2020 Income Tax Law and Practice Solved Paper, B.Com CBCS Pattern Hons

 Income Tax Law and Practice Solved Paper 2020 CBCS Pattern
3 SEM TDC ITLP (CBCS) C 306
2 0 2 0 (Held in April–May, 2021)
COMMERCE (Core)
Paper: C–306 (Income Tax Law and Practice)
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions

1. Write True or False:                   1×4=4

a) Income of previous year is charged in the next following assessment year at the tax rates applicable for the relevant assessment year.

Ans: True

b) Exemption shall be available if the employee has not actually incurred expenditure on payment of rent on stays in his own accommodation (HRA).

Ans: True

c) In case of more than one self-occupied house, one house is treated as self occupied and all the other house as deemed to be let out.

Ans: False

d) In business and profession interest on loan is not allowed as deduction only if loan is utilized for business purpose.

Ans: False

2. (a) What do you mean by residential status? How to determine residential status of an individual? 2+6=8

Ans: Residential Status and Tax Incidence

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. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship.

Residential Status of an Individual

As per section 6, an individual may be (a) resident 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 need 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.

Or

(b) What incomes are exempted under Section 10 which does not form part of total income? Mention any such eight incomes.              8

Ans: Income Exempted from tax under Sec. 10:

1. Agricultural Income: Income from agriculture is exempt. However, if the net agricultural income exceeds Rs.5, 000, it is taken into account for determining the rates of income-tax on incomes liable to tax. [Sec.10 (1)]

2. Receipt from Hindu Undivided Family: Any sum received by an individual as a member of Hindu Undivided Family where such sum has been paid out of the income of the family or in the case of any Impartible estate, where such sum has been paid out of the income of the estate belonging to the family, irrespective of whether tax is payable or not by the HUF on its total income. However, certain receipts from HUF are liable to be clubbed in the hands of an individual member u/s 64(2). [Sec.10 (2)]

3. Partner’s Share in the Firm’s Income: In the case of a person being a partner of a firm which is separately assessed as such, partner’s share in the total income of the firm is exempt. Share of a partner of the firm shall be computed by dividing the total income of the firm in the profit-sharing ratio mentioned in the Partnership Deed. [Sec.10 (2A)]

4. Value of Leave Travel Concession: Value of any leave travel concession or assistance received by or due from the employer to the employee (including noncitizens) and his family (spouse, children and dependent- father, mother, brother, sister dependent on him) in connection with his proceeding on leave or after retirement or termination of his service to any part of India. [Sec.10 (5)]

5. Leave Encashment: Any payment received by a Central/State Govt. employee, as cash equivalent of leave salary in respect of a period of earned leave at his credit at the time of his retirement whether o superannuation or otherwise. However, in the case of other employees, the exemption is available subject to specified limits. For details see ‘Receipts Exempt from Income Tax’ in the chapter ‘Salary’. [Sec.10 (10AA)]

6. Compensation to Employee: Any compensation received by a workman under Industrial Disputes Act or under any other Act or rules, order or notification issued there under or under any standing order or under any award, contract of service or otherwise at the time of his retrenchment is exempt to the extent such compensation is in accordance with Section 25F (b) of Industrial Disputes Act, subject to a maximum of Rs.5, 00,000.

7. Payment from Provident Fund: Any payment (including interest) from a provident fund under the Provident Fund Act, 1925 or Public Provident Fund Scheme, 1968. [Sec.10 (11)]

8. Payment from Sukanya Samriddhi Account: Any payment from an account under the Sukanya Samriddhi Account Rules, 2014 [Sec.10 (11A)]

3. (a) What is the basis of computation of income from house property? How is the annual value of a let out house property calculated?      4+10=14

Ans: Basis of charge of tax on income generated under the “income from house property”

Under section 22 of the income tax act, the annual value of a property, consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, is chargeable to tax under the head ‘Income from house property’. However, if a house property, or any portion thereof, is occupied by the assessee, for any business or profession, carried on by him, the profits of which are chargeable to income-tax, the value of such property is not chargeable to tax under this head.

Thus, three conditions are to be satisfied for property income to be taxable under this head

1) The property should consist of buildings or lands appurtenant thereto: The scope of this head of income is limited to the income from building or land appurtenant thereto. Land which is not appurtenant to any buildings does not come within the scope of this section.

2) The assessee should be the owner of the property: It is only the owner of the house property who can be tax under this head of income. The tax under this section is in respect of the legal or beneficial owner and not the occupation or possession of house property.

Again, the assessee who is deemed to be the owner of the house property is also is also chargeable to tax under this head.  Under Section 27 of the Income Tax Act, the assessee in the following cases is deemed to be the owner of the house property, though not owner of the house property: -

(a)   If an individual transfers a house property to his or her spouse (except in connection with an agreement to live apart) or to a minor child (except a married daughter) without adequate consideration, he is deemed as the owner of the property for tax purposes.

(b)   The holder of an impartible estate is deemed to be the owner of all the properties comprised in the estate.

(c)    A member of a co-operative society, company or association of persons, to whom property or a part thereof is allotted or leased under a house building scheme of the society, company or association, is deemed to be the owner of such property.

(d)   A person who has acquired a right in a building by way of a lease for a term of not less than 12 years, is the deemed owner of the property. This provision does not cover any right by way of a lease renewable from month to month or for a period not exceeding one year.

3) The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax. But where the profits of such business or profession are not chargeable to tax, the annual value of the house property is chargeable under this head.

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.

Ø  STEP 1 Determine the Gross Annual Value(GAV)

Ø  STEP 2 Determine the value of Municipal taxes

Ø  STEP 3 Compute the Net Annual Value

STEP 1- Determine the Gross Annual Value (GAV):

Calculation of GAV based on the following factors:

1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.

2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.

3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.

4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.

5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:

a) Tenancy is in good-faith.

b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.

c) The defaulting tenant doesn't continue to occupy any other property of the assessee.

d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use. 

6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.

7) Unoccupied property: The House property which cannot be occupied by its owner because of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.

STEP 2 - Determine the value of Municipal taxes:

The municipal tax or the property tax paid is allowed as a 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                                             ++++++

Or

(b) Mrs. Anima aged about 55 years is a Finance Manager of Zenith Co. Ltd. based at Tinsukia. She receives the following salary and perquisites from the company for the previous year, 2019–20:

(1) Basic pay – Rs. 50,000 p.m.

(2) Dearness allowance – Rs. 5,000 p.m. (treated as retirement benefit)

(3)  Commission – 1% of the turnover of the company. Company achieved a turnover of Rs. 30,00,000.

(4) Contribution of the employer and employee to the RPF account Rs. 25,000 p.m. each.

(5) Interest credited to RPF account @ 12% Rs. 60,000.

(6) Rent-free unfurnished accommodation provided by the company for which the company pays a rent of Rs. 70,000 p.a.

(7) Entertainment allowance – Rs. 2,500 p.m.

(8) Children’s Education allowance to meet the hostel expenditure allowance of 3 children Rs. 700 p.m.

(9) House Rent Allowance (HRA) Rs. 3,000 p.m. Mrs. Anima resides in the house property owned by her Hindu Undivided Family (HUF) for which she pays rent Rs. 4,000 p.m.

(10) Professional tax paid – Rs. 2,500 (by the employer).

Determine the income from salary for the Assessment Year, 2020–21. 14

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4. (a) What do you understand by the term ‘Capital Gains’? What are short-term and long-term assets? How are capital gains computed? 4+4+6=14

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.

Or

(b) Shri Jibon Nath owns 3 houses at Tinsukia, Dibrugarh and Guwahati. Compute income from house property of Shri Jibon Nath from the following: 14

Status

Tinsukia House

Let out for residential purpose

Dibrugarh House

Let out to employees   which is not necessary for business

Guwahati House

Self-occupied

Rent received (in Rs.)

Municipal value (in Rs.)

Lease rent (in Rs.)

Repairs (in Rs.)

 

Insurance (in Rs.)

Vacant for (in month)

Interest on loan (in Rs.)

84,000

94,000

0

25,000

(borne by tenant)

3,000

0

9,000

96,000

1,01,000

1,000 p.m.

0

 

3,800

2

10,000

-

76,000

0

20,000

 

2,600

3

17,000

Additional Information:

1)    Municipal tax is levied at 10% on municipal value and is to be paid quarterly. During the previous year, 2019–20, Shri Jibon Nath paid municipal tax in respect of Tinsukia house for 2 years including tax for the previous year, 2018–19. However, for Dibrugarh house municipal tax for the last quarter remained unpaid.

2)    Loan was taken for renovation of house property.

3)    In respect of Guwahati house, out of current year’s interest Rs. 2,000 is still outstanding.

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5. (a) What are the incomes chargeable under the head ‘income from other sources’? State the deductions that are allowed and disallowed under the head ‘income from other sources’.    6+4+4=14

Ans: Income from other sources is the last and residual head of income. A source of income that does not specifically fall under any one of the other four heads of income (viz., “Salaries”, income from house property”, profits and gain of business or profession’’, Capital gain’’) is to be computed and brought to charge under section 56 under the head ’’Income from other source’’.

To put the aforesaid matter differently, the residuary heads of income can be invoked only if all the following conditions are satisfied:

1. Income –There is an income.

2. Income shall not be exempt – That income is not exempt from tax under section 10 to 13 A.

3. Not covered by other heads -That income is neither salary income, nor income from house property, nor income from business /profession, and neither capital gains. These four categories of income are not chargeable to tax under head ‘‘Income from other sources’’.

Deduction Allowed from Income from other sources (Sec. 57)

The following deductions are allowed from income from other sources:

A) Deductions for Interest on Securities, Dividends etc.:

(a) Collection charges [Section 57(i)]: Any reasonable sum paid by way of commission or remuneration to a banker, or any other person for the purpose of realizing the interest.

(b) Interest on Loan [Section 57(iii)]: Interest on money borrowed for investment in securities is allowed as deduction.

(c) Any other expenditure [Section 57(iii)]: Any other expenditure, not being an expenditure of a capital nature, expended wholly and exclusively for the purpose of making or earning such income is allowed as deduction.

B) Deductions permissible from letting out of machinery, plant or furniture and buildings [Section 57(ii) and (iii)]: The following deductions are allowable:

a.       current repairs, to the premises

b.       Insurance premium against risk of damage or destruction of the premises

c.       Repairs and insurance of machinery, plant or furniture

d.       Depreciation based upon lock of assets, in the same manner as allowed under section 32.

e.       Any other expenditure not being an expenditure of a capital nature, laid out or expended wholly and exclusively for the purpose of making or earning such income is to be given as deduction

C) Deductions in respect of employee’s contribution towards staff welfare schemes [Section 57(ia)]:

Deduction in respect of any sum received by an employer as contribution from his employees towards any welfare fund of such employee is allowable only if such sum is credited by the employer to the employee’s account in the relevant fund before the due date.

D) Family pension payments received by the legal heirs of a deceased employee [Sec.57(iii)]

Family pension is taxable under the `Income from other sources’. On such family pension a standard deduction is to be allowed to the legal heir at 33 1/3% of such pension, or ` 15,000 whichever is less.

Deductions Not allowed from income from other sources (Sec. 58)

The following are not allowed as deduction in computing income from other sources.

1. Personal expenses: Any personal expenses of the assessee are not deductible.

2. Interest: Any interest chargeable under the Act which is payable outside India on which tax has not been deducted at source is not deductible.

3. Salary without TDS: Any payment chargeable under the head ``Salaries’’ and payable outside India is not deductible if tax has not been paid or deducted there from.

4. Income from betting, gambling and speculation: In case an assessee has income from lotteries, crossword puzzles, races including horse races, card games, betting, gambling etc., such assessee shall not be allowed any deduction in respect of any expenditure or allowance in connection with such income. However, in the case of income from the activity of owning and maintaining race horses, the expenses incurred on the maintenance of horse is allowed as deduction.

5. Amount specified by Section 40A: Any amount specified by section 40A under the head profit or gain from business or profession is not deductible while calculating income under the head ``Income from other sources’’.

6. Expenditure in respect of Royalty and Technical fees received by a foreign company: In the case of foreign companies, expenditure in respect of royalties and technical service fees as specified by section 44D is not deductible.

Or

(b) Shyam, a retail trader of Dibrugarh, gives the following Trading and Profit & Loss A/c for the year ending 31st March, 2019:

 

Rs.

 

Rs.

Opening Stock

Purchases

Gross Profit

63,000

10,30,000

3,07,000

Sales

Income from UTI

Dividend from Foreign Co.

Closing Stock

12,11,600

2,400

6,000

1,80,000

 

14,00,000

 

14,00,000

Salary

Rent and Rates

Interest on Loan

Depreciation

Printing & Stationery

Postage and Telegram

Loss of Sale of Shares (short-term)

Other General Expenses

Net Profit

60,990

36,000

15,000

1,05,000

23,200

1,640

8,100

7,070

50,000

Gross Profit

3,07,000

 

3,07,000

 

3,07,000

Additional Information:

1)    It was found that some stocks were omitted to be included in both the opening and closing stock, the values of which were:

a)    Opening Stock—Rs. 9,000

b)    Closing Stock—Rs. 18,000

2)    Salary includes Rs. 10,000 paid to his brother, which is unreasonable to the extent Rs. 2,000

3)    The whole amount of printing and stationery was paid in cash

4)    The depreciation provided in the Profit & Loss A/c Rs. 1,05,000 was based on the following information:

The written down value of Plant and Machinery is Rs. 4, 20,000. A new plant falling under the same block of depreciation of 25 percent was bought on July 1, 2019 for Rs. 70,000. Two old plants were sold on October 1, 2019 for Rs. 50,000

5)    Other general expenses include Rs. 2,000 paid as donation to a public charitable trust.

Determine the taxable income of Shyam for the Assessment Year, 2019–20.                       14

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6. (a) What do you mean by ‘set-off and carry forward of losses’? Discuss the provisions of Income Tax Act relating to the set-off of losses.  2+6=8

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.

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 relating to 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.

Or

(b) From the following particulars, compute the taxable Capital Gains of Mrs. Geeta for the Assessment Year, 2020–21: 8

 

Rs.

Cost of Jewellery (purchased in the Financial Year, 2005-06)

Sale price of Jewellery sold in January 2019

Expenses on transfer

Residential house purchased in March 2019

1,82,000

17,50,000

17,000

15,00,000

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7. Write short notes on any two of the following:            4×2=8

a) Aggregation of income.

Ans: Normally, a person is liable to pay taxes on his income only. But there are certain provisions in Income Tax Act, 1961 in which income of one person is included in the income of other person. This is called clubbing of income or aggregation of income. Clubbing of income is simply aggregation of Income of other person in assessee’s total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband. Income of a minor child is taxable in the hands of his parents.

Under the Income Tax Act, 1961 a person has to pay taxes on his income. A person cannot transfer his income or an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he does so the income shown to be earned by any other person is included in the assessee’s total income and the assessee has to pay tax on it. For example: A purchased a house property in the name of his wife B. A let out this house property. The rental income earned by A in name of his wife B is taxable in the hands of A.

Provisions of the Income Tax Act’ 1961 relating to Clubbing of Income (Sec 60 to 65)

A. Income of other persons which are included in assessee’s total income

B. Income of an individual (Transferor) to include income of spouse, minor child, etc. Section 64

C. Clubbing of Income of a Minor Child [Sec 64 (1A)]

D. Income from self-acquired property converted to joint family property (HUF) otherwise than for adequate consideration [Sec 64(2)]

b) Tax liability of an individual.

Ans: Income earning individuals in India are subject to various types of taxes by the government. The type of tax applicable will vary depending upon the source of income of an individual. As per section 14, all income, for purposes of income-tax, will be classified under the following heads of income.

(i)      Income under the head Salaries (Sections 15 to 17),

(ii)    Income from House Property (Sections 22 to 27),

(iii)   Profits and gains of business or profession (Sections 28 to 44)

(iv)   Capital gains (Sections 45 to 55)

(v)    Income from other sources (Sections 56 to 59)

Incomes earn under different heads are calculated separately and then aggregated. The aggregate of incomes computed under the above 5 heads, after applying clubbing provisions and making adjustments of set-off and carry forward of losses, is known, as gross total income (GTI) [Sec. 80B]

From the gross total income computed above, deductions allowed under Sections 80C to 80U is deducted to find the total income. If the total income of the assessee is more than the prescribed limit, then income tax liability of the individual is calculated.

c) Perquisites.

Ans: Perquisites (Sec. 17[2]): The word ‘perquisite’ has not been defined under the Income-tax Act, 1961. According to the oxford dictionary perquisites means any casual emolument, fee, or profit, attached to an office or position in addition to the salary or wages. In simple words, Perquisites are the benefits or amenities in cash or kind, in addition to the normal salary to which the employee has a right by virtue of his employment.

Section 17(2) gives an inclusive definition of perquisites. As per the Terms of Section 17(2), Perquisites Includes:

(i) The value of rent-free accommodation provided (used or not) to the assessee by his employer;

(ii) The value of any concession in the matter of rent respecting any accommodation provided (used or not) to the assessee by his employer;

(iii) The value of any benefit or amenity granted or provided (used or not) free of cost or at concessional rate in any of the following cases (specified employee):

(a) By a company to an employee, who is a director thereof;

(b) By a company to an employee is a person who has a substantial interest in the company;

‘Substantial Interest’: In relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power.

(c) by any employer (including a company) to an employee to whom the provision of clause (a) and (b) do not apply and whose income under the head of Salaries (whether due from or paid or allowed by, one or more employer), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000.

(iv) Any sum paid by the employer in respect of any obligation on behalf of the employee;

(v) any sum payable (not necessarily paid) by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity;

(vi) the value of any other fringe benefit or amenity as may be prescribed.

The perquisites can be divided into three categories:

1.       Perquisites which are taxable for all employees

2.       Perquisites which are fully exempted

3.       Perquisites which are taxable for specified employees only

8. (a) State the Relief and Rebate in respect of income tax and rates of income tax. 10

Ans: Relief under Section 89(1)

If an employee received any portion of salary in arrears or on advance or received profit in lieu of salary, relief can be claimed u/s 89 (1). Salary in arrears or advance received in lump-sum is liable to tax in the year of receipt. Some relief is however allowed from tax on such receipts. Claiming of relief is optional and should be claimed only when it is advantageous to the claimant.

Calculation of relief u/s 89 when salary has been received in arrears or in advance

The relief on the salary received in arrears or in advance (hereinafter to be referred to as additional salary is computed in the manner laid down in rule 21A (2) as under;

Ø  Calculate the tax payable on the total income, including the additional salary, of the relevant previous year in which the same is received.

Ø  Calculate the tax payable on the total income, excluding the additional salary, of the relevant previous year in which the additional salary is received.

Ø  Find out the difference between the tax at (1) and (2).

Ø  Compute the tax on the total income after including the additional salary in the previous year to which such salary relates.

Ø  Compute the tax on the total income after additional salary in the previous year to which such salary relates.

Ø  Find out the difference between tax at (4) and (5)

Ø  The excess of tax computed at (3) over tax computed at (6) is the amount of relief admissible under section 89. No relief is, however, admissible if tax computed at (3) is less then tax computed at (6). In such a case, the assessee- employee need not apply for relief.

If the additional salary relates to more than one previous year, the salary would be spread over the previous year to which it pertains in the manner explained above.

Rebate Under Section 87A of the Income Tax Act, 1961

​​​​​​​​​An individual who is resident in India and whose total income does not exceed Rs. 5,00,000 is entitled to claim rebate under section 87A​. Rebate under section 87A is available in the form of deduction from the tax liability. Rebate under section 87A​ will be lower of 100% of income-tax liability or Rs. 12,500. In other words, if the tax liability exceeds Rs. 12,500, rebate will be available to the extent of Rs. 12,500 only and no rebate will be available if the total income (i.e. taxable income) exceeds Rs. 5,00,000.

Or

(b) Mr. Arun Hazarika, an employee of a company, submits the following information for the previous year, 2019–20. Compute his total income for the Assessment Year, 2020–21:    10

Particulars

Rs.

(1) Salary and other allowances received @ Rs. 60,000 p.m.

(2) Rent received from house property @ Rs. 5,000 p.m.

(3) Dividend from an Indian company

(4) Interest on Savings Bank deposits

(5) Dividend from UTI

(6) Interest on debentures of an Indian Co. (Gross)

(7) Dividend from a foreign company

(8) Interest on deposits with an Indian company

(9) Interest on Government Securities

7,20,000

60,000

7,000

14,000

2,000

5,000

1,000

2,000

3,000

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