, still the loss remains unadjusted. Where the losses are not fully adjusted against the income of the same tax year and such losses are transferred to the next tax year, this process of transferring un- adjustable losses to the next year is known as carry-forward of losses. Such unadjusted loss can be carried forward to next year for adjustment against subsequent year(s)’ income Separate provisions have been framed under the Income-tax Law for carry forward of loss under different heads of income. Carry forward of losses (other than loss from house property and unabsorbed depreciation) is permissible if the return of income for the year, in which loss is incurred, is filed in time. The late filing of return should not impact the status of carry forward of loss of previous years.
Rules regarding carry forward of losses of various heads are given below
1. Loss under head House Property: The loss under the head house property, let out or self occupied, can be carried forward to the subsequent years subject to a limit of 8 assessment years. The loss is to be set off against the income from house property only. Loss under the head `house property’ may be et off against income under any other head upto a maximum of Rs.2,00,000 [Sec.71(3A)].
2. Business Loss: It can be carried forward for subsequent years subject to a limit of 8 assessment years and it is to be set off against profit from under head business only. In set off and carry forward of business losses the following important points are to be considered:
(a) The person who has incurred the loss, alone has the right to carry it forward. The successor except succession by inheritance (business passing from father to son) cannot claim to carry forward the loss incurred by his predecessor in business. However, where a company merges with another under the scheme of amalgamation, the past loss of the amalgamating company can be carried forward by the new company.
(b) The unabsorbed business loss of an industrial undertaking which was discontinued due to natural calamities shall be carried forward and set off against the profit of the reconstructed, re-established business upto a period of 8 assessment years as reckoned from the previous year in which the business is re-started.
(c) The business loss could be carried forward for 8 assessment years to be set off from income under the head ``profits and gains of business or profession.’’
(d) Loss from any asset held as stock-in-trade can be set off from any income from such asset even if it is taxable under the head other sources.’
(e) To carry forward business losses, continuity of same business is not necessary.
3. Speculation Loss: The loss of a speculation business of any assessment year is allowed to be set off only against the profits and gains of another speculation business in the same assessment year. But if speculation loss could not be set off from the income of another speculation business in the same assessment year, it is allowed to be carried forward to claim as a set off in the subsequent year, but only against the income of any speculation business. Such loss is also allowed to be carried forward for 4 assessment years immediately succeeding the assessment year for which the loss was first computed.
It may be observed that it is not necessary that the same speculation business must continue n the assessment year in which the loss is set off. It can be carried forward for succeeding 4 assessment years. But the loss is to be set off against the speculation profit only. A company whose principal business is that of trading in shares has been excluded from the purview of the explanation to Sec.73. Consequently, such activity shall not be regarded as speculation activity and any los arising there from shall be treated as normal business loss and not as speculation loss.
4. Unabsorbed Depreciation [Sec. 32(2)]: If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the depreciation allowance for the following previous year or years and so on infinitely and deemed to be part of that allowance. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation.
The assessee should set off brought forward losses in the following manner:
a)      First of all current year depreciation will be adjusted.
b)      Then brought forward business losses will be set off (speculative or non-speculative)
c)       Then unabsorbed depreciation will be set-off against business income.
d)      Unabsorbed depreciation can be carried forward for indefinite number of years.
e)      Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.
5. Loss under the head “Capital Gain’: Where in respect of any assessment year, the net result of the computation under the head `Capital gains’ is a loss to the assessee, whether short-term or long-term such short-term and long-term capital losses shall be separately carried forward. Further, such carried forward short-term capital loss can be set off in the subsequent assessment year from income under the head capital gains whether short-term or long-term. But brought forward long-term capital loss shall be allowed to be set off only from long-term capital gain. Such capital losses can also be carried forward to a maximum of 8 assessment years, immediately succeeding the assessment year for which the loss was first computed.
6. Expenses incurred on maintenance of race horses: Loss from Owning and maintaining race horses: (Section 74A) An Assessee can carry forward these losses up to 4 years immediately succeeding the Assessment year in which the loss has incurred. It can be set off only against that income and an Assessee must file the Income Tax Return within due date prescribed under section 139(1). 
Or
(b) The following are the particulars of income and loss of an individual under different heads of income. Set off losses in the Assessment Year, 2018-19 and find out the Gross Total Income:                                                       14

Rs.
Income from house property A
Loss from house property B
Income from interest on securities
Loss from cycle business
Profit from speculation business
Loss from short-term capital asset
Long-term capital loss
Long-term capital gain (investments)
4,000
9,000
25,000
35,000
35,000
7,000
25,500
21,500
Ans: Computation of Gross Total Income for the Assessment year, 2018 – 2019
Particulars
Amount
Amount
House Property Income:
Income from house property A
Loss from house property B to be set off


Business Income:
Profit from speculative business
Set-off loss from cycle business


Capital Gains:
(i) Long Term Capital Gains
(ii) Set-off loss from another long term capital asset
Long term Capital loss to be C/F

(iii) Short term capital loss to be C/F

Income from other sources:
Interest on securities

4,000
(9,000)


(5,000)




Nil







Nil


25,000



35,000
(35,000)



21,500
(25,500)
(4,000)

(7,000)

Gross total Income

20,000
6. (a) Explain the meaning, need and limitations of tax planning.                             14
Ans: Tax Planning: In an organized society, tax is unavoidable because it is the price paid for administrative and political stability by the public to the Government. It is the duty of each citizen to pay due taxes in time and not to resort to any device to evade the payment of taxes. An effective tax strategy is vital for successful financial planning since payment of taxes reduces the disposable income of the tax payers. To solve the problem of tax burden, the concept of tax planning has been introduced in the Income Tax Act. Tax planning may be defined as an arrangement of one’s financial affairs in such a way that without violating in any way the legal provisions, full advantage is taken of all tax exemptions, rebates, allowances and other reliefs or benefits permitted under the Act. This will reduce the burden of taxation on the assessee as far as possible. Tax planning may be regarded as a method of intelligent application of expert knowledge of planning one’s economic affairs with a view to securing the consciously provided tax benefits on the basis of national priorities in keeping with the legislative and judicial opinion. But it does not imply taking undue advantage of loopholes in tax laws or evading tax liability. Hence tax planning is defined as the methods used by a tax payer to reduce his burden of taxes in a legal manner. Tax planning may be legitimate provided it is within the frame work of tax laws. Hence tax evasion and tax avoidance must be understood as distinct from tax planning.
Need and Significance of Tax Planning
Tax Planning is the honest and rightful activity to minimize tax burden of various persons. Needs and significances of tax planning were discussed below:
(a) Reduction of tax liability: The basic need of tax planning is to reduce tax liability by arranging his affairs in accordance with the requirements of law, as contained in the Income tax law. In many a cases, a taxpayer may suffer heavy taxation not due to high rate of tax, but, because of his lack of awareness of the legal requirements.
(b) Minimization of litigation: There is always struggle between taxpayers and tax administrators. Tax payers try to pay least tax and the tax administrators attempt to levy higher amount of tax. Where a proper tax planning is adopted by the tax payer in conformity with the provisions of the taxation laws, the incidence of litigation is minimized.
(c) Productive investment: Channelization, of taxable income to the various investment schemes is one of the prime purpose of tax planning as it is aimed to attain twin-objectives of: (i) mobilising the resources for socially productive projects, and, (ii) relieving the tax payer from the burden of taxation, converting the earnings into means of further earnings.
(d) Reduction in cost: The reduction of tax by tax planning reduces the overall cost. It results in more sales, more profit and more tax revenue.
(e) Healthy growth of economy: The growth of a nation’s economy is synonymous with the growth and prosperity of its citizens. In this context, a saving of earnings by legally sanctioned devices fosters the growth of both. Tax-planning measures are aimed at generating white money having a free flow and generation without reservations for the overall progress of the nation. On the other hand tax evasion results generation of black money, the evils of which are obvious. Tax planning thus assumes a great significance in this context.
 (f) Economic stability: Tax planning results in economic stability by way of: (i) availing of avenues for productive investments by the tax payers and, (ii) harnessing of resources for national projects aimed at general prosperity of the national economy and (iii) reaping of benefits even by those not liable to pay tax on their incomes.
(g) Employment generation: Tax planning creates employment opportunities in different ways. Firstly, efficient tax planning requires some sort of expertise that creates job opportunities in the form of advisory services. Secondly, amount saved through tax planning is generally invested in commencement of new business or the expansion of existing business. This creates new employment opportunities.
Limitations of tax planning
1.       Tax planning has its own scope beyond which an assessee cannot go. All decisions regarding tax planning should be taken in such a manner that they do not hurt others.
2.       Taxation laws are most dynamic laws and they keep changing very frequently. There is not stability in the applicability of these laws. The government can change them at any time it likes. As a result tax planning can be done only for a very short period i.e. only for one to two previous years. Long terms tax planning is not possible.
3.       The law gives several benefits to an assessee and to claim them certain preconditions are imposed. It is essential that those preconditions must be fulfilled to claim that benefit. A blind person must get a certificate from the medical authorities about his blindness to claim deduction u/s 80U. The procedure to claim this certificate is very complicated and as such the blind person is in difficulty. As such tax planning becomes limited to the extent of fulfillment of these conditions.
4.       Indian tax laws are among the most complicated laws of the world. Understanding its intricacies is a very difficult job. This act as a limitation for successful tax planning.
5.       Tax planning does not mean infringement of different provisions of law. It means reducing the tax liability while lawfully implementing the different provisions of law. Thorough knowledge of Income Tax Act, Wealth Tax Act, Interest Tax Act, Expenditure Tax Act, Money Laundering Act, Foreign Exchange Management Act etc. is very necessary to be a successful tax planner.
6.       It is not only the knowledge of tax and other laws are necessary it is also essential for good tax planning to be an expert in the field of accountancy. The little knowledge of accountancy can caused bad tax planning.
7.       As the income increases, the tax liability increases. The increase in profitability of business is good for the economy. But when the profits increase the financial managers become busy in finding ways and means to reduce the tax burden. The time, which they should devote towards more profitability, is devoted towards tax planning.
Or
(b) “A tax planner should have a thorough knowledge of various sources of law relating to the income tax.” Discuss.14
Ans: Requisites of a successful tax planner i.e. requisites of successful tax planning
1. Thorough knowledge of present law: A layman who does not know the various provisions of taxation laws of the country cannot think of filing his own tax return and he can never think of tax planning. The process of tax planning starts with every individual whose income is in tax bracket. He starts gathering knowledge about his income and various ways and means by which he can save tax. This shows that to be a successful tax planner the knowledge of all the provisions of Income Tax Act 1961, rules framed there under the notifications and circulars issued by the Central Board of Direct Taxes. The person who is not well conversant with the latest position of law cannot be successful tax planner.
2. Preparedness for retrospective amendments: in our country amendments are made by the Finance Act passed annually along with budget. Sometimes amendments are made by Taxation laws Amendment Acts. The certain modifications are made by circulars and notification issued from time to time. Generally these amendments are prospective and one can make plans but occasionally the amendments are made retrospectively also and here all the planning comes to an end. In such a situation a planner must be able to absorb the shock of such retrospective amendments.
3. Knowledge of other allied laws: The person who wants to plan his tax liability is supposed to have the knowledge of other allied laws also. There are:
a)      Wealth Tax Act.
b)      Central Sales Tax Act.
c)       State Sales Tax Act.
d)      Interest Act.
e)      Expenditure Tax Act.
f)       Transfer of Property Act.
g)      Foreign Exchange Management Act. Etc.
A working knowledge of these laws shall certainly help the planner to make effective and realistic plans.
4. Knowledge of methods of tax planning: The various methods of tax planning have to be understood and mastered by a successful tax planner. These methods are:
a)      Determination of residential status: The residential status plays a very important role for those persons who have foreign income. A resident has to pay tax on income earned and received anywhere in the world whereas a non-resident has to pay tax on only those incomes which are earned and received in India only.
b)      Selection of suitable form of organisation: While starting a new business or when a business is at such a stage that it has to change its form of organisation, the amount of tax advantage weights large while selecting the form of organisation. The tax incentives, rates of tax, ease of formation, legal obligations etc. are some of the factors which have to be considered.
c)       Capital structure decisions-whether to have loaned capital or owned capital. What should be the optimum combination of these two forms of capital has its bearing on the successful tax planning.
d)      Diversification of business activity i.e. to add or drop a product, to produce or to purchase certain parts etc.
e)      Replacing old assets to obtain maximum advantage of rules regarding depreciation or take assets on lease.
f)       Optimum claim of expenses to reduce the tax liability. The effort should be made to claim such expenses which are allowed to be debited under Income Tax Act.
(OLD COURSE)
Full Marks: 80
Pass Marks: 32
1. (a) Write True or False:                               1x4=4
1)         Rent paid by a partnership firm to one of its partners for using his house for the business of the firm is an admissible deduction.
2)         Term Capital Asset u/s 2(14) includes only tangible asset.
3)         Income Tax Authorities shall act as authorities under the Wealth-tax Act.
4)         With effect from Assessment Year, 1999-2000 loss under the head house property can be carried forward for 8 succeeding previous years to be set off from income under the head house property only.
(b) Fill in the blanks:                                           1x4=4
1)         100% of advertisement expenses exceeding Rs. _______ paid in cash are disallowed expenses on computation of profit from business.
2)         Cost Inflation Index (CII) for the Assessment Year, 2017-18 is _______.
3)         Speculation loss to be carried forward for _______ succeeding previous years [Section 73(4)]
4)         When total depreciation is more than available profits, the excess is called _______ depreciation.
2. Write short notes on any four of the following:                4x4=16
a)         Inadmissible deduction u/s 40.
b)         Capital assets.
c)          Carry forward of loss from capital gain.
d)         Net wealth under the Wealth-tax Act.
e)         General incomes [Section 56(1)]
3. (a) What is understood by the term ‘depreciation’? Discuss the rules regarding grant of deduction for depreciation. 4+8=12
Or
(b) The following is the Profit & Loss A/c of Mr. Gaurav for the year ending 31.03.2018:
Particulars
Rs.
Particulars
Rs.
To Opening Stock
To Purchases
To Wages
To Rent
To Repairs to Motor Car
To Income Tax paid
To Medical Expenses
To General Expenses
To Bad Debts
To Provision for Bad Debts
To Depreciation
To Profit for the year
15,000
40,000
20,000
6,000
3,000
5,000
2,000
10,000
500
1,000
5,000
39,500
By Sales
By Closing Stock
By Gift from father
By Sale of Motor Car.
By Refund of Income
1,00,000
20,000
15,000
9,000
3,000

1,47,000

1,47,000
Additional Information:
1)      Rent includes Rs. 1,000 paid for the residential portion.
2)      General expenses include Rs. 1,000 paid to the domestic servant.
3)      Depreciation admissible under the Income-Tax Act is Rs. 10,000.
Compute his taxable income from business for the relevant Assessment Year.               12
4. (a) What are capital assets in the context of capital gains? Describe the assets which are outside the purview of capital gains.                    4+7=11
Or
(b) What is transfer of capital asset? Under what circumstances a transfer is not regarded as transfer under Section 47 of the Income-tax Act?             4+7=11
5. (a) What is meant by the term ‘assets’ under the Wealth-tax Act? What are the assets mentioned in Section 2(ea) of the Wealth-tax Act?                4+7=11
Or
(b) Explain the deemed assets under the Wealth-tax Act.                                                         11
6. (a) Discuss the provisions of the Income-tax Act, 1961 regarding carry forward and set-off of losses.                   11
Or
(b) (1) Describe the rules of set-off of losses from one head against the income of the other head.       6
(2) How loss under the head house property is to be carried forward?                         5
7. (a) What is Tax Planning? Distinguish between Tax Planning and Tax Avoidance.   5+6=11
Or
(b) Write short notes on the following:                                                      4+4+3=11
1)         Requisites of a Successful Tax Planner.
2)         Tax Management.
3)         Tax Evasion.

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