2021 Income Tax Law and Practice Solved Paper, B.Com CBCS Pattern Hons

 Income Tax Law and Practice Solved Paper 2021 CBCS Pattern 
Dibrugarh University B. Com 3rd Sem Question Papers
3 SEM TDC ITLP (CBCS) C 306
Income Tax Law and Practice’ 2021
(Held in January/February, 2022)
COMMERCE (Core)
Paper: C-306
Full Marks: 80
Pass Marks: 32
Time: 3 hours
The figures in the margin indicate full marks for the questions

1. (a) Fill in the blanks:                  1x4=4

(1)  Residential status is determined with reference to the individual’s physical presence in India.

(2)  Gratuity is ordinarily taxable as salary.

(3)  All those assets to which one rate of depreciation is applicable are known as block of asset.

(4)  The Permanent Account Number is a 10 (Ten) digit alpha numeric number which is issued by an assessing officer of the income tax department.

(b) Write True or False:                 1x4=4

(1)  The present Income-tax Act came into force with effect from 1st April, 1961.      False, 1-4-1962

(2)  The annual value of house property must consist of any building or lands appurtenant thereto.                True

(3)  Long-term capital gains on sale of securities listed in stock exchange are taxed u/s 115A of the Income-tax Act, 1961.        False, 112A

(4)  Total income is also known as taxable income.                 False

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

(a) Standard deduction (u/s 16).

Ans: Deductions from Salaries [Section 16]: While computing the salary income an employee, the following three deductions are allowed under section 16:

i. Standard Deduction [Section 16 (ia)]: Standard deduction of Rs. 50,000 from the Assessment year 2020-21 is allowed to every employee.

ii. Entertainment Allowance [Section 16 (ii)]: Entertainment allowance is fully exempted for non-government employees. But in case of a government employee’s a deduction is allowed u/s 16(ii) at the least of the following:

a)       Statutory limit: 5000

b)      1/5th of basic salary

c)       Actual entertainment allowance

iii. Tax on Employment (Professional Tax) [Section 16 (iii)]: As per the Constitution of India, the State Governments/Local Authorities are empowered to make law and collect taxes on professions, trades, callings and employment.

(b) Home loan.

Ans: Home Loan: Buying or constructing a house is not an easy task in present situation. But home loan facilities by government and other financial institutions made this easy. Having a house is dream of everyone. The Indian government always encourage citizens to invest in houses by providing them multiple tax benefit u/s 54 and also tax deduction under Section 80C. Many schemes like Pradhan Mantri Jan Dhan Yojana are flashing green light on the Indian housing sector by striving to bring down the issues of affordability and accessibility.

The Income Tax Act, 1961 offers various provisions for a tax rebate on home loans. The following are the three major areas where such a borrower can claim exemptions:

1. Principal repayment of home loans can net annual tax deductions of up to Rs.1.5 lakh under Section 80C of The Income Tax Act, 1961

2. On the interest payments for a home loan, tax deductions of up to Rs.2 lakhs can be claimed, as per Section 24 of the Income Tax Act.

3. Additional tax deductions of up to Rs.50000 can also be availed under sec. 80EE.

(c) Deduction u/s 54.

Ans: 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, two residential house in India. This exemption is allowed only once in the lifetime of the assessee provided amount of capital gains does not exceed Rs. 2 crores.

Amount of exemption: The amount of exemption available is equal to the amount so utilised or the amount of capital gain, whichever is less. If the whole or any part of the capital gain cannot be so utilised for acquisition of a residential house before filing the return, the same should be deposited in Capital Gains Account Scheme, 1988 in order to claim exemption, before the due date for furnishing the return.

For availing this exemption, the assessee must not transfer the new house, within a period of three years from the date of its purchase or construction, as the case may be. Otherwise the exemption allowed under this section shall be reduced from the cost of the new house, in computing the capital gains arising there from.

(d) Unexplained investment (u/s 69)

Ans: 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.

(e) Filing of return of income.

Ans: An Income tax return (ITR) is a form used by assessees to file information about their income under various heads to the Income Tax Department. As per the income tax Act 1961, the return must be filed every year by an assessee that earns any income during a financial year. The tax liability of a taxpayer is calculated based on his or her income.  The income of an assessee can be from salary, house property, business or profession, capital gains and income from other sources.

Tax returns have to be filed by an individual or a business before a specified date. If a taxpayer fails to abide by the deadline, he or she has to pay a penalty if his income is above basic exemption limit. A delay in filing returns will not only attract late filing fees but also hamper chances of getting a loan or a visa for travel purposes.

Tax liability of an assessee is to be calculated at a predetermined rate. Some assesse is required to pay their taxes in advance. In case the return shows that excess tax has been paid during a year, then the individual will be eligible to receive income tax refund from the Income Tax Department.

3. (a) Explain the following (any two):    4x2=8

(a) Assessee.

Ans: Assessee [Section 2 (7)]: 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 assessee 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.

Every person by whom any amount is payable under the Income Tax Act is called assessee. But all person mentioned above is not liable to pay taxes.

A. Following persons are liable to pay income tax if their taxable income’ in a year exceeds the basic exemption limit for the year:

1.       Individuals (including non-residents),

2.       Hindu Undivided Families (HUFs)

3.       Association of Persons (AOPs)/Bodies of Individuals (BOIs) (where the individual shares of the members are known)

4.       Artificial juridical persons, such as deities of temples

5.       Societies and charitable/religious trusts

B. Following persons are liable to pay income-tax irrespective of their income:

1.       All partnership firms (including limited liability partnership firms)

2.       Co-operative societies

3.       Companies

4.       Local authorities

5.       AOP/BOI where shares of the members are indeterminate or unknown.

(b) Agricultural income.

Ans: Agriculture Income [Section 2 (1A)]: 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.

(c) Gross total income.

Ans: Section 14: 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 and on this income tax is calculated.

Or

(b) Enumerate any four items of income which are fully exempted from income tax. Also mention any four such incomes which are partially exempted from income tax.               4+4=8

Ans: Incomes Fully 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)]

Partly taxable allowance: Partly taxable allowance includes the following: (A+B+C)

A) House Rent allowance [Sec.10 (13A)]: House rent allowance (HRA) received by an employee from his employer is an exempted income. If the actual house rent allowance received by the employee is in excess of the lowest limit as prescribed, the excess sum will be taxable salary. HRA is exempt from tax to the lower of the following.

(a) 50% of Salary in Mumbai, Kolkata, Chennai, Delhi; 40% of salary in other cases.

(b) Actual amount of house rent allowance received; or

(c) The excess of rent paid over 10% of salary.

If the employee is living in his own house or in a house where he is not paying any rent, HRA is fully taxable.

Salary for this purpose means basic salary and dearness allowance if the terms of employment so provide. It also includes any commission based on a fixed percentage of turnover achieved by the employee, as per the terms of the service contract. However, it excludes all other allowances and perquisites.

B) Entertainment Allowance: Entertainment allowance is fully taxable for non-government employees. But in case of a government employee’s a deduction is allowed u/s 16(ii) at the least of the following:

(a)    Statutory limit: 5000

(b)    1/5th of basic salary

(c)     Actual entertainment allowance

C) Children Education Allowance: Children Education allowance is exempted upto Rs. 100 per month per child for a maximum of two children.

D) Hostel Expenditure allowance: Hostel expenditure allowance is exempted upto Rs. 300 per month per child for a maximum of two children.

4. (a) Explain the following relating to Income from salary:                          3x3=9

(1) House Rent Allowance.

Ans: House Rent allowance [Sec.10 (13A)]: House rent allowance (HRA) received by an employee from his employer is an exempted income. If the actual house rent allowance received by the employee is in excess of the lowest limit as prescribed, the excess sum will be taxable salary. HRA is exempt from tax to the lower of the following.

(a) 50% of Salary in Mumbai, Kolkata, Chennai, Delhi; 40% of salary in other cases.

(b) Actual amount of house rent allowance received; or

(c) The excess of rent paid over 10% of salary.

If the employee is living in his own house or in a house where he is not paying any rent, HRA is fully taxable.

Salary for this purpose means basic salary and dearness allowance if the terms of employment so provide. It also includes any commission based on a fixed percentage of turnover achieved by the employee, as per the terms of the service contract. However, it excludes all other allowances and perquisites.

(2) Gratuity.

Ans: Gratuity [Sec. 10(10)]: Gratuity is the sum paid by the employer to its employees in appreciation of its past services. Taxability of perquisites is given below for various types of employees:

Government employees

Employees covered under the Gratuity Act

Any other employee

Fully exempt

Minimum of the following 3 limits:

Minimum of the following 3 limits:

(1) Actual gratuity received, or

(2) 15 day's salary for every completed year, or part thereof exceeding six months (7 day's salary for each season for an employee in a seasonal establishment); or

(3)Rs. 20,00,000

(1) Actual gratuity received, or

(2) Half months average salary of each completed year of service.

(3) Rs.20,00,000

Meaning of Salary:

(i) Basic salary plus Dearness allowance.

(ii) Last drawn salary (average salary of the preceding three months in case of piece rated employee)

(iii) No. of days in a month to be taken as 26

Meaning of Salary:

(i) Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if a fixed percentage of turnover.

(ii) Average salary of last 10 months preceding the month in which event occurs.

(iii) Only completed a year of service is to be taken.

(3) Recognized Provident Fund.

Ans: Recognized Provident Fund (RPF): This scheme is applicable to an organization which employs 20 or more employees. An organization can also voluntarily opt for this scheme. All RPF schemes must be approved by The Commissioner of Income Tax. Here the company can either opt for a government-approved scheme or the employer and employees can together start a PF scheme by forming a Trust. The Trust so created shall invest funds in a specified manner. The income of the trust shall also be exempt from income taxes.

Taxability of Recognised Provident Funds

Particulars

Taxability

1. Employee's/ assessee's contribution

Deduction u/s 80C is available from gross total income subject to the limit specified therein

2.Employer's contribution

Exempt up to 12% of salary. Amount in excess of 12% is included in gross salary.

3. Interest on Provident Fund

Exempt u/s 10 up to 9.5% p.a. Interest credited in excess of 9.5% p.a. is included in gross salary

4.Repayment of lump-sum amount on retirement / resignation /termination

Exempt if the employee has rendered a minimum of 5 years of continuous service

Or

(b) Mr. Rajiv is a production manager of an industrial unit at Chennai. The particulars of his salary income are as follows:

Particulars

Rs. (p.m.)

Basic Salary

DA (given under the terms of employment)

Entertainment allowance

Medical allowance

House Rent allowance

Rent paid for the house

40,000

15,000

1,000

500

12,000

15,000

Car of 1.2 litre capacity provided by employer for private and official use. Employer meets of car. He and his employer (each) contribute 13% of salary to Recognized Provident Fund.

Mr. Rajiv had taken interest-free loan of Rs. 15,000 to purchase refrigerator. Compute income under the head salary for the AY, 2020-21.9

Ans: Available on our YouTube Channel or Download our mobile application for Solutions.

5. (a) From the particulars given below, compute income from house property which consists of two independent units having 1/3rd and 2/3rd area:    10

Date of completion

Municipal rental value

Fair rental value

Self-occupied

Let out

 

Municipal taxes

Fire insurance premium

Ground rent

Interest on loan

01-11-2013

Rs. 96,000

Rs. 84,000

2/3rd portion.

1/3rd portion from 01-04-2018 to 31-08-2018 @ Rs. 7,200 p.m.

and self-occupied from 01-09-2018 onwards.

Rs. 6,000 p.a.

Rs. 2,000 p.a.

Rs. 4,000 p.a.

Rs. 7,500

Ans: Available on our YouTube Channel or Download our mobile application for Solutions.

Or

(b) What is ‘annual value’? How is it determined? What deductions are allowed from the annual value in computing taxable income from house property?   2+3+5=10

Ans: Annual Value (Section 23)

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

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

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.

It should be noted that the procedure for the determination of Gross Annual Value is not the same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:

1) Property is let-out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.

2) Let out property is vacant for a part of the year (Section 23(1) (c)):  If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV.  If the ARR < ERV for any other reason, GAV = ERV.  If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let-out period only and the ERV is for the whole year as usual.

3) Self-occupied or Unoccupied property (Section 23(2)): The gross annual value of two self-occupied house property is Nil. 

4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)):  GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)

5) Deemed to be let out property (Section 23(4)):  This case arises when the assessee has more than two Self-occupied properties in a previous year. In such case, only two of such properties are treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.

6) A portion of the property is let out and the remaining portion is self-occupied:  GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.

Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.

Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.

STEP 2 - Determine the value of Municipal taxes:

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

Deductions allowable under section 24 of the income tax act

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

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

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

Limit of deduction u/s 24(b)

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

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

Ø  A loan taken after 1 – 4 – 99

Ø  For construction/purchase (Capital expenditure) of house

Ø  Construction completed within 5 years from the end of the financial year in which loan is borrowed.

Ø  Loan certificate is obtained

For all other cases, the maximum allowed deduction is Rs. 30000

6. (a) Dr. Kunal is a medical practitioner. He gives you the following summary of cashbook for the year ending on 31.03.2020:

 

Rs.

 

Rs.

To Balance b/d

‘’ Consultation fee

‘’ Visiting fee

‘’ Gifts and presents

‘’ Sale of medicine

‘’ dividend from UTI

‘’ Life insurance maturity

‘’ Dividend from NDS

10,000

60,000

45,000

8,000

42,000

6,000

1,00,000

6,000

By Rent of clinic

‘’ Purchase of medicine

‘’ Staff salaries

‘’ Surgical equipment

‘’ Motor car expenses

‘’ Purchase of motorcar

‘’ Household expenses

‘’ Balance c/d

18,000

38,000

24,000

40,000

8,000

1,40,000

7,000

2,000

 

2,77,000

 

2,77,000

Other Informations:

(1)    50% of the motorcar expenses incurred in connection with profession. Car was purchased in December 2019.

(2)    Household expenses include Rs. 6,800 for insurance premium.

(3)    Gift and presents include Rs. 3,000 from relatives.

(4)    Closing stock for medicine for Rs. 12,000 and opening stock on 01-04-2019 was Rs. 4,000.

Compute his professional gain for the Assessment Year, 2020-21.             10

Ans: Available on our YouTube Channel or Download our mobile application for Solutions.

Or

(b) Mention ten examples of expenses allowable as deduction u/s 37 of the Income-tax act while computing the profits and gains of business or profession. 10

Ans: General Deductions [Sec.37]: Under Sec.37, deductions of a general nature are allowed subject to the conditions as specified. The language of this section may be stretched to claim deduction for many items of expenditure which is not specifically covered elsewhere under this head, though there are restrictions with regard to expenditure on entertainment, advertising, traveling etc., as also under Sec.40 and 40A.

Conditions of deduction under Sec.37:

1. The expenditure is not of the nature described in Sec 30 to 36.

2. It is not in the nature of capital expenditure

3. It is not in the nature of personal expenses of the assessee

4. It is laid out wholly and exclusively for purposes of the business or profession of the assessee.

The followings are some of the examples of expenses allowable as deduction u/s 37

1. All expenses in the nature of advertisement to push up sales.

2. Sales-tax and expenses incurred in relation to sales tax appeal.

3. Reasonable expenses incurred at the time of puja, mahurat, Diwali, etc.

4. Royalty paid in connection with the use of trade marks, patents, copyrights, etc.

5. Compensation paid to an agent in connection with the termination or modifications in the terms and conditions of his agency.

6. Installation expenses of new telephone and payment made under 'Own Your Telephone' (O.Y.T.) scheme.

7. Legal expenses incurred to claim damages or compensation in case of non-fulfilment of a contract.

8. Gifts given to the employees but such gifts should not fall in the category of perquisites.

9. Any compensation paid to an employee on the termination of his service compensation paid to a managing agent on the termination of his agency.

10. Insurance premium paid to get insurance of employees against injury, accident while working and also any compensation paid to employees due to such injury or accident. 

7. (a) Mr. Sudip purchased a house on 12-04-2018 for Rs. 11,00,000 and spent Rs. 1,80,000 on its improvement on 14-07-2018. On 16-12-2019, he sold the house for Rs. 21,50,000 (stamp duty value Rs. 23,00,000) and incurred Rs. 12,000 as expenses on transfer. Compute the amount of capital gains from the AY, 2020-21.   9

Ans: Available on our YouTube Channel or Download our mobile application for Solutions.

Or

(b) Mention the different kinds of incomes specifically mentioned as chargeable to tax under the head, ‘Income from other sources’. 9

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’’.

 If the above three condition are satisfied, the income is taxable under the head ‘‘Income from other sources’’. All incomes chargeable to tax under this head are divided into 2 categories:

A. General Incomes [Sec. 56(1)]

B. Specific Incomes [Sec. 56(2)]

[Sec. 56(2)]: Specific Incomes: 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.

Income chargeable under this head is computed in accordance with the method of accounting regularly employed by the taxpayer. For instance, if book of accounts are kept on basis of mercantile system, income is taxable and expenditure is deductible on ‘‘due basis, whereas if books of account are kept on the basis of cash system, income is taxable on ‘‘receipt’’ basis and expenditure is deductible on ‘‘payment’ ’basis.

8. (a) From the following information relating to Financial Year, 2019-20 furnished by Mr. Shiv Prasad Gupta, compute his gross total income for the AY, 2020-21:    10

(1)       Income from salary (computed) Rs. 7,00,000.

(2)       Interest of Rs. 80,000 on the bank fixed deposit for the Financial Year, 2019-20 was credited to the Savings Bank A/c of Raman, his nephew (son of his sister).

(3)       He gifted a flat to his wife on 01-04-2019. The income from house property (computed) for the Financial Year, 2019-20 was Rs. 3,20,000.

(4)       Cash gift received by his minor son Bimal during his 10th birthday celebration Rs. 92,000.

(5)       Income of minor daughter Sangita from fixed deposit in a bank Rs. 50,000.

(6)       Minor son’s income from fixed deposit in a bank Rs. 2,400.

Ans: Available on our YouTube Channel or Download our mobile application for Solutions.

Or

(b) Explain the provisions of the Income-tax Act regarding set-off and carry forward of the following: 3+3+4=10

1) Loss from house property.

Ans: Loss under head House Property: The loss under the head house property, let out or self-occupied, can be carried forward to the subsequent year’s 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 set off against income under any other head upto a maximum of Rs.2,00,000 [Sec.71(3A)].

2) Capital loss.

Ans: 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.

3) Loss of the discontinued business.

Ans: Discontinued business [Section 176]: In case any business or profession is discontinued during a previous year the income of the period from the expiry of last previous year till the date of discontinuation will be assessed to tax in the current previous year itself. The power of the Assessing Officer to invoke the provisions of section 176 is discretionary and concerning the other provisions mentioned above, it is mandatory.

In the above cases, the income of the previous year may be taxed as the income of the assessment year immediately preceding the normal assessment at the rates applicable to that assessment year.

According to the proviso to section 72(1), if there is any loss of a business which is discontinued in the circumstances specified in section 33B and it is re-established, reconstructed or revived by the assessee at any time before the expiry of a period of three years from the end of the previous year in which it was discontinued, then the loss of the previous year in which such business is discontinued including the brought forward loss:

1. Shall be allowed to be set off against the profit and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and

2. If the loss cannot be wholly so set off, the amount of balance loss be carried to the following assessment year and so on for seven assessment years immediately succeeding provided such reestablished business is continued to be carried by the assessee. Continuity of the business is not necessary for the loss to be carried forward by the assessee during the year in which brought forward loss is sought to be set off but it cannot be carried forward for more than eight assessment years.

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