Commerce ePathshala NOTES
(IGNOU)
Important Questions & Answers
IGNOU
: BCOM
BCOC
136 – ELEMENTS OF INCOME TAX
Q – Distinguish between
Previous year and Assessment year.
Ans.
ASSESSMENT YEAR
Assessment Year (AY) is defined in Section 2(9) of the
Income Tax Act, 1961. It means the period of 12 months commencing on the April
1 of each year and ending on March 31 next. For example, the current assessment
year is 2020-21 which commences on April 1,2020 and will end on March 31, 2021.
It is the financial year in which the assessment takes
place an assessee is required to pay tax in the AY on the income that was
earned by him in the previous year according to the rates of tax prescribed by
Annual Finance Act.
To illustrate, the current assessment year is 2020-21
and an assessee is required to pay tax in this AY on the income that was earned
by him in the previous year 2019-20.
As a precaution, it should be pointed out here that
there are a few exceptions to the general rule that income earned in the
previous year only is taxed in the assessment year.
PREVIOUS
YEAR
Income tax is levied on net taxable income of previous
year. So, it is very important to make clear the meaning of the term ‘Previous
Year’. It is defined in section 3 of Income Tax Act. In simple words, a
previous year is that year in which the income is earned and received and the
year in which it is taxed is termed as Assessment Year. As the assessment year
starts on 1st April of every year, it is essential to end previous year prior
to 1st April or till 31st March every year. Previous year is also called
‘Financial Year’ or ‘Accounting Year’.
In other words, previous year is a period maximum
twelve months which will certainly end on 31st March every year (prior to
assessment year). For example, the period of previous year related to the
assessment year 2020-21 ended on 31st March, 2020. Following points are
important in reference of previous year.
1)
Preceding Financial Year: Financial year immediately preceding
the assessment year is called previous year; for example, Financial Year of
2019- 20 will be previous year for the assessment year 2020-21.
2)
Previous year for every source of income: Prior to assessment year
2007- 08, the assessee had the option to choose any previous year, i.e. Diwali
Year, Dussehra Year, Calendar Year, etc. But at present, no assessee can choose
separate previous year under the Direct Tax Amendment Act, 1987. Thus,
amendment came into force from the assessment year 1989-90. Now for every
source of income, it is essential to have only one previous year (from 1st
April to 31st March). In brief, the previous year will be uniform for all
assesses and for all sources of income.
3)
Separate Account Year: If an assessee, due to any reason,
does not keep accounts on financial year basis but keeps on any other basis, he
may do so. But he must have his accounts upto 31st March every year separately
for income tax purposes. Thus, the assessee will have to keep accounts two
times, which is not practical. To avoid this difficulty, mostly the assesses
keep their accounts on financial year basis (from 1st April to 31st March).
4)
Previous Year for newly started business or profession:
If a business or a profession is started on any day of financial year (during
1st April to 31st March), its duration from the date of commencing the business
to next 31st March will be treated as previous year for the relevant assessment
year. For example, Mr. Amit commences his business on 30th January, 2020; the
previous year of his business shall be treated from 30th January, 2020 to 31st
March, 2020.
5)
Previous Year for new source of income: The period, from the date
of new source of income to next March, will be treated previous year for the
relevant assessment year. For example, Mr.Rakesh a bank officer lets his house
on rent first time on 1st January, 2020. The previous year for this source of income
shall be from 1st January, 2020- 31st March, 2020.
6)
Previous Year undisclosed money: If an income tax officer
finds any undisclosed money in case of any person’s account for which he does
not explain its source satisfactorily, it is called undisclosed or unexplained
money. This is considered assessee’s income. The previous year for this income
shall be the same as in case of that business in which this unexplained income
is found.
7)
Previous Year for the share in firm’s profits:
In this case, the previous year of the firm’s business will be treated the
previous year.
Q – Distinguish between
capital and revenue incomes
Ans.
distinguish
between capital and revenue receipts:
1)
Nature of receipt at the initial stage: If the receipt at the
initial stage possesses the characteristics of a trading receipt, it will be
taxed as such. If however, at the initial stages, it looks like a capital
receipt, it cannot be taxed irrespective of the magnitude and the appropriation
of the same by the assessee.
2)
Nomenclature not decisive: Irrespective of what the parties to a
contract call the transaction and the receipt arising therefrom, the true
nature of the receipt has to be ascertained based on the principles laid down
and the circumstances of the case.
3)
Nature of receipt in the hands of the receiver:
It is important to note that when considering a receipt, its nature in the
hands of the receiver is important. This implies that even if an item of
expenditure is of a capital nature in the hands of the giver, it very well
could be an item of revenue receipt in the hands of the receiver. It is,
therefore, the nature of receipt in the hands of the receiver that isimportant
and not the nature of the expenditure in the hands of the giver.
4)
Nature under company law not important: It has been held by the
Supreme Court that there is no inconsistency between a receipt being a capital
receipt under the Company Law and being a revenue receipt under the Income Tax
Act, 1961.
5)
Lack of assessment in earlier years immaterial:
The mere fact that the Income Tax Authorities have failed to levy tax on the
interest part of the annual receipt does not change the nature of the receipt,
it continues to be part capital and part revenue in nature and thereby
chargeable to tax on the revenue part. 6) Income from consumable assets:
Profits arising from consumable assets would be of a revenue nature although
capital asset seems to be getting exhausted or consumed.
7)
Exchange rate fluctuation: Excess income arising to the assessee
as a result of exchange rate fluctuation will be taxed as revenue receipt. If
however, the profit arises not as a result of the business of the assessee but
as accrual to the investment, it will be treated as a capital receipt.
8)
Perpetual annuity: The annuity receivable in exchange for a
capital asset is taxable income. However, if the annuity is described as
installment of a capital sum received in exchange for the capital asset, it is
not taxable.
Q – Explain the provisions of
Income Tax Act for an individual, if he is a a) Resident b) Not Ordinarily
Resident c) Non-Resident
Ans.
Individual An Individual may have anyone of the following residential status
depending upon applicability of rules of Income Tax Act:
a) Resident and Ordinarily Resident
b) Not Ordinarily Resident
c) Non Resident
A)
Resident and Ordinarily Resident: Section 6(1) and Section
6(6)(a) of the Income Tax Act determines the Residential status of an
Individual. Section 6(1) prescribes two conditions which may be treated as
basic conditions and similarly, Section 6(6)(a) also prescribes two conditions
which may be treated as additional conditions. An Individual shall be
considered as Resident in India, if he shall fulfill atleast one basic condition
and both the additional conditions.
Conditions
of Part I or Basic Conditions:
i) He must be physically present in India for a period
of 182 days or more during the relevant previous year, or
ii) He must be in India for a period of 60 days (182
days in some special circumstance) or more during the relevant previous year
and 365 days or more during 4 years immediately preceding the relevant previous
year.
Exception
to the ‘Basic Conditions’
a) In the case of an individual being ‘Citizen of
India’, if he leaves India during the previous year as a member of the crew of
an Indian ship or for the purpose of employment outside India, he shall fulfill
the basic condition No (ii) only where he is in India for at least 182 days
instead of 60 days.
b) In the case of an individual who is a ‘Citizen of
India’ or a person of ‘Indian Origin’, if he is already outside India and comes
on a visit to India during the previous year, he shall fulfill the basic condition
No (ii) only when he is in India for at least 182 days instead of 60 days.
Conditions
of Part II or Additional Conditions [Section 6(6)(a)]
a) If he has been resident in India for at least 2 out
of the 10 years preceding the previous year, and
b) He has been in India for a period or periods
amounting in all to 730 days or more during 7 previous years preceding the
previous year.
B)
Not Ordinarily Resident
If an individual satisfies anyone of the two conditions
of Part I, or basic condition but does not satisfy both the conditions or
fulfills only one of the two additional conditions of Part II, he is said to be
resident but not ordinarily resident or simply stated, he will be a “not
ordinarily resident”.
Illustration:
Mr. Mayank came to India for the first time in July 2019 and stayed in
Delhi up to 31st March, 2020. Determine his residential status for the
assessment year 2020 - 21.
Solution: For the assessment year 2020-21, Mr. Mayank
is resident but not ordinarily resident. During the previous year 2019-20, Mr.
Mayank was in India for a period of more than 182 days and he thereby fulfills
one of the basic conditions or condition (1) of Part I. But, he does not
satisfy both the additional conditions of Part II. Therefore, he is resident
but not ordinarily resident for the assessment year 2020-21.
C)
Non-Resident
If an individual does not satisfy anyone of the basic
conditions or conditions of Part I, he is said to be non-resident in that
previous year whether he satisfies one or both conditions of Part II or
additional conditions.
Illustration
:
Mr. Anup left India for Canada on August 15, 2012. During 2019-2020, came to
India on July 12, 2019 and stayed in Delhi for a period of one month and again
left for Canada, on August 10, 2019. Determine his residential status for the
assessment year 2020-21.
Solution:
Mr. Anup is a non-resident for the assessment year 2020-21, as he stayed in
India for only 30 days during the previous year 2019-20. As such, he does not
satisfy any of the basic conditions of Part I. Therefore, he is a non-resident.
Q - State the list of Exempted
Incomes Under Section 10.
Ans.
LIST OF EXEMPTED INCOMES (Section 10)
1) Agricultural income [Sec.10 (1)] Agricultural income
from the land situated in India is fully exempted from income tax (Agricultural
income definition given under Income Tax Act.)
2) Sum received by a member from Hindu undivided family
[Sec.10 (2)] Any sum received by a member of Hindu undivided family at the time
of division is tax free.
3) Share of a partner in firm’s income [Sec.10 (2A)]
The share of a partner in firms profit is fully tax free.
4) Profit of newly established industrial undertaking
in free trade zone [Sec.10AA].
5) Compensation received by victims of Bhopal gas leak
disaster [Sec.10 (10BB)] Any compensation paid under any Plan of Bhopal Gas
Leak Disaster (Processing of claims Act, 1985) is exempted from tax.
6) Sum received from life insurance [Sec.10 (10D)] Any
sum received from life insurance Corporation as the maturity of insurance
policy is fully exempt from tax, even bonus received is also fully exempted.
But, Keyman Insurance Policy and any sum received under u/s 80DD(3) will not be
exempted.
7) Sum received from Public Provident Fund [Sec.10
(11)] Any sum received from public provident fund (in state bank and head
offices) is fully exempted.
8) Payment from Sukanya Samridhi account [Sec.10 (11A)]
Any sum received from Sukanya Samridhi Account rules, 2014 made under
Government saving bank Act, 1873is fully exempt from tax9) Payment from
National Payment System Trust [Sec.10 (12A)] Exempted Incomes Any payment from
national payment system trust u/s 80(CCD), if it does not exceed 40% of total
amount, payable to assessee at time of closure of the scheme is exempt from
tax.
10) Partial withdrawal from National Pension System
Trust [Sec.10 (12B)] Any withdrawal by the assessee from national pension
system trust, upto 25% of it is tax free.
11) Interest, premium or bonus on specified investments
[Sec.10(15)] Like Annuity certificates, National Saving Certificates, Post
Office Savings, Bank Account, Interest on relief Bonds, Post office cash
certificates etc are fully exempt from tax.
12) Scholarships [Sec.10 (16)] Any fellowship or
scholarship granted by Government for education and research work will be
exempted.
13) Allowances of M.Ps and MLA’s [Sec.10 (17)] For
example daily allowances, constituency allowance, shall be exempt fully.
14) Award or reward [Sec.10 (17A)] Any award in form of
cash or kind granted by Central or State Government for work of literature or
scientific shall be exempted.Any award from any other institution apart from
Government, shall be exempted from tax provided, such exemption is approved by
Central Government.
15) Pension to an individual awarded by ‘Vir Chakra’
[Sec.10 (18)] Any amount in form of pension received by an individual or family
who had been a central or state Government employee and was awarded ‘Param Veer
Chakra, Vir Chakra, Mahavir Chakra, shall be exempted.
16) Family pension to family members of armed forces
[Sec.10 (19)] Family pension to widow or children or nominated pension of a
member of the armed forces died during operational duty shall be exempted.
17) Annual value of a palace of the Ex-rulers [Sec.10
(19A)]
18) Incomes of scheduled tribes [Sec.10 (26)] Any
income accrued to scheduled tribes living in tribal areas (as given in VI
schedule of constitution) of State of Manipur, Sikkim, Tripura, Mizoram,
Nagaland and Arunachal Pradesh shall be exempted.
19) Subsidy received from tea board [Sec.10(30)] Any
subsidy from tea Board, to the assessee, carrying on the business of growing
and manufacturing tea in India, received shall be exempt from tax, provided,
the certificate of exemption, has been presented to Income Tax officers.
Q - State the Exempted Income
for Non-Citizen/or Non-Resident Indian.
Ans.
EXEMPTED INCOME FOR NON-CITIZEN AND/OR NON-RESIDENT ASSESSEE
1) Income of interest on some securities or bonds by a
non-resident [Sec.10 (4)] (with effect from 2006-07).
2) Interest on saving certificates [Sec.10 (4B)] -This
exemption is available to non-resident individuals of Indian origin or Indian
citizens who has purchased saving certificates from outside India by foreign
currency.
3) Tax paid on remuneration to foreign technicians
[Sec.10 (5B)] -Now it’s not exemption with effect from AY 2003-04.
4) Income as an employee of a foreign
enterprise[Sec.10(6)(vi)]-This exemption is allowed if such employee stays in
India for more than 90 days during PY and such enterprise has no trade of
foreign concern in India.
5) Remuneration during training period [Sec.10 (6)
(xi)] -It should be received by an employee of foreign company from foreign
Government.
6) Tax paid on behalf of foreign companies in respect
of certain income [Sec.10 (6)] -Such income should be received between 1/4/1976
and 31/3/ 2002 and the tax liability should be in form of royalty or technical
fee received from Indian Government.
7) Income of foreign companies for providing technical
services in Exempted Incomes enterprises connected security in India
[Sec.10(6c)]
8) Allowances or perquisites outside India [Sec.10 (7)]
- Such allowance or perquisites is given by Government of India to citizen of
India.
9) Remuneration received from Foreign Government under
Cooperative Technical Assistance Programme [Sec.10 (8)].
10) Income of an advisor [Sec. 10(8A)] This exemption
is allowed for the appointment of advisor under agreement between International
Organization and Central Government and remuneration is paid to him is out of
its technical Assistance grant.
Q – What do you mean by
‘Profits’ in Lieu of Salary ?
Ans. ‘Profits’ in Lieu of Salary
As stated above-the term salary includes any profit in
lieu of salary, the above term according to Section 17(3) includes:
i)
Compensation received by an employee on
termination of his employment or on modification of his terms of employment.
Compensation is basically a capital receipt since it is the very source of
income i.e., the salary. Capital receipts are not taxable unless by definition
they are treated as income. In the present case, the termination compensation
is specifically treated as profit in lieu of salary. Such compensation is
taxable as salary.
Sometimes, the terms and
conditions of employment may be modified in future; the employee will get lower
salaries in lieu of which they will be paid immediately a lump sum
consideration. Such payment is taxable as salary.
ii)
Payments from unrecognized fund Any payment
received by an assessee from an unrecognized provident fund or any fund (not
being an approved superannuating fund) tothe extent it consists of employer’s
contribution and interest thereon is taxable as profits in lieu of salary.
Specific exemptions The following payments, however, do
not constitute profits in lieu of salary.
i)
Exempted Gratuity-[Section10(10)]
ii)
Exempted value of Commuted Pension-Section
10(10A)
iii)
Exempted amount of Retrenchment
Compensation-Section 10(10B)
iv)
Payment from Statutory Provident
Fund-Section 10(11).
v)
Exempted amount from Recognized Provident
Fund-Section 10(12).
vi)
Payment from Approved Superannuation
Fund-Section10(13).
vii)
House Rent Allowance.
Q – What do you mean by
Voluntary Retirement ?
Ans.
Voluntary Retirement [Section 10(10C)] If any employee of Public Sector Company
or any other company or any authority established under any act or any
corporation or cooperative society or university or Indian institute of
technology established under any central or provincial act or any management
institute notified by central government, takes retirement from his service
voluntary, whole amount received or receivable in this connection shall be
exempt upto a maximum limit of Rs. 5, 00,000.An exemption of maximum Rs. 5,
00,000 shall be allowed. The advantage of such exemption upto Rs 5, 00,000
shall also be given to employees of such concerns which are very famous for all
over India or state and these concerns are notified by central government. If
any assessee gets sum under such scheme in installments, he will also be
entitled to avail this exemption upto a total limit of Rs. 5, 00,000. Least of
the following will be exempt from tax:
i)
Actual compensation amount received
ii)
Salary of 3 months service period of full
year service length
iii)
Remaining month of service * salary at the
time of retirement
iv)
Maximum amount Rs 5, 00,000
[Meaning of Salary- Basic salary + Dearness Pay
+Dearness allowance (if it is under terms of employment) + Commission at fixed
percentage on sale (if any)]
Q – Explain Treatment of
Gratuity [Section 10(10)] ?
Ans.
Gratuity [Section 10(10)]
Gratuity is a gratuitous payment made by the employer
to his employee. It is a gift or present, in return for favor of services
rendered, at the time of retirement or death. It is paid in recognition of long
and meritorious services, rendered by the employee. The payment of gratuity
act, 1972 has legally recognized the concept. Even where the act is not
applicable, invariably all employers provide for payment of gratuity to their
employees through the terms of employment. The amount of gratuity is paid to the
employee, if he survives at the time of retirement, or to his wife or children,
if he dies before retirement.
The provisions regarding gratuity are stated below:
a) In the case of government employees
[Sec10(10)(i)]
Any death – cum –
retirement gratuity received by central, state, local government employees is
fully exempt from income tax. 82 Salaries
b)
In the case of employees covered by the Payment of Gratuity Act, 1972
[Sec 10(10)(ii)]
Any gratuity received by an employee covered by the Payment
of Gratuity Act, 1972 is exempt from tax to the extent as stated below:
i)
15 days salary (7 days in case of employees
of a seasonal concern) for each years’ service (service for a period of more
than 6 months is regarded as one year’s service) based on salary last drawn
i.e., 15 days salary x length of service, or.
ii)
20,00,000 as maximum amount; or
iii)
Actual amount of gratuity received,
whichever is less
Taxable gratuity = Actual
gratuity received – Exempted gratuity (Meaning of salary for purpose of computation
of gratuity = Last drawn salary + D.A. last drawn by the employee but excluding
all other payments)
Q – State some Fully Exempted
Perquisites ( Tax Free Prequisites )
Ans.
FULLY EXEMPTED PERQUISITES (TAX FREE PERQUISITES)
There are certain other perquisites which are exempt in
the hands of all employees. They are as follows:
1)
Medical facility
A)
Medical facility in a hospital etc. maintained by the employer
Medical facility which is given to employee and his/her family member in
hospital, dispensary and nursing home which belongs to employer is fully tax
free.
B) Medical
treatment in India The following expenditure incurred by employer shall not
be a perquisite: a) Any sum paid by employer in respect of: i) Actual expenditure
incurred by employee on his or his family member’s medical treatment in any
hospital maintained by the government or any local authority or in a hospital
approved by the government for medical treatment for its employees. ii)
Expenditure actually incurred by employee on his or his family member’s medical
treatment in respect of prescribed diseases or ailments as prescribed in Rule
3A of the income tax rules, in any hospital approved by the principal chief
commissioner or chief commissioner of income tax, having regard to the
prescribed guidelines b) Any amount of insurance paid by the employer for
insurance of the health of the employees under a scheme approved by the central
government or the insurance regulatory and development authority. c) Any reimbursement
by the employer of any insurance premium paid by the employee, for an insurance
for his health or the health of any member of his family a scheme approved by
the central government or the Insurance Regulatory and development authority is
also tax free perquisite.
C) Medical
treatment outside India The following expenditure incurred by employer on
treatment of the employee or his family members outside India is also tax free
perquisite: 1) Expenses on medical treatment of the employee or any member of
his family outside India. However, such expenses shall be tax free perquisite
to the extent permitted by Reserve Bank of India. 2) Expenses on stay abroad of
the employee or any member of his family for medical treatment with one
attendant who accompanies the patient in connection with such treatment. These
expenses shall also be tax free perquisite to the extent permitted by Reserve
Bank of India. 3) Travel expenses of the patient (employee or his family
member) and one attendant who accompany the patient in connection with such
treatment. It shall be tax free in the case of those employees whose gross
total income (before including therein such travel expenditure as perquisite)
does not exceed Rs 2, 00,000.
2) Facility of refreshment This exemption
is provided only when refreshment is given during office hours and at place of
duties.
3) Transport facility or conveyance facility
This shall be tax free to all types of employees, if an employer provides any
vehicle or other transport or conveyance facility to the employee for the
purpose of carrying him from the place of residence to the place of his duty
and back to his residence. The conveyance facility to employee shall be tax
free provided the enterprise is engaged in business of transport, e.g., facility
of free pass to railway employees.
4) Employer’s contribution Employer’s
contribution in schemes like group insurance scheme, deferred annuity or
pension shall be tax free.
5) Use of laptop or computer of employer
The use of laptops or computers (belongs to employer or hired by employer) by
the employee or his family member, its value shall be exempted.
6) Facility of entertainment This facility
should be provided to employees collectively, to avail its exemption; else it
shall not be tax free.
7) Accommodation in remote area If the
employer provides accommodation facility to such employees in remote area or
offshore locality, its value shall be exempt. Such facility shall also be
exempted for the employees who are employed at mining sites or oil exploration
site. 8) Perquisites provided outside India Such exemption is provided to
Indian citizen and Government employees who are employed in foreign countries.
9) Facility of
telephone The payment of telephone (including mobile phones) bills
installed at employee’s residence by the employer is tax free. The telephone
can be used for any purpose.
10)
Facility of refresher course or training Such perquisite is tax
free provided the employees do the work with much skills, it includes lodging
and boarding expenses for this purpose.
11)
Payment of accidental insurance premium Any payment made by the
employer for insurance premium on policy taken by employer against any loss of
employee, shall not be taxable.
12)
Educational facility for children of the employee
The educational institutions is run by the employer or the employer has
provided free educational facilities to the children of employees in another
educational institution, the value of these facilities shall be exempt provided
that such value should not be more than Rs 1,000 per child per month.
13)
Tax paid by the employer on non-monetary perquisites
If an employer provides non-monetary perquisite and pays any tax on these, it
shall be tax free and shall not be included in computing income under the head’
salaries’. It should be noted that no deduction shall be allowed to the
employer while computing income under the head ‘profits or gains of business
and profession’.
14)
Leave Travel Concession (LTC) An employer (present or
former employer) may grant the facility of LTC to his employees with members of
his family in connection with the journey to home town or any other place in
India.
Q – What are the provisions
of section 16 (ii) regarding entertainment allowance for non-government
employees?
Ans.
Entertainment Allowance [Section 16(ii)]
Entertainment allowance is normally given to Senior
Officer. An employer gives allowances to his employee to spend it on the
reception of the customers. An entertainment allowance is part of salary.
Hence, it is first to be included in the salary income. Thereafter, a deduction
on Entertainment allowance which is given to both types of employee, government
and non-government employee as explained below, will be allowed.
i)
Government
employee: The least of the following will be allowed as a
deduction:
a)
Rs. 5,000, or
b)
1/5th or 20% of the employee’s salary, or
c)
Amount of entertainment allowance granted during the year.
Meaning of Salary:
For the purpose of entertainment allowance, only basic salary shall be
considered. Any other allowance even dearness allowance (Inspite of being under
terms of employment), fixed percentage of commission on turnover and dearness
pay shall not be included in the salary for the purpose of deduction of
entertainment allowance.
ii)
Non-government
employee (including semi-Government employee, employees of
statutory corporation and local authority): From the assessment year 2002-03,
the deduction of entertainment allowance to non-government employees has been
abolished.
Q – What are the provisions
regarding unrecognized provident fund in Income Tax Act, 1961.
Ans. Unrecognized
Provident Fund This is a provident fund which is not recognized by the
Commissioner of Income Tax. Since it is not recognized, no relief is granted to
the assessee for tax purpose. In other words, it can neither be termed as
statutory provident fund nor a recognized provident fund. Such a fund is
normally maintained by private employers
provisions regarding unrecognized provident
fund in Income Tax Act, 1961
Unrecognized P.F Employee is paid his monthly salary
after deducting his contribution to provident fund but Employee’s contribution
in URPF is included in taxable salary.
But the entire contribution does not qualify for
deduction u/s 80C.
Tax free upto 12% of salary. Excess over 12% of salary
is included in salary.
Tax free (u/s 10) upto 9.5% p.a rate of interest;
excess over 9.5% is included in gross salary
Tax free u/s 10 (12) provided: (i) the employee has
served continuously for at least 5 years, or (ii) he has been removed from
service on account of retrenchment, illness or closure of business.
Q – State Some of the
Deduction Under Section 80C.
Ans.
DEDUCTION UNDER SECTION 80C
Section 80C allows certain investments and expenditure
to be tax-exempt. Under this section, deduction is allowed in respect of
specified qualifying amount paid or deposited by individual or H.U.F taxpayer
(assessee) only.
Gross
Qualifying Amount
Deductions in respects of contribution to life
insurance premium, Deferred Annuity, Provident Fund and Public Provident Fund
and subscription to certain shares and debentures, etc. (Sec. 80C). This
deduction is available on the basis of specified qualifying
investments/contributions/ deposits/payments (Gross Qualifying Amount) made by
the taxpayer during the previous year.
Eligibility
of Assessee: This deduction is allowed only to the
following assesses from their gross total income computed as per the provisions
of the Act: i) An individual or ii) A Hindu Undivided family
Deduction
on account of the following saving/investment cannot exceed Rs. 1,50,000.
The above assesses shall be entitled to a deduction of whole of the amount paid
or deposited in the previous year, being the aggregate of sum referred to below
as does not exceed Rs. 1,50,000.
A)
In case of Individual Assessee
i)
Life Insurance Premium : The premium paid by an assessee on
his own life, on the life of spouse (husband or wife) and children,
contribution of employee in insurance plan, joint life premium and group
insurance W.e.f. Assessment Year 2019-20 maximum 20% of sum assured shall be
allowed as deduction u/s 80C.
ii)
Deferred Annuity: To effect and to keep in force a contract
for a deferred annuity on the life of spouse and children.
iii)
Contribution of employee in Statutory
Provident Fund.
iv)
Contribution of employee in Recognized
Provident Fund.
v)
Contribution in Public Provident Fund upto
maximum Rs. 1,50,000.
vi)
Payment under Unit Linked Insurance Plan,
1971.
vii)
Amount deducted out of salary of Government
employee or deferred annuity or for provision to wife and children restricted
to 1/5th of salary.
viii)
Contribution in Approved Superannuation
Fund.
ix)
Contribution in Notified Central Government
Securities or in Notified Deposit Scheme. For this section, investment in 6
years National Saving Certificate VIII or IX issue and deposits in National
Saving Scheme, 1992 have been recognized.
x)
Re-investment of accrued interest on
National Saving Certificate (NSC) VIII.
Q – State the Exempted
Incomes From House Property.
Ans.
EXEMPTED INCOMES FROM HOUSE PROPERTY
i)
Buildings situated in the immediate
vicinity of agricultural land and which is occupied by the cultivator as a
dwelling house or as a store house. It is treated as agriculture income and is
fully exempt.
ii)
Annual value of any one palace in the
occupation of an Ex-Indian Ruler.
iii)
House properties belonging to a local
authority, scientific research association, University or other recognized
educational institution, hospital, or Games or Sports Association and
Registered Trade Union.
iv)
Property belonging to an authority
constituted under any law for the purpose of marketing of commodities and used
for letting of godowns or warehouse for storage of commodities.
v)
House property held by a trust established
wholly for charitable purposes.
vi)
House property held by a political party.
vii)
House property owned by an assessee and
used for his own business or professional purposes.
viii)
Self-occupied houses - The Finance Act,
1986 W.e.f. 1.4.1987 provides that where the property consists of one house or
part of a house in the occupation of the owner for his own residence and is not
actually let out during any part of previous year, the annual value of such a
house shall be taken to be nil.
Q – Write short notes: a)
Composite rent b) Unrealised Rent c) Standard Rent
Ans. a) Composite Rent :
If a building is let out to a person along with other facilities (e.g.
Electricity, Gas, Air conditioning, water, Lift, Watch and Ward etc.) for a
composite rent and if the rent of the building can be separated from the rent
of such facilities, rent belonging to the building only will be taxed under the
head ‘House Property’ and that which belongs to other facilities will be taxed
under the head ‘Income from Other Sources’. If the composite rent cannot be
split up it will not be taxed under the head ‘House Property’, but under the
head ‘Other Sources.’
b)
Unrealised Rent
Meaning of
unrealised rent
·
It is the rent of
the property pertaining to the previous year, which the owner of the property
could not recover from the tenant. It is subsequently realized from a
tenant
·
To be able to
deduct unrealized rent from your rental income, there are four conditions:
o The tenancy is bonafide
o The defaulting tenant has vacated or steps have
been taken to compel him to vacate the property
o The defaulting tenant is not in occupation of any
other property of the assessee and
o The assessee has taken all the reasonable steps to
institute legal proceedings for the recovery of the unpaid rent or satisfies
the assessing officer that legal proceedings would be useless.
·
Unrealized rent
will not be allowed as a deduction from your actual rent received or receivable
if the conditions are not falling under the above-mentioned four conditions.
c)
Standard
Rent - Meaning of Standard Rent It is the maximum rent which
a person can legally recover from his tenant under the Rent Control Act.
Standard rent is applicable only in case of properties covered under Rent
Control Act.
Q – Explain necessary
conditions for income to be chargeable under the head ‘Profit and gains of
Business or profession’.
Ans. Basic
Principles for Computing income Taxable under the head ‘Profit and Gains of
Business or Profession’
1.
Business or
profession carried on by the assessee –
Business or profession should be carried on by the assessee.
2.
Business or
profession should be carried on during the previous year –
Income from business or profession is chargeable to tax under
this head only if the business or profession is carried on by the assessee at
any time during the previous year (not necessarily throughout the previous
year). There are a few exceptions to this rule.
3.
Income of
previous year is taxable during the following assessment year –
Income of business or profession carried on by the assessee
during the previous year is chargeable to tax in the next following assessment
year. There are, however, certain exceptions to this rule.
4.
Tax incidence
arises in respect of all businesses or professions –
Profits and gains of different businesses or professions carried
on by the assessee are not separately chargeable to tax. Tax incidence arises
on aggregate income from all businesses or professions carried on by the
assessee. If, therefore, an assessee earns profit in one business and sustains
loss in another business, income chargeable to tax is the net balance after
setting off loss against income. However, profits and losses of a speculative
business are kept separately.
5.
Legal
ownership vs. Beneficial ownership –
Under section 28, it is not only the legal ownership but also
the beneficial ownership that has to be considered. The courts can go into the
question of beneficial ownership and decide who should be held liable for the
tax after taking into account the question as to who is, in fact, in receipt of
the income which is going to be taxed.
6.
Real profit
vs. Anticipated profit –
Anticipated or potential profits or losses, which may occur in
future, are not considered for arriving at taxable income of a previous year.
This rule is, however, subject to one exception: stock-in-trade may be valued
on the basis of cost or market value, whichever is lower.
7.
Real profit
vs. Notional profit –
The profits which are taxed under section 28 are the real
profits and not notional profits. For instance, no person can make profit by
trading with himself in another capacity.
8.
Recovery of
sum already allowed as deduction –
Any sum recovered by the assessee during the previous year in
respect of an amount or expenditure which was earlier allowed as deduction, is
taxable as business income of the year in which it is recovered .
9.
Mode of book
entries not relevant –
The mode or system of book-keeping cannot override the
substantial character of a transaction.
10.
Illegal
business –
The income-tax law is not concerned with the legality or
illegality of a business or profession. It can, therefore, be said that income
of illegal business or profession is not exempt from tax.
Q – Explain special cases
where income from business is not taxable under ‘Profit and gains of Business
or profession.
Ans. Business Income Not
Taxable under the head ‘Profit and Gains of Business or Profession’
In the following cases, income
from trading or business is not taxable under section 28, under the head
“Profits and gains of business or profession”: Rental income in the case of Dealer in
Property :
Rent of house property is
taxable under section 22 under the head “Income from house property”, even if
property constitutes stock-in-trade of recipient of rent or the recipient of
rent is engaged in the business of letting properties on rent. Dividend on Shares in the case of a
Dealer-in-Shares :
Dividends on shares are
taxable under section 56(2)(i), under the head “Income from case of a
dealer-in-shares other sources”, even if they are derived from shares held as
stock-in-trade or the recipient of dividends is a dealer-in-shares. Dividend
received from an Indian company is not chargeable to tax in the hands of
shareholders (this rule is subject to a few exceptions‡). Winnings from Lotteries, etc.
Winnings from lotteries,
races, etc., are taxable under the head “Income from other sources” etc.
(even if derived as a regular business activity). Interest received on Compensation or
Enhanced Compensation :
Such interest is always
taxable in the year of receipt under the head “Income from other sources”
(even if it pertains to a regular business activity). A deduction of 50 % is
allowed and effectively only 50 % of such interest is taxable under the head
“Income from other sources”. Profits derived from the
aforesaid business activities are not taxable under section 28, under the
head “Profits and gains of business or profession”. Profits and gains of any
other business are taxable under section 28, unless such profits are exempt
under sections 10 to 13A. |
Q – Explain the following
terms in the context of the I.T. Act.
i. Capital Assets
ii. Short-term Capital Assets
iii. Transfer of Capital Assets
Ans. 1. Capital
assets are significant pieces of property such as homes,
cars, investment properties, stocks, bonds, and even collectibles or art. For
businesses, a capital asset is an asset with a useful life longer than a year
that is not intended for sale in the regular course of the business's
operation. This also makes it a type of production
cost.
For example, if one company buys a computer to use in its office, the computer
is a capital asset. If another company buys the same computer to sell, it is
considered inventory.
2.
Short-term Capital Asset [Section 2(42A)]: The asset which is
not covered under the category of long term capital asset is known as short
term capital asset. If an assessee holds with him any asset, e.g., Gold,
Ornaments and some other assets (Except any Financial Assets like Shares,
Securities, Units of Unit Trust of India, any Mutual Fund and Zero Coupon
Bonds), for 36 months or less than 36 months from the date of its acquisition
(12 months or less than 12 months in case of shares, securities, units of UTI,
mutual fund and zero coupon bonds), such asset is known as short term asset.
3.
Transfer of Capital Assets [(Section 2 (47)]
Transfer in relation to capital assets includes:
i)
Sale, exchange or relinquishment of the
assets, or .
ii)
The extinguishment of any rights therein,
or
iii)
The compulsory acquisition by the
Government under any law, or
iv)
Where the asset is converted by the owner
thereof into stock-in-trade of a business carried on by him, such conversion.
Further, where a business is converted into a limited company, there is a
transfer of capital assets, or
v)
The maturity or redemption of zero coupon
bonds or
vi)
Any transaction involving the allowing of
the possession of any immoveable property to be taken or retained in part
performance of a contract of the nature referred to in the Transfer of Property
Act, 1882, or
vii)
Any transaction which has the effect of
transferring or enabling the enjoyment of any immovable property.
Q – Explain clearly the
meaning of the term ‘Dividend’ as defined in the Indian Income-Tax Act, and
point out the law relating to taxation of dividends.
Ans.
In ordinary language, dividend means,
the sum received by a shareholder of a company on the distribution of its
profits; but under Section 2(22) dividend includes the following:
a) Any distribution by a company of accumulated profits
if such distribution entails the release by the company to its shareholders of
all or any of the assets of the company. Such accumulated profit may be
distributed in cash or kind. Where the distribution is in kind, the market
value of the asset shall be deemed dividend in the hands of shareholders.
b) Any distribution to its shareholders by a company of
debenture or debenture stock or deposit certificates in any form, and any
distribution to its preference shareholders of shares by way of bonus, to the
extent to which the company possesses accumulated profits, whether capitalized
or not.
c) Any distribution made to the shareholders of a
company on it liquidation, to the extent to which the distribution is
attributable to the accumulated profits of the company immediately before its
liquidation, whether capitalized or not.
d) Any distribution to its shareholders by a company on
the reduction of its capital, to the extent to which the company possesses
accumulated profits, whether capitalized or not.
e) Any payment by a company, not being a company, in
which the public is substantially interested, of any sum by way of advance or
loan to a shareholder, being a person who is the beneficial owner of shares
holding not less than 10% of the voting power or to any concern in which such
shareholder is a member or a partner and in which he has a substantial
interest, to the extent to which the company possesses accumulated profits
except where the advance or loan is made to a shareholder or the said concern
by a company in the ordinary course of its business, where the lending of money
is substantial-part of the business of the company, it shall not be considered
as dividend.
Rules
for Taxation of Dividends
The following are the rules for taxations of dividends:
i)
Any dividends declared by a company shall
be deemed to be the income of the shareholders of the previous year in which it
is declared.
ii)
Any interim dividend shall be deemed to be
the income of the shareholders of the previous year in which the amount of such
dividend is unconditionally made available by the company to the members who
are entitled to it. It means that the date of declaration of such dividends is
immaterial so long as the amount is not released for disbursement.
iii)
Dividend paid by an Indian Company outside
India shall be deemed to accrue or arise in India.
iv)
In the case of dividend received from a
foreign company, if the foreign company has deducted tax at source and nothing
is paid out of it to the Government of India, the amount deducted as tax at
source shall not be included in the dividend income of the Indian shareholder.
v)
The income tax deducted at source from the
dividend declared for the shareholders is to be included in the dividend income
of the shareholders and as such the net amount of dividend received by a
shareholder has to be grossed up or increased by the amount of tax deducted at
source, and the shareholder gets credit in his assessment for the amount of tax
deducted at source from the dividends declared by the company.
Q - What do you mean by
Clubbing of Income? In what circumstance is the income of one person treated as
income of another?
Ans. A
Slab System is followed to charge income tax on the total income of an
individual. Since, Progressive Tax System is followed, therefore, there are
progressive rates of tax and as the income rises (go up.), and the rate of tax
also goes up. The tax-payers falling under the higher tax brackets has
atendency to divert partially their income to the close people or relatives etc
having a lower bracket or fully exempt bracket of income. By doing so such,
assessee reduces their own tax rate slab and avoids payment of tax on their
income by a higher rate of tax. In order to curb such practices of tax
avoidance, there are provisions under Section 60 to 65 of Income Tax Act.
According to these provisions to the extent of transfer
of income to the other person or to the extent of income earned by such person
on such transfers shall be included in the total income of the assessee. Such
inclusion of income of other person in the income of the assessee is called
‘Clubbing of Income’. Provisions of Clubbing of Income are as under:
1.
Transfer of Income without Transfer of Assets If an income
earned through an asset is transferred by a person to another person without
transferring the ownership of the asset, the income from such asset shall be
deemed to be the income of the transferor and shall be included in his total
income.
2.
Revocable Transfer of Assets (Section 61) Where a revocable
transfer is made of an asset by one person to another person, any income
arising or derived from such assets shall be deemed to be the income of the
transferor and shall be included in his total income.
3. Salary, Commission, Fees, or Any Other
Remuneration to the Spouse (Section 64) In computing the total
income of an individual, there shall be included all such income as arises
directly or indirectly to the spouse of such individual by way of salary,
commission, fees or any other form of remuneration whether in cash or in kind
from a concern in which such individual has a substantial interest. However,
these provisions will not apply on the income of such spouse who possesses
Technical or Professional Qualifications and the income is solely attributable
to the application of his or her Technical or Professional knowledge and
experience.
4.
Income from Assets Transferred to Spouse [Section 64 (1) iv]
Where an individual transfers his asset (excluding house property) directly or
indirectly, to his spouse, any income from such asset is deemed to be the
income of the transferor.
5.
Income from Assets Transferred to Daughter-in-law (Son's wife) [Section 64 (1)
(vi)] Income arising from transfer of an asset by an
individual directly or indirectly on or after the 1st day of June 1973 without
adequate consideration to son's wife (daughter-in-law) is included in the total
income of the transferor.
6.
Income from Assets Transferred to a Person or Association of Persons for the
Benefit of Spouse [Section 64 (1) (vii)] Income arising from
transfer of an asset directly or indirectly by an individual without adequate
consideration to a person or Association of Persons for the immediate or
deferred benefit of his or her spouse shall be included in the total income of
the transferor to the extent it is for the benefit of the spouse.
7
Income from Assets Transferred to a Person or Association of Persons for the
Benefit of Son's Wife [Section 64 (1) (viii)] Income arising
from transfer of an asset after 31.05.1973, directly or indirectly by an
individual without adequate consideration to a person or Association of Persons
for the immediate or deferred benefit of son's wife, shall be included in the
total income of the transferor to the extent it is for the benefit of the son's
wife.
8.
Income to the Spouse or Son's wife from investment of Transferred Asset
Where the individual has transferred any asset or assets directly or indirectly
to the spouse or son's wife and such assets are invested by the transferee.
Q – What are the provisions regarding set-off of
the following losses: a) Short-term capital losses b) Long term capital losses
c) Losses of lottery and card games d) Speculation losses
Ans.
a) Short-term capital losses -
Set off of Losses under the Head Capital Gains Capital Losses can be (a) Short-term
and (b) Long-term. i) Short-term capital Loss can be set off from any capital
Gain i.e. Shortterm gain or Long-term gain.
b)
Long term capital losses - Long-term capital Loss can only be
set off against Long-term Capital Gains.
c)
Losses of lottery and card games - Set off of Losses of
Lottery, Betting, Gambling, Crossword Puzzles or Card Games etc These losses
are not allowed to be set off against any income including winnings of
lotteries, crossword puzzles, races, card games etc.
d)
Speculation losses- Set-off of Losses of Speculation Business
[Section 73(1)] Losses related with speculation business can be set off only
from profits and gains (if any) of another similar business (i.e. speculation
business) carried on by the assessee and not against the income of any other
head.
Q – State the steps for
Computation of Tax Liability of n Individual.
Ans.
STEPS FOR COMPUTATION OF TAX LIABILITY OR REFUND
Step- 1 : Calculate tax on incomes, taxable at special
rates such as short terms capital gains and long-term capital gains etc.
Step- 2 : Calculate tax at normal rates on balance of
taxable income.
Step- 3 : Make sum of the tax calculated in Step-1 and
Step-2.
Step- 4 : Deduct tax rebate under Section 87 A (if
applicable)
Step- 5 : Add surcharge 10% or 15% (if applicable) as
per income slab.
Step- 6 : Add: Health and Education Cess @ 4% on the
tax payable (including surcharge)
Step 7: Deduct
rebate of Section 86, if applicable
Step- 8 : Deduct Tax Deducted at Source (T.D.S.) or Tax
Collected at source (TCS), if any, from the total of tax calculated upto
Step-7. i.e. (income tax+ surcharge+ Cess).
Step- 9 : Deduct advance tax paid/tax paid on
self-assessment/double taxation relief.
Step- 10 : Balance is Tax Payable or Net Refund. This
amount should be rounded off nearest to the multiple of ten rupees.
Q – Explain in detail
provisions of Section 184 in relation to the assessment of the firm
Ans.
PROVISIONS OF SECTION 184 REGARDING ASSESSMENT OF FIRMS
1) Firm's assessment can be made (as a firm) if:
· The
partnership is evidenced by an instrument. Instrument not only may include
partnership deed but also constitute any other formal document.
· The
individual shares of partners are specified in that instrument. In other words,
individual share of profits in the profit of the partnership must clearly be
given in the instrument of partnership.
2) A certified copy of the instrument of partnership
deed shall accompany the returns of income of the firm for the previous year
relevant to the assessment year in respect of which assessment as a firm is
first sought. In other words, the first return of the income of the firm should
accompany a certified copy of the instrument of partnership.
3) If once a firm is assessed as a firm for any
assessment year, it shall continue to be assessed as a firm for every
subsequent year if there is no change in the constitution of the firm.
4) If a change occurs in the constitution of the firm
or profit sharing ratio during any previous year, a certified copy of the
revised instrument (partnership deed) along with return of income of the
relevant assessment year should be furnished / filed.
5) If a firm fails to comply with the provision
mentioned u/s 184, the firm shall be assessed as firm but the following
disallowance of deductions will apply:
· No
deduction by way of payment of interest, salary, bonus, commission or
remuneration, by whatever name called, made by the firm to its partners shall
be allowed in computing the income chargeable under the head 'Profits and Gains
of Business or profession.
· Such
interest, salary, bonus, commission or remuneration shall not be chargeable to
tax in the hands of partners under the head Profits and gains of business or
profession u/s 28 (v).
Q - Explain with example the
term Book Profit in relation to the assessment of firms.
Ans.
COMPUTATION OF TOTAL INCOME OF THE FIRM
When a Profit & Loss a/c is given to compute the
total income of the firm, then profit or loss as revealed by Profit & Loss
a/c shall be adjusted in the same manner as is done in the computation of
income under the head Profit and Gains of Business or Profession. After
arriving at aforesaid profit as under the head ‘Profits and Gain of Business or
profession’ and under the other heads of income (i.e. Income from House
property, Capital Gains and Income from Other Sources) is computed and added in
the income computed under the head Profits and Gains of Business or Profession
and the resultant amount is the Gross Total Income (GTI) of firm. Incomes
exempt under Section 10 to 13-A shall be ignored while computing income under
various heads of income as stated above. From the Gross Total Income of the
firm, deductions allowed u/s 80C to 80U shall be deducted and the balance shall
be the Total Income of the Firm. It is to be noted that deductions u/s 80 G, 80
GGA, 80 GGC, 80 IA, 80 IAB, 80 IB, 80 IC, 80 ID, 80 IE, 80 JJA and 80 JJAA only
are applicable to a firm. The deductions under the above mentioned Section will
not be allowed against short-term capital gains (specified in Section 111-A)
and Long-term capital gains (u/s 112).
Q – Explain the procedure of
computation of total income of the firm. Give a proforma and such computation
Ans.
COMPUTATION OF BOOK PROFIT
Book profit of the firm is the profit before deducting
remuneration to partners; it is shown by profit and loss account which has been
calculated under provisions under Sections 28 to 44 of income tax act, 1961.This
profit is then, increased by the amount of remuneration given or to be given to
partners provided this remuneration had already been deducted in ascertaining
the net profit. Steps to calculate Book profit
1) Profit or loss is calculated by preparing profit and
loss account, if profit or loss is given, then, then it is taken as base.
2) The necessary adjustments mentioned in Section 28 to
44D are made in profit and loss account.
3) The remuneration given to the partners is added in
net profit. The final amount so arrived shall be the book profit of the firm.
Q – Explain the five major
Steps for E-filing of ITR in India?
E-filing of returns means filing income tax returns by
individual internet. Individual can file their returns either by taking some
professional help or it can also be filed simply by registering on the website
of income tax department.
E-filing income tax process
1) Register yourself on an ITR Portal:
First step to be follwed by an individual for E-filing of ITR is to register
himself/herself on the ITR portal of income tax department website. The
individual will be asked to provide Permanent account number and date of birth
and a log in ID and password will be generated. This ID and password will be
used for further steps.
2) Select
the relevant ITR Form: After registering and logging in on the portal a
salaried individual have to select the ITR 1 form.
3) Form
filling: ITR forms can be filled in both the forms, either via Offline or
Online mode. The step to step process for online filing of income tax returns
is explained futher in the unit. For filing the offline returns, the form can
be downloaded from the “Downloads section-ITR Forms” on the website, from here,
download the income tax return utility and fill the details and then upload it
on the website.
4) Acknowledgement
and Verification: After uploading return on site, Individual will receive an
acknowledgement in form ITR 1. If the Aadhar details are not updated on Income
Tax site, then he/she will have to submit physical signed copy of ITR 1 to the
Income Tax Department on address mentioned on ITR 1 for completing the E-filing
process within next 120 days through an ordinary post or speed post.
5) Tax
refund: In case, if the tax owe is less than the sum of the total amount of
withholding taxes and estimated taxes that have been paid by the taxholder,
then he/she is eligible for tax refund. Tax refund is basically the refund on
taxes when the tax liability is less than the taxes paid.
Q – What are the various
benefits of filing income tax returns?
Ans.
BENEFITS OF E-FILING
The E-filing of returns have gained more popularity as
compared to Physical filing of returns. It is because of the following reasons:
•
Acts as a Proof: Acts as a proof and it is always handy,
ITR 1 can be furnished easily as a proof at any time for any kind of financial
liability.
•
Convenient: There is no constraint of time and place
in case of E-Filing. Any individual can file it at any place and anytime 24*7
according to their convenience.
•
Error Free: In E-filing, calculations are done
automatically which reduces the probability of making mistakes and room for
errors, thus improves the accuracy in calculated amounts.
•
Time saving: It cuts down on processing time,
individuals and business can receive fund more quickly within 2-3 weeks.
•
Cofidential: It has better security as compared to
paper filing because the data is not accessible to anyone by any chance. In
case of paper filing, the details can fall in wrong hands at Department’s
office.
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