Basic Concepts of Income Tax Act – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.
Basic Concepts of Income Tax Act – CMA Inter Direct Tax Study Material
Short Notes
Question 1.
Write short note on Explain the term ax planning and tax evasion” (Dec 2021, 3 marks)
Answer:
Tax planning: Tax planning is a way to reduce tax liability by taking full advantages provided by the Act through various exemptions, deductions, rebates & relief. In other words, it is a way to reduce tax liability by applying script & moral of law. It is the scientific planning so as to attract minimum tax liability or postponement of tax liability for the subsequent period by availing various incentives, concessions, allowances, rebates and relief provided in the Act.
Tax evasion: Tax evasion is the illegal way to reduce tax liability by deliberately suppressing income or sale or by increasing expenses, etc. which results in reduction of total income of the assessee. Tax evasion is illegal, both in script & moral. It is the cancer of modem society and work as a clog in the development of the nation.
Distinguish Between
Question 2.
Explain the difference between ‘Total Income’ and ‘Gross Total Income’. (Dec 2012, 2 marks)
Answer:
| GTI | Total Income Sec. 5 |
| 1. Sum total of all 5 heads [Salary, House Property, Business Profession, Capital Gain, Other Sources] | 1. GTI (-) deduction u/s chap. VI A |
| 2. GTI is not rounded off | 2. Rounded oft u/s 288A |
| 3. No tax is calculated on GTI | 3. Tax is calculated on TI |
Descriptive Question
Question 3.
What are the circumstances in which previous year and assessment year will be the same? (Dec 2013, 3 marks)
Answer:
Previous year and the assessment year will be same in the following cases:
- Shipping business of non-resident. (Section 172)
- Persons leaving India. (Section 174)
- AOP or BOl or Artificial juridical person formed for a particular event or purpose. (Section 174A)
- Persons likely to transfer property to avoid tax. (Section 175)
- Discontinued Business. (Section 176)
Question 4.
Explain the term “substantial interest” defined in Section 2(32) and its application in at least two situations. (June 2014, 3 marks)
Answer:
Substantial Interest
- For company- If individuals along with relatives hold not less than 20% equity shares beneficially.
- For others- If individual along with relatives is entitled to at least 20% of income.
Application
An individual is chargeable to tax in respect of any salary, commission, fees, or any other remuneration received by the spouse from a concern in which the individual has substantial interest.
- But that portion of salary etc., of spouse which is due to application of technical or professional knowledge or experience shall not be clubbed.
- If husband and wife both have substantial interest in the concern and both are receiving remuneration because of interest in the concern then the remuneration of both shall be clubbed in the hands of that spouse whose total income is greater, before clubbing such
Question 5.
Statu the situations in which the income of the assessee can be assessed in the previous year itself, instead of in the assessment
year. (June 2016, 5 marks)
Answer:
Incomes which are taxed in the assessment year Itself
The income of an assessee for a previous year is charged to income tax in the assessment year, following the previous year. However, in certain cases, the income is taxed in the previous year in which it is earned. These exceptions have been made to protect the interests of revenue. The exceptions are as follows:
(i) Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock, mail, or goods shipped at a port in India, the ship is allowed to leave the port only when the tax has been paid or satisfactory arrangement has been made for payment thereof. 7.5% of the freight paid or payable to the owner or the charterer or to any person on his behalf, whether in India or outside India on account of such carriage is deemed to be his income which is charged to tax in the same year in which it is earned.
(ii) Where it appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry and he has no present intention of returning to India, the total income of such individual for the period from the expiry of the respective previous year up to the probable date of departure from India is chargeable to tax in that assessment year.
(iii) If an AOP/BOI etc. is formed or established for a particular event or purpose and the Assessing Officer apprehends that AOP/BOI is likely to be dissolved in the same year or, in the next year, he can made assessment of the income up to the date of dissolution as income of the relevant assessment year.
(v) Where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the previous year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year.
Question 6.
Explain the following concepts
Tax Planning
Tax Avoidance
Tax Evasion (June 2018, 3 marks)
Answer:
Tax Planning: It means arranging the financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitle the assessee to get certain rebates and reliefs. This is permitted nd not frowned upon by law.
Tax Avoidance: The line of demarcation between tax planning and tax avoidance is very thin and blurred. There could be elements of mala fide motive involved in tax avoidance also. Any planning which, though done strictly according to legal requirements defeats the basic intention of the Legislature behind the statute could be termed as instance of tax avoidance.
Tax Evasion: It refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant laws.
Practical Questions
Question 7.
With brief reasons, state whether the following constitute capital or revenue expenditure/ receipt:
(i) Compensation paid to customer for defect in goods supplied.
(ii) Outright purchase of patent by paying ₹ 25 lakhs.
(iii) Construction of building on land taken on lease basis.
(iv) Arrear wages to employees for earlier years after entering into agreement with Labour Union.
(v) Painting expenditure for company’s registered office building.
(vi) Liquidated damages received from supplier for delay in supply of machinery. (2019 Dec, 6 marks)
Answer:
(i) Compensation paid to Customer for defects in goods supplied It is a revenue expenditure because it is in the normal course of business.
(ii) Outright purchase of patent by paying ₹ 25 lakhs. Patent is a intangible assets for the company, it is capital expenditure
(iii) Construction of building on land on lease basis It is a Capital expenditure
(iv) Arrears wages to employee for earlier years, after entering into agreement with Labour Union, it is a revenue expenditure, because arrear, wages is also part of employee salary which is allowable expenditure.
(v) Painting expenditure for Company’s Registered office building, it is a revenue expenditure.
(vi) Liquidated damages received from supplier for delay in supply of machinery, it is a capital receipt because it is related to fixed assets and it is not a recurring nature of transaction.