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

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

1) Assessee means a person by whom any tax or any other sum of money is payable under the Income-tax Act.

2) Unrecognised provident fund is that fund which is not recognized by the Commissioner of income tax.

3) The value of perquisites is chargeable to tax under the head Income from Salaries.

4) The rent fixed under the Rent Control Act whereas over applicable is called Standard rent.

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

1) The Income-tax Act, 1961 came into force from April 1, 1962 in whole of the country.                  True

2) Any amount withdrawn from the statutory provident fund is exempted from tax.          True

3) House rent allowance is a fully taxable allowance. False, Partly taxable

4) Bank interest is an example of taxable interest u/s 56(1) of the Income-tax Act, 1961.  True

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

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.

b) Ordinary resident.

Ans: 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.

c) Profits in lieu of salary [Section 17(3)].

Ans: Profit in Lieu of salary: The amount of any compensation due to or received by an assessee from his employer or former employer or in connection with the termination of his employment. [Sec.17 (3)]. These payments include the following.

(1)    Terminal compensation

(2)    Payment from an unrecognized provident fund or an unrecognized superannuation fund

(3)    Payment under Keyman Insurance Policy

(4)    Any amount due or received before joining or after cessation of employment

(5)    Any other sum received by the employee from the employer.

d) Income from other sources.

Ans: Income from other sources (Basis of Charge – Sec.56)

 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)]

e) 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.

3. (a) Define the terms ‘Previous Year’ and ‘Assessment Year’. What are the exceptions to the rule that income of a Previous Year is assessed to tax in the Assessment Year?  4+4+4=12

Ans: Previous Year: [Sec. 3]: As the word, ‘Previous’ means ‘coming before’, hence it can be simply said that the Previous Year is the Financial Year preceding the Assessment Year e.g. for Assessment Year 2020-2021 the Previous Year should be the Financial Year ending 31^st March 2020. The term previous year is very important because income earned in the previous year is to be assessed to tax in the assessment year. The simple rule is that the income of a previous year is taxed in its relevant assessment year. At present, the previous Year 2019-2020 (1-4-2019 to 31-3-2020) is going on.

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

The Assessment Year is the Financial Year of the Govt. of India during which income a person relating to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act, files Return of Income by prescribed dates. These Returns are processed by the Income Tax Department Officials and Officers. This processing is called Assessment. Under this Income Returned by the assessee is checked and verified, tax is calculated and compared with the amount paid and assessment order is issued. The year in which the whole of this process is undertaken is called Assessment Year. At present, the Assessment Year 2020-2021 (1-4-2020 to 31-3-2021) is going on.

The exception to the rule Income tax is charged on the income of the previous year

As a normal rule, the income earned during any previous year is charged to tax in the immediately succeeding assessment year. However, in the following circumstances, the income is taxed in the same year in which is earned.

1. Income of Shipping Business (Section 172): In case a non-resident Shipping Company, which has no representative in India, earns income from any Indian port it will not be allowed to leave the port till the tax on such income has been paid or alternative arrangements to pay tax are made in the current year itself.

2. In case of persons leaving India permanently [Section 174]: If the Assessing Officer has the reasons to believe that an individual will leave India permanently, he may ask him to pay tax on the income earned during the previous year up to the date of his leaving the country.

3. Assessment of association of persons or body of individuals or artificial judicial person formed for a particular event or purpose [Sec.174A]: Where it appears to the Assessing Officer that any association of persons or a body of individuals or an artificial judicial person formed or established or incorporated for a particular purpose and that purpose is completed, the total income of such person or body or artificial judicial person, for the period from the expiry of the previous year up to the date of its dissolution, shall be chargeable to tax in that assessment year.

4. In case of persons trying to transfer their assets [Section 175]: If the Assessing Officer thinks that any person is likely to sell, transfer, dispose of or to part with any of his assets with the intentions to avoid payment of any tax liability, he may ask to file the return and pay taxes during the previous year itself.

5. 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.

Or

(b) Explain in brief at least twelve incomes which are exempted u/s 10 of the Income-tax Act, 1961.       12

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)]

9. Accumulated Balance of Recognised Provident Fund: Any accumulated balance due and becoming payable to an employee from a recognised provident fund, on fulfillment of any of the following conditions:

(i) If he has rendered a continuous services of five years or more; or

(ii) If his service, though not as stated in (i) above, has been terminated due to his ill-health or by the contraction or discontinuation of his employer’s business or any other cause beyond his control; or

(iii) If on cessation of his employment, his accumulated balance is transferred to a recognised provident fund maintained by his new employer;

10. House Rent Allowance: Any special allowance granted to an assessee by the employer to meet expenditure incurred on payment of rent for residential accommodation subject to prescribed limits and conditions. [Sec.10 (13A)]

11. Allowances of MPS and MLAs:

(a) Any daily allowance received by Members of Parliament or any State Legislature.

(b) Any allowance received by any Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986.

(c) Any constituency allowance received by any member of any State Legislature under any Act or rules made by it. [Sec.10 (17)]

12. Income of a Professional Association set up for the control, supervision, regulation or encouragement of the professions of law, medicine, accountancy, engineering, architecture or other notified profession (i.e. Company Secretary, Chemistry, Materials Management and Town Planning), subject to specified conditions. [Sec.10 (23A)]

4. (a) Explain in brief the following items as per the Income-tax Act, 1961 (any two):      5½ x 2 = 11

a) 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.

b) Statutory provident fund.

Ans: Statutory Provident fund: Statutory Provident fund scheme is a welfare scheme for the benefit of the government employees. Under this scheme, a certain sum is deducted by the government from the employees’ salary as his contribution to the statutory provident fund every month. The government also contributes a certain percentage of the salary of the employee to the statutory provident fund. These contributions are deposited. The interest earned on these investments is also credited to the statutory provident fund account of the employees. The balance thus keeps accumulating year after year. The fund so accumulated is called statutory provident fund. At the time of retirement, the accumulated amount is given to the employee. Statutory provident fund is mainly allowed to the government employees.

Taxability of Statutory Provident Funds

Particulars	Tax treatments
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	Fully exempt from tax
3. Interest on Provident Fund	Fully exempt from tax
4.Repayment of lump-sum amount on retirement / resignation /termination	Fully exempt u/s 10(11)

c) Entertainment allowance to government employees.

Ans: 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)      1/5^th of basic salary

c)       Actual entertainment allowance

Or

(b) Mrs. Shilpa is a production manager of an industrial unit at Delhi. The particulars of her salary incomes are as under:

Particulars

Rs.

a) Basic salary b) Dearness allowance (given under the terms of employment) c) Entertainment allowance d) Medical allowance e) House rent allowance f) Rent paid for the house Car of 1.2 litres capacity provided by employer for private and official use. Employer meets expenses of the car. She and her employer (each) contribute 10% of salary to recognized provident fund. Mrs. Shilpa had taken interest-free loan of Rs. 15,000 to purchase a refrigerator.

80,000 p.m. 30,000 p.m. 2,000 p.m. 1,000 p.m. 20,000 p.m. 25,000 p.m.

Compute income under the head Salary for the Assessment Year 2021-22.                                           11

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5. (a) A house was completed on April 1, 2019 and following information is available about this house:

Municipal value of the house Fair rental value of the house Actual rent Municipal taxes

Rs. 30,000 p.a. Rs. 32,000 p.a. Rs. 4,000 p.m. Rs. 6,000 p.a.

Let out for the period 01.04.2019 to 31.12.2019 and self-occupied from 01.01.2020 onwards:

	Rs.
Fire Insurance Premium Land Revenue	3,600 6,000

Interest on Loan for the period:

(1)       01.04.2016 to 31.03.2019 Rs. 45,000.

(2)       01.04.2019 to 31.03.2020 Rs. 15,000.

Calculate Income from House Property for the Assessment Year 2020-21.                             11

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Or

(b) Define annual value. How is it determined? What deductions are allowed from the annual value in computing taxable income from house property?   3+5+3=11

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                                             ++++++

6. (a) Mr. Mohan furnishes the following particulars for the Previous Year ending on 31.03.2020 and requests you to compute the Taxable Capital Gain:          11

(1)       He had a residential house inherited from father in December 2016, which was acquired by father in 1998 and the fair market value of which as on 01.04.2001 is Rs. 4,00,000.

(2)       In the year 2006-07, further construction and improvement cost came to Rs. 1,80,000.

(3)       On 18.09.2019, the house was sold for Rs. 35,00,000. Expenditure in connection with transfer was Rs. 90,000.

(4)       On 20.12.2019, he purchased a residential house for Rs. 18,00,000.

Cost of inflation index:

2001-02 2004-05 2006-07 2019-20

100 113 122 289

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Or

(b) Discuss in detail the provisions of the Income-tax Act, 1961 for determination of income from other sources.     11

Ans: Income from other sources (Basis of Charge – Sec.56)

 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(1): General Incomes: Following are the popular and general incomes that are offered for tax under the head “income from other sources”:

a)       Income from subletting;

b)      Interest on bank deposits and loans;

c)       Income from royalty (if it is not an income from business/profession);

d)      Director’s fee;

e)      Ground rent;

f)        Agriculture income from a place outside India;

g)       Directors ‘s commission for standing as guarantor to bankers;

h)      Director’s commission underwriting shares of new company;

i)        Examination fees received by a teacher from a person other than his employer

j)        Rent of plot of land

k)       Insurance commission;

l)        Mining rent and royalties

m)    Casual income;

n)      Annuity payable a will, contact trust deed (excluding annuity payable by employer which is chargeable under the head ‘’

o)      Salary to payable to member of parliament;

p)      Interest on securities issued by a foreign Government;

q)      Family pension received by family members of a deceased employee;

r)       In case of retirement, interest on employee’s contribution if provident fund is unrecognized;

s)       Income from undisclosed sources;

t)        Gratuity paid to a director who is not an employee of the company;

u)      Income from racing establishments;

v)       Compensation received for use of business assets;

w)     Annuity payable to the lender of a trademark.

[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 is 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.

7. (a) Explain the following in brief:         5½ x 2 = 11

(1) Deductions from 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.

(vi)     Salaries,

(vii)   Income from House Property,

(viii) Profits and gains of business or profession

(ix)     Capital gains

(x)       Income from other sources

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].

After calculating gross total income, total taxable income is to be calculated after certain deductions as mentioned under Secs 80C to 80U. The deductions to be allowed from the gross total income are to be distinguished from the deductions which are made while computing income under different heads. The deductions made from gross total income are either incentive to save for future or a kind of relief to the assessee. On the other hand, the deductions made while computing income under different heads are allowed to meet the expenses which are incurred in earning income under these heads of income.

Points to be taken into consideration while claiming deductions under Sec 80

1.    Incomes which are not eligible for claiming deductions under Sec 80:

a)    STCG arising on transfer of equity share or units of equity oriented fund where transactions is covered under STT.

b)    LTCG

c)    Casual incomes such as winning from lotteries, races, card games, gambling etc.

2.    The aggregate amount of deductions under various sections does not exceed the gross total income of the assessee excluding the incomes mentioned under Sec 80.

3.    Claim for deduction must be made by the assessee by presenting the necessary documents.

4.    Claim under any section is only once.

(2) Income of other persons included in assessee’s total income.

Ans: Income of other persons which are included in assessee’s total income

Following income must be included in the total income of the transferor:

1. Transfer of income without transfer of asset (Section 60): If an assessee transfer’s part of income to another person without transferring the asset producing such income, such an income will be added with the total income of the transferor.

2. Revocable transfer of assets (Section 61): All incomes arise from the transfer of revocable assets must be included in the total income of transferor not in total income of transferee. Transfer is said to be revocable:

a)    If it contains provision for re-transfer of whole or any part of the income to the transferor.

b)    It gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets.

However, as per section 62(1), the provisions of revocable transfer, discussed above, shall not apply in following circumstances:

a)    Transfer by way of trust

b)    In case of any other transfer, the transfer is not revocable during the life time of the transferee;

c)    If transfer is made before 1-4-1961, the transfer is not revocable for a period exceeding 6 years.

Or

(b) What do you mean by the term ‘depreciation’? What are the conditions regarding the claim of deduction of depreciation? 4+7=11

Ans: DEPRECIATION ON ASSETS (Section 32): Depreciation means diminution in value of an asset on account of wear and tear and obsolescence. It is debited to profit and loss account and is an allowed expenditure. Depreciation is provided on all tangible and intangible assets except land, animals and goodwill on block of asset basis.

Block of assets: Block of assets means a group of assets falling within a class of assets and on which same rate of depreciation is charged. Class of assets comprised of:

(i) Tangible assets being building, machinery, plant and furniture.

(ii) Intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

METHODS OF DEPRECIATION AND WHICH METHOD IS TO BE ADOPTED:

Depreciation under income tax is calculated by using the following methods:

1.       Written down value method;

2.       Straight line method.

Diminishing Balance Method/Written down value method: Under this method the depreciation is charged every year at a fixed rate on the book value of the block of assets. Book value of asset is calculated by deducting yearly depreciation from the cost of assets.

Straight line method: Under this method the depreciation is calculated at a fixed rate every year on the amount of actual cost of the asset. Block of assets concept is not applicable in this case. This method is applicable on certain assets of power generating units referred to in section 32(1)(i).

Depreciation under Income tax Act is calculated under written value method except in case of an undertaking engaged in generation and distribution of power which have the option to choose the straight line method of charging depreciation.

CONDITIONS FOR CLAIMING DEPRECIATION

a)       Depreciation is allowed on all tangible or intangible assets except land, animals or goodwill.

b)      Asset must be owned (wholly or partly) by the assessee and must be used for the purpose of business or profession.

c)       If an asset is partly used for the purpose of business or profession and partly for personal purpose then, proportionate depreciation is to be provided.

d)      No depreciation is charged on the hired asset but if any capital expenditure is incurred on hired building then depreciation can be claimed on such capital expenditure.

e)      Asset must be used during the relevant previous year. It is not necessary that asset must be used throughout the year, even use during any part of the year would be sufficient to claim depreciation.

f)        Depreciation is calculated on the last day of accounting year and only on those assets which are in use on that day.

g)       Depreciation shall be allowed on WDV of Block of asset at a prescribed rate. Under section 2(11), “Block of assets” means a group of assets falling within a class of assets comprising

(i)      Tangible assets, being buildings, machinery, plant or furniture.

(ii)    Intangible assets, being know-how, patents, copyrights, Trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.

h)      Total depreciation in the life of an asset cannot exceed its actual cost.

i)        Depreciation on stand-by assets or assets which are not used during previous year is not allowed except in case generator.

j)        No depreciation is allowed in the year in which the assets is sold or demolished or discarded or destroyed.

k)      When a new asset acquired during previous year, full depreciation is allowed if assets used for 180 or more than 180 days and half year’s depreciation is allowed if installed and used for less than 180 days.

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