ECO - 11: ELEMENTS OF INCOME TAX | IGNOU SOLVED ASSIGNMENT 2020 - 21 | B.COM | FREE SOLVED ASSIGNMENT

 TUTOR MARKED ASSIGNMENT
Course Code: ECO- 11
Course Title: ELEMENTS OF INCOME TAX
Assignment Code: ECO-11/TMA/2020-21
Coverage: ALL BLOCKS Maximum Marks: 100
Attempt all the questions:


1. What are the different categories into which the assessee’s are divided with regard to residence? Give brief account of each of them? (20)

Ans: Meaning of Assessee: Assessee means a person by whom any tax or any other sum of money payable under the Act and include:

i)        Every person in respect of whom any proceeding has been initiated under the act for the assessment of his income or the income of any other person. These assessees are also called ordinary assessee. It also includes that person to whom tax refund is due or by whom any amount of tax or interest or penalty is payable under this Act.

ii)       A person who is deemed to be an assessee under any provision of the Act. A person who is not only liable for his own income but also for the income of another person is called deemed assessee or representative assessee. E.g., Guardian of minor or a lunatic etc.

iii)     A person who is deemed to be an assessee in default in any of the provision of the Act. Assesses in default is a person who fails to fulfill his statutory obligations. E.g., in case of an employer paying salary, he has to deduct tax at source and deposit the same in the government treasury. If he fails, then he is called assessee in default.

Classification of assessee on the basis of residential status:

Tax incidence on an assessee depends on his residential status. The residential status of an assessee is determined concerning his residence in India during the previous year. Therefore, the determination of the residential status of a person is very significant to find out his tax liability. Assessee includes individuals, HUF, AOP, BOI, Company and other artificial judicial person. But on the basis of residential status, there are mainly two categories:

a)    Resident in India

b)   Non-resident in India

Further, resident in India is divided into two categories in case of individual and HUF

1. Resident and ordinarily resident in India

2. Resident but not ordinarily resident in India

Rules regarding residential status of various types of assessee are given below.

1. Residential Status of an Individual

As per section 6, an individual may be (a) resident in India or (c) non-resident in India. Further, an individual resident in India is again divided into two categories: ordinarily resident in India and Not ordinarily 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 182 days or more

OR

b) He is in India for 60 days or more during the previous year and has been in India for 365 days or more during 4 years immediately preceding the previous year.

Exceptions to the Second Basic Condition: In the following two cases, an individual needs to be present in India for a minimum of 182 days or more to become resident in India:

(a) An Indian citizen who leaves India during the previous year to take 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 a 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 730 days or more during 7 years immediately preceding 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.

2. HUF: Resident or Non-Resident

A Hindu undivided family is said to be resident in India if control and management of its affairs are wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs are 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 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.

3. 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.

4. Residential Status of a Company

Residential status of a company is determined on the basis of its incorporation. As per section 6(3), an Indian company is always resident in India. A foreign company is a resident in India only if, during the previous year, control and management of its affairs are situated wholly in India. However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs are either wholly or partly situated out of India.

5. Residential Status of any other person including artificial judicial persons

In case of every other person, which has its control and management wholly India during the relevant previous year is said to be resident in India. But if the control or management of such persons is wholly outside India during the relevant previous year, such a person is called NRI.

2. What do you understand by the term ’Capital Gains’ under Income Tax Act? How is Long term Capital gain and Short term Capital gain computed? (20)

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)

a) Full value of consideration and Transfer expenses

Ans: The total amount, received by the assessee from the asset transferred by him, is known as full value of consideration. This consideration can be in cash or in kind. If it is received in kind, then the fair market value of such asset is taken as full value of consideration. Even if the full consideration is received is the same, the entire value of consideration is considered for computing the capital gain.

Expenditure, which is necessary for the purpose of transfer, is considered as expenditure incurred wholly and exclusively in connection with transfer of capital asset. Expenditure, which is wholly and exclusively in connection with transfer of a capital asset, is deductible from the full value of consideration. Transfer expenses include brokerage paid for arranging the deal, legal expenses incurred for preparing conveyance deed and other documents, cost of inserting advertisement in newspapers for sale of the asset and commission paid to auctioneer. However, it is necessary that the expenditure should have been incurred wholly and exclusively in connection with the transfer. An expenditure incurred primarily for some other purpose but which has helped in effecting the transfer does not qualify for deduction. For instance, salary of an employee who helps in maintenance of capital assets, carries out works in connection with transfer, maintains accounts for the capital assets and capital gains, etc., is not deductible.

b) 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.

c) 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.

d) Indexed cost of acquisition and improvement

Ans: For computing long-term capital gains, ‘Indexed Cost of Acquisition’ and ‘Indexed Cost of Improvement’ are required to be deducted from the full value of consideration of the capital asset. Both these costs are thus required to be indexed with respect to the Cost Inflation Index pertaining to the year of transfer. Accordingly, ‘Indexed Cost of Acquisition’ and ‘Indexed Cost of Improvement’ shall be computed as under:

Indexed Cost of Acquisition = (Cost of Acquisition x Cost Inflation Index for the year of transfer)/ Cost Inflation Index for the year of acquisition or 2001-02, whichever is later

Cost Inflation Index: = (Cost of Acquisition x Cost Inflation Index for the year of transfer)/ Cost Inflation Index for the year of acquisition or 2001-02, whichever is later

e) Exemption under section 54:

1. Capital Gains from Transfer of a Residential House: [Sec.54.

2. Capital Gains from Transfer of Urban Agricultural Land: [Sec.54B.

3. Capital Gains from Compulsory Acquisition of land and building of Industrial Undertaking: [Sec. 54D].

4. Capital Gains invested in Certain Bonds: [Sec.54EC].

5. Capital Gains invested in Units of a Notified Fund for Financing Start-Ups: [Sec.54EE].

6. Capital Gains from an Asset other than Residential House: [Sec. 54F].

7. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to Rural Area [Sec.54G].

8. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to SEZ: [Sec.54GA].

9. Capital Gain from Transfer of a Residential Property invested in a manufacturing small or medium enterprise: [Sec. 54GB].

3. From the following information of Mr. Sunil, computed the taxable income of house property:

I. Municipal Valuation 3, 30,000

II. Fair Rent 3, 60,000

III. Standard Rent under Rent Control Act 3, 36,000

IV. Unrealised Rent of previous year 2013-14 (Conditions of Rule 4 Satisfied) 30,000

V. Rent realised in year 2019-20 from unrealised Rent of previous year 2013-14 24,000

VI. House was let at Rs. 30,000 p.m.

VII. Rent Unrealised of the year 2019-20 30,000 (20)

Ans: Computation of Income from house property for the assessment year 2020-21 (Previous Year 2019 – 20)

Particulars

Amount

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) (3,60,000 – 30,000)

6. Gross Annual Value (higher of 4 or 5)

Less: Deduction under section. 24

(a) Standard Deduction @ 30%

3,30,000

3,60,000

3,36,000

3,36,000

3,30,000

3,36,000

 

1,00,800

Current year’s Income from house property after deduction

Add: Unrealised rent recovered (24,000 - less 30% standard deduction)

2,35,200

16,800

Taxable income from House Property

2,52,000

4. From the following particulars of income of Mr. Anup, a Government Employee computes taxable income from salaries for the assessment year 2020-21:

I. Basic Salary 78,000

II. High Cost of Living Allowance 13,000

III. Entertainment Allowance 11,200

IV. Conveyence Allowance 6,000

V. Family Allowance 6,000

VI. Bonus 20,000

VII. Rent – free unfurnished house of which rental value is Rs. 6,000 p.m.

VIII. Anup has his own moter -cycle which is used by him both for private and official proposes. Employer paid Rs. 10,000 for its expenses.

Mr. Anup spends 40% of entertainment allowance on the entertainment of Government officials. He contributes 12% of his salary in statutory provident fund. 80% of convenyance allowance was spent in performing duties. He got entertainment allowance Rs. 250 per month prior to 1-4-1980. As per Government rules, the licensing fee of house shall be equal to 10% of basic salary. (20)

Computation of salary Income of Mr. Anup for the Assessment Year (2020-2021)

Particulars

Amount

Amount

a) Basic Salary

b) High cost of living allowance

c) Entertainment Allowance

d) Conveyance Allowance

Less: Exempted upto actual expenditure @80%

e) Family allowance

f) Bonus

g) Value of rent free unfurnished house (License fees of the house = 10% of basic salary)

h) Reimbursement of expenses on Motor-cycle by employer

Less: Exempted upto Rs. 900 per month

 

 

 

6,000

4,800

 

 

 

10,000

10,000

78,000

13,000

11,200

 

1,200

6,000

20,000

7,800

 

Nil

Gross Salary

Less: Deduction U/S 16

(ia) Standard deduction

(ii) Entertainment Allowance (upto minimum of the following)

a)    Actual EA

b)   1/5 of basic salary

c)    Rs. 5,000

 

 

 

 

11,200

15,600

5,000

1,37,200

 

50,000

 

 

 

5,000

Income from Salary

Less: Deduction u/s 80C

a) Contribution to SPF (78000*12%)

 

82,200

 

9,360

Taxable Salary Income

 

72,840

5. Write short notes on the following:

a) Agriculture Income

Ans: Agriculture income is fully exempted from tax u/s 10(1) and as such does not form part of total income. As per Section 2(1A), agriculture income includes:

a)      Any rent or revenue derived from land which is situated in India and is used for agricultural purpose;

b)      Any income derived from such land by agriculture or by the process employed to render the product fit for market or by the sale of such produce by the cultivator or receiver of rent in Kind.

c)       Any income derived from any building provided the following conditions were satisfied:

Ø  The building is or on the immediate vicinity of the agricultural land;

Ø  It is occupied by the cultivator or receiver of rent or revenue

Ø  It is used as a dwelling house or storehouse or outhouse ;

Ø  The land is assessed to land revenue and it is not situated within the specified area.

b) Pension

Ans: Pension is regular payment which is paid by the employer to its employee after retirement or family members of the employee after the death of the employee. Self employed person can also get pension by investing in pension fund. Pensions receive by employees or family members of employees are taxable.

Taxability of pension: After the retirement, employee can either get monthly pension which is known as uncommitted pension or they have option to get advance lump sum payment of pension which is known as commuted pension.

Uncommuted pension i.e. the periodical pension: It is fully taxable in the hands of all employees, whether government or non-government.

Commuted Pension: Exemption of commuted pension u/s 10(10A)

Govt. Employees

Any other employee

Fully exempt

(a) If gratuity is not received: The commuted value of 1/2 of pension which he is normally entitled to receive is exempt.

(b) If gratuity is also received: The commuted value of 1/3rd of pension which he is normally entitled to receive is exempt.

 

c) Bond washing Transactions

Ans: Section 94 of the Income Tax Act, 1961 deals with bond washing transactions. Bond washing transactions are simply a technique of avoidance of tax. A bond washing transaction is a transaction in which securities held from sometime are sold just before the due date of the interest and it is again acquired after the due date. In such transactions, high net worth investors tries to reduce their tax liability by transferring interest income to some other parties. Sec. 94 of the Income Tax Act tries to control this type of activity and it provides that if income is transferred in that manner, the interest will be added to the income of the person was the owner of the securities.

According to Section 94(1) of the Income Tax Act, 1961, Where the owner of any securities sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.

d) Capital Gain Account Scheme 1988

Ans: Capital Gain Account Scheme was introduced in the year 1988 by the Central Government with a view to encourage the investors to reinvest capital gains arises by the sale of capital assets in such scheme. Any investment made in capital gain account scheme within a specified period will be allowed as deduction from total capital gains made by the investors. This account can be used as a tool to save tax liability. There are two types of capital gains account – saving deposit account term deposit account. Saving deposit account can be used as normal bank account. Any amount withdrawn is required to be utilised for specified investment within 60 days of withdrawal and any unutilised amount may be re-deposited to saving deposit account immediately. Maximum lock in period of funds in cash of term deposit account is 3 years. No loan facility is available in case of capital gain account and also deposit certificate cannot be mortgaged.

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