Basics of Income Tax Solved Question Paper 2025 (May/June)
[Dibrugarh University BCOM 2nd SEM NEP Syllabus]
COMMERCE (Generic
Elective Course)
Paper: GECCOM2 (A)
(Basics of Income Tax)
Full Marks: 60 (80
for 2023 Batch)
Time: 2 hours (3
hours for 2023 Batch)
1. (a) Fill in the
blanks of the following: (1x4=4)
(i) Income tax was first introduced in India in the year ________.
Ans: IT was first introduced in 1860 by James Wilson, but the
current The Income Tax Act 1961 has been brought into force with 1 April
1962.
(ii) Gratuity received by a government employee is ________.
Ans: Gratuity received by a government employee is fully
exempt from tax under Section 10(10)
(iii) In case of self-occupied house property, the annual value of two
houses is taken as ________.
Ans: Nil
(iv) Capital gain arising from the transfer of a long-term capital asset
is called ________.
Ans: LTCG
(b) Write 'True' or
'False' of the following: (1x4=4)
(i) Dividend from Indian company is exempt from tax.
Ans: False Taxable in the hands of investors
(ii) Short-term capital loss can be set off only against short-term
capital gain.
Ans: False, both STCG and LTCG
(iii) Section 80 C applies only to individual and Hindu undivided
family.
Ans: True
(iv) Health and Education Cess is levied at 4% on total income.
Ans: False, Health and Education Cess is levied at 4% on the amount of
income tax plus surcharge (if any), not on the total income itself.
2. (a) What do you
mean by the term 'residential status'? Explain how you would determine the
residential status of an individual. (2+12=14)
Ans: Tax incidence on an assessee depends on his
residential status. The residential status of a taxpayer is determined based on
his physical presence in India or the location of effective management in the
case of companies. It is assessed separately for each financial year and
affects the scope of income taxable in India. If a person is resident in India
for any source of income in a previous year, he is deemed resident for all
sources of income.
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. A person who is
not a citizen of India can be residence in India based on his physical presence
in India or vice-versa. 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
(b) An Indian
citizen leaving India during the previous year as a member of the crew of an
Indian ship.
(c) In case
of an Indian citizen or a person of Indian origin comes on a visit to India
during the previous year, modified condition (ii) of sec. 6(1) is applicable. 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.
- If his
total Indian income exceed Rs. 15 Lakhs – 120 days instead of 60 days’ rule
will be applicable.
- If his
total Indian income is upto Rs. 15 Lakhs – Second basic condition is not
applicable.
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) Write short
notes on the following: (3.5x4=14)
(i) Person
Ans: Person [Section 2(31)]: Person
includes seven types of persons namely:
a. An individual;
b. A Hindu undivided family (HUF);
c. A company;
d. A firm;
e. An association of persons (AOP) or a
body of individuals (BOI);
f. A local authority;
g. Every artificial juridical person not
falling within any of the preceding sub-clauses.
An association of person or body of individuals or a local authority or
an artificial juridical person shall be deemed to be a person, whether or not
such person was formed or established or incorporated with the object of
deriving income, profits and gains. AOP and BOI are different terms. The 2 basic
differences between AOP and BOI are:
a)
In BOI there are only individuals but in AOP there can be any type of persons.
b)
BOI is a creation of law whereas AOP can be created by different persons coming
together for doing some income producing activity on a voluntary basis.
(ii) 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)
Salaries,
(ii)
Income from House
Property,
(iii)
Profits and gains
of business or profession
(iv)
Capital gains
(v)
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.
(iii) Assessment Year
Ans: Assessment Year: [Sec. 2 (9)]: “Assessment
Year” means a period of
12 months commencing on the 1st day of April every year. In
India, the Govt. maintains its accounts for period of 12 months i.e. 1st April
to 31st 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 previous Year 2026-2027 (1-4-2026 to 31-3-2027)
is going on.
Effective April 1, 2026, the
Income Tax Act, 1961, is replaced by the Income-tax Act, 2025, which replaces
the term "Previous Year" (and Assessment Year) with "Tax
Year". This new "Tax Year" represents the 12-month financial
year (April 1 to March 31) in which income is earned, simplifying the previous
dual-year system.
(iv) Pension
Ans: Pension is a periodic or
lump-sum payment made by an employer to an employee after retirement or to the
family after the death of the employee, in consideration of past services.
Pension received by a retired employee is taxable under the head
"Salaries". However, family pension received by family members after
the death of the employee is taxable under the head "Income from Other
Sources".
Tax treatment of Pension:
* Uncommuted pension i.e. the periodical
pension: It is fully taxable in the hands of all employees, whether government
or non-government.
* Commuted Pension: Exemption of commuted
pension u/s 10(10A)
|
Govt. Employees |
Any other employee |
|
Fully
exempt |
(a)
If gratuity is not received: The commuted value of 1/2 of pension which he is
normally entitled to receive is exempt. (b)
If gratuity is also received: The commuted value of 1/3rd of pension which he
is normally entitled to receive is exempt. |
3. (a) Mr. X is
employed at Dibrugarh at a basic salary 25,000 p.m. and he is also getting the
following allowances: (14)
|
Dearness
Allowance |
2,000 |
|
Lunch Allowance |
1,000 |
|
Transport Allowance |
2,000 |
|
Education
Allowance (for three children) (per child) |
300 |
|
Hostel Allowance
to one child |
500 |
|
House Rent
Allowance |
5,000 |
He paid
professional tax 200 p.m. He was in a rented house and paying a rent of 7,000
p.m. His employer's contribution in RPF @ 10% of his salary. Interest on RPF
balance @ 12% 9,000. Find out his salary income for the Assessment Year,
2024-25.
Solution:
OR
(b)
How will you determine the annual value of house property? Briefly explain the
deductions u/s 24 in computing the taxable income from house property. (7+7=14)
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
4. (a) Mr. S
submits the following particulars about the sale of assets during the year,
2023-24: (12)
|
Particulars |
Jewellery |
Land |
Gold |
|
Sale Price (Rs.) |
5,00,000 |
18,50,000 |
3,50,000 |
|
Expenses on Sale
(Rs.) |
50,000 |
--- |
60,000 |
|
Cost of
Acquisition (Rs.) |
2,10,000 |
1,00,000 |
2007-08 |
|
Year of
Acquisition |
2004-05 |
2009-10 |
--- |
|
CII |
113 |
148 |
--- |
Calculate the
amount of capital gain chargeable to tax for the Assessment Year, 2024-25 if
CII for 2023-24 is 348.
Solution:
OR
(b) Mention the
different kinds of income chargeable to tax under the head 'income from other
sources'. (12)
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) Any sum received by a unit holder from
a business trust which
- is not in the
nature of income referred to in clause (23FC) or clause (23FCA) of section 10;
and
- is not
chargeable to tax under sub-section (2) of section 115UA:
h) where any sum is received, including the
amount allocated by way of bonus, at any time during a previous year, under a
life insurance policy, other than the sum received under a unit linked
insurance policy;
i) 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.
5. (a) Explain the provisions
of the Income-tax Act, 1961 regarding carry forward and set-off of losses. (12)
Ans: Set-Off of Losses: After computing
the income under five heads one by one and after taking the clubbing of income
under Sec.60 to 64, we have to aggregate all these incomes to get Gross Total
Income. But before arriving at the gross total income, we have to adjust losses
either in the same head or against other heads under Sec.70 to 80. First we have
to set off the losses within the same head and if it cannot be adjusted,
against income of other heads. The adjustment of
losses from one head against the income, profits or gains of any other head of
income during the same tax year is called set-off of losses.
A) Set off of
loss under the same head of income. (Sec.70: Inter-source set off): The process of adjustment of loss from a source under a particular head
of income against income from other source under the same head of income is
called inter-source adjustment, e.g. Adjustment of loss from business A against
profit from business B.
Income of a person is computed under five heads. ‘Sources’ of
income derived by an individual may be many but yet they could be classified
under the same head. For instance, an individual may have a dual employment,
yet the income would be classified under the head ‘Salaries’. However, given
the mechanism of computing taxable salary income, it would be safe to say that
an individual cannot incur losses under this head of income. Some of the inter-source adjustable
incomes are given below:
a. Speculative Business Losses: An Assessee can set off the
Losses incurred in speculation Business only against the profits of any other
speculation Business. It is not permissible to set off speculative Loss against
any other Business or Professional Income. An Assessee has an Opportunity to
set off any other Business Loss with the profits of speculation Business.
b. Long Term Capital Losses: A long term Capital Loss can be
set off only against the profits of any other long term capital gains, but
short term capital loss can be set off against both short term and long term
capital gains.
c. Loss from owning and maintaining race horses: This loss
can be set off only against the income from owning and maintaining race horses.
d. Loss of specified Business under section 35AD: Specified
Business loss can be set off only against profit from such specified business,
but loss from other business can be set off against the profit of the specified
business.
e. Section 72AA is amended to allow the carry forward of
accumulated losses and unabsorbed depreciation in the case of the amalgamation
of a banking company with another banking company within five years of the
strategic disinvestment.
B) Set off Loss
from one head against Income from another Head (Sec. 71: Inter head set off): After making inter-source adjustment (if any) the next step is to make
inter-head adjustment. If in any year, the taxpayer has incurred loss under one
head of income and is having income under other head of income, then he can
adjust the loss from one head against income from other head, E.g.,
Loss under the head of house property to be adjusted against salary income.
A person may have various sources of income computed under
different heads of income. Loss under one head of income is generally allowed
to be set off against income under another head. Some of the inter-head
adjustable incomes are given below:
a. House Property Losses: House Property Losses can be set
off against profits from other heads. It can be set off against salary income,
Business income, Income from capital gain, and income from other sources except
casual income.
b. Non-Speculative Business Losses: Non speculative Business
Losses can be set off under any other head except income from salary. Means it
can be set off from income from house property, income from capital gain and
Income from other sources except casual income.
In the following cases losses cannot be set off under
inter-head adjustments. Speculative Business Losses. Specified Business Losses.
Capital Gain Losses. (Both short term capital loss and long term capital loss).
Losses from owning and maintaining race Horses.
C) Carry forward of
losses: Many times it may happen that after making
intra-head and inter-head adjustments, still the loss remains unadjusted. Where the losses are not fully adjusted
against the income of the same tax year and such losses are transferred to the
next tax year, this process of transferring un- adjustable losses to the next
year is known as carry-forward of losses. Such unadjusted loss
can be carried forward to next year for adjustment against subsequent year(s)’
income Separate provisions have been framed under the Income-tax Law for carry
forward of loss under different heads of income. Carry forward of losses (other
than loss from house property and unabsorbed depreciation) is permissible if
the return of income for the year, in which loss is incurred, is filed in time.
The late filing of return should not impact the status of carry forward of loss
of previous years.
Rules regarding carry
forward of losses of various heads are given below
1. Loss under head House Property: The loss
under the head house property, let out or self-occupied, can be carried forward
to the subsequent 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. Business Loss: It can be carried forward for
subsequent years’ subject to a limit of 8 assessment years and it is to be set
off against profit from under head business only. In set off and carry forward
of business losses the following important points are to be considered:
(a)
The person who has incurred the loss, alone has the right to carry it forward.
The successor except succession by inheritance (business passing from father to
son) cannot claim to carry forward the loss incurred by his predecessor in
business. However, where a company merges with another under the scheme of
amalgamation, the past loss of the amalgamating company can be carried forward
by the new company.
(b)
The unabsorbed business loss of an industrial undertaking which was
discontinued due to natural calamities shall be carried forward and set off
against the profit of the reconstructed, re-established business upto a period
of 8 assessment years as reckoned from the previous year in which the business
is re-started.
(c)
The business loss could be carried forward for 8 assessment years to be set off
from income under the head ``profits and gains of business or profession.’’
(d)
Loss from any asset held as stock-in-trade can be set off from any income from
such asset even if it is taxable under the head other sources.’
(e)
To carry forward business losses, continuity of same business is not necessary.
3. Speculation Loss: The loss of a speculation business of
any assessment year is allowed to be set off only against the profits and gains
of another speculation business in the same assessment year. But if speculation
loss could not be set off from the income of another speculation business in
the same assessment year, it is allowed to be carried forward to claim as a set
off in the subsequent year, but only against the income of any speculation
business. Such loss is also allowed to be carried forward for 4 assessment
years immediately succeeding the assessment year for which the loss was first
computed.
It
may be observed that it is not necessary that the same speculation business
must continue in the assessment year in which the loss is set off. It can be
carried forward for succeeding 4 assessment years. But the loss is to be set
off against the speculation profit only. A company whose principal business is
that of trading in shares has been excluded from the purview of the explanation
to Sec.73. Consequently, such activity shall not be regarded as speculation
activity and any loss arising there from shall be treated as normal business
loss and not as speculation loss.
4. Unabsorbed Depreciation [Sec. 32(2)]:
If
there is a loss under business and profession and the reason for such loss is
depreciation, then it is called unabsorbed deprecation and it shall be allowed
to be carried forward. Unabsorbed
depreciation allowance shall be added to the depreciation allowance for the
following previous year or years and so on infinitely and deemed to be part of
that allowance. The depreciation shall be carried forward even the
business/profession to which is relate even of the business/profession not in
existence. Return of loss is not required to be submitted for carry forward of
unabsorbed depreciation.
The assessee
should set off brought forward losses in the following manner:
a) First of all, current year depreciation
will be adjusted.
b) Then brought forward business losses
will be set off (speculative or non-speculative)
c) Then unabsorbed depreciation will be
set-off against business income.
d) Unabsorbed depreciation can be carried
forward for indefinite number of years.
e) Unabsorbed depreciation can be set off
from any head of income other than Salary and Capital Gain in any year.
5. Loss under the head “Capital Gain’: Where in
respect of any assessment year, the net result of the computation under the
head `Capital gains’ is a loss to the assessee, whether short-term or long-term
such short-term and long-term capital losses shall be separately carried
forward. Further, such carried forward short-term capital loss can be set off
in the subsequent assessment year from income under the head capital gains
whether short-term or long-term. But brought forward long-term capital loss
shall be allowed to be set off only from long-term capital gain. Such capital
losses can also be carried forward to a maximum of 8 assessment years,
immediately succeeding the assessment year for which the loss was first
computed.
6. Expenses incurred on maintenance of race horses: Loss from Owning and maintaining race horses: (Section 74A) An Assessee
can carry forward these losses up to 4 years immediately succeeding the
Assessment year in which the loss has incurred. It can be set off only against
that income and an Assessee must file the Income Tax Return within due date
prescribed under section 139(1).
7. Eligible startups will be able to set off and carry forward
losses incurred during their first ten years of incorporation, even if there has
been a change in shareholding, as long as all shareholders continue during the relevant
period. The previous time limit of seven years’ time is now increased to ten years.
OR
(b) Mr. Ramnath
(aged 45) furnishes the following particulars regarding his income and other
information related to the Previous Year, 2023-24: (12)
|
Particulars |
Amount (Rs.) |
|
Gross income from
salary |
7,82,000 |
|
Income from house
property (computed) |
52,000 |
|
Long-term capital
gain u/s 112 |
60,000 |
|
Dividend from
foreign company |
35,000 |
|
Interest from
government bond |
28,000 |
|
Winning from
lottery (gross) |
40,000 |
Mr. Ramnath made
contribution of 60,000 towards Unit Linked Insurance Plan (ULIP). Compute the
Total Income of Mr. Ramnath for the Assessment Year, 2024-25.
Solution:
Additional
Questions, 20 marks for 2023 Batch
6. (a) Explain the provisions of the Income-tax
Act, 1961 regarding the following: (5+5=10)
(i) 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.
Note: Under the new tax regime
(as of April 1, 2026), House Rent Allowance (HRA) exemption is not
available. The entire HRA component received from an employer is fully
taxable as part of the salary. Unlike the old regime, employees cannot claim
deductions for rent paid under Section 10(13A).
(ii) 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 Recognized Provident Funds
|
Particulars |
RPF |
|
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) Write
any ten expenses that are allowed for deduction u/s 37 under the head 'profits
and gains of business or profession'. (10)
Ans: EXPENSES DEDUCTIBLE FROM INCOME FROM
BUSINESS/PROFESSION: All the expenses relating to business and profession are
allowed against income. Following are few examples of expenditures which are
allowed against income: (ALLOWED EXPENSES)
1. Rent of Business Premises (Sec.
30): Rent of the business premises is allowed as deduction. In case of
own premises rent cannot be debited. In property is partly for business and
partly for personal purpose, then rent relating to business is allowed as
deduction. Rent paid to a partner of the firm for using premises is also
allowed as deduction. (Sec. 30)
2.
Expenses relating to machinery, plant and furniture [Sec.31]: According
to Sec.31 the following expenses are deductible: (a) Current repairs (b)
Insurance premium. However, any repair expenditure of capital nature
shall not be allowed as deduction under this section.
3. Depreciation (Sec. 32):
Depreciation on buildings, machinery, plant or furniture, being tangible
assets; know-how, patents, copyrights, trademarks, licences, franchises or any
other business or commercial rights of similar nature, being intangible assets
acquired on or after the 1st day of April, 1998, owned, wholly or partly, by
the assessee and used for the purposes of the business or profession are
allowed as deduction as per rate specified in income tax act.
4. Development rebate (Sec. 33): In
respect of a new ship or new machinery or plant which is owned by the assessee
and is wholly used for the purposes of the business carried on by him, there
shall, in accordance with and subject to the provisions of this section and of
section 34, be allowed a deduction as development rebate to the extent of 40%,
35% or 25% of the actual cost as the case may be.
5. Tea Development Account, Coffee
Development Account and Rubber Development Account (Sec. 33AB): This
deduction is allowed only to an assessee who is engaged in the business of Tea,
coffee and rubber production. The amount of deduction will be 40% of PGBP or
amount deposited in site restoration accounts whichever is less.
6. Site restoration fund (Sec. 33ABA): This
deduction is allowed only to an assessee who is engaged in the business of
extraction and production of petroleum, natural gas or both and entered into an
agreement with central government in this respect. The amount of deduction will
be 20% of PGBP or amount deposited in site restoration accounts whichever is
less.
7. Conditions for Allowance of
depreciation (Sec. 34): This section deals with the conditions under
which depreciation is allowed under the Sec. 32 and Sec. 33 of the Income Tax
Act, 1961.
8. Expenditure on Scientific research
(Sec. 35): Expenditure on scientific research is divided into two
categories:
a) Expenditure on research carried on
by assessee himself.
1.
Revenue Expenditure: Any revenue expenditure incurred by an assessee in a
research which is helpful in his business is fully allowed as deduction.
2.
Capital Expenditure: Any expenditure of capital nature on scientific research
carried on the assessee himself and related which assessees business or
profession shall be allowed as deduction in full.
3.
Expenditure on in-house research and development: Weighted deduction @ 150% of
the expenditure incurred on in-house research by a company engaged in the
business of bio-technology or in any business of manufacture or production of
any article is allowed.
b) Expenditure on research carried on
by outsiders whether or not research is related to assessee’s business:
1.
Contribution to an approve research association, university, college or other
institutions:
A)
If Amount is given to an approved research association, university, college or
other institutions for research which is unrelated to assessee’s business, a
weighted deduction @ 150% of actual expenditure shall be allowed. W.e.f. A/y
20121 – 22, no weighted deduction shall be allowed.
B)
If amount is given to an approved research association, university, college or
other institutions for research in the field of social science or statistical
research which is unrelated to assessee’s business, a deduction upto actual
expenditure shall be allowed.
2.
Contribution to National Laboratory: A higher weighted deduction @ 150% of
actual amount shall be allowed if amount is given to a national laboratory or a
university or an Indian institute of technology for undertaking scientific
research programme approved by the prescribed authority.
3.
Contribution to a company for scientific research: In case any assessee
provides money to an Indian company engaged in the scientific research and
approved for this purpose, a weighted deduction @ 100% of the amount paid shall
be allowed.
9. Other Deductions (Sec. 36)
a) Insurance premium of stock and
employees.
b) Salary, bonus, commission to
employees.
c) Salary, interest and remuneration to
working partners subject to certain conditions.
d) Contribution to recognised provident
fund or approved superannuation fund.
e) Contribution to an approved gratuity
fund
f)
The
amount of bad debt which is irrecoverable and written off from books of
accounts.
g) Communication, Traveling and
conveyance expenses.
h) Advertisement expenses in respect of
promotion of business products.
i)
Discount
allowed to customers.
j)
Interest
on loans (Whether Private or Institutional).
k) Bank Charges/Bank Commission expenses.
l)
Entertainment/Business
Promotion expenses
m) Discount on zero coupon bonds.
n) Banking cash transaction paid during
previous year.
o) Securities transaction tax.
p) Staff Welfare expenses.
q) Festival/Puja Expenses.
r) Printing and stationery expenses
s) Postage expenses.
t)
All
other expenses relating to business/profession
Note: The above expenditures are
allowed on the basis of actual payment as well as on accrual basis at the date
of finalization accounts.
10.
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.
7. Explain the following: (5+5=10)
(a) Tax deducted at source
(b) Capital Assets
Ans:
Capital asset means property of any kind held by an assessee, whether or not
connected with his business or profession. It includes plant and machinery,
building – whether business premises or residential, all assets of a business,
goodwill, patent rights etc. This definition of a capital asset is very wide
and includes all types of properties, whether movable or immovable, tangible or
intangible, fixed or floating but does not include the following.
1.
Stock-in-trade, consumable stores or raw materials held for business or
profession.
2.
Personal movable properties viz. furniture, motor vehicles,
refrigerators, musical instruments etc. held for the personal use of the
assessee or his family. But personal property does not include the following:
Ø Jewellery
Ø Residential house property
Ø Archaeological collections, drawings,
paintings, sculptures, or any work of art.
3. Rural
Agricultural land:
Ø Land within the jurisdiction of a
municipality or cantonment board having a population of 10,000 or more or
Ø Land situated within 8 kilometers from
the local limits.
4.
6½ per cent Gold Bonds, 1977 or 7 per cent Gold Bonds, 1980 or
National Defence Gold Bonds, 1980 issued by the Central Government.
5.
Gold Bonds issued by Government of India including gold deposit bonds
issued under the gold deposit scheme, 1999 notified by the central Government.
6.
Special Bearer Bonds, 1991 issued by the Government of India.
7.
Deposit Certificates issued under the Gold Monetization Scheme,
2016 w.e.f. The assessment year 2017-18
It
must be noted that “Property” also includes any rights in or in relation to an
Indian company, including rights of management or control or any other rights
whatsoever.
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