Shiv Das ‘3 | (PROGRAMME) Semester 3 INCOME TAX LAW AND PRACTICE PAPER - BE 3.2 > University Question Papers with Answers > Examination Questions — Topic-wise > Latest Syllabus SHIV DAS BOOKSVena Vil. Syllabus Theory - Basic Concepts - Residential Status . Exempted Incomes Income From House Property . Income Under the Head “Profits and Gain of Business or Profession” . Capital Gains . Income From Other Sources . Clubbing of Income 1. Set-off and Carry Forward of Losses Deductions From Gross Total Income « Preparation of Return of Income & E-filing Practicals . Determination of Residential Status : . Computation of Income on The Basis of Residential Status ... . A. Income From Salary B. Problems on Retirement Income From House Property Capital Gains Carry Forward and Set-off of Loss of Depreciation Computation of Income from Various Sources VIIL Agricultural Income University Question Papers (with answers) guga i), (iv) HW T-12 124 1-29 132 738 TAH 49 157 P-1 P-7 P12 P-28 P35 P-49 P-58 P-62 P-71 PPA onwardsSyllabus B.Com. (Prog.) CBCS PAPER BC 3.2 INCOME TAX LAW & PRACTICE Duration: 3 hours Objective. To impart knowledge of laws pertaining to levy of income tax in India and to enable students to apply the same practically. Course Learning Outcomes: After completing the course, the student shall be able to: CO1: understand the basic concepts in the law of income tax and determine the residential status of different persons. C02: identify the five heads in which income is categorised and compute income under the heads ‘Salaries’ and ‘Income from House Property’. C03: compute income under the head’ Profits and gains of business or profession’, ‘Capital gains’ and ‘Income from other sources’. CO4: understand clubbing provisions, aggregate income after set-off and carry forward of losses, and deductions allowed under the Income Tax Act, COS: compute tax liability of individuals and firms and understand the provisions of filing return of income. UNITI Introduction: Basic concepts: Income; agricultural income; person, assessee; assessment year; previous year; Gross total income; total income; maximum marginal rate of tax; Permanent Account Number (PAN); Residential status; Scope of total income on the basis of residential status; Exempted income under section 10. UNIT It Computation of income under different heads—1 Income from Salaries; Income from house property. UNIT Ill Computation of income under different heads—2 Profits and gains of business or profession; Capital gains; Income from other sources. UNITIV Total income and tax computation: Income of other persons included in assessee’s total income; aggregation of income and set-off and carry forward of losses; deductions from gross total income; rebates and reliefs. UNIT V Computation of total income of individuals and firms: Tax liability of individual and firm; Preparation of return of income; filing of returns; manually, online filing of returns of income & TDS; provision and procedures of compulsory on-line filing of returns for specified assesses. (iii)Note: 1. There shall be a practical examination of 20 marks on E-filing of Income Tax Returns using a software utility tool. The student is required to fill appropriate From and generate the XML file. 2, sl (ie)<—ow Basic Concepts Q. 1. Explain the concept of income under the provisions of Income Tax Act. Ans. Concept of Income u/s 2(24). Income includes: (i) profits and gains; (ii) dividend; (ii) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such religious purposes or by certain other specified associations or institutions; (iv) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of Section 17; (x) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet the expenses. wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit; (vi) any allowance granted to the assessee either to meet the personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living. (vii) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a Director or by a person who has a substantial interest in the company, or by a relative of the Director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the Director or other person aforesaid; (viii) the value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-Section (1) of Section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being here in after in this sub-clause referred to as the ‘beneficiary’) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary; (ix) any sum chargeable to income-tax under clauses (ii), (iii), (iiia), (iiib) and (ilic) of Section 28 or Section 41 or Section 59; (x) the value of any benefit or perquisite taxable under clause (iv) of Section 28; (xi) any sum chargeable to income-tax under clause (v) of Section 28; TAT-2 @ Shiv Das DELHI UNIVERSITY SERIES (P) (xii) any Capital Gains chargeable under Section 45; (xiii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society; (xiv) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoev (xv) any sum received by the assessee from his employers as contribution to any provident fund or superannuation fund or any fund set up under the provisions of the Employees’ State Insurance Act, 1948 or any other fund for the welfare of such employees; (xvi) any sum received under a Key-man Insurance Policy including the sum allocated by way of bonus on such policy; (xvii) any sum referred to in Section 28(va). ic, any sum, whether received or receivable in cash or kind under an agreement for: * not carrying out any activity in relation to any business; or * not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services; (xviii) any sum of money exceeding %50,000 received without consideration by an individual or HUF from any person (other than a relative), the whole of such sum. (xix) Any consideration for issue of shares by a closely held company as exceeds the fair market value of shares as provided in Section 56(2)(viib). (xx) Gifts received by a firm or closely held company as provided in Section 56(2)(viia). Q. 2. Define “Previous year". “Income-tax is charged on income of the previous year during the assessment year.” Do you fully agree with this statement? If not, what are its exceptions? [2010S, 20115, 2012R, 2012S, 2013R, 20145 Ans. Previous Year, ‘Previous Year’ means the financial year immediately preceding the Assessment Year. For example, in relation to the Assessment Year 2019-20 immediately preceding financial year 2018-19 beginning with 1" April 2018 and ending with 31" March 2019, shall be the Previous Year. In other words, the year in which income is earned is known as Previous Year. Previous Year in case of New source of Income: In the case of newly set up business or profession or a new source of income during the financial year, the Previous Year shall begin from the date of setting up or coming into existence of new business/ profession or new source of income and ending with the said financial year. Suppose a new business is set up on 10-3-2019, the Previous Year shall commence on 10-3-2019 and end on 31-3-2019 even though the AY consists only 22 days. It means there will be uniform previous year for all the assessees and for all sources of income. Exceptions to Previous Year. Normally income earned during the previousBASIC CONCEPTS @ T-3 year is charged to tax during the assessment year. However, there are certain exceptions to this rule. In the following cases the assessee is liable to be assessed to tax in the same year in which he has earned the income. (i) Income from shipping business of a non-resident: A non-resident who is carrying on a shipping business and earns income from carrying passengers/livestock/ goods from a port in India will be charged Income tax before the ship is allowed to leave the Indian port. Master of the ship is obliged to file a Return of Income i.c., 7.5% of full amount of the fare and freight is deemed to be the income. (i) Income of persons leaving India: If the Assessing officer feels that any individual may leave India during the year and has no intention of returning to India, then total Income of such Individual from 1st April of the year up to the date of his probable departure from India shall be chargeable to tax in the same year. (ii) Income of AOP/BOI or artificial juridical person formed for a particular event or purpose: If the AOP/BOI or artificial juridical person formed or incorporated for a particular event or purpose and that event or purpose is likely to be dissolved in the same year in which it was formed, then total Income of such entity from 1st April of the year up to the date of his dissolution shall be chargeable to tax in the same year. (iv) Income of a person likely to transfer property to avoid tax: If any person is likely to transfer, sell any of his assets with a view to avoid any Payment of tax, total Income of such person from Ist April of the year till the date when the assessing officer commences proceedings, shall be chargeable to tax in the same year. (v) Income of discontinued business: Where any business or profession is discontinued in any year, the income of the period from 1* April up to the date of such discontinuance may [at the discretion of assessing officer] be charged to tax in the same year. Q. 3. What do you mean by “Person” in the Income Tax Act, 1961? Explain briefly different types of persons. How is the term ‘person’ different from the term ‘assessee’? [2070R, 20105 Ans. The term Person [Section 2(31)] as defined under the Income Tax Act covers in its ambit natural as well as artificial persons. The term Person includes: — an Individual; — a Hindu Undivided Family (HUF); — a Firm; — a Company; — an Association of Persons (AOP) or a Body of Individuals (BOI), whether incorporated or not; — a Local authority; — every Artificial juridical person not falling within any of the preceding subclauses. As per Section 2(7) of the Income Tax Act, Assessee means a person by whom any tax or any other sum of money is payable under the act. Every assessee is a person but every person need not be an assessee.T-4 @ Shiv Das DELHI UNIVERSITY SERIES (P) Q. 4, Define the word ‘Assessee’ under the Income Tax Act. Briefly explain different types of Assessees. [20155 Ans. Assessee [Section 2(7)]. Assessee means a person by whom any tax or any other sum of money is payable under this Act and includes the following: () Every person in respect of whom any proceeding under the Income Tax Act has been taken: * for the assessment of his income or the income of any other person in respect of which he is assessable, or * to determine the loss sustained by him or by such other person, or * to determine the amount of refund due to him or to such other person. (ii) A person who is deemed to be an assessee under any provisions of this Act. This would include the legal representative of a deceased person or the agent of a person who is a Non-resident or the trustee of a trust. (iii) Assessee in default. A person is said to be an assessee in default if he fails to comply with the duties imposed upon him under the Income Tax Act. For example, if a person is responsible for deducting tax at source but does not do so, or after having deducted tax, fails to pay it to the Government, he will be an assessee in default. Types of assessee: * Normal assessee * Deemed assessee * Assessee in default On the basis of residence: Resident assessee + Not ordinarily resident assessee * Non-resident assessee Every assessee is a person, but every person need not be an assessee. Q. 5. Though ‘Previous Year’ as well as ‘Assessment Year’ are financial years, yet they are not same. Discuss. Ans. Both previous year and assessment year are financial years, but there is a difference. Financial year, in which income is earned, is called Previous Year whereas the financial year succeeding the Previous Year in which the income is assessed is called Assessment Year. For example, financial year 2019-20 is the previous year for the income earned during the financial year 2019-20 and financial year 2020-21 is the assessment year for the income earned during, the previous year 2019-20. Q. 6. A person may not have assessable income but may still be an assessee? Discuss. Ans, A person may not have assessable income but may still be an assessee u/s 2(7). For example, X is a retired employee. He kept his retirement benefits %6,00,000 in SBI. He has no other income. Interest earned at the end of the year is 359,000. The Bank deducted tax at source %5,900. He can apply for refund. It is a case where X has no taxable income but he is considered as an assessee. In the following cases also a person may be treated as an assessee: (i) Deemed Assessee (ii) Assessee in default (iif) Assessment of Loss.BASIC CONCEPTS @ T-5 Assessee without assessable income. In the following cases the person may not have taxable income, but he may be treated as an assessee: (i) 'X', whose total income is less than %2,00,000, files the Return of Income tax claiming refund for tax deducted at source on interest. He is an assessee. (ii) Income of Mr. A for Assessment Year 2020-21 is (-) %60,000. He files his Return of loss u/s 139(3). He is an assessee. Q. 7, Explain the following terms: (i) Gross total income (ii) Total income [2011R Ans. (i) Gross Total Income, As per Section 14, income of a person is computed under the following heads: (a) Salaries, (b) Income from house property, (c) Profits and gains of business profession, (d) Capital gains and (e) Income from other sources. Aggregate of income computed under the above five heads, after applying clubbing provisions and making adjustments of set-off and carry forward of losses is known as Gross Tatal Income [Section 80 B(5)]. (if) Total Income [Section 2(45)]. Total income means the total amount of income referred to in Section 5 computed in the manner laid down in the Act. In other words, the total income of an assessee is computed by deducting from the gross total income all permissible deduction under Sections 80C to 80U. Q. 8. Give examples of the incomes which are deemed to be received in India in the previous year. [2011s Ans. The following incomes shall be deemed to be received in India in the previous year even in the absence of actual receipt: () Contribution made by employer to the recognised provident fund (RPF) in excess of 12% of the salary of the employee; (i) Interest credited to the RPF of the employee which is in excess of 9.5% p.a. (iii) Transfer balance from the unrecognised provident fund to a recognised provident fund (i) The contribution made by the central government or any other employer in the previous year, to the account of an employee under a notified contributory pension scheme under Section 80CCD. Q. 9, What are the rates of tax applicable to incomes of various assessees for the financial year 2019-207 [2013R Ans. Rates of Income Tax for the Financial Year 2019-20, i.e, Assessment year 2019-20. I. In the case of every Individual (other than covered in part II or III below) or Hindu Undivided family or AOP/BOI (other than a co-operative society) whether incorporated or not, or every artificial juridical person. ALY. 2020-21 Upto %2,50,000 Nil 22,50,010 to %5,00,000 5%, 85,00,010 to 210,00,000 20% Above %10,00,000 30%T-6 @ Shiv Das DELH! UNIVERSITY SERIES (P) II, In the case of every individual, being a resident in India, who is of the age of 60 years or more but less than 80 years at any time during the previous year. ALY. 2020-21 Upto 23,00,000 Nil %3,00,000 to %5,00,000 5% %5,00,000 to 710,00,000 20% Above 710,00,000 30% IIL In the case of every individual, being a resident in India, who is of the age of 80 years or more at any time during the previous year. ALY. 2020-21 Upto %5,00,000 Nil %5,00,000 to 710,00,000 20% Above %10,00,000° 30% Notes: 1. Special rate of Income Tax: Besides the normal rates, special rates of tax are also applicable in case of certain Incomes in the hands of various persons. These rates are covered under sections 111A to 115BBE. 2. Rebate of Income Tax under section 87A: This rebate is allowed to an Individual who is resident in India and whose total income (including the income taxable at special rates) does. not exceed %5,00,000. For the amount of rebate under this section will be £12,500 or 100% of income tax, whichever is less for individuals whose total income during the previous year does not exceed %5,00,000, Surcharge. The amount of income tax computed in accordance with the above rates shall be increased by a surcharge @ 10% of such income tax in case of a person referred to above having a total income exceeding 750 Lakhs and upto 71 crore and 15% of such income-tax in case of a person having total income exceeding 71 crore. Marginai relief. The total amount payable as income tax and surcharge on total income exceeding %1 Crore shall not exceed the total amount payable as income tax on a total income of %1 Crore by more than the amount of income exceeding 71 Crore. Cess. ‘Health and Education cess’ @ 4% (H & EC) on income-tax (inclusive of surcharge, if applicable) shall be levied.> 0091 BA0qy papiaoid st “{pazaaoar yunowse (sum) (1e9 Jo ys02 jo ed OL @ vonepaidap Surpnout) aigexey are sadojdwua curd 0812 fenjoy] canjea ajgexey | ey) Aq paumou are asn “(aahoydury ayy Aq | ayy Aq pasansur sasuadxy aigexe] ON (aadojduuy ayy Aq paginouy | weuosiad soy sasuadxy) | pauinour are sasuadxg)| —(aedojdury Aq pauinout (axojdwag, aue sasuadxq) asodind | asodand jeuossad Ajyed | asodand jeuossad Apsed | sasuadxg) asodind | fq pasinout sasuadxa) feuosiad 10) Sqaed pue | pue yeroyjo Apaed 40y ued 10) aa | jouosiad 40g aasojduua | asodand jersygo 404 ako} Tepyjo 40y Apued pasn pue | eadojdwia oy uaas pue | -ojduia ayy oy usar pue | ayy 0} uaar pure | -duia ayy oy waar pue sakoydiag ayy Aq paumg | 49Aojdury ayy Aq paumg | sadojdurg ayy Aq paumg | sadojdurg ayy Aq paumg | saXojdiug ayy ZL ‘Tay Aq panruuad “000'00'Zg Ue a1 st asuadxa Yons Surpnysut a10yaq [LD asoym aadojduia ue 10) sasodind jeorpaut 10) eIpuy apisino- Buiod 10 sakojdwy ayy Aq ausog sasuadxa 3 “Ayes peorpaur Surpraoid 10; sadojdura ayy Aq paanour sasuadxy yeio], saouvarojyy [wIxpaus paxty junowe ayy paadxa you saop yo yi idwaxa si Quepuaye auo + yuayed jo sasuadxa Arjs pur jaaeay Surpnpout) yokojdurg ayy Sq papiaoud e1puy apisino AAAIT!De} [EPA -wkojdurg, &q pasanquiiaa/pred — umturaid Wea, ‘saUOIssHUWOD JatyD ayy Aq paroadde jendsoy e ut Arye eorpau payroads « “saakojduia UaUTUIaAO Jo UaUL]PIHy 105 quauruZaA05 ayy Aq papuiatuoss, feydsoy awAL v UL « -endsoy quauusaa0 e ul « yt Aq paureyureur /paumo pendsoy v ut sadojdwe ayy fq papiaord Aye; [espaw apueansut any a1qexoy, 21q0x0} JON SOMES [IPA JO woHENTEA (2)4 Income From House Property Q. 1. State the items of income from house property which are not liable to tax, [2010R Ans, When income from house property is not charged to tax. In the following cases income from house property is not charged to tax: (i) Farm house. Income from any building owned or occupied by an agriculturist or receiver of rent/revenue of such land provided that the building is in the immediate vicinity of an agricultural land and is used as a dwelling house or as a store house or other out-building. (i) Property held for charitable purposes. As per Section 11, where the property is being held for charitable or religious purposes, the income from such property is exempt from tax. (ii) Property used for own business/profession. It falls under the head ‘Income from business and profession’ and although no income will be derived but deductions/allowances of such property shall be allowed under that head. {iv) Self-occupied house. Annual value of two self-occupied house shall be taken as Nil [u/s 23(2)(a)]. From AY 2020-21 the Annual Value of two self-occupied house properties can be taken as NIL. (v) Property of registered trade union/local authority. The income from property held by a registered trade union/local authority is not taxable. (vi) Palace of ex-ruler. The annual value of any one palace in the occupation of an ex-ruler shall be exempted from tax. (vii) Property for Scientific Research Association. Income from house property which belongs to a Scientific Research Association is also not chargeable to tax. (viii) Property of a Political party. Income belonging to the house property in the hands of a Political party is also not taxable. Q, 2, Explain the provisions of deemed ownership under the head Income from House Property. [2010S, 2015S, 20168 Ans. Deemed Ownership [Section 27]. As per Section 27, though the following persons are not the legal owners of the property, yet they are deemed to be the owners for the purpose of Sections 22 to 26: () Transfer to a spouse/child [Sec. 27(i)]. If an individual transfers any house property to his or her spouse/minor child otherwise than for adequate consideration, the transferor in that case is deemed to be the owner of the house property so transferred. This would, however, not cover cases where property is transferred to a minor-married daughter or spouse in connection with an agreement to live apart. 7-24INCOME FROM HOUSE PROPERTY @ T-25 Note. Where the individual transfers cash to his/her spouse or minor child and the transferee acquites a house property out of such cash. the transferor shall not be treated as deemed owner of the house property. Such transaction will, however, attract clubbing provisions (ii) Holder of an impartible estate [Section 27( The holder of an impartible estate shall be deemed to be the individual owner of all properties comprised in the estate. The impartible estate, as the word itself suggests, is a property which is not legally divisible. (iii) Member of a Cooperative Society etc. [Section 27(iii)]. A member of a cooperative society, company or other association of persons to whom a building or part thereof is allotted or leased under a House Building Scheme of a society /company /association, shall be deemed to be owner of that building or part thereof allotted to him, although the cooperative society/company association is the legal owner of that building. (ic) Person in possession of a property [Section 27(iiia7)]. A person who is allowed to take or retain the possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act shall be the deemed owner of that house property. This would cover cases where the: * possession of property has been handed over to the buyer; sale consideration has been paid or promised to be paid to the seller by the buyer; sale deed has not been executed like power of attorney/agreement to sell/will etc., have been executed. The buyer would be deemed to be the owner of the property, although it is not registered in his name. (v) Person having right in a property for a period not less than 12 years [Section 27(iiib)]. A person who acquires any right in or with respect to any building or part thereof, by virtue of any transaction as is referred to in Section 269UA(f), iz., transferred by way of lease for not less than 12 years shall be deemed to be the owner of that building or part thereof. This will not cover the case where any right by way of lease is acquired on month-to-month basis or for a period not exceeding one year. Q. 3. Discuss briefly the provisions relating to determination of income from self-occupied house property. [20135 Ans. Self-occupied house property. The annual value of such house shall be Nil [u/s 23(2)] Where the property consists of a house or part of a house which: ® is in the occupation of the owner for the purposes of his own residence; or * cannot actually be occupied by the Owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him. The annual value of such house or part of the house shall be taken to be Nil. Q. 4, Define Annual Value. In computing the taxable income from let out house property what deductions are available from annual value? [20145 Ans. Annual value [Section 23(1)]. The annual value of a properly shall be deemed to be:T-26 @ Shiv Das DELHI UNIVERSITY SERIES (P) (a) The sum for which the property might reasonably be expected to let from year to year; or (b) When the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excesses of the sum referred to in clause (a), the amount so received or receivable or (c) Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than sum referred to in clause (a) the amount so received or receivable. The following deductions are available from annual value of let out house property: () Municipal Tax. If these taxes are borne by the owner and are actually paid by him during the previous year. (ii) Statutory deduction. 30% of annual (net) value is allowed as deduction irrespective of the amount spent by the tax payer. The Assessee can avail this deduction even if the tenant undertakes to carry out the repairs etc. (tii) Interest on Borrowed Capital. If the assessee has borrowed any amount for the purpose of acquiring, constructing, repairing, modernizing or reconstruction of the house, the amount of interest on such sum paid or payable during the previous year is allowed to be deducted in full. Interest on unpaid interest is however, not deductible. If any commission or brokerage is paid for arranging a loan it is also not deductible. Interest payable by the assessee in respect of the funds borrowed for the acquisition or construction of a house property and pertaining to the period prior to the previous year in which such property has been acquired or constructed, to the extent it is not allowed as a deduction under any provision of the Act, will be deducted in five equal instalments commencing from the previous year in which the house was acquired or constructed. Pre-construction period means the period commencing on the date of borrowing and ending on 31° March immediately prior to the date of completion of construction or date of acquisition or date of repayment of loan, whichever is earlier, Deduction of interest in cost of self-occupied house: () Loan taken before 1-4-1999. For purchase construction, repairs, etc. maximum limit 730,000. (i) Loan taken on or after 1-4-1999. Purpose repair etc. Maximum limit %30,000, purchase, construction, etc. Maximum limit %2,00,000, Conditions: (a) Completion with in 5 years from the end of the financial year in which capital was borrowed. (b) For deduction Certificate from lender is to be produced. Q. 5. Explain clearly the income tax provisions or rules regarding how the taxable income is computed in the case of a let out house: (i) which is let out throughout the previous year; and (if) which is let out and remained vacant for some part of the previous year. [20135INCOME FROM HOUSE PROPERTY ™ T-27 Ans. (i) When the house is let out throughout the previous year: In this case, Gross annual value (GAY) shall be higher of the following amounts: 1. Expected Rent; or 2. Actual Rent Net Annual Value (NAV) shall be calculated by deducting the municipal taxes actually paid by the owner of the house from the GAV. Thereafter, following deductions u/s 24 are allowed to the assessee from NAV: 1. Standard deduction @30% of NAV. 2. Interest payable on Loan taken in relation to the house property. Income from house property when the house is let out Gross Annual Vaiue (GAV) Less; Municipal Tax paid during the previous year Net Annual Value (NAV) Less: Standard Deduction @ 30% of NAV Interest on Loan (No limit prescribed) Income/Loss from the house property (ii) When the house is let out and remained vacant for some part of the previous year: In this case following, conditions have to the be fulfilled in addition to above mentioned procedure: 1. House is actually let out; 2. House is vacant for few months during the previous year; Where the property or part thereof was vacant during the year due to which Actual Rent is less than the Expected Rent, then the GAV shall be the amount of Actual Rent. Q. 6. What do you mean by Annual Value? Discuss the rules that are to be followed in computing the Annual Value of a let-out house. [2011R, 2011S, 2012S Ans. As per Section 23(1)(a) the annual value of any property shall be the sum for which the property might reasonably be expected to be let from year to year. It may neither be the actual rent derived nor the municipal valuation of the property. It is something like notional rent which could have been derived, had the property been let. In determining the annual value there are four factors which are normally taken into consideration. These are: (i) Actual rent received or receivable. Actual rent is not only the sum received in monetary terms, but it can also include other considerations where the owner agrees to bear certain obligations of the tenant ¢.g, water bill of the tenant may be payable by the owner. In this case, de facto rent (what should have been the actual rent) will be calculated by reducing the amount actually spent from the rent received the amount actually spent by the owner. (ii) Municipal value. This is the value as determined by the municipal authorities for levying municipal taxes on house property. (iii) Fair rent of the property. Fair rent is the rent which a similar property can fetch in the same or similar locality, if it is let out for a year. (iv) Standard rent. The standard rent is fixed under the Rent Control Act. Rules to be followed to compute annual value: Firstly, calculate Gross annual value (GAV) which shall be higher of the followings amount:T-28 @ Shiv Das DELHI UNIVERSITY SERIES (P) 1. Expected Rent; or 2. Actual Rent Then, calculate Net Annual Value (NAV) which shall be calculated by deducting the municipal taxes actually paid by the owner of the house from the GAY. Thereafter, following deductions u/s 24 are allowed to the assessee from NAV: (i) Standard deduction @30% of NAV. (ii) Interest payable on Loan taken in relation to the house property, Income from house property when the house is Let out ig Gross Annual Value (GAV) 0K Less: Municipal Tax paid during the previous year x Net Annual Value (NAV) or Less; Standard Deduction @ 30% of NAV 1X Interest on Loan (No limit prescribed) v0 Income/Loss from the house property XK Q. 7. How do you determine annual value of a property which is self occupied for a part of the year and let out for the remaining part of the year? Explain. Ans. Where a house property is , for part of the year let out and for part of the year occupied for own residence, its annual value shall be determined as per the provisions of Section 23(1) relating to let out property. In this case, the period of occupation of property for own residence shall be irrelevant and annual value of such house property shall be determined as if it is let for the part of the year. Hence, the expected rent as per Section 23(1)(a) shall be taken for full year but actual rent received or receivable shall be taken only for the period let out and Gross annual value shall be higher of the two. Q. 8. State the deductions that are allowed from the anuual value in computing the Income from house property. Ans. Deduction from house property under section 24: ()) Standard deduction. From annual value computed, the assessee shall be allowed a standard deduction of a sum equal to 30% of the Net Annual Value (NAY). (ii) Interest on borrowed capital. Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital is allowed as a deduction. It is immaterial whether the interest has been actually paid or not during the year. Interest attributable to the period prior to completion of construction: Interest paid/ payable for the period prior to the previous year in which the property is acquired/ constructed will be aggregated and allowed in 5 successive financial years starting from the year in which the construction was completed.5 Income Under the Head “Profits and Gain of Business or Profession” The following incomes shall be chargeable to income fax under the head “Profits and Gains of Business or Profession”: (i) Profits and gains of any business or profession; (ii) Any compensation or other payment due are received by any person specified in Section 28(ii); (iii) Income of Trade or Professional Association; (iv) Profit on sale of import licence; (v) Cash assistance, received or receivable against export; (vi) Duty drawback of customs and Central Excise duty; (vii) The value of any benefit or perquisite received by a person either in connection with his business activities or in the course of his professional services; {viil) Any interest salary, commission, bonus or remuneration received by a partner from firm; (ix) Any sum received for not carrying out any activity in relation to any business or not to share any know-how, patent, copyright, trade mark, ete; (x) Any sum, including bonus, received under Keyman Insurance Policy; (xi) Income from speculative business; and (xii) Interest on securities, if securities are kept as stock-in-trade. Q. 1. Enlist at least six expenses which are expressly disallowed by the Income Tax Act while computing income from business & profession. [2017S Ans. Expenses that are disallowed by the Income Tax Act: Amounts not deductible [Section 40}. The following amounts shall not be deducted in computing the income chargeable under the head “Profits and Gains of Business Or Profession”: 1. Advertisement expenses [Section 37(2B)]. No deduction is allowed in respect of expenditure incurred by an assessee on advertisements in any souvenir, broucher, tract, pamphlets published by a political party. 2. In the case of any assessee [Section 40(a)|: (i) Payment outside India. Any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India or in India to a non-resident or a foreign company on which tax is deductible at source but has not been deducted at source or after deduction has not T-29T-30 @ Shiv Das DELHI UNIVERSITY SERIES (P) (#) (iti) (iv) () Q2 basis. been paid during the previous year or in subsequent year with in subscribed time shall not be allowed as a deduction. However, if in respect of such sum tax has been deducted or paid in a subsequent year, after the prescribed time such sum shall be allowed as a deduction in computing the income of the previous year in which tax has been paid. Payments to residents—(a) any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or (b) amounts payable to a resident contractor or sub-contractor for carrying out any work, on which tax is deductible at source and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in Section 139(1), it shall not be allowed as a deduction. However, if in respect of such sum tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in Section 139(1); such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. Salary payable outside India. Like the first item, any salary paid by the assessee outside India or to a non-resident and the tax has not been paid thereon nor deducted at source is disallowed. Payment to a fund. Any payment to a provident fund or other fund established for the benefit of employees, will be disallowed, if effective arrangement for deduction of tax at source has not been made from payments made from the fund which are chargeable to tax under the head ‘Salaries’. Payment of taxes. If the assessee has paid any tax on profits on the business assets, such payments are nat allowed as deduction. Tax on perquisites of employee. Any tax actually paid by an employer on the value of perquisites provided to an employee which is exempted u/s 10(10 CC) is not allowed as deduction. Explain Section 43B with regard to certain expenses allowed on paid [2013R Ans, Certain deductions to be allowed only on actual payment [section 43B]: In case an assessee follows mercantile system of accounting , the payments covered in items no. 1 to 6 in the chart below can be claimed on due basis as well, provided the payment for the same is made within the stipulated time period mentioned against each expenditure: Nature of Expense Stipulated time period 1. Any sum payable by way of tax, Due amount should be paid on or duty, cess or fee, by whatever | before the due date of furnishing the name called, under any law for the | return of income u/s 139(1) in respect time being in force. of the previous year in which the 2. Any sum payable by the assessee | |iabili as to pay such sum was an employer by way of incurred.INCOME UNDER THE HEAD “PROFITS AND GAINS OF BUSINESS OR PREFESSION” ® T-31 contribution to any provident fund | or superannuation fund or gratuity | fund or any other fund for the welfare of employees. 3. Any sum payable to an employee as bonus or commission for services rendered. 4. Any sum payable by the assessee | as interest on any loan or borrowing from any Public | financial institution or State | Financial Corporation or State | Industrial Investment Corporation like IDBI, IFCl etc. However, in cases (1) ta (6), if the payment of outstanding liability is made after the due date, deduction can be claimed in the year of payment. 5. Any sum payable by the assessee as interest on any loan or advance from a scheduled bank in| accordance with the terms and conditions of the agreement governing such loan. 6. Any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee. 7. Any sum payable by the assessee | to the Indian Railways for the use | of Railway's assets. However, in cases (1) to (6), if the payment of outstanding liability is made after the due date, deduction can be claimed in the year of payment.6 Capital Gains Q, 1. What is a Capital asset under the Income Tax Act?[2010R, 2012R, 20175 Ans, Capital Asset—Section 2(14). ‘Capital Asset’ means property of any kind held by the assessee whether it is connected with his business or profession or not. The term ‘asset’ includes all kinds of properties, whether movable or immovable, tangible or intangible, fixed or circulating. Any securities held by a Foreign Institutional Investor which has invested in such securities shall also become part of Capital Asset. According fo Section 55(2) the following are also capital assets: ()) Goodwill of a business or a trade mark of brand name associated with a business. (i) Right to subscribe to right shares or any other security. (iii) Tenancy Rights, Stage Carriage Permits and Loom Hours. (iv) A right to manufacture, produce or process any article or thing. However, the following items are not treated as Capital Asset for the purpose of this head of income: 1. Stock-in-trade, Consumable Stores or Raw Materials held for the purpose of the business or profession of the assessee. 2. Personal effects of the assessee, namely movable property (including wearing apparel, furniture, etc.) held by him either for his personal use or for the use of his family members dependent on him. However, the following items meant for personal use are treated as a capital asset and any profit on its sale is taxable: (a) Archaeological collections (b) Drawings {© Paintings (d) Sculptures (e) Any work of Art (f) Jewellery 3. Agricultural land in India. However, it does not include any land situated — in any area which falls within the jurisdiction of a Municipality or Cantonment Board, having a population of not less than 10,000 according to the published figures of the last preceding census; — within the area measured aerially specified below: (i) not being more than two kilometers from the local limits and which has population of more than ten thousand but not exceeding 771 lakh; or (ii) not being more than six kilometers from the local limits and which has population more than one lakh but not exceeding 710 lakhs; or Gii) not being more than eight kilometers from the local limits and T-32(CAPITAL GAINS m T-33 which has population more than 710 lakhs. 4. 6¥2% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980. 5. Special Bearer Bonds, 1991. 6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999. Q. 2. Explain the following: 1. Types of capital assets; [20105 2. Meaning of transfer of Capital Asset. Ans. 1. Capital assets are of two types: (i) Short-term Capital asset; (i) Long-term Capital asset. (i) Short-term Capital asset [Section 2(42A)}. A capital asset which is held by an assessee for not more than 36 months preceding the date of its transfer is known as short-term capital asset. However, the following assets shall be treated as short-term capital assets, if they are held for not more than twelve months immediately preceding the date of its transfer. (a) Equity or preference shares (Listed on a recognised stock exchange in India). (b) Any other securities listed in a recognised Stock Exchange in India. (c) Units of the Unit Trust of India or units of Mutual Fund specified u/s 10(23D). (a) Zero coupon bonds. The time period of holding unlisted equity and preference shares is 24 months. (ii) Long-term capital asset [Section (29A)]. It means a capital asset which is not short-term capital asset. In other words, if an asset is held by an assessee for more than 36 months or 12 months or 24 months as the case may be, such assets shall be treated as long-term capital assets. 2. Meaning of transfer of capital asset [Section 2(47)]. The term ‘transfer’, in relation to capital asset includes: the sale, exchange, or relinquishment of the asset; or the extinguishment of any right therein; or the compulsory acquisition thereof under any law; or in case where the asset is converted by the owner thereof into or is treated by him, as stock-in-trade of a business carried on by him such conversion or treatment; or any transaction involving the allowing of the possession of any immovable property to be taken or retained in the past performance of a contract of the nature referred to in Section 53A of the transfer of Property Act, 1882. Q. 3. Distinguish between Short-term Capital Gain and Long-term Capital Gain. [2011R, 2011S, 20125, 2013R, 2014S, 2015S Ans. Short-term Capital Gain vs. Long-term Capital Gain: Short-term Capital Gain. Any gain resulting from the transfer of Short-term Capital assets is called Short-term Capital Gain. Long-term Capital Gain. Any gain arising on the transfer of Long-term CapitalT-34 ™ Shiv Das DELHI UNIVERSITY SERIES (P) assets is known as Long-term Capital Gain. Carry forward of Capital Losses: (i) Short-term Capital Loss. Any loss on Short-term Capital assets is allowed to be carried forward to be set-off in subsequent years against Capital Gains (Short-term as well as Long-term). The period of Carry forward is 8 years. (i) Long-term Capital Loss. Any loss from Long-term Capital assets can also be carried forward to be set-off in subsequent years only against Long- term Capital Gains. The period of carry forward is 8 years. (iii) Such a loss cannot be carried forward unless Return is filed within the time limit of Section 139(1). Q. 4. Explain: Exemption of Long-term Capital Gains u/s 54. [2016s Ans. Exemption of Long-term Capital Gains u/s 54. The capital gains on residential house property (self-occupied or let out) are exempt from tax without any limit provided the following conditions are satisfied: (3) Such house property is owned by an individual or HUF and is used for residential purposes (its income being chargeable under the head ‘Income from House Property’). (ii) Such house property has been held by the assessee as a ‘Long-term Capital Asset’ (held for more than 36 months) before its transfer. (iii) The assessee has—(a) within a period of one year before or two years after the date of transfer of such residential house purchased another residential house, or (b) within a period of three years after the date of transfer, constructed or two residential house f. ALY. 2020-21. If the whole amount of capital gain arising on the sale of the old residential house (original asset) has been invested either in the purchase or in the construction of the new residential house (new asset) the whole amount will be exempt. If only a part of such capital gain is invested in the purchase or construction of a new house, the balance of capital gain will be taxable. Where the amount of capital gain is not appropriated or utilised by the assessee for purchase or construction of residential house before furnishing the Return of income u/s 139(1) it shall be deposited by the assessee on or before the due date of furnishing the Return, in Capital Gains Account Scheme, 1988. The amount so deposited shall be deemed to be the amount utilised for the purchase of new house. w.e,f 01.04.2020, where the amount of Capital Gain does not exceed Two Crore Rupees, the assessee may, at his option, purchase or construct two residential houses in India, Further, Once the assessee has exercised this option, he shall not be subsequently entitled to exercise the option for the same or any other Assessment Year. Cost of new house. If the new house is not sold or transferred by the assessee for a period of at least three years from the date of this asset was purchased or constructed, the cost of acquisition of the new house will be the cost. Where the new house is transferred within three years of its purchase or construction, the cost of new house shall be taken to be nil where the capital gains were more than the cost of new house. Where the cost of the new house was more than the amount of capital gains, the cost of new house shall be the cost (io (v)