CMA Inter

Return and PAN – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Return and PAN – CMA Inter Direct Tax Study Material

Short Notes

Question 1.
Revised return of income: Meaning and interplay of Section 139(5). (June 2017, 5 marks)
Answer:
Revised Return: Section 139 (5)
Law effective from Assessment year 2021 -22 [Finance Act, 2021]:
If any person having furnished a return under section 139(1) or under section 139(4), discovers any omission or wrong statement therein, then he may furnish a revised return up to 31st December of the relevant Assessment year or before the completion of assessment, whichever is earlier.

Law up to Assessment Year 2016-17:
Upto Assessment Year 2016-17, the return filed under section 139(4) could not have been revised under section 139(5).
As per Finance Act, 2016 w.e.f. Assessment Year 2017-18, the return filed under section 139(4) can be revised under section 139(5).

Notes:

1. The revised return substitutes the original return from the date the original return was filed. Once a revised return is filed, the original return is deemed to have been withdrawn and the revised return is deemed to have been filed on the date the original return was filed.
2. As assessee can revise a return any number of times provided that the revised return is filed within the time prescribed under section 139(5).

Question 2.
Write short notes on the following:
Who must sign the return of income in the following cases:
(i) Hindu undivided family when karta is bedridden.
(ii) Local authority.
(iii) Political party.
(iv) Limited Liability Partnership.
(v) Association of persons (Dec 2017, 5 marks)
(c) Revised return. (Dec 2017, 5 marks)
Answer:
(b)
(i) If the karta is absent from India or is mentally incapacitated, then by any adult member of the family.
(ii) In case of a Local Authority, by the Principal Officer thereof.
(iii) In case of Political Party, by the Chief Executive Officer of the Party.
(iv) In case of a Limited Liability Partnership:

• By the Designated partner thereof, or
• Where there is no designated partner as such, or where for any unavoidable reason such designated partner is not able to verify the return, by any partner thereof.

(v) In case of Association of Person by, any member or the Principal Officer thereof.

(c) Revised Return: Law Effective from Assessment year 2021-22 [Finance Act, 2021]
If any person having furnished a return under section 139(1) or under section 139 (4), discovers any omission or wrong statement therein, then he may furnish a revised return at any time up to 31 December of the relevant Assessment year or before the completion of the assessment, whichever is earlier.

Last Date for Filing of Belated or Revised Returns of Income Reduced by Three Months:
Currently, belated and revised ITRs can be fed voluntarily after the normal deadline, up to March 31st of the assessment year.
From FY 2021-22 onwards, belated returns are to be filed three months before the end of the relevant assessment year (up to December 31) or before the completion of the assessment, whichever is earlier.

Question 3.
Write short notes on the following:
(a) Fee for delay in furnishing the return of income;
(d) Adjustments during the course of processing of return of income u/s 139(1). (June 2018, 5 marks each)
Answer:
(a) Fee for Default in Furnishing Return of Income (Introduced by Finance Act, 2021)
1. Without prejudice to the provisions of this Act, where a person required to furnish a return of income under section 139 fails to do so within the time prescribed in sub-section (1) of the said Section, he shall pay, by way of fee, a sum of:
(a) ₹ 5,000, if the return is furnished after the due date of the assessment year; provided that if the total income of the person does not exceed ₹ 5 lakhs, the fee payable under this section shall not exceed ₹ 1,000.

2. The provision of this section shall apply in respect of return of income required to be furnished for the assessment year 2021-22 and future Assessment years.

(d) Scheme of processing of Returns:
(1) Where a return has been made under section 139, or response to a notice under section 142(1), such return shall be processed in the following manner, namely:
(a) the total income or loss shall be computed after making the following adjustments namely:

• any arithmetical error in the return; or
• an incorrect claims, if such incorrect claim is apparent from any information in the return;
• disallowance of loss claimed, if return of the previous year for which set off of loss is claimed was furnished beyond due date specified, under section 139(1);
• disallowance of expenditure or increase in income indicated in the audit report but not taken into account in computing the total income in the return;
• disallowance of deduction claimed [Under Section 10AA or under any of provisions of Chapter VI-A under the heading “C-Deductions in respect of certain incomes” if] the return is furnished beyond the due date specified under section – 139(1).
• addition of income appearing in Form 26AS or Form 16A or Form 16 which has not been included in computing the total income in the return;

Provided further that the response received from the assessee, if any, shall be considered before making any adjustment, and in a case where no response is received within thirty days of the issue of such intimation, such adjustments shall be made.

(b) the tax and interest and fee under section 234F, if any shall be computed on the basis of the total income computed under clause (a);

(c) the sum payable by, or the amount of refund due to, the assessee shall be determined after adjustment of the tax and
interest and fee under section 234F, if any, computed under clause (b) by any tax deducted at source, any tax collected at
source, any advance tax paid any relief allowable under section 89/90/90/91, any tax paid on self-assessment, and any amount paid otherwise by way of tax or interest and fee under section 234F;

(d) an intimation shall be prepared or generated and sent to the assessee specifying the sum determined to be payable by, or the amount of refund due to, the assessee under clause (c); and

(e) the amount of refund due to the assessee in pursuance of the determination under clause (c) shall be granted to the assessee. With effect from 1.4.2020 (A.Y. 2020-21): Enlarging the Tax Base:
To enhance the scope of this provision a proviso inserted in the subsection (1) so as to provide for furnishing of return by a person referred to in clause (b) of the sub-section (1), who is not required to furnish a return under the said sub-section, if such person during the previous year:

• has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current account
  maintained with a banking company or a cooperative bank; or
• has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or
• has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or
• fulfills such other conditions as may be prescribed. 6th proviso of the said sub-section amended so as to provide for the furnishing of return by a person who is claiming rollover benefit of capital gains, for investment in a house or a bond or any other asset under sections 54,54B, 54D, 54EC, 54F, 54G, 54GA and 54GB.

Question 4.
Write short notes on the following:
(a) Verification of return of income in the case of an individual, HUF, and political party (Dec 2018, 5 marks)
(b) Any five transactions where quoting PAN is mandatory (Dec 2018, 5 marks)
Answer:
(a) Verification of Return of income in the case of:
Individual:
By the individual himself, in case he ¡s absent from India, by the individual himself or by some person duly authorised by him in this behalf.

HUF:
By the Karta and where the Karta ¡s absent from India or is mentally incapacitated from attending to his affair, by any other adult member of such family

Political Party:
By the chief executive officer of such party.

(b) Following are the five transactions where quoting PAN Is mandatory:

1. Cash exceeding ₹ 50,000 during any one day
2. Opening a Bank A/c with bank
3. Making application for issue of a credit or debit card
4. Sale or purchase of goods or service of any nature other than those specified above for an amount exceeding ₹ 2 lakh/transaction
5. A contract for sale or purchase of security (other than share) for amount exceeding ₹ 1 lakh/transaction.

Question 5.
Write short note on the following:
Verification of return of income for company assessee under section 140. (June 2019, 5 marks)
Answer:
Verification of ROI for corporate assessee:

In general	Managing Director
If due to any reason, it is not possible for MD to verify or where there is no MD	Any director
Where an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under Insolvency and Bankruptcy Code, 2016	Insolvency professional appointed by such Adjudicating Authority
Non-resident company	A person holding a valid power of attorney. Copy of such power of attorney must be attached with the return.
Company in the process of winding up Where the management of the company has been taken over by the Central or State Government.	Liquidator of the company Principal officer

Question 6.
Write short notes on the following:
Belated return under section 139(4)
Quoting of Aadhar number under section 139AA (Dec 2019, 5 marks each)
Answer:
Belated Return under Section 139 (4)
If Assessee fails to file return within due date then he can file belated return within following time limit
(a) 31st December of the Relevant Assessment year
or
(b) Before Completion of Assessment whichever is earlier.

Belated return filed u/s 139 (4) can be revised u/s 139(5) w.e.f A.Y. 2017-18
Last Date for Filing of Belated or Revised Returns of income Reduced by Three Months:
Currently, belated and revised lTRs can be filed voluntarily after the normal deadline, up to March 31 of the assessment year.
From FY 2021-22 onwards, belated return are to be filed three months before the end of the relevant assessment year (up to
December 31) or before the completion of the assessment, whichever is earlier.

(c) Quoting of Aadhaar number under Section 139 AA
Every person who is eligible to obtain Aadhaar number shall on or after the 15th July 2017, quote Aadhaar number:

• In the application form for allotment of permanent account Number.
• In the return of income if Aadhaar Number not available then that person should quote application – ID of Aadhaar.

As per Central Govt. Notification, provision of Section 139 AA not apply to an individual who does not possess the Aadhaar Number is:

• Resident in the states of J&K, Meghalaya and Assam;
• A non-resident as per Income Tax Act;
• Of the age of 80 years or more at any time during the P.Y;
• Not a Citizen of India.

Descriptive Question

Question 7.
State ten instances/transactions where Permanent Account Number (PAN) has to be compulsorily quoted. (Dec 2012, 5 marks)
Answer:
The following are the transactions for which quoting of PAN is mandatory.
1. Amount exceeding ₹ 10 lakh or valued by stamp valuation authority referred to in section 50C at an amount exceeding ₹ 10 lahks;

2. Sale or purchase of a motor vehicle or vehicle, which requires registration by a registering authority;
Note: The sale or purchase of a motor vehicle or vehicle does not include two-wheeled vehicles, inclusive of any detachable side car having an extra wheel attached to the motor vehicle.

3. A time deposit, exceeding ₹ 50,000 (fifty thousand rupees), with a bank;

4. A time deposit with post office, exceeding ₹ 50,000 (fifty thousand rupees) or aggregating to more than 5 Lakh during the financial year;

5. A contract of a value exceeding ₹ 1,00,000 (one Lakh rupees) for sale or purchase of securities;

6. Opening an account (other than basic saving A/c or time deposit not exceeding ₹ 50,000/-) with a banking company;

7. Payment to hotels and restaurants against their bills for an amount exceeding ₹ 50,000 (Fifty thousand rupees) at any one time;

8. Payment in cash for purchase of bank drafts or pay orders or banker’s cheques from a bank for an amount aggregating ₹ 50,000 (fifty thousand rupees) or more during any one day;

9. Deposit in cash aggregating ₹ 50,000 (fifty thousand rupees) or more, with a bank during any one day;

10. Payment in cash in connection with travel to any foreign country of an amount exceeding ₹ 50,000 (Fifty thousand rupees) at any one time.

Note:

• “payment in cash in connection with travel” includes payment in cash towards fare, or to a travel agent or for the purchase of foreign currency;
• “travel to any foreign country” does not include travel to the neighboring countries or to such places of pilgrimage

11. Making an application to any bank orto any other company or institution, for issue of a credit or debit card;

12. Payment of an amount of ₹ 50,000 (fifty thousand rupees) or more to a mutual fund for purchase of its units;

13. Payment of an amount of ₹ 50,000 (fifty thousand rupees) or more to a company for acquiring shares issued by it;

14. Payment of an amount of ₹ 50,000 (fifty thousand rupees) or more to a company or an Institution for acquiring debentures, or bonds issued by it;

15. Payment of an amount of ₹ 50,000 (fifty thousand rupees) or more to the Reserve Bank of India (RBI), for acquiring bonds issued by it;

16. payment of an amount aggregating ₹ 50,000 (fifty thousand rupees) or more in a year as life insurance premium to an insurer;
17. Sale or purchase, by any person, of goods or services of any nature any amount exceeding ₹ 2,00,000.

18. A time deposit with a Nidhi referred in section 406 of the Companies Act 2013, exceeding ₹ 50,000 (Fifty thousand rupees) or aggregating to more than ₹ 5 Lakh during the financial year.

19. A time deposit With a NBFC which holds a certificate of registration under section 45-IA of the RBI Act, 1934 to hold or accept deposit from public, exceeding ₹ 50,000 (Fifty thousand rupees) or aggregating to more than ₹ 5 Lakh during the financial year.

Question 8.
What are the consequences if a person fails to comply with the provisions of Section 139A of the Income Tax Act, 1961?
(June 2013, 2 marks)
Answer:
As per Sec. 272 B (2) if a person fails to comply with the provisions of Sec. 139A, the assessing officer may direct such person to pay by way of penalty a sum of ₹ 10,000/-

Question 9.
Answer the following question with brief reasons/working:
Every return of income filed by the assessee cannot be revised is the statement correct? (June 2016, 1 mark)
Answer:
Effective from: AY. 2021 -22
If any person, having furnished a return under section 139(1) or belated return under section 139(4), discovers any omission or any wrong statement therein he may furnish a revised return at any time up to 31st December of the relevant assessment year or before the completion of the assessment whichever is earlier.

Therefore Answer Should be True:
Return furnished in pursuance of a notice issued under section 142(1) cannot be revised.

Question 10.
Track the importance of furnishing the Return of Loss with special reference to the provisions of section 80 read with section 139(3). (Dec 2021, 4 marks)
Answer:
Importance of Return of income as per section 139(3)
1. ROI is required to be furnished if a person wants to carry forward his losses.
2. If any person has sustained any loss in PY & he wants to carry forward following losses:

• Normal business loss u/s 72(1);
• Speculation business loss u/s 73(2);
• Loss from specified business u/s 73A(2);
• Loss u/h “Capital Gains” u/s 74(1);
• Loss from the activity of owning & maintaining race horses u/s 74A(3); he shall mandatorily furnish a ROL within the time prescribed u/s 139(1) to carry forward loss.

3. Section 139(3) nw sec. 80 require the assessee to file ROL in same manner as that of ROI within the time a’owed u/s 139(1) & all the provisions of this Act shall apply to ROL as if it is a ROI u/s 139(1).
Note: It is not mandatory to file ROI (Except in case of Company/Firm) as there is No Income.

Practical Questions

Question 11.
Powell Ltd. filed its return of loss beyond the ‘due date’ prescribed in Section 139(1) read with Section 80 of the Act. It has business loss of ₹ 20,50,000. It approaches you for advice regarding the course of action to be taken to secure the benefit of carry forward of business loss for set off against future profits. Advise suitably. (June 2014, 3 marks)
Answer:
Generally, return filed beyond the due date specified in Section 139 (1) would deprive the taxpayer the benefit of carry forward of business loss. However, in extraordinary circumstances, the CBDT has the powers to condone the delay in filing return having carry forward of business loss to the future years.

[Associated Electro Ceramics vs. CBDT 201 ITR 501 (Kar)].
As per Circular No. 8 of 2001 monetary limits have been prescribed for condonation of delay in filling loss returns. In cases where the refund is less than ₹ 10,000, the Assessing Officer can condone the delay with the approval of CIT. for refunds from ₹ 10,001 to ₹ 1,00,000 the Assessing Officer can condone the delay with the approval of CCIT/DGIT. Where the refund
claim exceeds ₹ 100,000 only the CBDT has the power to condone the delay.

Therefore, the loss return of Powell Ltd. could be condoned by CBDT. However, Powell Ltd. has to file a condonation petition to the CBDT to carry forward the business loss.

Question 12.
Mr. A (non-resident) aged 66 has total income (computed) ₹ 2,60,000 comprising income from house property and income
from other sources. Is he required to file his return of income for the assessment year 2023-24? Also compute the total amount of tax payable by him. (Dec 2014, 3 marks)
Answer:
Mr. A is a senior citizen but non-resident. The basic exemption limit applicable to him is ₹ 2,50,000. As the total income exceeded the basic exemption limit, he is liable to file his return of income.

He is not eligible for rebate under section 87A because it is applicable to resident assessee (ordinary or not ordinary) only.

Question 13.
You are requested to state whether the following will attract penalty provisions for the financial year 2022-23.
(i) Mr. Jayant whose turnover was ₹ 150 lakhs for the financial year 2021- 22 admitted income as per books of account as ₹ 6,50,000. The return was filed without getting the books of account audited under section 44AB.
(ii) Mr. Maheswari received ₹ 5 lakhs by cash on 01.10.2022 for sale of an a partment at Thane to Mr. Mahesh. As the agreement between the parties got cancelled, Mr. Maheswari refunded the advance by account payee cheque on 01.02.2023. (Dec 2017, 4×2 = 8 marks)
Answer:
(i) Yes, u/s 271 B failure to get accounts audited or furnish a report of audit as required under section 44 AB:
½% of Total sales, turnover, or gross receipts, etc, or ₹ 1,50,000 whichever is less. In the present case, Total penalty will be ₹ 75,000.

(ii) Yes, u/s 271D – Taking or accepting certain Loans and deposits or specified sum in contravention of the provisions of Section 269SS:
Amount equal to loan or deposit or specified sum is taken or accepted. In the present case, Maximum penalty u/s 271 D will be ₹ 5,00,000.

Question 14.
State with one line reason, the due date for tiling the return of income in the throwing cases:
(i) Mr. Solkar, engaged in trade, has total turnover of ₹ 220 lakhs for the year ended 31.03.2023.
(ii) Krish Srikanth, an advocate, has aggregate professional receipts of ₹ 12,40,000 opting to admit income under section 44ADA.
(iii) Mr. Abid Ah, having 5 heavy goods transport vehicles which are run on hire, opting to admit income under section 44AE.
(iv) M/s Jayantilal & Mankaci, a firm engaged in hotel business with annual turnover of ₹ 130 lakhs preferring to offer income based on applicable presumptive provisions.
(v) Vaman Kumar Charitable Trust having total income of ₹ 12 lakhs. (before giving effect to the provisions of Section 11 and 12, and before seeking accumulation of income for application in the future years.) (June 2018, 6 marks)
Answer:
Every person:
(a) being a company or a firm, or
(b) being a person other then a company or a firm, if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to tax.

All those taxpayers, who have opted for the presumptive income scheme as per Section 44AD, Section 44ADA, and Section 44AE of the Income-Tax Act bile his return before;

• A person (other than a company) where accounts are required to be audited under the Income-tax Act or under any other low; The due date for filing the return is 31st October of the assessment year.
• Mr. Krish Sri Kanth, an advocate, who opting presumptive income scheme u/s 44ADA shall file before 31 October, if Audit are applicable and 31st July if Audit are not applicable.
• Mr. Abid All, having goods transport vehicles opting presumptive income scheme u/s 44AE shall file before 31 St October, if Audit are applicable and 31st July if Audit are not applicable.
• M/s Jayantilal and Mankad, a partnership firm engaged in hotel business with annual turnover of 130 lakhs, opting presumptive income scheme U/S 44AD shall file before 31st October if Audit are applicable and 31st July if Audit are not applicable.
• Vaman Kumar Charitable Trust having total income of ₹ 12 Lakhs. (Before giving effect to the provision of sections 11 and 12) shall file return of income u/s 139(4A) before 31st October of the assessment year.

Advance Tax – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Advance Tax – CMA Inter Direct Tax Study Material

Short Notes

Question 1.
Write short note on the following:
Advance tax for senior citizens being resident/non-resident. (Dec 2017, 5 marks)
Answer:
Advance Tax ¡s not payable by:
An individual, Resident India, who does not have any Income chargeable under the head “Profits and Gains of Business or profession” and is of the age of 60 years or more at any time during the previous year. Advance tax is payable by senior citizen being non-resident.

Descriptive Question

Question 2.
Enumerate the conditions for exemptions of senior citizens from payment of advance tax u/s 207. (June 2013, 4 marks)
Answer:
Every assessee is required to pay Advance Tax if the tax liability for the previous year is ₹ 10,000/- or more. From the financial year 2017-18. Section 207 has been amended to provide that Advance Tax need not be payable in the case of senior citizens if the following conditions are satisfied.

Question 3.
Answer the following question with brief reason/working:
Is a company liable to pay advance tax when it is required to pay tax on “book profit” under section 115JB? (Dec 2015, 2 marks)
Answer:
There is specific provision in Section 115JB(5) providing that all other provisions of the Income-tax Act shall apply to every assessee, being a company mentioned in that section. Section 115JB is a self-contained code pertaining to MAT and by virtue of sub-section (5) thereof, the liability for payment of advance tax would be attracted.

Question 4.
Answer the following questions in the context of the provisions relating to advance tax:
(i) Who is not liable to pay advance tax, in case of individual assesses?
(ii) State the due dates of instalment for payment of advance tax and the amount of instalment for such assessees who are not covered under the provisions of Section 44AD. (June 2017, 6 marks)
Answer:
(i) Advance Tax Is not payable by:

• An Individual
• Resident in India
• Who does not have any income chargeable under the head “Profits and Gains of Business or Profession” And is of the age of 60 years or more-at any time during the previous year.

(ii) Advance Tax is payable in the following Installments:
In case of all Assessees except those who are covered under section 44AD

Due date of Instalment	Amount Payable (₹)
On or before 15th June	Not less than 15% of the advance tax liability.
On or before 15th September	Not less than 45% of the advance tax liability as reduced by the amount, if any, paid in earlier instalment.
On or before 15th December	Not less than 75% of the advance tax liability as reduced by the amount, if any, paid in earlier instalment.
On or before 15th March	The whole of the advance tax liability as reduced by the amount, if any, paid in the earlier instalments.

Question 5.
State the due dates for payments of advance tax, along with the quantum of amount payable in each instalment. Present your answer in the fomi of a table. (Dec 2018, 7 marks)
Answer:
Advance tax is payable in the following installment:
In case of all assessee except those who are covered under Section 44 AD or 44 DA

Due date of Installment	Amount Payable
On or before 15th June	Not less than 15% of the advance tax liability
On or before 15th September	Not less than 45% of the advance tax liabilities as reduced by the amount it any paid in earlier installment
On or before 15th December	Not less than 75% of the advance tax liability as reduced by the amount, if any paid in earlier installment
On or before 15th March	The whole amount of the advance tax liability as reduced by the amount, it any paid in earlier installment

In case of Eligible Assessee in respect of an eligible business referred to in Section 44AD or eligible profession referred to ¡n Section 44ADA. On or before 15th March – The whole amount of the advance tax liability.

Question 6.
What are the conditions to be satisfied for issuing notice of demand u/s 156 requiring the assessee to pay advance tax and when can it be passed by the Assessing Officer? (Dec 2021, 4 marks)
Answer:
Conditions for seeking advance tax from tax payer by the AO
The. A.O. may pass an order and issue a notice of demand u/s 156 requiring the assessee to pay advance tax.

Conditions to be satisfied for issuing such order

• The assessee has already been assessed by way of a regular assessment in any previous year.
• The Assessing Officer is of opinion that such person ¡s liable to pay advance tax.
• Such order can be passed at any time during the financial year but not after last day of February.
• Such order must be made in writing.
• Such order also specifies the amount of advance tax and the installments thereof to be paid by the assessee.

Note: Such order can be issued even if assessee has paid any installment of advance tax during the year, which is, in the opinion of the Assessing Officer, not as per the provision of sec. 211.

Practical Questions

Question 7.
Vijay, a resident individual aged 59, is running a wholesale business in fertilisers, whose turnover for the year ended 31.03:2023 is ₹ 70 lacs. Is he liable to pay advance tax, if he maintains books of accounts and gets his accounts audited under section 44AB of the Income-tax Act, 1961 (business income is ₹ 5.2 lacs)? Will your answer be different if he opts for presumptive taxation? He has no other income. (June 2015, 3 marks)
Answer:
Liability to pay advance tax:
Where the assessed tax payable by an individual who is not a senior citizen, exceeds ₹ 10,000, he is liable to pay advance tax.
In the first situation, since the tax payable on total income exceeds ₹ 10,000 he is liable to pay advance tax. Where he opts for presumptive tax, the obligation to pay advance tax will not arise at all.

Question 8.
Compute the amounts of. advance tax installments, payable in the financial year 2022-23 in respect of the following cases:
(i) A domestic company with tax liability of ₹ 3,90,000.
(ii) A super senior citizen (age above 80) having pension income of ₹ 3 lakhs and property income (computed) ₹ 5 lakhs. (Dec 2016, 4 marks)
Answer:
(i) Calculation of Installment of Advance Tax for a domestic company with Tax Liability of ₹ 3,90,000
15% of Tax Liability upto 15th June ₹ 58,500
45% of Tax liability upto 15th September ₹ 1,17,000(1,75,500 – 58,500)
75% of Tax Liability upto 15th December ₹ 1,17,000(29,25,00 – 1,75,500)
100% of Tax Liability upto 15th March ₹ 97,500. (3,90,000 — 2,92,500)

(ii) A super senior citizen (age above 80) having pension income of ₹ 3 lakhs and property income (computed) ₹ 5 lakhs. In the case of senior citizens and super senior citizens as per section 207(2) no advance tax is payable where they do not have income chargeable under the head ‘profits and gains of business or profession’.
Thus advance tax liability = ‘NIL’.

Question 9.
Mr. Madavan (aged 35 years), a resident individual, is a dealer of garments. During the previous year 2022-23, total turnover of his business was ₹ 135 lakhs (out of which ₹ 22.5 lakhs were received by way of account payee cheques and balance in cash). Mr. Madavan does not opt to pay tax as per the provisions-of section 115BAC. What would be your advice to Mr. Madavan relating to the provisions of advance tax with its due date, along with the amount payable, assuming that he wishes to make maximum tax savings without getting his books of account audited. (Dec 2021, 5 marks)
Answer:
Computation of advance tax of Mr.Madavan under Presumptive Income scheme as per section 44AD. The total turnover of Mr. Madavan, a dealer of garments, is ₹ 135 lakhs. Since his total turnover from such business is less than ₹ 200 lakhs and he does not wish to get his books of account audited, he can opt for presumptive tax scheme under section 44AD.

Profits and gains from business under section 44AD = ₹ 10,35,000
An eligible assessee opting for computation of profits and gains of business on presumptivR basis under section 44AD in respect of eligible business is required to pay advance tax of the whole amount on or before 15th March of the financial year.
Tax liability of Mr. Madavan as per normal provisions of Income-tax Act, 1961 = ₹ 1,27,920

Accordingly, he is required to pay advance tax of ₹ 1,27,920 on or before 15th March of the financial year. However, any amount by way of advance tax on or before 31st March of the financial year shall also be treated as advance tax paid during the financial year ending on that day for all the purposes of the Act.

Assessment of Various Persons – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Assessment of Various Persons – CMA Inter Direct Tax Study Material

Practical Questions

Question 1.
ABC LLP furnishes you the following details pertaining to the financial year 2022-23:

	₹
Net Profit as per Profit and Loss Account	90,00,000
Depreciation debited in the Profit and Loss Account	7,00,000
Depreciation allowable under Section 32	9,00,000
inadmissible/disallowable expenses	5,00,000
Deduction under Section 10 AA (computed)	12,00,000
Deduction under Section 80 IA (computed)	60,00,000

Compute total income, adjusted total income under Section 11 5JC and tax liability of ABC LLP for the assessment year 2023-24. (June 2014, 6 marks)
Answer:

Question 2.
(a) The Profit & Loss Account of M/s. Saxena & Chaturvedi, Cost Accountants, shows a net profit of ₹ 25,50,000 after debiting/crediting the following items:
(i) Interest of ₹ 1,40,000 on capital of Mr. Saxena, partner calculated at 14% per annum.
(ii) Remuneration ₹ 35,00,000 to Mr. Saxena and Mr. Chaturvedi, who are working partners.
(iii) Salary of ₹ 40,000 to Mr. Chatterjee, Manager for February, 2023 was paid by bearer cheque on 1st March, 2023.
(iv) Depreciation ₹ 1,20,000.
(v) Professional fee of ₹ 45,000 was paid to a lawyer for obtaining a legal opinion. No tax was deducted at source.
(vi) A sum of ₹ 30,000 was paid to a trainee as a special award for ranking first in Final Examination of the Institute of Cost Accountants of India.
(vii) Refund of penalty ₹ 35,000 paid in the financial year 2020-21 relating to delayed payment of Goods & Service tax, after decision of the appellate authority in favour of the assessee.
(viii) Interest on fixed deposit ₹ 5,00,000.
The firm is entitled to depreciation of ₹ 1,45,000 under Section 32. Compute total income of the firm for the assessment year 2023-24. (Dec 2014, 9 marks)
Answer:

Notes:
1. Penalty for infractions of law is never allowed as deduction under section 37(1). Therefore, penalty for delayed payment of GST was disallowed in financial year 2020-21. As penalty was disallowed, refund of such penalty as a result of favourable appeal order does not attract deeming provision of Section 41(1). Hence, it is not taxable.

2. Special award was given to trainee for excelling in final examination of the institute to motivate him and in recognition of his caliber. Payment was made to boost his morale so that he could contribute more to the assessee firm. Thus, it has a nexus with the profession carried on by the firm and hence, the same is allowable is deduction under section 3 7(1). As it is debited to profit & loss account, no further adjustment is required.

Question 3.
Mohit Sharma gives you the following information for the year ended 31.03.2023:
Owns 3 goods carriages throughout the financial year 2022-23
Retail trade turnover ₹ 36,00,000
Has eligible brought forward depreciation of the assessment year 2020-21 ₹ 60,000 relating to retail trade.
Deposited ₹ 80,000 in PPF account and ₹ 90,000 in tax saver deposit. Assume that he wants to offer income by opting for Sections 44AD and 44AE. Compute his total income for the assessment year 2023-24 (June 2015, 5 marks)
Answer:
Computation of total income of Mr. Mohit Sharma for the Assessment Year 2023-24

Note:
Amendment to [Section-44AE]
Section 44AE(2) has been substituted (with effect from the assessment year 2019-20) so as to provide that for a heavy goods vehicle, the profits and gains shall be an amount equal to ₹ 1,000 per ton of gross vehicle weight (or unladen weight) for every month (or part of a month) during which the heavy goods vehicle s owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

In the case of a goods carriage other than heavy vehicle, the profits an gains shall be an amount equal to ₹ 7,500 for every month (or part of a month) during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher. For this purpose, “heavy goods vehicle” means any goods carriage the gross vehicle weight of which exceeds 12,000 kilograms.

Question 4.
Mr. Shiva (age 62) having 4 heavy goods vehicles and 3 non-heavy goods vehicles wants to show the income chargeable to tax on presumptive basis. During the year 2022-23, he received interest on enhanced compensation of ₹ 5 lakhs relating to compulsory acquisition of land (made in the year 1991). He borrowed ₹ 3 lakhs for renovation of a let-out property from which he earned rental income of ₹ 10,000 per month. Interest on borrowed for house renovation for the year is ₹ 30,000. Compute his total income and income tax liability for the assessment year 2023-24. (Dec 2015, 5 marks)
Answer:

Working Notes:
1. Income from business:
Income = 7 truck 4 heavy & 3 Non heavy goods vehicles
= (3 × 7,500 × 12) + (4 × 12,000 × 12)
= 8,46,000

Note: Amendment to (Section-44AE1
Section 44AE (2) has been substituted (with effect from the assessment year 201 9-20) so as to provide that for a heavy goods vehicle, the profits and gains shall be an amount equal to ₹ 1,000 per ton of gross vehicle weight (or unladen weight) for every month (or part of a month) during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

In the case of a goods carriage other than heavy vehicle, the profits and gains shall be an amount equal to 7.500 for every month (or part of a month) during which the carriage of the goods is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher. For this purpose, heavy goods vehicle” means any goods carriage the gross vehicle weight of which exceeds 12,000 kilograms.

Question 5.
Mr. Suresh Raina sold a residential building for ₹ 75,00,000 on 1st July, 2022. It was acquired for ₹ 22,04,000 on 1st June,
2013. The stamp duty valuation of the property at the time of acquisition was ₹ 25,00,000 and at the time of transfer was ₹ 85,00,000. He paid brokerage at 1 % at the time of transfer. He deposited ₹ 40,00,000 in bonds of Rural Electrification Corporation Ltd. In March, 2023 and deployed the balance in a business commenced by him. He has business loss of ₹ 5,00,000 for the year ended 31st March, 2023. Compute total income of Mr. Suresh Raina and advise by what date he must file his return of income. Cost inflation index – F. Y. 201 3-1 4: 220; F. Y. 2022-23: 331 (Dec 2015, 5 marks)
Answer:

As per Sec. 56 (2)(x) the difference of stamp duty valuation and cost of acquisition is more than ₹ 50,000 (positive) the excess of stamp duty valuation over such cost of acquisition shall be taxed under head “income from other sources”.

Question 6.
From the following particulars compute total income of Mr. Chatterjee for the assessment year 2023 – 24:
(i) Basic salary ₹ 50,000 per month.
(ii) Bonus for the year 2021-22 received in October 2020 ₹ 30,000.
(iii) Commission for the year 2022-23 but not received till 31.03.2023 ₹ 70,000.
(iv) Reimbursement of medical expenses on production of bills ₹ 20,000.
(y) Education allowance for 2 children paid by the employer ₹ 24,000.
(vi) Maid servant’s salary reimbursed by the employer ₹ 30000.
(vii) Income from cultivation and manufacture of rubber in the rubber estate owned in Kerala ₹ 1,00,000.
(viii) Tax on non-monetary perquisites paid by the employer ₹ 35,000. (June 2016, 9 marks)
Answer:

Question 7.
Mr. Anjan, an individual, aged 40 years having gross total income of ₹ 5,00,000 (including long-term capital gain from sale of land amounting to ₹ 3,90,000) during previous year 2022-23. He is entitled to get deduction under Chapter Vi-A for ₹ 1,79,000 consisting of deductions permissible under sections 80C, 80D and 80DD for ₹ 95,000, ₹ 4,000 and ₹ 80,000 respectively. Compute income tax payable by Mr. Anjan for assessment year 2023-24. (June 2016, 5 marks)
Answer:
Computation of income tax payable by Mr. Anjan for assessment year 2023-24

Particulars	₹
Gross Total Income	5,00,000
Less: Deduction under chapter VI-A Eligible deduction	₹ 1,79,000
Deduction under chapter VI-A cannot be claimed from long-term capital gain. Hence deduction is restricted to other income i.e. ₹ 5,00,000 – ₹ 3,90,000= ₹ 1,10,000	1,10,000
Total Income (representative long-term capital gain only)	3,90,000
Tax on other income	Nil
On long-term capital gain @ 20% of (₹ 3,90,000 – ₹ 2,50,000)	28,000
Less: Rebate under section 87A	12,500
	15,500
Add: Health and Education Cess @ 4%	620
Total Tax Liability	16,120.

Question 8.
Mr. Manoj gives you the following particulars of his income for the year ended 31st March, 2023:

Particulars	₹
1. interest on loan given to a friend (non-relative)	80,000
2. Interest on public provident fund	21,500
3. Winning from crossword puzzle (net)	70,000
4. Directors fee from a company	25,000
5. Royalty on a book written by him	1,50,000
6. Expenses for typing the manuscript of the book	15,000
7. Cash gift from father-in-law	2,00,000

Compute the income of Mr. Manoj for the assessment year 2023-24. (June 2016, 8 marks)
Answer:
Computation of Total Income of Mr. Manoj for the Assessment year 2023-24

Particulars	₹	₹
Income from Other sources:
Interest on loan		80,000
Interest on public provident fund	21,500
Less: Exemption U/s.10(15)	21,500
		Nil
Winning from crossword puzzle ₹ 70,000 x 100/70		1,00,000
Directors fee from a company		25,000
Royalty on book	1,50,000
Less: Expenses allowable U/s. 57	15,000
		1,35,000
Cash gift father-in-law – relative hence not taxable		Nil
Total Income		3,40,000

Question 9.
Determine the total income of Mr. Raman from the following details for the Assessment Year 2023-24:

Particulars	₹ In lakhs
Loss from house property	3.20
Income from salary	2.20
Income from non-speculation business	1.60
Loss from speculation business	5.40
Long-tern capital gain from sale of land	2.40
Long-term capital gain from sale of listed shares in recognised stock exchange	1.80
Short-term capital loss from sale of listed shares in recognised stock exchange	2.80
Family pension received	2.20
Lottery winnings (net of TDS)	2.10
Lottery tickets purchased	0.30

Show clearly the items to be carried forward and those which cannot be carried forward. (Dec 2016, 6 marks)
Answer:

Losses to be carried forward

1. Loss from Speculation Business 5,40,000
2. ST CL on Sale of Listed Securities 40,000
3. Loss from house property 1,20,000

Note: As per section 112A, Long-term capital gain on sale of listed equity shares, in excess of ₹ 1 lakh taxable @ 10%.

Question 10.
Rao and Jam is a partnership firm, consisting of 5 partners, with turnover of ₹ 1,20,00,000 for the year ended 31.03.2023. The
partnership deed provides for interest on capital at 14% per annum on the capital contribution of 5 lakhs each made by all the partners. All the partners are eligible for monthly working partner salary of ₹ 10,000 each. The firm provides you the following additional information:

Depreciation eligible under Income-tax Rules, 1962	₹ 2,00,000
Interest paid on unsecured loans for which no tax was deducted at source during the year or before the due date for filing return of income u/s 139(1)	₹ 5,00,000
Contract payments made during the year for which tax was deducted but remitted in financial year 2023-24 and before ‘due date’ for filing the return of income specified in Section 139(1).	₹ 4,00,000

Rent paid to a partner Mr. Jam for premises occupied by the firm ₹ 1,20,000 on which no tax was deducted at source. The reasonable rent for similar premises was determined at ₹ 1,80,000.

The Net Profit of the firm before charging interest on capital and working partner salary as per books was ₹ 8,40,000. Depreciation notionally computed and provided in the books amounts to ₹ 1,60,000. The partners of the firm want you to compute income under section 44AD and also as per regular provisions, and suggest which option would be beneficial to them. (June 2017, 9 marks)
Answer:

Note: .
Deduction of Remuneration to partners and Interest on capital to partners will not allowed from Deemed Income u/s 44AD w.e.f. AY. 2023-24.
Computation of Total Income of partnership firm Rao & Jam for the A.Y. 2023-24 (under Normal Provisions of the Income Tax Act.)

Note: It is in the interest of the firm to maintains the Books of Accounts and get done tax Audit because the Tax liability in case of computation of Total Income and tax under regular provisions of Income Tax Act is less.

Question 11.
Ms. Vidya residing in Chennai acquired a residential house for ₹ 15,25000 on 28th May, 2011. It was sold for loo Iakhs in July
2022. The stamp duty valuation on the date of sale was ₹ 110 Iakhs. She paid brokerage @2% of sale consideration and on which no tax was deducted at source.

She deposited ₹ 40 lakhs in REG Capital Gain Bonds in September, 2022 and ₹ 20 lakhs in NHAI Capital Gain bonds in February 2023. She acquired a residential property in Colombo for ₹ 50 lakhs and left for Colombo in August 2022 and occupied the said property. She returned to India in September 2022 leaving the property vacant till the date of sale.
Her other incomes include (i) ₹ 1,50,000 by way of interest on capital @ 15% from a firm at Salem; and (ii) income from rubber estates and manufacture of rubber in Kerala amounting to ₹ 3 lakhs., where rubber is grown and processed by her.

She paid ₹ 35,000 towards health insurance of her parents who are senior citizens through credit card and paid in cash ₹ 8,000 towards master health checkup for herself.
Cost Inflation Index: F.Y. 2011-12 = 184; F.Y.2022-23:331
Compute the total income of Ms. Vidya for the Assessment Year 2022-23 under proper heads of income. Ignore DTAA provisions. (June 2017, 8 marks)
Answer:

Notes:
1. DeductIon under Section 80D: Maximum upto ₹ 30,000 including preventive health checkup for self.
2. Exemption U/s 54EC: Maximum up to ₹ 50 lakhs subject to investment made within 6 months from the date of transfer of Capital Asset.

Question 12.
Mr. Chirag has given the following details relating to financial year 2022-23:
(i) Received ₹ 56,000 by way of gift from his friends on the occasion of his marriage.
(ii) Purchased a land at Kanpur for ₹ 12,50,000 for construction of a residential house from a friend. The stamp duty value of the land on the date of purchase was ₹ 15,00,000.
(iii) Interest amounting to ₹ 1,80,000 relating to earlier years, on enhanced compensation received during the year. Legal expenses incurred ₹ 25,000.
(iv) Received loan of ₹ 3,50,000 from CNK Private Limited in which Mr. Chirag holds 12% voting power. The accumulated profit in the hands of the company at the time receipt of loan was ₹ 2,90,000.
Briefly narrate the tax consequences of the aforesaid items, sharing clearly the amount to be taxed in each case. (June 2017, 9 marks)
Answer:
(i) Gift Received from friends of ₹ 56,000 on the occasion of his marriage is not taxable U/s 56(2)(vii).
(ii) Since the Difference between stamp duty value and actual purchase price is more than ₹ 50,000 i.e. (15,00,000 -12,50,000=2,50,000) is liable to tax Under the head Income from other sources U/s 56(2)(vii).
(iii) Interest on enhanced compensation received ₹ 1,80,000 is taxable under the head Income from other sources under section 56(2)(vill) and 50% of such interest is eligible for deduction u/s 57Qv).
(iv) Loan Received by Mr. Chirag from CNK Private Limited will be treated as dividend U/s 2(22)(e) upto the amount of Accumulated profit in the hands of the company on the date of loan given by the company if Mr. Chirag holds 10% or more voting power in the company. In the given case Amount of ₹ 2,90,000 out of ₹ 3,50,000 will be treated as dividend U/s 2(2)(e).

Question 13.
Mr. Sen G. Gupta (aged 65 years) is a retired person drawing a monthly pension of ₹ 6,000. His taxable long-term capital gain
from sale of paintings during the previous year 2022-23 is ₹ 2,75,000. He has no other income during the year. Compute his tax liability for Assessment Year 2023-24 (i) it he is resident and (ii) if he is non-resident. (June 2017, 8 marks)
Answer:

Note:
Where the individual assessee is non-resident, he is not entitled to deduct the excess of basic exemption limit over other income from long-term capital gain for computing tax liability (Section 112).

Question 14.
State the implications of the following transactions carried out by Kalai & Co. a partnership firm (Whose turnover always exceeded ₹ 500 lakhs) with reverence to the provisions applicable for the assessment year 2023-24:
(i) Audit fees of ₹ 35,000 paid by electronic transfer but no tax was deducted at source.
(ii) Arrear salary of 60,000 paid in cash to an employee who was posted in a ship for 10 days continuously. Tax was deducted at source on the total salary paid to the employee during the year.
(iii) Lorry freight paid by cash ₹ 30,000.
(iv) ₹ 3 lakhs freight paid to Indian Railways without deduction of tax at source.
(v) Salary paid to a son of a partner ₹ 20,000 per month. The market rate of such salary for similar qualifications is found to be ₹ 15,000 per month.
(vi) Income tax paid in cash ₹ 22,000.
(vii) Interest on term loan paid to Canara Bank ₹ 18,000 without deduction of tax at source.
(viii) interest on capital paid to partners at 15% in accordance with the condition contained in the partnership deed.
(ix) Keyman insurance policy premium paid ₹ 40,000. (Dec 2017, 9 marks)
Answer:
(i) 30% of Audit fees of ₹ 35.000. i.e. ₹ 10,500 will be disallowed.
(ii) Arrear of salary of ₹ 60,000 paid in cash will be disallowed, there is no need of adjustment.
(iii) Lorry freight paid by cash upto ₹ 35,000 allowed therefore no adjustment required.
(iv) TOS providers are not applicable to payment made in respect of Railway freight.
(v) Excess salary paid to a son of a partner disallowed i.e. ₹ 5,000 per month will be disallowed.
(vi) Income tax is a personal liability of partnership firm, not an expense. Therefore not allowed as expense.
(vii) Interest on term loan paid to Canara Bank of ₹ 18,000 is an allowed expense. There is no need of TDS.
(viii) Interest on capital paid to partners allowed at 12%, therefore 3% interest will be disallowed and added to profit.
(ix) Keyman insurance policy premium paid ₹ 40,000 is an allowed expense. There is no need of adjustment.

Question 15.
Mr. Rajiv. a resident individual, engaged in a wholesale business of health products. He is also a partner In XYZ & Co., a partnership firm. The following details are made available for the year ended 31.03.2023:

You are required to compute the total income of the Mr. Rajiv for the assessment year 2023-24 and the closing WDV of each block of assets. (Dec 2017, 9 marks)
Answer:

Question 16.
Following is the Profit and Loss Account of Mr. Abdul for the year ended 31.03.2023:

Particulars	₹	Particulars	₹
To Staff Salary	4,85,000	By Gross Profit	14,48,800
To Shop rent	1,20,000	By Post office SB A/c interest	14,200
To Admin. Expenses	2,96,000	By Dividend from listed Indian Companies	43,000
To Drawings	96,000
To Depreciation	2,22,000
To Medical Expenses	37,000	By Bank SB interest	12,000
To Net Profit	2,62,000
	15,18,000		15,18,000

Additional information:
(i) Shop rent was paid to wife of Mr. Abdul and ₹ 60,000 is found to be excessive payment considering its size and location.
(ii) Depreciation allowable under the income-tax rules works out to ₹ 1,81.000.
(iii) Medical expenses include expenditure for family members of ₹ 16,000. Balance relates to staff medical expenses.
(iv) Drawings denote personal expenses of the proprietor.
(b) During the year he acquired a residential house for ₹ 20 lakhs which included stamp duty and registration fee of ₹ 1,60,000.
You are requested to compute the total income of Mr. Abdul for the assessment year 2023-24. (Dec 2017, 7 marks)
Answer:

Note-1: There is a change in the dividend taxation regime with the abolishment of dividend distribution tax in case of dividends paid/distributed by domestic companies after 1st April 2020, hence, Section 10(34) which provided exemption from dividend received (after payment of Dividend Distribution Tax) is provided with a sunset clause i.e., the exemption would not be applicable on income received by way of dividend on or after 1st April 2020. Hence, such deemed dividend will be taxable in the hands of recipient.

Question 17.
Compute the tax liability of Sri A. Hari Chandra Prakash whose total income is
(a) 49,62,500
(b) 51,00,000
Note : (Source of income is Salary only) (June 2018, 5 marks)
Answer:

Note: In case of individual and HUF, where total income exceeds ₹ 50 lakhs but does not exceed ₹ 1 crore, the aggregate of income tax and surcharge shall be restricted to: Tax on 50 lakhs + (Total income – 50 lakhs)

Question 18.
Mr. Ashwin of Chennai sold a vacant site for ₹ 30 lakhs to Mr. Raina on 01.05.2022. The value of land for stamp duty purposes was ₹ 25 lakhs. The vacant site was acquired in April, 2006 for ₹ 3 lakhs. The fair market value of the vacant site on 01.04.2006 was ₹ 4 lakhs. The entire sale consideration plus a housing loan of ₹ 38 lakhs from a nationalized bank was availed for acquiring a residential building for ₹ 68 lakhs in Pune on 01.07.2022. The stamp duty paid for the purpose of acquisition was ₹ 2,90,000. The property was let out for a monthly rent of ₹ 10,000 from 01.07.2022. Interest on housing loan during the year till its closure amounted to ₹ 2,80,000.

Mr. Ashwin sold yet another vacant site for ₹ 28 lakhs on 21.01.2023. This vacant site was acquired in October, 2020 for ₹ 20 lakhs. He utilized the entire sale proceeds realized in January 2023 for repaying the housing loan. His other incomes are (i) Income from business (computed) ₹ 3,90,000 and (ii) Bank interest of ₹ 60,000 from term deposits and ₹ 15,000 from SB account. Compute the total income of Mr. Ashwin for the assessment year 2022-23. Cost inflation index: F.Y. 2006-07 = 122; F.Y. 2020-21 = 301; E.V. 2022-23 = 331. (June 2018, 7 marks)
Answer:

Note No 1:
a. As per Section 50C where the consideration received or accruing as a result of the transfer by an assessee of a capital assets, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the “Stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purpose of Section 48, be
deemed to be the full value of the consideration received or accruing as a result of such transfer.

b. As amended by Finance Act, 2020, that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed 110% of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purpose of section 48 be deemed to be the full value of the consideration.

And where the value adopted or assessed or assessable by the stamp valuation authority is exceed 110% of the consideration received or accruing as a result of the transfer then Stamp Duty Value shall, for the purpose of section 48. be deemed to be the full value of the consideration.

Note No: 2
According to Section 54F subject to sub-section (4), where in the case of an assessee being an individual or HUF, the capital gain arises from the transfer of any long-term capital assets, not being a residential house (hereinafter in this section referred to as the original assets) and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three year after that date constructed, one residential house in India and cost of new asset is more than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under Section 45.

With effect from Assessment Year 2020-21 corresponding to FY 2019-20, a capital gain exemption is available for purchase of two residential houses in India. However, the exemption is subject to the capital gain not exceeding ₹ 2 crore. Also, the exemption is available only once in the lifetime of the seller.

Question 19.
Mr. Kamal is employed in Rajini Mfg. Co. Ltd. Mumbai as General Manager furnishes the following information for the year ended 31.03.2023:

Particulars	Amount (₹)
Basic salary (per month)	50,000
Dearness Allowance (eligible for retirement benefits)	80% of basic salary
House Rent Allowance (per month)	10,000
Rent paid by him ₹ 15,000 per month for 6 months and ₹ 20,000 per month for balance 6 months (at Mumbai)
City Compensatory Allowance (per month)	2,500
Medical reimbursements (annual)	13,000
Gymkhana club annual membership fee reimbursed by employer	20,000
Mobile phone bill reimbursed by the employer (Used for both official and personal use)	37,500
Motor car (cubic capacity of engine 2.2 liters) owned by the employee but the maintenance expenses fully met by the employer (Motor car was used both for personal and official use)	85,800
Cash gift paid by the employer in appreciation of performance on 01.01.2023	30,000

Contribution to recognized provident fund:

You are requested compute the total income of Mr. Kamal for the assessment year 2023-24. (June 2018, 10 marks)
Answer:
Computation of total income of Mr. Kamal for the Assessment Year 2023-24

	₹
Basic Salary (50,000 x 12)	6,00,000
Dearness allowance (80% of 6,00,000)	4,80,000
House rent allowance (Note 1)	18,000
City compensatory allowance	30,000
Medical reimbursement (Annual)	13,000
Annual membership fee	20,000

Working Note: 1
House rent allowance received 1,20,000
Less. Exemption u/s 10(13A)
(a) Actual house rent allowance received 1,20,000
(b) Rent paid over 10% of salary 2,10,000 – 1,08,000 = 1,02,000
(c) 50% of salary = 5,40,000
Least of the above exempt i.e. = 1,02,000
Taxable H.A. = Actual – Exempt = 1,20,000 – 1,02,000 = 18,000

Working Note: 2
Any amount contributed to recognized provident fund by employee shall be allowed as deduction u/s 80C from gross total income subject to the limit specified therein and contribution of employer shall be exempted up to 12% of salary.

Working Note : 3
Any contribution by an individual to any pension fund set up by any mutual Fund referred U/S 10(230) shall be allowed as deduction U/S 80C.

Question 20.
The Profit & Loss Account of ABC & Associates, a partnership firm for the previous year 2022-23 is given below:

Additional information:
(i) Establishment expenses include bonus ₹ 2,40,000 which was paid on 30-12-2023.
(ii) The firm is eligible for deduction under section 80-IC.
(iii) Establishment expenses also included securities transaction tax of ₹ 2,000.
Compute the tax liability of the firm for the assessment year 2023-24.
Assume that no extension of time has been granted u/s 139 (1) for filing the return of Income. (June 2018, 10 marks)
Answer:
Computation to total income and tax liability of the firm for the assessment year 2023-24

Note: 1
Interest and remuneration paid to the partners by a firm are not deductible. However, the interest and remuneration paid to partners by a firm are deductible if all the following conditions are satisfied:
(i) Payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred as remuneration) is to a working partner. If it is paid to a non-working partner, the same shall be disallowed.

Note: 2
The payment of interest to a partner should not exceed the amount calculated at the rate of 12% per annum simple interest (any amount in excess will be disallowed).

Note : 3
As per section 11 2A, long-term capital gain on an equity share of a company taxable @ 10% in excess of 1 lakh without providing indexation.

Note: 4
Bonus received by an employee is charged to tax in the year of receipt relief under Section 89 can be claimed in respect of arrears of bonus received during the year.

Question 21.
Discuss the taxability or otherwise in the hand of the recipient:
Nilay, a member of his father’s HUF, gifted a house property to the HUF. The stamp duty value of the house is ₹ 8 lakhs. (2 marks)

ABC & Co., a partnership firm, consisted of 4 equal partners up to 31.03.2022. It had accumulated business losses of ₹ 8 lakhs and unabsorbed depreciation of ₹ 6 lakhs relating to assessment year 2021-22. On 01.04.2022 one partner retired. The firm, for the previous year ended 31st March, 2023, made a turnover of ₹ 150 lakhs. The firm wishes to opt for presumptive taxation. The entire sale proceeds were realized through banking channel. Compute the total income of the firm for the assessment year 2023-24. (June 2018, 5 marks)
Answer:
(a) Since the HUF is covered under the definition of relative, therefore, gift of house property tÕ the HUF by its member is exempt from Tax.
(b) Computation of total income of the firm ABC & Company for the Assessment Year 2023-24

Note: An individual HUE or partnership firm, who is a resident, whose total turnover or gross receipt in the previous year does not exceed on amount of two crore rupees are eligible for opting pres-emptive taxation scheme.

Question 22.
Mr. Raghavan, aged 57, is a person with disability. He furnishes you the following information for the year ended 31.03.2023.
(i) Income from business (computed) ₹ 7,00,000
(ii) Dividend from an Indian company ₹ 10,50,000
(iii) Interest on Saving bank account with a nationalized bank ₹ 17,000
(iv) Medical insurance premium paid by account payee cheque For self ₹20,000
For brother, wholly dependent on him ₹ 15,000
Compute his total income for the Assessment Year 2023-24. (Dec 2018, 5 marks)
Answer:

Note-1: There is a change in the dividend taxation regime with the abolishment of dividend distribution tax in case of dividends paid/distributed by domestic companies after 1st April 2020, hence, Section 10(34) which provided exemption from dividend received (after payment of Dividend Distribution Tax) is provided with a sunset clause i.e., the exemption would not be applicable on income received by way of dividend on or after 1st April 2020. Hence, such dividends will be taxable.

Question 23.
CMA Anup Banerjee is in practice as Cost Accountant. He follows mercantile basis of accounting. His income & expenditure account for the year ended 31st March, 2023 is given below:

Expenditure	₹	Receipts	₹
Salary and stipends	10,50,000	Professional fees	45,00,000
Bonus to staff	1,00,000	Share of profit from a partnership firm	2,00,000
Meeting Conference and seminars	2,50,000	Interest on fixed deposit in a bank (Net of TDS)	27,000
Fees to consultants	1,50,000	Honorarium for valuation of answer papers of various institutes (Net of TDS)	54,000
Travelling and conveyance	4,60,000
Rent for office premises	6,00,000
Provision for bad debts	40,000
Depreciation	1,45,000
Provision for income tax	7,02,000
Excess of income over expenditure	12,84,000
	47,79,000		47,79,000

Other information:
(i) Depreciation as per the Income-tax Act ₹ 2,00,000.
(ii) Salary and stipends include ₹ 40,000 paid to one trainee for passing CMA final examination with rank.
(iii) Bonus to staff was paid in November 2023.
(iv) In the financial year 2021-22, a sum of ₹ 15,000 was due to a consultant, which was allowed. The said amount was paid on 14th May, 2022 in cash.
Compute the total income of CMA Anup Banerjee for the assessment Year 2023 -24. He has not opted for presumptive taxation scheme under section 44ADA. The due date for furnishing the return of income under section 139(1) may be taken as 31st Oct, 2023. (Dec 2018, 15 marks)
Answer:

Particulars	₹	₹
Profits & gains of business or profession Net surplus as per Income & Expenditure A/c Add: Payment to a trainee for passing CMA Final examination with rank is in the nature of incentive to boost the morale of the staff. The expenditure is wholly and exclusively for the purpose of profession of the assessee and allowable u/s 37(1). As the amount has already been debited to income & expenditure account, no adjustment is necessary		12,84,000
Bonus to staff not paid before the due date of filing return of income disallowed u/s 43B	1,00,000
Under Section 36(1)(vii), bad debt does not include provision for bad debts. Hence, provision for bad debts is disallowed	40,000
Depreciation debited to profit & loss account	1,45,000
Provision for income-tax disallowed u/s 40(a)	7,02,000

Question 24.
Compute the total income of Mr. Jagari, a resident, from the following details:

Particulars	Amount (₹)
(i) Income under head Salaries’	3,50,000
(ii) Income from owning and maintaining race horses	(3,00,000)
(iii) Long-term capital gain from sale of house plot	(90,000)
(iv) Income from house property-X	50,000
(v) Business Income-Medicines	(5,00,000)
(vi) Speculative business – A	2,00,000
(vii) Business Income-Textile	3,50,000
(viii) Speculative business-B	(1,00,000)
(ix) Income from horse races	1,50,000
(x) Income from house property – Y	(3,10,000)
(xi) Short-term capital gain from sale of immovable property	1,00,000

(June 2019, 9 marks)

(b) Brindavan & Co. is a partnership firm consisting of 4 partners viz., Ram, Rahim, Robert and Rakesh. The firm made turnover exceeding ₹ 100 lakhs and the net profit of firm was ₹ 9,50,000 before considering the following items:
Answer:

Question 25.
Madhav is a sole proprietor of Han Silks. He reports turnover of ₹ 240 lakhs for the previous year 2022-23 and a net profit of
₹ 8,10,000 as per books of account. The following items are debited and credited to Profit and Loss Account.
(i) Bonus to employees ₹‘60,000 Provision made on 31.03.2023 and was paid on 30.11.2023 after the due date for filing the return.
(ii) Interest on private loan ₹ 12,000 was paid by account payee crossed cheque on 10.08.2022. No tax was deducted at source. Turnover of Raghav for the previous year 2021-22 also exceeded ₹ 200 lakhs.
(iii) Dividend train Indian Companies (listed in recognized stock exchange) received during the year ₹ 21,000.
(iv) PPE interest credited 27,000 and savings bank interest ₹ 13,500 from UCO Bank.
(v) One Generator was purchased for ₹ 90,000 on 10.01.2023. Subsidy received from Government @ 20%. The subsidy is credited to P&L Account. No depreciation is charged in the books for generator.
(vi) Rent received from let out property  ₹ 1,65,000 credited to profit and toss account. Municipal tax to the said property 1 ₹ 5,000 was paid on 10.03.2023 which is debited to profit and loss account.
(vii) Salary paid to wife 30,000 per month during the year 2022-23. (Reasonable monthly salary considering her qualifications and experience is ₹ 20,000 per month.)
You are requested to compute the income from business of Madhav taking note to the above adjustments. Brief reason is to be given for treatment of each item given above. (Dec 2019, 9 marks)
Answer:

Question 26.
The total income of Mr. M is ₹ 10 lakhs. In this income, ₹ 50000 was earned by way of Interest on which the payer of Interest
deducted tax at source @ 10% (₹ 5,000). He paid advance Tax of ₹ 25,000 in different installments. TCS collected at source was ₹ 10,000. Calculate the self-assessment tax to be paid under section 140A at the time of filing the Return of income.
[Note: Compute the tax as per old regime.] (Dec 2021, 3 marks)
Answer:

Question 27.
Following is the profit arid loss account of Ashok (age 56) a resident for the year ended 31.03.2023:

To Rent	2,70,000	By Gross Profit	10,50,000
To Car repair & running expenses	10,000	By Cash Gift from friend	35,000
To Income tax	15,000	By Profit on sale of car	20,000
To Medical expenses	20,000	By Interest on income tax refund	1,300
To Administration expenses	1,30,000
To Salary	90,000
To Net Profit	5,71,300
	11,06,300		11,06,300

Other information:
(i) He bought a motor car on 1st March, 2023 for ₹ 2 lakhs by paying cash.
(ii) He sold his old motor car on 8th September, 2022 whose WDV as on 01.04.2022 was ₹ 60,000 and book value ₹ 80,000 for ₹ 97,000.
(iii) Medical expenses given above includes medical expenses for wife ₹ 7,000.
(iv) Let out a residential property for a monthly rent of ₹ 25,000 to Amin through out the financial year 2022-23. Municipal tax of ₹ 30000 was paid in cash in December, 2022
(v) Incurred ₹ 50,000 towards medial expenditure for employees due to fire accident in business premises. This amount is included in administrative expenses given above.
(vi) Paid health insurance premium for himself and wife ₹ 20,000 by crossed cheque. Also paid health insurance premium for his two children by net banking ₹ 12,000.
(vii) Repaid housing loan principal by cash ₹ 1,05,000 and life insurance premium of his brother ₹ 22,00,000 and of himself ₹ 25,000.
Compute the total income of Ashok for the assessment year 2023-24. (Dec 2022, 15 marks)

Deductions, Rebate, and Reliefs – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Deductions, Rebate, and Reliefs – CMA Inter Direct Tax Study Material

Short Notes

Question 1.
Write short flotes on deduction under Section 😯 TTA in respect of interest from banks. (June 2014, 4 marks)
Answer:
80TTA
Individual/HUF – Eligible Assessee
Interest on savings account with a Scheduled Bank, or a Co-operative Bank or Post Office Upto ₹ 10,000.
Section – 80 TTB
(Deduction in respect of Interest on Deposits in case of Senior Citizens) Deduction under section 8OTTB is available (from the assessment year 2019-20) if the following conditions are satisfied –

1. The assessee is a senior citizen (i.e., a resident individual who is at least 60 years of age at any time during the previous year).
2. His income includes interest on deposits with a bank/co-operative bank post office (it may be interest on fixed deposits, interest on savings account or any other interest).

Amount of deduction – If these conditions are satisfied, the assessee can claim deduction under section 8OTTB which is equal to ₹ 50,000 or the amount of aforesaid interest, whichever is lower.

Note: with effect from the A.Y. 2019-20, a senior citizen who can avail deduction u/s 8OTTB, shall not be eligible for the deduction u/s 80TTA.

Descriptive Question

Question 2.
What is the effect of contribution made by an individual to electoral trust on his taxable income? (June 2013, 2 marks)
Answer:
The scope of Section 8OGGC has been widened so as to enable an individual to claim deduction from gross total income in respect of amount of contribution made by him to an electoral trust during the year.

Question 3.
Write a brief note on the deduction available under Section 8ODDB. (June 2014, 4 marks)
Answer:
80TTA
Resident individual/ HUF – Eligible Assessee
Medical Treatment of Specified Disease of Self, Spouse, Parent, Children, Brother, Sister. Amount received from Insurance Company shall be deducted from ₹ 40,000 or ₹ 1,00,000 if incurred in respect of Senior Citizen or in respect of very senior citizen. The Assessee must furnish a certificate in form No. 10-l along with the return of Income.

Question 4.
Who are not ‘Regular Workmen, u/s 80 JJAA of the Income Tax Act, 1961? (June 2014, 3 marks)
Answer:
Following are not regular workmen u/s 80 JJAA –

1. Casual workmen and workmen employed through contract labour.
2. Other workmen if employed for less than 150 days during the previous year.

Practical Questions

Question 5.
Determine the eligibility and quantum of deduction under Chapter VI-A in the following cases:
(ii) Contribution to notified pension scheme (referred to Section 80 CCD) by the employer ₹ 40,000 for an employee whose basic salary plus dearness allowance was ₹ 3,00,000 for the year. (Dec 2012, 4 marks)
Answer:
An assessee who is an individual employed by central Govt. (or any other employer) make any contribution to his account under a pension scheme notified (or as may be notified by Central Govt.) the assessee shall be allowed a deduction in computation of his total income, the deduction is subjected to amount of 10% of his salary in previous year. (Sec. 80CCD)

Contribution to Notified Pension Scheme
Amount of deduction u/s 80CCD(2)
(least of the following)
1. Actual Amount Paid – ₹ 40,000
2. 10% of Salary 3,00.000 x 10% – ₹ 30,000
Hence, Amount of Deduction is ₹ 30,000.

Question 6.
Answer the following sub-divisions briefly in the light of the provisions of the Income-tax Act, 1961:
A life insurance policy was taken in April, 2022 for a capital sum assured of ₹ 8 lakhs. The annual premium amounts to ₹ 1,10,000 for 10 years. How much is deductible under Section 80C? (Dec 2013, 1 mark)
Answer:
Only 10% of the premium on the capital sum assured is eligible for deduction. Amount Deductible u/s 80C = 8,00,000 × 10% = ₹ 80,000.

Question 7.
Compute the quantum of deduction under Section 80C for Mr. Niraj for the assessment year 2023-24.

	₹
Life Insurance premium
Own – Capital sum assured 2,00,000 (being the first premium paid)	25,000
Brother’s life – dependent on Niraj	10,000
Major son – doing business	5,000
Contribution to recognized provident fund	15,000
Repayment of bank loan for purchase of residential apartment-let out	60,000
Tuition fees for M.Com (part-time) pursued by wife	12,000

(Dec 2013, 3 marks)
Answer:
Computation of deduction u/s 80c

Particulars	₹
Life insurance premium
Own- capital sum assured ₹ 2,00,000 (being the first premium paid) – limited to 10°/o i.e. ₹ 2,00,000 × 10%	20,000
Major son – doing business – allowed	5,000
Contribution to recognized provident fund – allowed	15,000
Repayment of loan for purchase of residential apartment -let out – allowed	60,000
Total amount eligible for deduction u/s 80 C	1,00,000

Note: Brother’s Life – Dependent on Niraj & Tuition fees for M.Com (part-time) pursued by wife will not be allowed as Deduction u/s 80 C.

Question 8.
Mr. Praveen Kumar (aged 59 years) having gross total income of ₹ 27,50,000 during previous year 2022-23 incurred expenditure of ₹ 1,30,000 during the said year on medical treatment of his dependant father (aged 80 years) who is suffering from chronic disease specified in Section 8ODDB of the Income-tax Act and also paid medical insurance premium of ₹ 26,000. Determine total income of Mr. Praveen Kumar for Assessment Year 2023-24. (Dec 2016, 4 marks)
Answer:
Computation of Total Income of Mr. Praveen Kumar for A.Y. 2023-24:

Gross Total Income	27,50,000
Less: Deductions u/s 80 D
For medical insurance premium for self under section 80D-
maximum allowable is ₹ 25,000	25,000
u/s 80 DDB	1,00,000
Total Income	26,25,000

Note: Amendment to (Section-800DB)
Section 800DB has been amended (with effect from the assessment year 2020-21) so as to raise the above monetary limit of deduction to ₹ 1,00,000 for both senior citizens and super senior citizens.

Question 9.
Mr. Gangai Amaran (age 50) incurred following expenditures during the financial year 2022-23:

Particulars	₹
(i) Medical expenditure on the treatment of his non-dependent father (age 82)	30,000
(ii) Medical expenditure on treatment of his non-dependent mother (age 73)	25,000
(iii) Medical expenditure for a surgery undergone by himself	50,000
(iv) Medical insurance premium for non-dependent mother (age 73)	35,000
(v) Medical insurance premium for self (paid by cheque)	27,000
(vi) Preventive medical health check-up paid in cash for himself.	7,000

Computer the amount eligible for deduction under section 80-D for the financial year 2022-23. (Dec 2017, 7 marks)
Answer:

Note: Amendment to [Section – 80D]
The following amendments have been made to the scheme of section 80D with effect from the assessment year 20 19-20 as follows:
Section 80D, inter alla, provides that for medical insurance (or preventive health ‘of a senior citizen), deduction of ‘₹ 30,000
shall be allowed. Further, in the case of supersenior citizens, the said section also provides for a deduction of medical expenditure within the overall limits of ₹ 30,000.
The above monetary limits have been extended so as to provide that the deduction of ₹ 50,000 in aggregate shall be allowed to senior citizens in respect of medical insurance or preventive health check-ups or medical expenditures.

In case of single premium health insurance policies having cover of more than one year, deduction under section 80D shall be allowed on proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit.

Question 10.
With brief reasons compute the quantum of eligible deduction in the following independent cases:
(i) Ranjit made tax saver deposit in SBI of ₹ 80,000 in his wife’s name and paid life insurance premium of 25,000 on a sum assured policy of ₹ 2,00,0O0 taken on 01.06.2019.
(ii) Vikas having basic pay and DA (forming part of retirement benefits) of ₹ 4,50,000 contributed ₹ 50,000 to a pension scheme notified under section 80 CCD and repaid education loan of SBI of ₹ 60,000 for son’s education outside India. The education loan was taken in the financial year 2017-18.
(iii) Ms. Madhuri engaged in manufacturing activity paid ₹ 30,000 to National Urban Poverty Eradication Fund on 31.12.2023. She also paid rent for residential premises @ ₹ 25,000 per month. She does not own any house property. Her gross total income (computer) is ₹ 6,50,000. She has not claimed any other deduction under Chapter VI-A. (Dec 2019, 2 x 3= 6 marks)
Answer:
Quantum of eligible deduction
(i) Deduction under Section 80C
Tax Saver Deposit in the name of wife is not eligible for deduction under section 80C.

(ii) Deduction u/s 80CCD
Amount of deduction = Lower of following:
1. employee contribution (50,000)
2. 10% of Salary (45,000)
Deduction = 45,000

Deduction u/s 80E
deduction in respect of interest on loan for higher education in India or abroad
Amount of Deduction = ₹ 60,000

(iii) Deduction u/s 8OGG = Rent paid of House property
Amount of deduction:
Lower of following

• ₹ 5,000 1 month [5 x 12,000] 60,000
• 25% of 6,50,000 1,62,500
• Rent paid 10% of GTI = (3,00,000 – 65,000) 2,35,000
• Amount of deduction = ₹ 60,000

Question 11.
Determine the quantum of deduction under the applicable provisions of Chapter VI-A for the assessment year 2023-24 in the following cases:
(i) Rahul engaged in manufacture of household utensils applied for housing loan for the first house property for self-residential use. The loan was sanctioned in June, 2022 of ₹ 40 lakhs and the balance ₹ 8 lakhs was met from his own source. Interest on loan for the year ended 31.03.2023 amounts to ₹ 2,40,000.
(ii) Prarnod employed in a listed company availed loan from SBI for the purpose of purchase of electric car. The cost of electric car was ₹ 15,00,000 for which he borrowed loan of ₹ 12 lakhs. Interest payable on loan for the financial year 2022-23 amounts to ₹ 1,70,000.
(iii) Priti (P) Ltd. contributed ₹ 5 lakhs to an electoral trust and incurred ₹ 90,000 on advertisement in a brochure of a recognized political party.
(iv) The gross total income of Everest (P) Ltd. includes profits and gains of ₹ 11 lakhs from the collecting and processing of bio-degradable waste for producing biogas. The company began the business in the financial year 2019-20. (Dec 2022, 8 marks)

Descriptive Question

Question 12.
Briefly explain marginal relief allowable while computing tax payable by certain assessee. (June 2010, 3 marks)
Answer:
Marginal Relief: In case of Surcharge
A.

1. In case of individual and HUE, where total income exceeds ₹ 50 lakhs but does not exceed ₹ 1 crore, the aggregate of income tax and surcharge shall be restricted to. (Tax on ₹ 50 lakhs) + (Total Income – ₹ 50 lakhs)
2. In case of individual and HUF, where total income exceeds ₹ 1 crore but does not exceed ₹ 2 crore, the aggregate of income tax and surcharge shall be restricted to: (Tax on ₹ 1 crore with surcharge of 10%) + (Total Income – ₹ 1 crore)
3. In case of individual and HUE, where total income exceeds ₹ 2 crore but does not exceed ₹ 5 crore, the aggregate of income tax and surcharge shalt be restricted to: (Tax on ₹ 2 crore with surcharge of 15%) + (Total Income – ₹ 2 crore)
4. In case of individual and HUF, where total income exceeds ₹ 5 crore, the aggregate of income tax and surcharge shall be restricted to: (Tax on ₹ 5 crore with surcharge of 25%) + (Total Income – ₹ 5 crore)

B. In case of Local authority and Firm, where the total income exceeds ₹ 1 crore, then the aggregate of income tax and surcharge shalt be restricted to: (Tax on ₹ 1 crore) + (Total Income – ₹ 1 crore)

C. In case of domestic/Foreign company, where the total income exceeds ₹ 1 crore but does not exceed? 10 crores, then the aggregate of income tax and surcharge shall be restricted to: (Tax on ₹ 1 crore) + (Total Income – ₹ 1 crore)

D. In case of domestic company, where the total income exceeds ₹ 10 crore, then the aggregate of income tax and surcharge shall be restricted to: (Tax on ₹ 10 crore with surcharge of 7%) + (Total Income – ₹ 10 Crore)

E. In case of foreign company. where the total income exceeds ₹ 10 crore, then the aggregate of income tax and surcharge shall be restricted to: (Tax on ₹ 10 crore with surcharge of 2%) + (Total Income – ₹ 10 Crore).

Set Off & Carry Forward of Losses – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Set Off & Carry Forward of Losses – CMA Inter Direct Tax Study Material

Short Notes

Question 1.
Write short note on the following:
Losses which cannot be carried forward for set 6ff when the return of income Is not filed within the ‘due dEW specified under section 139(1). (June 2019, 5 marks)
Answer: .
Losses which cannot be carried forward where ROI is flied belatedly: Section 8.0 says that certain losses cannot be carried forward when the return is not filed within the “due date” specified under section 139(1) of the Act.

They are as under

• Business Loss
• Speculation Business Loss
• Loss from Business specified Ii section 35AD
• Loss assessable under the head “Capital gain”.
• Loss from owning and maintaining race horses.

Descriptive Question

Question 2.
Explain the provisions for carry forward and set off of business losses under Section 72. Explain the order of priority amongst
business loss, current depreciation and brought forward unabsorbed depreciation. (Dec 2012, 6 marks)
Answer:
The right of carry forward and set off of loss arising in a business or profession is subject to the following restrictions:
1. Loss can be set off only against Business Income: A loss to the assessee under the head “Profits and gains of business or profession”, and such loss cannot be or is not wholly set off against income under any head of income and he has no income under any other head, the whole loss shall be carried forward to the following assessment year, and:

• It shall be set off against the profits and gains, if any, of any business or profession carried on by him;
• if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on:

2. Loss can be carried forward for 8 Years: No lõss shall be carried forward under this Section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.

3. Return of Loss should be submitted in Time: A Loss cannot be carried forward unless it is determined in pursuance of a Return Filed within the time allowed:

• Current year depreciation u/s 32
• Brought forward business toss
• Brought forward unabsorbed depreciation
• Priority of set off.

Question 3.
What is reverse merger? Explain the reasons for resorting to the same by the assessees. (June 2014, 3 marks)
Answer:
A reverse merger refers to an arrangement where private company acquires a public company, usually a shell company, in order to acquire the status of a public company. Also known as a reverse takeover, it is an alternative to the traditional initial public offering (IPO) method of floating a public company. It is an easier way that allows private companies to change their
type while avoiding the complex regulations and formalities associated with an IPO. Also, the degree of ownership and control of the private stakeholders increases in the public company. It also leads to combining of resources thereby giving greater liquidity to the private company.

Question 4.
Explain the provisions relating to carrying forward and set off losses by closely held companies. (June 2015, 3 marks)
Answer:
Carry forward and set off of Iošses in case of certain companies [Section 79]
Section 79(1) where a change in shareholding has taken place during the previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year, the shares of the company carrying not less than fifty-one percent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one percent of the voting power on the last day of the year or years in which the loss was incurred:

Provided that even if the said condition is not satisfied in case of an eligible start-up as referred to in section 80-lAC, the loss incurred in any year prior to the previous year shall be allowed to be carried forward and set off against the income of the previous year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such previous year and such loss has been incurred during the period of seven years beginning from the year in which such company is incorporated.

Section 79(2) Nothing contained in sub-section (1) shall apply,-
(a) to a case where a change in the said voting power and shareholding takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift:

(b) to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that fifty-one percent shareholders of amalgamating or demerged foreign company continue to be the shareholders of the amalgamated or the resulting
foreign company;

(c) to a company where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 (31 of 2016), after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;

(d) to a company, and its subsidiary and the subsidiary of such subsidiary, where,-
(i) The Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 (18 of 2013), has suspended the Board of Directors of such company and has appointed new directors nominated by the Central Government, under section 242 of the said Act; and

(ii) a change in shareholding of such company, and its subsidiary and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by the Tribunal under section 242 of the Companies Act, 2013 (18 of 2013) after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner;

(e) to a company to the extent that a change in the shareholding has taken place during the previous year on account of relocation referred to in the Explanation to clauses (viiiac) and (viiiad) of section 47;

(f) to an erstwhile public sector company subject to the condition that the ultimate holding company of such company, immediately after the completion of strategic disinvestment, continues to hold, directly or through its subsidiary or subsidiaries, at least fifty-one percent of the voting power of such company in aggregate.

Section 79(3) Notwithstanding anything contained in sub-section (2), if the condition specified in clause (f) of the said sub-section is not complied with in any previous year after the completion of strategic disinvestment, the provisions of sub-section (1) shall apply for such previous year and subsequent previous years.

Practical Questions

Question 5.
A meet furnishes the following particulars of income/loss pertaining to previous year 2022-23:

	(₹ in lacs)
(i) Profit from trading business	6
(ii) Loss from manufacturing business	1.50
(iii) Loss from profession	2.50
(iv) Profit from speculation in shares	2.50
(v) Loss from speculation in commodities.	3

He has no other income during the year. Determine total income of Ameet for the Assessment Year 2023-24. Also state the loss to be carried forward. The manner of set off must be clearly shown in your answer. (Dec 2013, 5 marks)
Answer:
Computation of Total Income of Ameet for Assessment Year 2023-24

Particulars	₹ In lacs
Profit from trading business	6
Less: Set-off of loss from manufacturing business and loss from profession under Section 70	4
	2
Profit from speculation in shares	2.5
Less: Setoff of loss from speculation ¡n commodities to the extent possible under Section 73	2.5
	Nil
Total Income	2

Unabsorbed loss of ₹ 0.50 lacs from speculation in commodities can be carried forward by Ameet for four assessment years.

Question 6.
(ii) X Co. Ltd. filed its return for the assessment year 2023- 24 on 10.12.2023, declaring a business loss of ₹ 12,00,000 and unabsorbed depreciation of ₹ 6,00,000. How much of loss and/or depreciation is eligible for carry forward? (Dec 2014, 3 marks)
Answer:
The assessee, in order to carry forward business loss, has to file the return of income before the ‘due date’ prescribed in Section 139(1). Section 80 debars carry forward of business loss to subsequent assessment years unless the return of income in which it has loss, is filed within due date specified in Section 139(1).

However, the embargo contained in Section 80 will not apply to carry forward of depreciation, both current year and that brought forward of preceding years. In view of the above, X Co. Ltd. cannot carry forward business loss of ₹ 12,00,000 but it can carry forward unabsorbed depreciation to future years for set-off.

Question 7.
Mr. Anurag, an individual engaged in the business, having turnover of ₹ 1.50 crores and no international transaction or specified domestic transaction incurred loss from business during the previous year 2021-22. Such business loss could not be set off against any other income during the year. He filed return of loss for Assessment Year 2022-23 on 31st March,2023.
(i) Can Mr. Anurag carry forward such loss for set off against income from
business of the assessment year 2023-24?
(ii) Is there any difference if Mr. Anurag has unabsorbed depreciation instead of loss from business in the previous year 2021 -22 for carry forward to assessment year 2023-24 for set off? (June 2016, 5 marks)
Answer:
(i) As per Section 80 read with Section 139(3), business loss cannot be carried forward unless such loss is determined in pursuance of return filed within the time allowed under section 139(1). It is essential such return is filed within the due date laid down in Section 139(1).

In other words, if the assessee fails to file his return of loss on or before the due date of furnishing of return as prescribed by
Section 139(1) i.e. 31 October, 2022, then the business loss of the assessment year 2022-23 cannot be carried forward for set off in the subsequent eligible assessment years.

(ii) The answer will be different as regards unabsorbed depreciation. The above provision ¡s not applicable in case of carry forward of unabsorbed depreciation and set off in the next years. Carry forward of unabsorbed depreciation and set off in the next assessment year is governed by Section 32(2). Section 80 does not restrict the carry forward of unabsorbed depreciation in case of delayed submission of return of income.

Question 8.
For the assessment year 2023-24, an individual assessee filed return of income on 30.11.2023. He has unabsorbed depreciation of ₹ 2 lakhs and business loss of ₹ 3 lakhs. Can these items be carried forward to subsequent assessment year? Can this return be revised upon discovery of any error? (Dec 2018, 5 marks)
Answer:
It is clear that return of income has been filled on 30.11.2023 the same is not a return of income filled within the due date specified in Section 139(1) i.e. 31.07.2023 it is a belated return.

As per Section 139(3) read with Section 80, certain losses which include business loss, can be carried forward only whose the return has been filed with in due date. Here the return of income was filed belatedly. Therefore, business loss of ₹ 3 lakh cannot be carried forward. However, unabsorbed depreciation is not covered by the same. Hence, the same can be carried forward. According to Section 139(5), belated return can be revised in case of discovery of any error.

Question 9.
The following details have been furnished by Parikshit relating to previous year 2022-23.

Particulars	₹
(i) Income from business (non-speculation)	6,00,000
(ii) Interest on fixed deposit (net of TDS)	63,000
(iii) Long-term capital gain on sale of a residential house	1,00,000
(iv) Unabsorbed short-term capital loss carried forward from Assessment Year 2022-23	1,10,000
(v) Loss in non-speculative business carried on by his wife, Prerana. The business was started with the amount gifted by Parikshit during the year	45,000

You are required to compute the total income of Parikshit for Assessment Year 2023-24. (June 2017, 6 marks)
Answer:

Question 10.
Mr. Rahman furnishes you the following information for the financial year 2022-23:

Particulars	₹
Loss from speculation business – A	80,000
Profit from speculation business – B	40,000
Loss from self-occupied house property	1,80,000
Income from let out house property	4,00,000
Income from trading and manufacturing business @ 8%	2,00,000
Salary income	3,70,000
Interest on PPF deposit	65,000
Long-term capital gain on sale of vacant site	1,10,000
Short-term capital loss on sale of Jewellery	50,000
Investment in tax saver deposit on 31.03.2023	60,000
Brought forward loss of business of assessment year 2017-18	1,00,000
Donation to a charitable trust approved under section 80G	1,40,000
Enhancement compensation received from Government for compulsory acquisition of lands in the year 2009.	3,00,000

You are requested to compute the total income of Mr. Rahman for the financial year 2022-23 and any loss e’igible for carry forward. (Dec 2017, 8 marks)
Answer:

Question 11.
Aswini’s accounts are not required to be audited under section 44AB. He furnished his return of income for Assessment Year 2023- 24 on 1st August, 2023. He has the following losses during the previous year 2022 – 23:
Loss from house property let out: ₹ 12,000
I oss from business: ₹ 60,000
Unabsorbed depreciation: ₹ 15,000
Short-term capital loss from sale of shares: ₹ 8,000
State, with reason, whether Aswini is entitled to carry forward above losses and unabsorbed depreciation. (June 2018, 5 marks)
Answer:
Where for any assessment year the net result of computation under the head “Income from house property”, “Profit and gains of business or profession”, income from the head “Capital Gains” is a loss to the assessee, and such loss is not wholly set off then the loss, which has not been set off wholly, shall be carried froward to the following assessment year, not being more than eight assessment year immediately succeeding the assessment year for which the loss was first computed.

Unabsorbed depreciation can be set off and carried forward to the following assessment year not being more then eight assessment years immediately succeeding the assessment year for which the loss was first computed. However, loss from house property can be set off only against the income from house property, and short-term capital loss can be set off only against the income from LTCG or STCG. On the basis of above discussion, we can say that Aswani is entitled to carry forward all these losses.

Question 12.
Ms. Pinky submits the following particulars for the year ended 31st March, 2023:

Particulars	₹
(i) Loss from let out residential building-computed	3,00,000
(ii) Arrear rent from a commercial building received during the year (commercial property had been sold in June, 2020)	10,000
(iii) Textile business discontinued from 31st October 2021- Brought forward business loss of Assessment Year 2019-20	60,000
(iv) Profit from chemical business of current year (computed)	5,50,000
(v) Bad debt written off in the Assessment Year 2018-19 relating to textile business recovered during the year consequent to Court decree	1,00,000
(vi) Long-term capital gain on sale of shares (STT paid) in recognized stock exchange on 23.05.2022	90,000
(vii) Speculation business in oil seeds profit	3,00,000
(viii) Winning from lottery (Gross)	11,00,000
(ix) Loss from the activity of lowering and maintaining race horses	2,10,000

You are required to compute the total income of Ms. Pinky and also ascertain the amount of losses that can be carried forward. (Dec 2018, 7 marks)
Answer:

Clubbing of Income – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Clubbing of Income – CMA Inter Direct Tax Study Material

Short Question

Question 1.
Write short note on the following:
(a) Clubbing of Minor Child (Dec 2022, 5 marks)

Descriptive Question

Question 2.
Explain the tax incidence in the case of a transfer of a let-out property, which is not revocable during the lifetime of the transferee. (Dec 2015, 3 marks)
Answer:
Section 62 of Income Tax Act, 1961 states that any asset transfer to the transferee:

• By way of trust which is not revocable during the lifetime of the beneficiary and in the case of any other transfer, which is not revocable during the lifetime of the transferee; or
• Made before the day of April 1961 WhiCh is not revocable for a period exceeding 6 years; Any income from such transfer shall be chargeable to tax as the income of the transferor as and when the power to revoke the transfer arises, and shall then be included in his total income.

Practical Questions

Question 3.
On 01.05.2022, Mr. Rama transferred the right to receive rental income arising from a factory godown owned by him, to his major son Mr. Lava, for a period of 10 years. The rental income derived is ₹ 10,000 per month. On 12.03.2018, he gifted 2000 shares of face value of ₹ 100 each, in Janak Granites Ltd., a listed company, to his wife Mrs. Seetha. Mr. Rama had purchased them on 19.02.2016 at ₹ 110 each.

Janak Granites Ltd. allotted bonus shares in the ratio of 1:1 on 12.04.2019. Mrs. Seetha sold all shares of the above company on 15.01.2023 in the National Stock Exchange for a net consideration of ₹ 180 per share, paying the applicable STT thereon.
Discuss how the above items will be treated in the hands of Mr. Rama and Mrs. Seetha for the assessment year 2023-24 (Computation of income is not required). (Dec 2012, 5 marks)
Answer:
As per Section 60, in case of transfer of income, whether recoverable or not, without transfer of assets from the income arises, such transferred income shall be included in total income of the transferor, not the transferee. Hence, in this case the rental income from the godown will be assessed in the hands of Mr. Rama.

As per Sec. 64(1)Qv), any income arising from assets transferred without adequate consideration to the spouse shall be included in the total income of the transferor-individual. Where such transferred asset is subsequently sold by the spouse, the resultant tax will have to be considered in the hands of the transferor only i.e., Mr. Rama.

Thus, capital gains on transfer of the original 2000 shares will have to be considered in the hands of Mr. Rama. Since the shares are long-term in nature and are listed shares sold in recognized stock exchange, STT also being paid, the ensuing capital gain is taxable under Section 112A.

However, accretion from the transferred asset is not clubbed in the hands of Mrs. Rama. Bonus shares are accretions and hence capital gains arising on transfer of the bonus shares will be assessed in the hands of Mrs. Seetha. Thus, capital gain on transfer of bonus shares will be taxed in the hands of M Seetha. The bonus shares have been held for less than 12 months and hence is a short-term capital asset. The cost of acquisition of bonus share is taken as nil. The profit from sale of the bonus shares being the net sale proceeds will be assessed as short-term capital gains and may be chargeable to tax at 15%.

Question 4.
Mr. Ashwin started a proprietary business on 20.04.2022 with a capital of ₹ 5,50,000. His wife Smt. Padma gifted ₹ 2,00,000 on the occasion of his birthday on 28.07.2021, out of which he introduced ₹ 1,00,000 into his proprietary business.
Details of his income from business are given below:
Financial year (Loss) Income
2021-22 ₹ (1,50,000)
2022-23 ₹ 4,00,000
He did not withdraw any amount from the business for his personal use. Determine the amount chargeable to tax in the hands of Ashwin and the amount liable for clubbing in the hands of his wife Smt. Padma. (Dec 2012, 5 marks)
Answer:
Computation of Income from business chargeable in the hands of Mr. Ashwin and clubbing in the hands of Smt. Padma for the Previous Year 2021-22. A.Y. 2022-23

	₹
Profit/ loss	(1,50,000)
Gifted amount considering the investing part in the business	1,00,000
Capital	5,50,000
Clubbed amount	Nil
Income chargeable in the hands of Ashwin	Nil

Computation of Income from business chargeable in the hands of Mr. Ashwin and clubbing in the hands of Smt. Padma for the Previous Year 2022-23. A.Y. 2023-24

	₹
Profit/loss	4,00,000
Gifted amount considering the investing part in the business	—
Capital	5,00,000
Clubbed amount	80,000
(Previous year capital + Gifted amount – loss of business) (i.e. 4,00,000 x 1.00,000 ÷ 5,00,000)

Income chargeable in the hands of Ashwin 3,20,000
(Profit earned — clubbed amount = 4,00,000- 80,000)
Hence, the Clubbed amount in the hands of Padma = ₹ 80,000 and
Income chargeable in the hands of Ashwin = ₹ 3,20,000

Note:
Based on cases-R. Ganesan vs. CIT (1965) 58 ITR 411 (Mad.). Asset acquired by transferee out of gift from spouse ¡s also covered. Smt Mohini Thapar vs. CIT (1972)83 ITR 208 (SC) Indirect transfers are also covered.
i. The amount of profit to the extent of gifted to total capital on the first day of the previous year must be clubbed in the hands of Smt. Padma.

ii. The gift was made on 28.07.2021 therefore, the clubbing provisions shall not apply as the gift was made after the 1st day of the previous year.

iii. As per question, Ashwin has not withdrawn any amount for his personal use. So, closing capital of 2021-22 plus profit for that year is taken as the capital for Financial Year 2022-23.

Question 5.
A, a mentally retarded minor has a total income of ₹ 2,40,000 for the assessment year 2023-24. The total income of his father
B and of his mother C for the relevant assessment year is ₹ 4,00,000 and ₹ 3,00,000 respectively. Discuss the treatment to be accorded to the total income of A for the relevant assessment year. (June 2013, 3 marks)
Answer:
All income accruing or arising to a minor chord has to be included in the income of that parent whose total income is greater. However, the income of a minor child suffering from any disability of the nature specified in Section 80U shall not be included in the income of the parents but shall be assessed in the hands of the child. (Sec. 64). Thus the total income of A had to be assessed in his hands and cannot be included in the total income of either his father or his mother.

Question 6.
Manoj gifted ₹ 3,00,000 to his wife on 01.07.2022, which she invested in her beauty parlour business. The capital of Mrs. Manoj as on 01.04.2022 was ₹ 6,00,000. The profit for the year ended 31.03.2023 (computed) from business amounts to ₹ 2,40,000. The total income of Manoj (before clubbing) who is employed in a company amounts to ₹ 4,50,000 (computed).
Determine the income liable for clubbing in the hands of Mr. Manoj out of the incomes earned by Mrs. Manoj during the financial year 2022-23. (Dec 2013, 3 marks)
Answer:
The gift was given by Manoj to his wife on 01.07.2022. Reference to Explanation 3 to Section 64 must be made. As the opening capital as on 01.04.2022 belongs to Mrs. Manoj, Explanation 3 to Section 64 cannot be invoked for the financial year 2022-23.

The opening capital as on 01.04.2022 wholly belonged to Mrs. Manoj and therefore in spite of the gift and its investment in business, no portion of such income would be liable for clubbing. The total income of Mr. Manoj will not change in any manner by applying the clubbing provisions.

Question 7.
Mr. Vishal gifted a sum of ₹ 3 lacs to Miss Mrinal on 01.04.2022. Miss Mrinal got married to Mr. Vishal’s son on 01.06.2022.
MrinaI earned an interest of ₹ 22,000 from this gifted amount, for the year ended 31.03.2023. Can the interest income of ₹ 22,000 be clubbed in the hands of Mr. Vishal? (Dec 2014, 4 marks)
Answer:
Clubbing of Income u/s 64
In computing the total income of an individual, the income arising from assets transferred by an iridMdual, directly or indirectly, otherwise than for adequate consideration, to the son’s wife, will be clubbed u/s 64(1). As on the date of such transfer for inadequate consideration (i.e., gift), the relationship of father-in-law/daughter-in-law should exist.

In the instant case, Mr. Vishal gave the gift, will before the marriage of Mrinal with Mr. Vishal’s son. Hence, the interest income of ₹ 22,000 earned from such gifted amount cannot be clubbed in the hands of Mr. Vishal.

Question 8.
Answer the following question with brief reason/working:
Interest of ₹ 15,000 on bank fixed deposits is received by the minor son of Ms. Santi. These fixed deposits were made by Ms. Santi out of her son’s earnings from stage acting. What is the tax treatment of interest? (Dec 2015, 2 marks)
Answer:
The interest received ₹ 15,000 will be taxed in hands of Mrs. Shanti. The income of minor son of Mrs. Shanti is chargeable under her individual hands. The clubbing provision do not apply to minor child’s income which is earned by his specialized skills but interest received is not the income earned by his manual work or activity involving application of specialized
knowledge, talent, skill or experience.

Question 9.
Mr. Vignesh and his wife Smt. Buddhi furnishes the following information for the year ended 31.03.2023:

Particulars	₹
(i) Salary income (computed) of Smt. Buddhi	5,50,000
(ii) Income of minor son Brijesh who suffers from disability specified in Section 80U	1,50,000
(iii) Income of minor daughter Chitra from singing	85,000
(iv) Income from business (computed) of Mr. Vignesh	4,00,000
(v) Rental income from property earned by Smt. Buddhi during the year ₹ 4,80,000. The property was gifted by Vignesh 3 years ago out of love and affection.
(vi) Income of minor daughter Chitra from company deposit.	20,000

Compute the total income of Mr. Vignesh and Smt. Buddhi for the Assessment Year 2023-24. (Dec 2015, 5 marks)
Answer:

Notes:
(i) All income occurring or arising to a minor child has to be included in the income of that parent whose total income ¡s greater. However, the income of a minor child suffering from any disability of the nature specified in Sec. 80U shall not be included in the income of the parents but shall be taxed in the hands of the child. Thus income of Bnjesh (who is suffering from disability specified in Section 80U) will be taxable in his own hands.

(ii) Income of Chitra (minor child of Mr. Vignesh and Smf. Buddhi) will be assessed in her own hands because ¡t is income earned by minor child by her specialized skill and talent.

(iii) Income from business of Mr. Vignesh will be taxable in Mr. Vignesh hand under head Profit and gain from business”.
(iv) As per Sec. 64(1)(iv) any income arising from asset transferred with out adequate consideration to the spouse shall be included in the total income of the transferor. Thus the income from house property will be clubbed in Mr. Vignesh‘s
income.

(v) Income of minor daughter Chit ra from company deposit will be clubbed in total income of Mr. Vigriesh.

Question 10.
State the taxability of the following transactions for the assessment year 2023-24:
Ms. Jency got gift of 500 listed equity shares of a company from her husband when the market value of the share was 150 per share. After a month, the company issued bonus shares in 1:1 ratio. The original shares were acquired by her husband 4 months before the date of gift for ₹ 50,000. All the 1000 shares were sold for ₹ 1,50,000 through off-market transaction. How much is taxable and In whose hands it is taxable as income? (Dec 2017, 2 marks)
Answer:
Short-term capital gain arising from sale of original shares gifted i.e., ₹ 25,000 ( ₹ 75,000 – ₹ 50,000) shall be taxed in the hands of husband of Ms. Jency under section 64.

Capital gain attributable to bonus shares will not be liable for clubbing under section 64 since it is an accretion to the original shares. Therefore, ₹ 75,000 being the sale consideration from sale of bonus shares whose cost of acquisition is Nil ¡s taxable in the hands of Ms. Jency as short-term capital gain.

Question 11.
Shri Mayur has two minor children named Lakshmi (age 10) and Sarath (age 14). Following details pertain to the minor children for the year ended 31.03.2023:
(i) Minor Lakshmi won Camatic music competition in TV channel and was awarded cash prize of ₹ 2,00000.
(ii) Minor Lakshmi received cash gifts from friends of Mayur ₹ 43,000. No single gift exceeded ₹ 10,000.
(iii) Minor Sarath received gift of gold chain whose fair market value was ₹ 80,000 from his maternal uncle on the occasion of his 14th birthday. He also received cash gift of ₹ 12,000 from friends of Mayur on his birthday.
(iv) Out of accumulated savings of daughter Lakshmi, one vacant land was acquired. The stamp duty value of the land ₹ 3,60,000. The documented value of the land ₹ 3,20,000. Compute the income of minor children of Mayur which ¡s liable for clubbing. (June 2019, 1 x 5 = 5 marks)
Answer:

Question 12.
Mr. Jayabrata gifted ₹ 10,00,000 to his wife, Mrs. Sangeeta on 1st January, 2021. Out of the same, Sangeeta lent 4,00,000 for 6 months . to her friend, Bedabati on 1st April, 2022 bearing interest @ 20% p.a. Sangeeta received half-yearly interest of ₹ 40,000 on such loan on 1st October, 2022.

The aforesaid interest was immediately invested in debentures of a company. These debentures were sold by Sangeeta for ₹ 70,000 on 31st January, 2023. The balance amount of gift received from Mr. Jayabrata was invested as her capital in a sole proprietary business, which resulted in a loss of ₹ 50,000 for the previous year 2022-23. Mr. Jayabratas’s own income (computed) consisted of salary of ₹ 30,00,000 and income from other sources of ₹ 80,000. The return of income is being filed on 21.12.2023. Compute the total income of Mr. Jayabrata under suitable heads of income, indicating brief reason for the treatment of all the important items. (Dec 2019, 9 marks)
Answer:

Note:
1. As per Section 64(1)(IV) if any individual transfer any assets to his or her spouse without consideration or for inadequate consideration then income from such assets is received by spouse but tax on such income paid by transferor. Hence in this case interest income taxable in the hand of Mr. Jayabratra.
2. Income includes loss, therefore if there is loss then also clubbing provisions are applicable
3. All the clubbing provisions are not applicable to second-generation income.

Question 13.
Mr. X gifts ₹ 1 Lakh to his wife Mrs. X on 1st April, 2022 which she lends to a firm at Interest rate of 14% p.a. On 1st Jan 2023, Mrs. X withdraws the money and gifts it to her son’s wife D. She claims that interest which has accrued to D, her daughter-in-law, from January 1st, 2023 to March 31, 2023 on investment made by D is not assessable ¡n her hands but in the
hands of Mr. X. is this correct? What would be the position, if Mrs. X has gifted the money to minor grandson, instead of the daughter-in- law? (Dec 2021, 4 marks)
Answer:
Applicability of clubbing provisions

• Yes, the statement of Mrs. X is correct. Section 64(1) provides that in computing the total income of any individual, there shall be clubbed all such income as arises directly or indirectly to the son’s wife, of such individual, from assets transferred directly or indirectly to the son’s wife by such individual otherwise than for adequate consideration.
• There is an indirect transfer by Mr. X to the daughter-in-law & therefore, the interest income shall be clubbed with the income of Mr. X.
• If Mrs. X had gifted the money to her minor grandson, then the interest income arising to the minor shall be clubbed u/s 64(1A) in the total income of that parent (son/daughter-in-law) whose total income (before including such income) is higher.

Income from other Sources – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Income from other Sources – CMA Inter Direct Tax Study Material

Descriptive Question

Question 1.
Attempt the question below:
At what rate of interest on debentures of an Indian public limited company subscribed in foreign exchange by a non-resident Indian taxed? (June 2015, 1 mark)
Answer:
20%

Practical Questions

Question 2.
Discuss whether the following receipts are chargeable to tax in the hands of the recipients;
(i) Prize money of ₹ 10,000 awarded to Arjun for participating in a motor car rally.
(ii) Madhu received ₹ 10000 each from six friends on his 50th birthday.
(iii) Ramesh received a plot of land from his father-in-law as gift on his marriage anniversary. The value assessed by the Stamp Valuation Officer for the purpose of stamp duty was ₹ 5 lacs.
(iv) Pramod purchased shares of Z. Limited at ₹ 1 lac from his friend. The fair market value of the shares on the date of purchase was ₹ 1.70 lacs. (Dec 2013, 4 marks)

(b) Sanjay holds 16% shares in XYZ Private Limited. The company has given him a loan of ₹ 2 lacs on 1 February, 2022. The accumulated profit of the company on that date was ₹ 1.75 lacs. Sanjay’ repaid the loan on 31st’ March, 2022. Examine the tax implication, if any, of the above transactions in the hands of Sanjay. (Dec 2013, 4 marks)
Answer:
(a) (i) Prize money is an income under Section 2(24). It was received by Arjun as a result of application of his skill and experience.

(ii) Any amount received without consideration from any person or persons other than specified relatives, is not an income assessable under the head “income from other sources” under Section 56(2)(vii), if such amount does not exceeds ₹ 50,000. As the aggregate amount received as gift from six friends exceeds ₹ 50,000, the amount ₹ 60,000 is taxable under Section 56(2)(x).

(iii) As per Section 56(2)(x) any immovable property received form relative as gift not taxable in the hands recipient, irrespective of amount of property gifted.

(iv) As per Section 56(2)(x) even it asset is received (or inadequate consideration it is taxable in the hands of the recipient, if the difference between fair market value and the amount of consideration exceeds ₹ 50,000. Hence ₹ 70,000 is taxable in the hands of Pramod under the head “income from other sources”.

Answer:
(b) As per Section 2(22)(e) where a shareholder of a closely held company having 10% or more voting rights in the company, obtains loan or advance from such company, the amount of loan or advance to the extent of accumulated profit of the company shall be deemed to be dividend. Therefore, the amount of loan to the extent of ₹ 1.75 lacs shall be deemed to be dividend in the hands of Sanjay.

Note: There is a change in the dividend taxation regime with the abolishment of dividend distribution tax in case of dividend
paid/distributed by domestic companies after 1st April 2020, hence, Section 10(34) which provided exemption from dividend received (after payment of Dividend Distribution Tax) is provided with a sunset clause i.e., the exemption would not be applicable on income received by way of dividend on or after 1st April 2020. Such deemed dividend will be taxable in the hands of Sanjay.

Question 3.
Mr. Somu placed a deposit of ₹ 20,00,000 in LMN Bank on which he is eligible for interest of 1,90,000 for the year. He also
borrowed ₹ 7,00,000 from the bank on the security of the deposit. The amount borrowed was used for his medical expenses and daughter’s education. Interest on the amount borrowed was ₹ 63,000. He offered net interest income of ₹ 1,27,000 under the head ‘income from other sources’. Is he correct? (June 2014, 3 marks)
Answer:
Mr. Somu is not correct as the amount borrowed was not used for making deposit with LMN Bank. Interest income under the head ‘Income from other Sources’ would be ₹ 1,90,000.

Question 4.
Discuss the taxability or otherwise of the following gifts received by Awn, an individual during the financial year 2022-23:
(i) ₹ 50,000 each from his four friends on the occasion of his birthday.
(ii) Wristwatch valued at ₹ 20,000 from his friend. (June 2014, 2 marks)
Answer:
(i) Gift in cash exceeding ₹ 50,000 in aggregate in a financial year is taxable. Therefore, gift of ₹ 2,00000 received from friends is taxable under head income from other sources
(ii) Wrist Watch is not covered under the definition of gift. Therefore, wrist watch valued at ₹ 20,000 from his friend is not taxable.

Question 5.
Ms. Priya has kept a fixed deposit of ₹ 10 lakhs with State Bank of India on which she received interest of 80,000. Subsequently, she borrowed ₹ 5 lakhs from the same bank on the security of the fixed deposit. Interest paid on such loan is ₹ 50,000. She offered interest income of ₹ 30,000 (after adjustment of interest paid ₹ 50,000). Is she correct?
(Dec 2015, 2 marks)
Answer:
Ms. Priya is not correct, there is no provision in the act to allow the interest paid against the interest received by the assessee. Interest liability can not be claimed as deduction u/s 57(111). Hence, ₹ 80,000 will be taxed under head “Income from other sources”.

Question 6.
State the taxability of the following transactions for the assessment year 2023-24:
Ms. Janaki received family pension of ₹ 84,000. (Dec 2017, 2 marks)
Answer:
Family pension will be treated as income from other sources but a deduction of ₹ 15,000 will be allowed from family pension. Therefore, income from other sources in the hands of Ms. Janaki will be ₹ 84,000 less ₹ 15,000 = ₹ 69,000.

Question 7.
Mr. Vidyasagar received following gifts during the financial year 2022-23:
(i) Gift on the occasion of marriage from friends ₹ 70,000.
(ii) Gift on the occasion of birthday from friends ₹ 55,000.
(iii) Gift from maternal uncle on birthday ₹ 35,000.
(iv) Gift of motor car by grandfather’s younger brother. Fair market value of the car on the date of gift ₹ 3,50,000.
Compute the amount of gifts includible ¡n the total income of Mr. Vidyasagar for the financial year 2022-23. (Dec 2017, 3 marks)
Answer:
(i) Gift on the occasion of marriage from friends of ₹ 70,000 is exempt from tax.
(ii) Gift on the occasion of birthday from friends of ₹ 55,000 is treated as income from other sources u/s 56(2)(x) because the amount of gift is more than ₹ 50,000.
(iii) Gift from Material Uncle on birthday of ₹ 35,000 is exempt because the amount of gift ¡s less than ₹ 50,000.
(iv) Grandfather’s younger brother is not covered by the definition of “relative”. However, motor car is not covered by in the definition of the term “property in Explanation to Section 56(2)(vii).

Question 8.
Discuss the taxability or otherwise in the hands of the recipients:
(i) PQR Private Limited issued 15000 shares at ₹ 150 per share (face value ₹ 100 per share).The far market value of the share is ₹ 130 per share.
(ii) Mr. Sakshitha received a sum of ₹ 92,000 being proceeds at the time of maturity of a life insurance policy (taken 5 years back) and ₹ 1,10,000 being proceeds of maturity value of a Key-man insurance pocy.
(iv) Rashmi received a cell phone worth ₹ 60,000 as gift from her friend on the occasion of her birthday.
(v) On the occasion of her marriage Tripti received cash gifts of ₹ 1,30,000, which includes ₹ 60,000 from her friends.
(June 2018, 2 marks each)
Answer:
(i) Section 56 (2) (viib) provides that the following shall be taxable under the head Income from other sources:
Where a company, not being a company in which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares.

Question 9.
Discuss the taxability or otherwise in the hands of the recipients:
(i) POR Private Limited issued 15,000 shares at ₹ 150 per share (face value ₹ 100 per share). The fair market value of the share is ₹ 130 per share.
(ii) Mr. Sakshitha received a sum of ₹ 92,000 being proceeds at the time of maturity of a life insurance policy (taken 5 years back) and ₹ 1,10,000 being proceeds of maturity valuo of a Key-man insurnœ policy.
(iv) Rashmi received a cell phone worth ₹ 60,000 as gift from her friend on the occasion of her birthday.
(v) On the occasion of her marriage Tnpti received cash gifts of ₹ 1,30,000, which includes ₹ 60,000 from her friends.
(June 2018, 2 marks each)
Answer:
(i) Section 56 (2) (viib) provides that the following shall be taxable under the head Income from other sources:
Where a company, not being a company ¡n which the public are substantially interested, receives in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the tace value of such shares, the agreegate consideration received for such shares as exceeds the fair market value of the shares.

Therefore, income from other sources ¡n the hands of PQR Pvt. Ltd. will be:
15,000 shares x (₹ 150 – ₹ 130)
= ₹ 3,00,000

(ii) proceeds of maturity of a life insurance policy ₹ 92,000 is exempt in the hands of Mr. Sakshitha and proceeds of Maturity value of a key-man insurance policy is also exempt in the hands of Mr. Sakshitha.

(iv) Sec. 56(2)(x)(c): Gift Received by any person any property other than immovable property without consideration, the Agreegate fair market value of which exceeds ₹ 50,000. the whole of the agreegate fair market value of such property is taxable under the head Income from other sources. But cell phone is not included in the definition of property.

Therefore, Rashmi Received a cell phone worth ₹ 60,000 as gift from her friend on the occasion of her birthday is not taxable under the head Income from other sources.

(v) Gift Received on the occasion of the marriage of the individual is not taxable under the head Income from other sources. Therefore, on the occasion of her marriage Tripti received cash gifts of ₹ 1,30,000 is exempt from tax.

Question 10.
Explain with reasons, the taxability of the following transactions under the head “Income from other sources”:
(i) Veena received interest of ₹ 5,00,000 on additional compensation on account of compulsory acquisition of land acquired few years back.
Year-wise break up of interest received:
₹ 1,20,000 for the Financial Year 2020-21, ₹ 2,40,000 for the Financial Year 2021-22 and ₹ 1,40,000 for the financial Year 2022-23. (Dec 2018, 3 marks)

(ii) Gopal has shareholding (with voting rights) of 12% in Krishna Pvt. Ltd., a closely held company. He received loan of ₹ 2,50,000 from the company on 1 May, 2021, for which he furnished adequate security to the company. The accumulated profit of the company at that time was ₹ 1,75,000. Gopal repaid the loan on 30th Sept 2022. (Dec 2018, 3 marks)
(iii) Family pension of ₹ 60,000 received by Sreelekha, window of Late Vikram. (Dec 2018, 1 mark)
(iv) Vasant, whose salary income is ₹ 4,00,000 has received a cash gift of ₹ 60,000 from a charitable trust for meeting his medical expenses. (Dec 2018, 1 mark)
Answer:
(i) Addition compensation taxable on Receipt Basis, and deduction of amount of 50% of compensation received u/s 57 allow.
Additional compensation taxable under the head – Income from other sources
Total Compensation Received
[1,20,000 + 2,40,000 + 1,40,000] 5,00,000
Less: Deduction u/s 57 2.50.000
Taxable under the head income from other sources 2,50,000

(ii) According to Section 2(22)(e), any payment by a company not being a company in which public are substantially interested of any sum by way of loan or advance to a shareholder being the beneficial owner of shareholding not less than 10% of voting power to the extent to which the company possesses accumulated profit deemed as dividend in the hand of the shareholder.

Deemed dividend taxable under the head income from other sources.
Deemed dividend = ₹ 1,75,000, taxáble in the hand of Gopal, as income from other sources.

(iii) As per Sec. 56, family pension taxable under the head income from other sources, and deduction u/s 57 allowed while computing income chargeable to tax under the head.

(iv) As per Section 56(2)(x), where any sum of money is received by any person from any person exceeding ₹ 50,000 in aggregate value of such sum will be liable to tax. Hence, Vasant received ₹ 60,000 from a charitable trust, are taxable under the head “Income from other sources.

Question 11.
Ms. Renu has received the following gifts during the previous year 2022-23:
(i) On the occasion of her marriage on 17th January 2023 she has received ₹ 1,00,000 as gift, out of which ₹ 50,000 are from relatives and balance from friends.
(ii) On 31st January, 2023, she has received gift of ₹ 55,000 from cousin of her mother.
(iii) She has received a mobile phone worth ₹ 22,000 from her friend on 16th August, 2022.
(iv) On 1st December 2022, she acquired a vacant land from her friend for ₹ 1,50,000. Stamp duty value on that date ₹ 2,10,000. Compute the taxable income from the aforesaid gifts. (June 2019, 8 marks)
Answer:

Taxable Amount	Reasons
(i) Nil	Gifts received on the on the occasion of marriage are not taxable, whether they are received from relatives or friends
(ii) 55,000	Cousin of Ms. Renu’s mother is not a relative. Hence, the gift is taxable.
(iii) Nil	Mobile phone is not included in the definition of property” as per Explanation to section 56(2)(x)
(iv) 60,000	Purchase of land for inadequate consideration on December 2022 would attract the provision of section 56(2)(x). Where any immovable property is received for a consideration which is less than the stamp duty value of the property by an amount exceeding ₹ 50,000, the difference between the stamp duty value and consideration is chargeable to tax in the hands of individual. Hence, ₹ 60,000 is taxable in the hands of Ms. Renu.

Question 12.
State with brief reason, the taxability or otherwise of the following in the hands of the recipients [except for (i), for which issue may be seen from the hands of the company], as per the provisions of the 1Income-tax Act, 1961:
Mr. Shankar gifted a LED 4” Generation TV to his sister’s daughter Manasa on 12.3.2023. The fair market value of the LED 4”’ generation TV on this date is ₹ 1,08,000. (Dec 2019, 2 marks)
Answer:
As per Section 56(2)(x), property includes Share and securities, Jewellery Drawings paintings, Archaeological Collections, Sculptures any other work of art, Bullion, Immovable property.

Any property received as gift or acquired for low consideration other than above. Section 56(2)(x) not applicable hence LED TV is not a property. It is not taxable in the hands of Manasa.

Question 13.
Rupesh furnishes you the following details for the financial year 2022-23:

	₹
Director sitting fees from Sky (P) Ltd	50,000
Dividends from Indian companies	1,20,000
Interest on moneys borrowed for purchase of shares from which dividend income was earned.	60,000
Interest on Public Provident Fund A/c	80,000
Rent received for sub-letting a leasehold house property	1,00,000
Lease rent for the sublet leasehold property	36,000
Gift received from relatives on the occasion of marriage	55,000
Gift received from non-relatives on the occasion of marriage	80,000
Gift received from friends on the occasion of 25th birthday	60,000
Fixed deposit interest from PSU banks	16,000
Savings bank account interest	12,000
Net Agricultural income from land in Malaysia	1,60,000

Compute total income of Rupesh for the assessment year 2023-24. (Dec 2022, 7 marks)

Capital Gains – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Capital Gains – CMA Inter Direct Tax Study Material

Short Question

Question 1.
Write short note on the following:
Capital gain on transfer of depreciable assets (Dec 2022, 5 marks)

Descriptive Question

Question 2.
Explain the provisions in regard to a reference to Valuation Officer for valuation of a capital asset under the provision of the Income-tax Act, 1961. (Dec 2012, 3 marks)
Answer:
Reference to Valuation Officer [Section 55A]
Under the following circumstances the Assessing Officer may refer the valuation of the capital asset to the Valuation Officer and his valuation report shall be binding on the Assessing Officer –
1. Where the value of the asset is estimated by the registered valuer but the Assessing Officer is of the opinion that the value so determined is at variance from its fair market value.

2. In any other case, the Assessing Officer is of the opinion that

• The fair market value of the asset exceeds the value of the assets declared by the assessee either by more than 15% or by ₹ 25,000. (Rule 111 AA); or
• The nature of the asset and other relevant circumstances are such that, it is necessary to do so.

Question 3.
Write a note on how interest received by an assessee on delayed compensation or enhanced compensation is taxed. (June 2013, 5 marks)
Answer:

• As per Section 145A (b) irrespective of method of accounting followed by the assessee interest received on compensation or on enhanced compensation shall be deemed to be the income of the year in which it is received.
• As per Section 56(2) (viD) income by way of interest on compensation or enhanced compensation shall be chargeable to income tax under the head “income from other sources”.
• Under Section 57 (iv) in computation of above Income of the assessee, a deduction for a sum equal to 50% ot such income shall be allowed to the assessee.

Question 4.
State the provisions relating to claiming of exemption in order to reduce tax liability on short-term capital gains. (June 2014, 5 marks)
Answer:
Provisions relating to claiming of exemption in order to reduce tax liability on short-term capital gains Applicable for Exemption U/s

• Transfer of Agricultural land 54B
• Transfer by way of compulsory acquisition by Government 54D
• Shifting of Industrial undertaking from Urban to Rural area 54G
• Compulsory acquisition of Agricultural land by Central Government / RBI 10(37)
• Transfer by companies engaged in power decorousness 10(41)

Question 5.
State the provisions of the Income Tax Act, 1961 relating to interest on compensation or enhanced compensation on compulsory acquisition of property. (Dec 2014, 4 marks)
Answer:
As per Section 1 45A (b), interest received by an assessee on compensation or enhanced compensation, as the case may be, shall be deemed to be the income of the year in which it is received irrespective of the method of Accounting followed by the assessee. Such interest is taxable under the head ‘Income f rorr. other sources as per the provision of Section 56.

In respect of such interest, the assessee shall be entitled under section 57 to claim deduction of a sum equal to 50% of such interest. No other deduction shall be allowed under any other provision of the Income-tax Act.

Key Points:

• Regardless of the method of accounting;
• Interest on compensation enhanced compensation is taxed in the year of receipt;
• It is taxed as income from other sources;
• 50% of such interest is allowable as expenditure.

Question 6.
Can Mr. Ajit who has long-term capital gain from sale of vacant site in India buy a residential house outside India to claim exemption under section 54F? Assume that he has no residential property in India. (June 2015, 3 marks)
Answer:
Exemption u/s 54F:
When the assessee has no residential house property or has not more than one residential house property, he ¡s eligible to claim exemption under section 54F. When a long-term capital asset other than a residential house is transferred, the exemption by way of investment in residential house could be obtained by deploying the net consideration.

The exemption is subject to the condition that the assessee has within a period of one year before or two years after the date of transfer of long-term capital asset acquires a residential house or three years after transfer constructs a new residential house in India for the purpose of availing the exemption under section 54F.

A person transferring a long-term capital asset in India cannot acquire a residential house outside India and be eligible for exemption under section 54F. Thus the person cannot claim exemption in respect of long-term capital gain on sale of vacant site in India by acquiring a residential house outside India.

Question 7.
When does advance money received for transfer of capital asset become chargeable to tax? Under what head of income is it
chargeable? (June 2015, 3 marks)
Answer:
As per Section 56(2)(ix) any sum of money received as advance in the course of transfer of capital asset is chargeable.

• If such sum is forfeited; and
• The negotiations did not result in transfer of such capital asset.
• Thus, the advance amount forfeited will be taxed as income from other sources.

Question 8.
State the conditions to be satisfied when a sole proprietary concern is succeeded by a company, to avail tax exemption in
respect of capital gains. (June 2015, 4 marks)
Answer:
Conversion of sole proprietary concern into a company:
Where a sole proprietary concern is succeeded by the company the capital gain on transfer of any capital asset or intangible asset will be tax-free.

The following conditions are to be satisfied in this regard:

• Alt the assets and liabilities of the sole proprietary concern relating to the business immediately before the success become the assets and liabilities of the company;
• The shareholding of the sole proprietor in the company is not less than 50% of the total voting power in the company and
• This continues to remain so for a period of 5 years from the date of succession; and
• The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, otherwise than by way of allotment of shares in the company.

Question 9.
State the circumstances under which the Assessing Officer may refer the valuation of capital asset to the Valuation Officer.
(Dec 2015, 4 marks)
Answer:
Reference to Valuation Officer [Section 55A]
Under the following circumstances the Assessing Officer may refer the valuation of the capital asset to the Valuation Officer and his valuation report shall be binding on the Assessing Officer –
1. Where the value of the asset is estimated by the registered valuer but the Assessing Officer is of the opinion that the value so determined is at variance from its fair market value.

2. In any other case, the Assessing Officer is of the opinion that

• The fair market value of the asset exceeds the value of the assets declared by the assessee either by more than 15% or by ₹ 25,000. (Rule 111 AA); or
• The nature of the asset and other relevant circumstances are such that, it is necessary to do so.

Practical Questions

Question 10.
(a) Answer the following sub-divisions briefly in the light of the provisions of the Income-tax Act, 1961:
(iv) Is the right of management in an Indian company a capital asset? On relinquishment directly or indirectly, is it liable to tax? (Dec 2013, 1 mark)
Answer:
Yes, it is a capital asset in view of the Explanation in Section 2(14). It is a transfer in view of Explanation 2 to Section 2(47). Hence the relinquishment is liable to capital gains tax.

Question 11.
Chirag, an individual, purchased 5,000 shares of X. Limited at ₹ 50 per share and 4,000 shares of Y. Limited at ₹ 60 per share
in the previous year 2015-16 and held them as capital assets. In the previous year 2020-21, he converted the shares into his stock-in-trade. The fair market value of the shares of both the companies on the date of conversion was ₹ 300 per share.
In the previous year 2022-23, he sold the shares of the two companies at ₹ 380 per share. Shares were sold by way of private sale and hence securities transactions tax was not payable.

Ascertain chargeable capital gain and business income from the above-noted transactions in the hands of Chirag.
Cost Inflation Index:
Financial Year 2015-16: 254
Financial Year 2020-21: 301
Financial Year 2022-23: 331 (Dec 2013, 5 marks)
Answer:

Computation of Business Income for Assessment Year 2023 – 2024

Particulars	₹
Sale proceeds of Shares (9,000 X ₹ 380)	34,20,000
Less: Fair market value of Shares on the date of conversion	27,00,000
Business Income	7,20,000

Note: As securities transaction tax was not paid, exemption under section 112A in respect of long-term capital gain is not available.

Question 12.
Mr. Ahuja purchased one plot of land in 2009-10 at a cost of ₹ 1,00,000 in Delhi. The land was held by him as capital asset. He converted the plot into his stock in trade on 1 April, 2021, on which date the fair market value of the plot was ₹15,50,000. He started constructing a building consisting of eight flats of equal size and dimension on the plot on 1st April, 2021. Cost of construction of each flat is ₹ 6,00,000. Construction was completed in June 2022. He sold five flats at ₹ 12,00000 per flat from June, 2022 to March, 2023. The remaining three flats were held as stock on 31 March, 2023. Compute Capital Gain and Business Income arising from above transactions for Assessment year 2023-24.
(Cost Inflation Index:
2009-10: 148
2021-22: 317
2022-23: 331) (Dec 2014, 9 marks)
Answer:

Notes:
1. Capital gain arising on conversion of capital asset into stock-in-trade is faxed in the year in which the converted asset is transferred. Therefore, capital gain in respect of proportionate land for 5 fIats is chargeable to tax in assessment year 2023-24.

2. Although tax liability for capital gain is taxed in the year of actual transfer, cost inflation index of the year in which capital asset is converted is fo be used for determining capital gain, as transfer under section 2(4 7) is recognized in the year of conversion.

Question 13.
Ajay purchased a house for ₹ 6 lacs from Anup Properties, a property dealer on 1st June, 2022, for his residential purpose. He paid stamp duty on value of ₹ 10 lacs assessed by Stamp Valuation Authority. Examine the tax implications in the hands of Ajay and Anup Properties. (Dec 2014, 4 marks)
Answer:
In the hands of Ajay:
As per Section 56(2)(x), where an individual receives any immovable property, being his capital asset for a consideration, which is less than the stamp duty value of the property by an amount exceeding ₹ 50,000, then the excess of stamp duty value over such consideration shall be taxed in the hands of the individual under the head “income from other sources”.
Therefore, the sum of 4 lacs (i.e., ₹ 10 lacs – ₹ 6 lacs) shall be taxed in the hands of Ajay under the head “income from other sources”.

In the hands of Anup Properties:
Anup Properties is a property dealer. So the property sold constituted his stock-in-trade. As per Section 43CA, where the consideration on transfer by assessee of an asset (other than capital asset), being land or building is less than the stamp duty value assessed or assessable, such stamp duty value shall be deemed to be the full value of consideration for the purpose, of
computing profits and gains from transfer of such asset.

Note:
The stamp duty value can be up to 120% (Earlier 110%) of the consideration if the transfer of “residential unit”, which means an Independent housing unit is made between 12th November 2020 and 30th June 2021. Therefore, sum of ₹ 10 lacs shall be taken to be the consideration on state of the building to Ajay and the said sum shall be considered for determination of business income of Anup Properties.

Question 14.
(a) From the following information, compute the income taxable under the head ‘Capital gains’ and ‘Income from other sources’ in the hands of Sachin:
(i) Sehwag gifted a vacant site to his friend Sachin on 23.05.2022 on the occasion of latter’s birthday.
(ii) Sehwag had acquired the said vacant site in May, 2016 for ₹ 30,00,000.
(iii) The fair market value of the site for stamp duty purposes on the date of gift i.e. on 23.05.2022 was ₹ 60,00,000.
(iv) Sachin sold the vacant site on 15.03.2023 for a consideration of ₹ 70 lakhs when its stamp duty value on the date of sale was ₹ 90 lakhs. For capital gains, state with reason, whether it is short-term or long-term. Also, compute the capital gains chargeable to tax in the hands of Sehwag. (Dec 2014, 4 marks)
Answer:
Computation of total income In the hands of Sachin A.Y. 2023-24

Particulars	₹
Capital gains: Sale consideration – Stamp duty valuation, as per Section 50C (i.e. more than 110% of sale consideration)	90,00,000
Less: Cost of acquisition	60,00,000
Short-term capital gain	30,00,000
Income from other sources: Stamp duty value of the property on the date of receipt of gift i.e., 23.05.22	60,00,000
Total income	90,00,000

Note:
Where a property is received without consideration, the FMV i.e., stamp duty valuation ¡s the value taxable under the head Income from other sources in the hands of Sachin. The holding period in the hands of Sachin shall be from the date of receipt of property arid not from the date of acquisition by the previous owner. Since it was received on 23.05.2022 and sold on 15.03.2023 it is a short-term capital asset and the resultant gain ¡s short-term capital gain. The donor Sehwag is not subject to capital gains as the property was no transferred but was gifted which is not regarded as transfer under Section 47.

Question 15.
Mr. Dhoni sold a residential building at Cochin for ₹ 65 lakhs in December, 2022. The stamp valuation authority determined the value at ₹ 80 lakhs which was not contested by Mr. Dhoni. The property was acquired in April, 2010 for ₹ 6 lakhs. He acquired a residential flat at Ranchi for ₹ 55 lakhs and another residential house at Cuttack for ₹ 25 lakhs before March, 2023. Compute the capital gain of Mr. Dhoni for the assessment year 2023-24.
Note:
Financial year Cost inflation index
2010-11 167
2022-23 331
You are required to plan in such a way that the incidence of tax is the least. (June 2015, 5 marks)
Answer:
Computation of capital gain of Mr. Dhoni for the assessment year 2023-24

Particulars	₹
Sale consideration of residential building at Cochin	65,00,000
Stamp valuation authority has determined the value at ₹ 80 lakhs.
The higher of the two is to be adopted as deemed sale consideration U/s 50C (See Note – 1)	80,00,000
Less: Indexed cost of acquisition
₹ 6,00,000 x 331 ÷ 167	11,89,222
Capital Gains Before Exemption	68,10,778
Less: Exemption U/s 54
In respect of residential property acquired at Ranchi & Cuttack	68,10,778
Taxable long-term Capital Gain	NIL

Note:
1. As per amendment made by Finance Act, 2020 w. e. f. 1st April, 2020 where the value adopted or assessed or assessable by the stamp valuation authority does not exceed 110% of the consideration receivec or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purpose of section 48, be deemed to be the full value of the consideration.

And where the value adopted or assessed or assessable by the stamp valuation authority is exceeds 110% of the consideration received or accruing as a result or the transfer then Stamp Duty Value shall, for the purpose of section 48, be deemed to be the full value of the consideration.

2. With effect from Assessment Year 2020-21 corresponding to FY 2019- 20, a capital gain exemption is available for the purchase of two residential houses in India. However, the exemption is subject to the capital gain not exceeding ₹ 2 crore. Also, the exemption is available only once in the lifetime of the seller.

Question 16.
Answer the following questions with brief’ reasons workings:
Mr. Vishnu received ₹ 2,00,000 on 10th April, 2022 as advance from Mr. Ram in pursuance of an agreement to transfer a vacant land held as capital asset. The agreement was cancelled later. Mr. Vishnu retained 50% of the advance and refunded the balance to Mr. Ram. What is the tax implication in the hands of Mr. Vishnu? (Dec 2015, 2 marks)

Mr. G gifted a house property to his son, Mr. H (age 20 years) on 5th June, 2022. The property was acquired by Mr. G on 10th October, 2018. Mr. H held the property as capital asset and transferred the property on 20th October, 2022 for ₹ 20 lakhs. Is the capital gain short-term or long-term? (Dec 2015, 2 marks)
Answer:
(a) As per Section 56(2)(ix) any sum of money received as advance in the course of transfer of capital asset is chargeable:

• If such sum is forfeited; and
• The negotiations did not result in transfer of such capital asset. Thus the amount of ₹ 1,00,000 (50% of 2,00,000) will be taxable under the head “Income from other sources” in hands of Mr. Vishnu.

(d) Where the capital asset became the property of the assessee under gift or will, the cost of acquisition of the asset shall be deemed to be the cost which the previous owner of the property acquired it; as increase by the cost of improvement incurred by the previous owner/assessee. (Section 49) and Where an asset received by the way of gift has been sold, the period of holding of the previous owner should be considered.

Therefore capital gain rising on sale of house property by Mr. H. will be long-term capital gain because the period of holding is more than 24 months.

Question 17.
ABC Private Limited allotted 10,000 shares of ₹ 10 each to Mr. A at 20 per share. The fair market value of the shares on the date of allotment was determined at ₹ 15 per share. Will such allotment have any tax implications in the hands of ABC (P) Ltd? What would be your answer in case the company is a listed company in Bombay Stock Exchange? If Mr. A is a non-resident, state the implication. (Dec 2015, 4 marks)
Answer:
Amendment to Section 56(2) of Income Tax Act, 1961. When a company (public unlisted or private company) issues its share to an Indian resident at a value more than fair market value of those shares, will be subjected to tax in hands of the company under head “Income from other sources”.

Thus share premium of ₹ 50,000 (i.e. 1,000 share at premium of ₹ 5 each) is taxable in hands of ABC Private Limited under head “Income from other sources”. and part of question/Answer: This clause is applicable to companies in which public are not substantially interested. The clause is not applicable to companies listed in any recognised stock exchange. This clause would not be applicable if ABC Private Limited is listed in BSE.

IIIrd part of question/Answer:
Any consideration paid by a non-resident to a closely held company for the share in it, the amount of share premium exceeds the fair market value of the share, company may not be liable to tax. If Mr. A is a non-resident, company would not be liable to tax for share premium (value in excess of fair market value of share) by Mr. A.

Question 18.
Ms. Sanvitha sold a residential house at Salem for a consideration of ₹ 9.5 crores on 10-01-2023. The buyer is an unrelated
person. The stamp duty valuation of the house is ₹ 10.20 crores. Brokerage on sale paid at 2%. In April, 2008 she had bought land for ₹ 1.20 crores. Registration and other expenses incurred were 10% of the same. The construction of the house was completed in March, 2011 for ₹ 1 crore.

She purchased the following two residential houses in March, 2023:
(i) House at Chennai for ₹ 1.1 crores
(ii) House at Mumbai for ₹ 3 crores.
She also purchased bonds of National Highway Authority of India on the following dates:
23-02-2023 ₹ 40 lakhs
12-04-2023 ₹ 50 lakhs
Compute income of Ms. Sanvitha under the head “capital gains’ for Assessment Year 2023-24. Cost inflation indices are:
FY 2009 – 10 148;
FY 2010 -11 167;
FY 2021 – 22 317;
FY 2022 – 23 331; (June 2016, 7 marks)
Answer:

Notes:
1. As per Section 50C, where the stamp duty value ¡s more than actual sale consideration, the former is to be adopted for computing capital gains. As per amendment made by Finance Act, 2020 w.e.f. 1st April, 2020 where the value adopted or assessed or assessable by the stamp valuation authority does not exceed 110% of the consideration received or accruing as a result of the transfer, the consideration so received or coming as a result of the transfer shall, for the purpose of section 48, be deemed to be the full value of the consideration.

And where the value adopted or assessed or assessable by the stamp valuation authority is exceeds 110% of the consideration received or accruing as a result of the transfer then Stamp Duty Value shall, for the purpose of section 48, be deemed to be the full value of the consideration.

2. U/s 54, exemption ¡s available only in respect of only one residential house acquired within the eligible period. Here it will be beneficial to claim for the house property bought at Mumbai. With effect from Assessment Year 2020-21 corresponding to FY 2019-20, a capital gain exemption is available for purchase of two residential houses in India. However, the exemption is subject to the capital gain not exceeding ₹ 2 crore. Also, the exemption is available only once in the lifetime of the seller.

3. U/s 54EC, maximum permissible deduction is ₹ 50 lacs.

Question 19.
Answer the following question with a brief reason/working:
(i) Mr. Rao sold a vacant site to Mr. Jam in August, 2020 for ₹ 5 lakhs.
The stamp duty valuation of the site at the time of sale was ₹ 8 lakhs.
The difference of ₹ 3 lakhs was taxed as income in the hands of Mr. Jam under the head ‘other sources’. Now in March, 2023, Mr. Jam sold the vacant site for ₹ 12 lakhs. What is the cost of acquisition of site to be adopted by Mr. Jam? ‘ (Dec 2016, 2 marks)
Answer:
Cost of acquisition of site to be adopted by Mr. Jam will be ₹ 8 lakhs as per Section 49 (4).

Question 20.
Mrs. Kiruthika sold a residential house at Mumbai for a consideration of ₹ 70,00,000 on 14.02.2023. She had bought land in May, 2011 for ₹ 8,00,000. Registration and other expenses incurred were 10% of the same. The construction of the house was completed in November, 2012 at a cost of ₹ 10,00,000. The sale was made to a stranger. She had taken an advance of ₹ 2,00,000

In cash on 10.04.2022, for which clear evidence is available. At that time stamp duty valuation was ₹ 70,00,000. At the time of registration in February, 2023, there was 10% increase in stamp duty valuation. She received the balance consideration of ₹ 68,00,000 in February, 2023 by cheque. Brokerage paid for sale was 1% on sale consideration received. She purchased the following residential houses in March, 2023:
(i) House at Delhi for ₹ 11,00,000
(ii) House at London for ₹ 19,00,000
He also purchased bonds of National Highway Authority of India approved for the purpose of Section 54EC on the following dates:
29/03/2022 ₹ 4,50,000
22/05/2022 ₹ 5,00,000 .
Compute income chargeable under the head ‘Capital Gains’ in the hands of Mrs. Kiruthika for Assessment Year 2023-24.
Cost Inflation Indices (CII) are as under:

Financial Year	CII
2011-12	184
2013-14	220
2021 -22	317
2022-23	331

(Dec 2016, 7 marks)
Answer:

Note 1: With effect from Assessment Year 2020-21 corresponding to 2019-20, a capital gain exemption is available for the purchase of two residential houses in India. However, the exemption is subject to the capital gain nol exceeding ₹ 2 crore. Also, the exemption is available only once in the lifetime of the seller.

Question 21.
State the taxability of the following transactions for the assessment year 2023-24:
(i) Mr. Ashok acquired a vacant site from Mr. Bnjesh (non-relative) for ₹ 6 lakhs when the stamp duty valuation of the vacant site on the date of registration of document was ₹ 10 lakhs.
(ii) Rosy & Co. a partnership firm engaged in trading of vacant lands. It sold vacant land for ₹ 40 lakhs when the stamp duty valuation of the lands was ₹ 55 lakhs.
(v) Mr, Jayaram retired from a nationalized bank on 30.11.2022, sold his motor car for ₹ 5 lakhs. The Car was used by him for the last 5 years and was received as gift from his brother who acquired the car for ₹ 10 lakhs on 10.01 .2015.
(vi) Mr. Vasu acquired an agricultural land situated in a village (rural area) for ₹ 10 lakhs from Mr. Sundar (non-relative) when the stamp duty valuation on the date of registration of document was ₹ 12 lakhs. (Dec 2017, 2 x 4 = 8 marks)
Answer:
(i) Under section 56(2)(x): Income from other sources: Where an Individual or HUF receives, in any previous year from any person or persons an immovable property being land or building with consideration (it stamp duty value exceeds the purchase price by more than ₹ 50,000) then value of gift stamp duty value – purchase price i.e.₹ 10 lakhs – ₹ 6 lakhs = ? 4 lakhs being taken as income from other sources and liable to tax.

(ii) Section 43CA: Special provisions for full value of consideration for transfer of assets other than capital assets in certain cases.

As per provisions of Section 43CA of the Income Tax Act, 1961 full value of consideration for sale of vacant land by Rosy & Co. will be ₹ 55 lakhs and difference between full value of consideration and cost of acquisition will be treated as income from business.

Note:
The stamp duty value can be up to 120% (Earlier 110%) of the consideration if the transfer of presidential unit, which means an independent housing unit is made between 12th November 2020 and 30th June 2021.
(v) Difference between sale consideration i.e. ₹ 5,00,000 and WDV of Car as on 01/04/2022 will Not be treated as short-term capital gain in the hands of Mr. Jayaram.
(vi) Rural agricultural land will not be treated as capital asset and difference between stamp duty value and cost of acquisition will not be treated a. income from other sources, hence not liable to tax.

Question 22.
The summarized financial position of Purva India (P) Ltd. as on 31/12/2022 is as under:

Liabilities	Amount ₹	Assets	Amount ₹
Equity share capital of ₹ 10 each	8,00,000	Land	6,00,000
Preference share capital	1,00,000	Building (WDV as per Income tax Act)	3,00,000
Reserves	2,00,000	Machinery (WDV as per Income tax Act)	4,00,000
Loan Creditors	6,00,000	Current Assets	10,40,715
Creditors	6,00,000
Provision of Dividend Distribution Tax	40,715
	23,40,715		23,40,715

Additional Information:
The Company went into liquidation on the balance sheet date; all current assets and buildings realized at book value. The realized money was applied towards payment of outside liabilities including Dividend Distribution Tax, and therefore after the preference shareholders.

Mr. Utkarsh is a holder of 10% equity shares and 20% preference shares of the company. Equity shares were originally acquired by him 16.08.2006 at face value. However, he had subscribed to preference shares on 01.04.2022, which were issued at par. He received a part of land (MV ₹ 5,00,000) and cash (for preference share) ₹ 20,000. Compute the capital gain in hands of the company and Mr. Utkarsh. (Dec 2018, 8 marks)
Answer:
As per Section 46(1), no capital gain shall arise in the hands of the company on distribution of assets to the shareholder on liquidation. Dividend includes any distribution made to the shareholder of the company on its liquidation, to the extent to which such distribution is attributable to the accumulated profit of the company immediately before its liquidation.

Question 23.
Vipul held a plot of land in Haryana as capital asset till 31st March, 2021. The land was acquired by him in the previous year 2017- 18 for ₹ 20,00,000. It was converted into stock-in-trade on 1st April, 2021 of real estate business carried on by him. The fair market value of the land on the said date was ₹ 35,00,000. Vipul sold the land to Vinod for, ₹ 45,00,000 on 31 January, 2023. The stamp duty assessed on the said date in respect of the land amounted to ₹ 50,00,000. Vipul purchased a flat for ₹ 15,00,000 on 31st March, 2023 for his residential purpose. He has no other residential property.
(i) Compute the income arising from the above transactions under appropriate heads of income ¡n the hands of Vipul.
(ii) What is the effect on assessment of Vinod, if Vinod had bought the land for constructing a residential property?

Additional Information:
Financial year Cost Inflation Index
2017-18 272
2022-22 317
2022-23 331
(June 2019, 10 marks)
Answer:

Computation of business income for Assessment Year 2023-24:

Particulars	₹
Consideration, being stamp duty value on the date of sale [under section 43C, actual consideration or stamp duty value, whichever is more is to be taken as consideration]	50,00,000
Less: Cost of acquisition, being fair market value on the date of conversion	35,00,000
Business income	15,00,000

(il) Effect on assessment of Vinod for Assessment Year 2023-24:
As per section 56(2)(x), where immovable property in the nature of capital asset is received for a consideration less than the stamp duty value, the difference between the stamp duty value and actual consideration shall be taxed as income from other sources, if such difference exceeds ₹ 50,000.

Note: .
The stamp duty value can be upto 120% (Earlier 110%) of the consideration it the transfer of “residential unit”, which means an independent housing unit is made between 12th November 2020 and 30th June 2021. In the instant case, Vinod purchased the land for constructing residential property meaning thereby that the land is his capital asset. So, the difference between the stamp duty value and actual purchase price i.e. ₹ 5,00,000 is taxable in his hands under the head ‘Income from other sources”.

Question 24.
State with brief reason, the taxability or otherwise of the following in the hands of the recipients [except for (i), for which issue may be seen from the hands of the company], as per the provisions of the Income-tax Act, 1961:
(i) Unicorn Capital Private Limited, a closely held company, issued ₹ 14,000 shares at ₹ 135 per share. (The face value of the share is ₹ 10 per share and the fair market value of the share is ₹ 120 per share).
(ii) Mr. Srinivsan received an advance of ₹ 96,000 on 1 9.09.2022 against the sale of his, house. However, due to non-payment of balance amount in time, the contract was cancelled and the amount of ₹ 96,000 was forfeited.
(iii) Mr. Dhandapani, transferred a house property to his son Mr. Vignesh Karthik without consideration. The value of the house is ₹ 12 lakhs as per the stamp valuation authority. (Dec 2019, 6 marks)
Answer:
(i) As per Section 56(2) (x), if any closely held company issue share to any resident shareholder on premium then:
(issue price of share – FMV of such share) shall be taxable in the hands of company under IFOS. Income from other sources in the hands of Unicorn Capital Private Limited
= (135 – 120) x 14,000 = ₹ 2,10,000

(ii) As per Section 51, Any advance money forfeiture on or after 1/4/2014 shall be charged to tax in the year of forfeiture under the head “income from other sources u/s 56(2) (x) Income from other sources in the hands of Srinivasan for the AY. 2023-24 ₹ 96,000

(iii) As per Section 56(2) (x), property is not taxable if it is received from any Relative without consideration. Hence house property ¡s received by Mr. Vignesh Karthik from his father without consideration It is not taxable in the hand of Vignesh
Karthik because father is covered under definition of Relative.

Question 25.
Shri. Charan, a resident, has sold some assets during the previous year 2022-23, and furnishes the following details:

Items	Cost of acquisition	Sale consideration	Year of acquisition
Land	₹ 20 lakhs	₹ 100 lakhs	2008-09
Jewellery	₹ 40 lakhs	₹ 180 lakhs	2002-03

Note: Cost Inflation Index FY 2003-04 = 109; FY: 2009-10 = 148; and FY 2022-23 = 331

In March, 2023, he purchased a residential house at Delhi for ₹ 80,00,000 for self-occupation, even though he already owned one residential house (self-occupied) since 1st April, 2014. Compute capital gain including exemption, if any. (Dec 2021, 5 marks)
Answer:

Question 26.
Compute capital gain in the individual cases:
(i) A listed equity share is acquired on 1st of March, 2018 for ₹ 150, its fair market value is ₹ 270 on 31 March, 2018 and it is sold on 31st of August, 2022 in a recognised stock exchange for ₹ 70.
(ii) A listed equity share is acquired on 1st of May, 2019 for ₹ 230, ¡ts fair market value is ₹ 450 on 31st of March, 2020 and it is sold on 1st’ of April, 2023 in a recognized stock exchange for ₹ 400. (Dec 2021, 3 marks)
Answer:
Computation of capital gains
(i) In this case, the actual cost of acquisition ¡s less than the fair market value as on 31st March, 2018. The sale value is less than the fair market value as on 31st of March, 2018, and also the actual cost of acquisition. Therefore, the actual cost of ₹ 150 will be taken as the cost of acquisition in this case. Hence, the loss under the head long-term capital gain will be ₹ 80 (₹ 70 – ₹ 150) per share in this case

(ii) In this case, the actual cost of acquisition is less than the fair market value as on 31st of March, 2018. However, the sale value is also less than the fair market value as on 31st of March, 2018. Accordingly, the sale value of ₹ 400 will be taken as the cost of acquisition and the long-term capital gain will be NIL (₹ 400 – ₹ 400).

Question 27.
Raghuram (age 44) inherited a vacant land from his father in April, 1999. The land was acquired by his father in January, 1991 for ₹ 5 lakhs. The fair market value of the land as on 01.04.2002 was ₹ 25 lakhs. Raghuram entered into an agreement for sale of land in January 2022 and received ₹ 5 lakhs as advance. This amount was forfeited since the party did not complete the transaction.

Again, Raghuram looked for a buyer and found one Sathish interested in the property. The sale consideration was fixed at ₹ 200 lakhs vide agreement made in December, 2022. It was sold and the document was registered in March, 2023. Brokerage @ 1% of the sale consideration was paid. The stamp duty value of the land on the date of sale was ₹ 215 lakhs. Raghuram acquired a residential building at Chennai for ₹ 180 lakhs in May, 2023. Cost inflation index F.Y. 2001-02 100, F.Y. 2022-23 = 331 Compute the taxable capital gain in the hands of Raghuram for the assessment year 2023-24. (Dec 2022, 7 marks)

Profits and Gains of Business or Profession – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Profits and Gains of Business or Profession – CMA Inter Direct Tax Study Material

Short Notes

Question 1.
Write short note on Tax audit requirements in the case of notified professions. (Dec 2021, 3 marks)
Answer:
In the case of persons carrying on notified profession, the provisions of tax audit contained in section 44AB would be attracted when the gross receipt exceeds ₹ 50 lakhs in the previous year. However, where the gross receipt does not exceed ₹ 50 lakhs. the assessee must admit income @ 50% or more of the gross receipt in order to be eligible for exemption from tax audit.

Thus, by default the provisions of section 44ADA would apply. Where the assessee has gross receipt below 50 Iakhs and does not want to admit income of 50% or more of the gross receipts, then the books of account have to be maintained under section 44AA and have to be audited under section 44AB. In such case, the presumptive provision contained in section 44ADA would not be applicable.

Descriptive Question

Question 2.
Name any four specified businesses covered under section 35AD and state the fiscal incentives available to such businesses.
(Dec 2012, 5 marks)
Answer:
Specified businesses covered by Section 35AD are:

• Setting up and operating cold chain facilities for specified products.
• Setting up and operating warehousing facilities for storing agricultural produce.
• Laying and operating cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being as integral part of such network.
• Building and operating, anywhere in India, a hotel of two-star or above category as classified by CG.
• Building and operating, anywhere in India, a hospital with at least one hundred beds for patients.
• Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or State Government, as the case may be, and notified by the CBDT in this behalf in accordance with the guidelines as may be prescribed.
• Developing and building a housing project under a scheme for affordable housing framed by the Central Government or State Government, as the case may be, and notified by the CBDT in this behalf in accordance with the guidelines as may be prescribed.
• Production of fertilizer in India in new plant or in a newly installed capacity in an existing plant. (w.e.f. 1-4-2012)

Availability of Fiscal Incentives:
100% of the capital expenditure incurred, wholly and exclusively, for the purpose of any specified business carried on by the assessee shall be allowed as deduction during the previous year in which such expenditure is incurred by him. However, expenditure towards acquisition of land, goodwill or financial instrument would not be eligible for deduction.

The loss of an assessee on account of a “specified business” claiming deduction u/s 35 would be allowed to be set off against the profits of any other specified business under section 73A, whether or not the latter is eligible for deduction u/s 35 AD.

Question 3.
Discuss whether it is required on the part of an assessee desiring to claim deduction of bad debt written off,to prove that the debt written off in the books as irrecoverable or bad debt, is incapable of recovery or that the said debt had really turned bad. (Dec 2012, 4 marks)
Answer:
Write-off of bad debt
Bad debts to be allowed as deduction only in the year in which they become irrecoverable on the basis of recently notified income computation and disclosure standards without recording the same In the accounts [Section 36(1)(vU)] [W.e.f. A.Y. 2016-17]

Where the amount of debt or part thereof which has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under section 145(2) without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written of as irrecoverable ¡n the accounts for the purposes of this clause.

Question 4.
Please state the deductibility of the following expenses:
(i) Litigation expenses for restraining another company from using assessee’s trademark.
(ii) Brokerage paid for raising loan to finance assessee-company’s business.
(iii) Compensation paid to cancel purchase order of a machine due to abnormal rise in its price. Assessee claims it as a trading loss. (Dec 2012, 6 marks)
Answer:
(i) Litigation expenses for restraining another company from using assessee’s trade mark, is one expended out of commercial
expediency, wholly and exclusively for the purchase of the business; being revenue expenditure, the same is an allowable expenditure u/s 37.

(ii) As per Section 37 deduction of expenditure ¡s allowed if it is done to expend wholly and exclusively for the purpose of such business or profession. In this case brokerage paid for raising loan to finance business is a deductible expenditure u/s 37 as it is incurred wholly and exclusively for the purpose of the business. If any tax is deductible at source u/s 194-H, the same has to be done; the provisions of Section 40(a)(ia) should not be contravened.

(iii) As per Section 37 deduction of expenditure is not allowed if it’s nature of capital expenditure. In this case compensation paid to cancel purchase order of a machine, ¡s a capital expenditure. It cannot be deducted u/s 37. As there is no ‘transfer’ of any capital asset, compensation paid cannot be claimed as a Capital loss also.

Question 5.
State who are the persons not eligible to avail any benefit u/s 44 AD. (June 2013, 2 marks)
An assessee owned a light commercial vehicle for 8 months and 3 days, a medium goods vehicle for 11 months, and another medium goods vehicle for 12 months during the previous year. Compute his profits from the three trucks In terms of Section 44 AE. (June 2013, 2 marks)
Answer:
Sec. 44AD: Special provision for computing profit and gains of business of civil construction.
(i) The following persons are not eligible u/s 44AD.

• Person carrying on profession as referred to in Section 44AA(1)
• A person earning income in the nature of commission or brokerage;
• A person carrying on any agency business; or
• A person who is in the business of plying, hiring or leasing goods carriages.
• Note: Section 44AA – maintenance of books of accounts by certain person cam/in g on profession or business.

(ii) Provision of Section 44AE for transporters:
A taxpayer who own not more than 10 goods carriage and is engaged in the business of plying, hiring, and leasing of goods carriage, his income would be deemed to be ₹ 7,500 per goods carriage per month. So, profit and gain of the assessee u/s 44AE would be:
(7,500 x 9) + (7,500 x 11) + (7,500 x 12) = ₹ 2,40,000

Amendment to [Section-44AE]
Section 44AE(2) has been substituted (with effect from the assessment year 2019-20) so as to provide that for a heavy goods vehicle, the profits and gains shall be an amount equal to ₹ 1,000 per ton of gross vehicle weight (or unladen weight) for every month (or part of a month) during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

In the case of a goods carriage other than heavy vehicle, the profits and gains shall be an amount equal to ₹ 7,500 for every month (or part of a month) during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher. For this purpose, “heavy goods vehicle” means any goods carriage the gross vehicle weight of which exceeds 12,000 kilograms.

Question 6.
State the deductibility of the following expenses while computing the business income:
(i) Anticipated hedging loss under a contract to purchase raw material;
(ii) Consultation fees paid to tax advisor;
(iii) Advertisement expenses incurred outside India in foreign currency. RBI permission has not been obtained;
(iv) 500 VIP briefcases costing 2,000 each presented to customers;
(v) Travelling expenses incurred to explore the feasibility of new line of business;
(vi) The assessee claims the setoff of unabsorbed depreciation of a discontinued business against the profits of another business. (June 2013, 6 x 1= 6 marks)
Answer:
The deductibility of the following expenses while computing the business income:
(i) Anticipated hedging loss under a forward contract is not allowed to be deducted
(ii) Consultation fees paid to tax advisor is allowed under section 37(1).
(iii) Advertisement expenses incurred in India or outside India is allowed to be deducted under section 37(1), provided it is not of a capital nature and it is incurred wholly and exclusively for the purpose of business. Permission of RBI is not relevant.
(iv) Presentation of VIP bags to customers is allowed as expenditure on advertisement under section 37(1). There is no ceiling limit for gift articles.
(v) Travelling expenditure for exploring new line of business is a capital expenditure. It is not allowed under sec. 37(1). It may be capitalized for the purposes of Sec. 35D.
(vi) Unabsorbed depreciation of a discounted business now can be set off against the profits of any other business and thereafter against income of any other head.

Question 7.
State the conditions to be fulfilled for deduction in respect of write-off of bad debt. (Dec 2013, 3 marks)
Answer:
Write-off of bad debt
Bad debts to be allowed as deduction only in the year in which they become irrecoverable on the basis of recently notified income computation and disclosure standards without recording the same In the accounts [Section 36(1)(vU)] [W.e.f. A.Y. 2016-17]

Where the amount of debt or part thereof which has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and disclosure standards notified under section 145(2) without recording the same in the accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been written of as irrecoverable ¡n the accounts for the purposes of this clause.

Question 8.
Briefly explain the deduction allowable u/s 37 of the Income Tax Act, 1961 in respect of income from business or profession.
(June 2014, 4 marks)
Answer:
General Deduction [Section 37(1)]
Section 37(1) is a residuary section. In order to claim deduction under this Section, the following conditions should be satisfied:

1. The expenditure should not be of the nature described under sections 30 to 36.
2. It should not be in the nature of capital expenditure.
3. It should not be personal expenditure of the assessee.
4. It should have been incurred in the previous year.
5. It should be in respect of business carried on by the assessee.
6. It should not have been incurred for any purpose which s an offence or is prohibited by any law. Thus, penalty paid under any law is not deductible.

Question 9.
Attempt the question below:
What is the rate of tax applicable to income of a non-resident sportsman who is a foreign national by way of participation in any sport in India? (June 2015, 1 mark)
Answer:
20%.

Question 10.
Name any tour businesses which are eligible for deduction under section 35AD of the Income-tax Act, 1961. (June 2015, 4 marks)
Answer:
Section 35AD: Deduction in respect of expenditure on specified business.
Eligible businesses u/s 35AD:
The following businesses are specified business as per Section 35AD(8):

• Setting up and operating a cold chain facility
• Setting up and operating a warehouse facility for storage of agricultural produce.
• Laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network.
• Building and operating, anywhere in India. a hotel of two star or above category as classified by the Central Government.
• Building and operating, anywhere in India, a hospital with at least one hundred beds for patients.
• Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or State Government, as the case may be and notified in this behalf.
• Developing and building a housing project under a scheme for affordable housing framed by the Central Government or State Government, as the case may be and notified in this behalf.
• Production of fertilizers in India.
• Setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962. Bee-keeping and production of honey and beeswax.
• Setting up and operating a warehouse facility for storage of sugar.
• Laying and operating a slurry pipeline for the transportation of iron ore; Setting and operating a semiconductor wafer fabrication manufacturing unit notified by the Board in accordance with such guidelines as may be prescribed.

Question 11.
When are the books of account of a person engaged in notified profession liable for audit under section 44A6? What is the penalty is leviable for failure to get the accounts audited? (June 2015, 2 marks)
Answer:
Every person carrying on profession shall, if his gross receipts in profession exceed ₹ 50 lakhs in any previous year must get his accounts audited under section 44AB. For failure to get the accounts audited the penalty leviable is 0.5% of the gross receipt or ₹ 1,50,000 – whichever is less (Section 271 B).

Question 12.
Answer the following question with brief reason/working:
Are profits on transfer of shares and securities held by a Foreign Institutional Investor chargeable to tax under the head “profits and gains of business or profession” or “capital gains”? (Dec 2015, 2 marks)
Answer:
Profit/gain on transfer of share and securities held by a foreign institutional investor shall be chargeable to tax under the head ‘capital gain’.

Practical Questions

Question 13.
Mr. Gopi carrying on business as proprietor converted the same into a limited company by name Gopi Pipes (P) Ltd. from 01.07.2022. The details of the assets are given below:
Block – I WDV of plant & machinery (rate of depreciation @15%) ₹ 12,00,000
Block – II WDV of building (rate of depreciation @10%) ₹ 25,00,000
The company Gop Pipes (P) Ltd. acquired plant and machinery in December 2022 for ₹ 10,00,000. It has been doing the business from 01.07.2023. Compute the quantum of depreciation to be claimed by Mr. Gopi and successor Gopi Pipes (P) Ltd. for the assessment year 2023-24.
Note: Ignore additional depreciation. (Dec 2012, 5 marks)
Answer:
Computation of depreciation for the Assessment Year 2023-24 u/s 32

The asset acquired during the year is used for less than 180 days, hence 50% of the depreciation will be allowed.

Question 14.
‘A’ Ltd. owns two plants: Plant X and Plant Y, as on April 1, 2022 (rate of depreciation: 15% depreciated value on 01.04.2022:
₹ 2,37,000).
The company purchased Plant Z on May 31, 2022 for ₹ 20,000.
It sells Plant X (on April 10, 2022) and Plant Y (on December 11, 2022), and Plant Z (on March 1, 2023) for ₹ 40,000; ₹ 36,000 and ₹ 24,000 respectively. Find out the WDV of the block of assets on 31.03.2023. Explain the treatment relating to depreciation and allied issues relating to the above. What is the opening WDV of the block as on 01.04.2023? (Dec 2012, 5 marks)
Answer:
Written down value of the block of assets will be determined as below:

Amount	₹
Opening WDV of the block consisting of Plants X & Y	2,37,000
Add: Cost of Plant Z (Because Put to use> 180 days)	20,000
Total	2,57,000
Less: Sale of Plants X, Y, and Z	1,00,000
Short-Term Capital Loss	1,57,000

Note:

• No depreciation is allowable as the block of assets ceases to exist on the last day of the previous year, since all plants are sold.
• As per Section 50(2) ₹‘ 1,5 7,000 will be treated as short-term capital loss on sale of the assets,
• On 1st of April, 2022 the WDV will be taken as ‘NIL’.

Question 15.
Please advise regarding admissibility of the following items of expenditure:
(i) Pa,ment of interest of ₹ 40,000 on monies borrowed from bank for payment of dividends to shareholders.
(ii) ₹ 12000 has been expended for shifting of business from the original site to another place which is more advantageously located.
(iii) Lump sum paid to acquire a licence regarding technical information to reduce production cost.
(iv) Expenses for registration of trademarks.
(v) Theft of stock-in-trade assuming
(a) it is insured
(b) it was uninsured (June 2013, 10 marks)
Answer:
(i) Loan utilized for payment of dividend. This is allowable u/s. 36(1)(iii).
(ii) Shifting expenses of business premises results in an expenditure of enduring benefit. It is a capital expenditure and hence it is not allowable.
(iii) Payment made to acquire license regarding technical information is a capital expenditure. Only depreciation is allowed on such cost u/s 32.
(iv) Expenditure incurred for registration of a trademark is a revenue expenditure. It is allowable u)s 38(1).
(v) Loss of stock in trade due to theft is allowed as incidental to business. However, if it is insured, insurance compensation received will be a trading receipt.

Question 16.
Answer the following sub-divisions briefly in the light of the provisions of the Income-tax Act, 1961:
(i) Interest on bank term loan paid during financial year 2022-23 was ₹ 1,21,000. Outstanding as on 31.03.2023 was ₹ 28,000. The assessee paid ₹ 15,000 before the “due date” for tiling the return of income under section 139(1). Is the amount paid after the end of the year be eligible for deduction?
(ii) A nationalized bank gave interest reduction of ₹ 1,70,000 in a cash credit account of a trader relating to earlier years. Is the interest reduction chargeable to income tax? Said interest had not been paid to the bank.
(iii) A windmill was installed in June, 2022 for ₹ 200 lakhs. What is the rate of normal depreciation applicable on such windmill?
(vi) A company-owned chain of star hotels in India. It has been availing deduction under section 35AD. In December, 2022, it transferred the operation of hotels (all above two-star category) to another group company. Is it eligible to avail the benefit of Section 35AD even after the transfer of operating the hotels? (Dec 2013, 1 x 4 = 4 marks)
Answer:
(i) The amount of interest paid before the due date for filing the return is eligible for deduction under section 43B. Thus the amount paid after the end of the account year but before the due date for filing the return of income is deductible.
(ii) Since the interest payment would not have been allowed earlier in view of Section 43B, the waiver is also not chargeable to tax by invoking Section 41(1) of the Act.
(iii) CBDT has amended the Income Tax Rules to restrict the depreciation allowed on windmills installed on or after 1 April 2012 to 15%. (Notification No 15/2012).
(iv) As per Section 35AD (6A) transfer of operation of hotels will not deny the assessee from availing or continuing to avail the benefits of Section 35AD.

Question 17.
State, with reasons, the deductibility or taxability of the following items in computation of income under the head “Profits and gains of business or profession”:
(i) Profit of ₹ 10 lacs on sale of import entitlement.
(ii) A sum of ₹ 15 lacs was spent for acquiring one equipment used for in house scientific research project which was approved by the prescribed authority.
(iii) Share of profit of ₹ 12 lacs as partner of a partnership firm.
(iv) Expenditure on purchase of raw materials amounting to ₹ 5 lacs from a concern owned by son of the Managing Director of the assessee company.
(v) Interest of ₹ 10 lacs on loan taken from a bank for acquiring a machine in connection with expansion project of the assessee. Loan was taken on 1st April, 2022 and the machine was put to use on July, 2022. (Dec 2013, 8 marks)
Answer:
(i) Profit on sale of import entitlement is chargeable to tax under the head “Profits or gains from business or profession” as per charging Section 28.
(ii) The assessee is entitled to claim a deduction at 100% of the amount of capital expenditure on in-house scientific research programme approved by the prescribed authority [Section 35 (2AB)]: Amount of Deduction = 15 lacs.
(iii) Partner’s share in profits of firm is specifically exempted under section 10 (2A) in the hands of the partner.
(iv) Such expenditure is allowed unless it is found that the payment is excessive or unreasonable having regard to the fair market value of raw materials received. In such case the excess amount, if any, shall be disallowed under section 40A (2).
(v) Interest on loan for the period from 1 April 2022 to 1st July 2022 i.e. ₹2.50 lacs ( 10 lacs × 3/12) shall not be allowed under section 36 (1) (iii). The balance interest i.e. 7.50 lacs can be claimed under section 36 (1) (iii). Interest to the extent of ₹ 2.50 lacs shall be added to the cost of machine and depreciation can be claimed.

Question 18.
Zoom Ltd. acquired a machinery from Japan on 17.08.2021 for $ 2,50,000. The eligible rate of depreciation is 15% and ¡t ¡s used regularly from 10.09.2021. The exchange rate at the time of acquisition was ₹ 50 per dollar and the company paid $ 1,50000. The balance payment to the supplier i.e. $ 1,00,000 was paid in September, 2022 when the exchange rate was ₹ 54 per dollar. Compute depreciation for the assessment year 2023-24. Ignore additional depreciation. (Dec 2013, 4 marks)
Answer:
Answer:
Exchange fluctuation and depreciation

Particulars	₹
17.08.2021: Cost of acquisition $ 2,50,000 x ₹ 50	1,25,00,000
Less: Depreciation for the financial year 2021 – 22 @ 15%	18,75,000
WDV as on 01-04-2022	1,06,25,000
Add: Exchange fluctuation in September 2022
$ 1,00,000 x ₹ 4 each	4,00,000
Block value	1,10,25,000
Depreciation @ 15% for the financial year 2022-23	16,53,750

Question 19.
State, with brief reason, whether disallowance attracted under any provision of the Income Tax Act, 1961 in the following cases, while computing income under the head ‘Profits and gains of business or profession’:
(i) Salary of ₹ 3,00,000 to each working partner by a firm without deduction of tax at source.
(ii) Interest to a nationalized bank on term loan ₹ 72,000 of which the amount actually paid during the year was ₹ 40,000 and ₹ 15,000 was paid before the ‘due date’ for filing the return of income.
(iii) Demerger expenses of ₹ 7,00,000 wholly debited to profit and loss account.
(iv) Expenditure incurred towards issue of bonus shares ₹ 2,00,000. (Dec 2014, 4 marks)
Answer:
(i) Salary paid to each working partner by a firm ₹ 3,00,000 without deduction of tax at source will not attract disallowance under section 40a(ia). However, based on book profit of the firm and subject to the limits in Section 40(b), disallowance may apply.

(ii) Interest paid to a nationalized bank on term loan during the year ₹ 40,000 and the amount paid before the ‘due date’ for filing the return ₹ 15,000 are eligible for deduction as there will be no disallowance u/s 43B. The balance of ₹ 17,000 will be disallowed under section 43B.

(iii) Demerger expenses applicable for companies contained in Section 35DD of ₹ 7,00,000 is deductible in five equal annual installments. Therefore, ₹ 1,40,000 is allowable and ₹ 5,60,000 would be disallowed.

(iv) Expenditure incurred towards issue of bonus shares ₹ 2,00,000 is deductible and would not attract any disallowance. Issue of bonus shares would not bring any fresh inflow of funds or increase in capital employed, hence, the expenditure is fully deductible. CIT vs. General Insurance Corporation (2006) 286 ITR 232 (SC).

Question 20.
Sarath Ltd., engaged in manufacturing activity, acquired new plant for ₹ 30 crores in August 2022 which was put to use from
15.09.2022 Compute depreciation, additional depreciation under section 32(1 )(iia) and investment allowance under section 32AC of the Income-tax Act, 1961 for the plant. Quantify the written-down value of asset as it would be on 31.03.2023. (June 2015, 4 marks)
Vivitha Pipes Ltd. set up a new unit for extension of its manufacturing activity. It incurred 45 Iakhs towards preliminary expenses. The cost of the project is ₹ 600 lakhs and the amount of capital employed is ₹ 700 lakhs. Determine the amount eligible for amortization under section 35D and the period of amortization. (June 2015, 6 marks)
Answer:
(a)

Particulars		₹ in lakhs
Normal depreciation at 15% on ₹ 30 crores	A	450
Additional depreciation at 20% on ₹ 30 crores	B	600
Investment allowance under section 32AC at 15% on ₹ 30 crores	C	450
Closing WDV = ₹ 30 crores – Depreciation – Additional depreciation [i.e. ₹ 30 crores – A – B] = ₹ (30 crores – 4.50 crores – 6 crores)		1950

Note: Investment allowance under section 32A C will not reduce the block value of assets.
Answer:
(b) Amortization of preliminary expenses:
Preliminary expenses are eligible for amortization in 5 equal annual installments.
In the case of company, 5% of the cost of the project or the capital employed shall be considered for computing the amount eligible for amortization.
5% of the cost of the project =₹ 600 lakhs × 5% = ₹ 30 lakhs
5% of the capital employed = ₹ 700 lakhs × 5% = ₹ 35 lakhs
Actual preliminary expenditure incurred = ₹ 45 lakhs.
The assessee hence is eligible to amortise ₹ 35 lakhs under section 35D.
Amount eligible for amortization for 5 years = ₹ 7 lakhs for each year.

Question 21.
Vimala Pharma Ltd. informs that it has net profit of ₹ 60 lakhs for the year ended 31 March, 2023. II gives you the following further information:
(i) Depreciation as per books ₹ 3,50,000.
(ii) Bad debts written off in the books ₹ 5,00,000, which includes ₹ 1 lakh due from one customer who has disputed the liability to pay but continues to have business relationship with the company.
(iii) Proposed dividend debited to Profit and Loss Account ₹ 6 lakhs.
(iv) One machinery which has become useless has been written off in the P & L Account, the amount debited being ₹ 90,000.
(v) Provident Fund collections from employees for the year ₹ 1,50,000 and company’s own contribution of ₹ 1,10,000 for the year have not been remitted. These amounts are shown as Sundry Liability in the books. Assume it will be remitted after 31st December, 2023.
(vi) Income from agricultural lands surrounding the factory ₹ 50,000 credited to Profit and Loss Account.
(vii) Bank term loan for purchase of machinery waived ₹ 2 lakhs is credited to capital reserve account.
(viii) The opening WDV of plant and machinery was ₹ 15,90,000. One machinery for ₹ 4,10,000 was acquired on 01.06.2021 and was put to use immediately.
(ix) Provisions for taxation debited in the Profit and Loss Account amounts to ₹ 15 lakhs.
You are requested to compute the income of the company under the head ‘Profits and gains of business or profession’ for the assessment year 2023- 24. (June 2015, 9 marks)
Answer:

Question 22.
Answer the following questions with brief reasons/workings:
The Statement of Profit and Loss of KCL Limited is debited by an amount of ₹ 1,20,000 in respect of an advertisement of company’s product in a newspaper owned by a political party. Is such expense allowable in computation of income from business? (Dec 2015, 2 marks)
The Statement of Profit and Loss of a company includes interest of ₹ 5,00,000 on a loan taken for financing its expansion scheme. The machineries purchased with the borrowed amount were in transit at the end of the year. Is such interest allowable as deduction in computation of the company’s business income? (Dec 2015, 2 marks)
Answer:
Advertisement expenses is allowed to be deducted u/s 37(1); provided it is not of a capital nature and it is incurred wholly and exclusively for the purpose of business. Hence, the amount of ₹ 1,20,000 is allowable as deduction u/s 37(1).

Section 36(1 )(ii) provided that any amount of the interest paid in respect of an asset for extension of existing business or profession (whether capitalized in the books of accounts or not) for arty period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. So, the amount of interest of ₹ 5,00,000 is not allowed as deduction because it is the interest on borrowing of machines for expansion schemes.

Question 23.
The Statement of Profit and Loss of XYZ Limited for the previous year 2022-23 shows a net profit of ₹ 8,50,390 after
debiting/crediting the following ¡tems:
(i) Purchase of goods for ₹ 42,000 (market value ₹ 35,000) from one of the directors of the company.
(ii) Interest of ₹ 1,00,000 paid on loan taken from Mr. Ron of USA without deducting tax at source.
(iii) Advance of ₹ 90,000 paid in earlier year for purchase of machinery written off.
(iv) Income tax on perquisites of employees paid by the company ₹ 20,000.
(v) Recovery of bad debt of ₹ 30,000 which was disallowed in previous assessment of the company. Compute income of XYZ Limited under the head “profits and gains of business or profession” for Assessment Year 2023-24 indicating reasons for treatment of each item. (Dec 2015, 6 marks)
Answer:

Notes:
(i) If the payment to director is excessive or unreasonable having regard to the fair market value of the material. In such case the excess amount shall be disallowed under section 40(a)(2).

(ii) In the case of interest paid to non-resident, there is a obligation to deduct tax at source u/s 195, hence non-deduction of tax at source will attract disallowance u/s 40(a)(i).

(iii) Advance paid for purchase of machine is a capita! expenditure. Hence, it’s not allowed as deduction.

(iv) Income tax on perquisites is allowable expense.

(v) As per Section 41(4), bad debts, earlier claimed as deduction 8 disallowed, ¡f recovered subsequently, then such recover1’ shall not be taxable as business gain/income.

Question 24.
Mr. Sivasankar carrying on trading business could not recover ₹ 1,00,000 due from a customer. He deems that the amount is not recoverable and hence has to be written off as bad debt. State the conditions that are to be satisfied for allowance of bad debt claim. (June 2016, 3 marks)

Mr. Ghosh established an undertaking in a notified backward area in the State of West Bengal. He invested ₹ 150 lakhs in June, 2022 towards acquisition of plant and machinery and was engaged in manufacturing activity. The regular rate of depreciation on such machineries is 15%.

Advise the maximum amount of deduction that Mr. Ghosh could avail by way of depreciation, additional depreciation, and deduction under section 32AD of the Income-tax Act, 1961. State the closing WDV of the plant and machinery after such claim. (June 2016, 4 marks)
Answer:
(a) Bad debt write-off is eligible for deduction in computing income under the head “Profits and Gains of business or profession” if the stipulated conditions are satisfied:

• The debt should be incidental to the business.
• The debt should have been taken into account in computing the income of the assessee or it should represent money lent in the ordinary course of banking or money lending business; and
• It should be written off in the books of account. If the assess is able to satisfy all the three conditions given above, he can claim the same as bad debt.

(b) Depreciation, additional depreciation, and WDV (₹ In Lacs)

Particulars	₹
Normal depreciation u/s 32 at 15% of the actual cost of plant and machinery (15% of ₹ 150 lakhs). (Assumed that the new machinery has been put of use for more than 180 days)	22.5
Additional depreciation under section 32 (iia) (20% of ₹ 150 lakhs)	30
Closing WDV of the plant and machinery (150-52.5)	97.5

Besides depreciation and additional depreciation, the assessee can claim 15% deduction under section 32AD for the investment in new plant and machinery in setting up an undertaking in notified backward area in the State of West Bengal. Thus he can claim 15% of the actual cost of plant and machinery being ₹ 22.50 lakhs. This is not deductible while computing the WDV. However, this amount will not go to reduce the written-down value of the assets.

Question 25.
State, with reasons, whether the following items are allowable as deduction in computation of income of Tyagi Aluminium Limited under the head ‘profits and gains from business or profession’ or otherwise:
(i) Contribution of ₹ 1,20,000 to political party on the occasion of its silver jubilee.
(ii) Interest of ₹ 80,000 paid to bank on loan taken and utilized for payment of dividend.
(iii) Fees of ₹ 75,000 paid to independent directors for attending board meetings without deduction of tax at source under Section 194J.
(iv) Interest of ₹ 40,000 on bank overdraft utilised for payment of dividend.
(v) Few customers are irregular in payment of dues against sale proceeds, for which provision for bad and doubtful debts has been created by debiting Statement of Profit & Loss. (Dec 2016, 1 x 5 = 5 marks)
Answer:
(i) U/s 80 GGB: Deduçtion in respect of contributions given by companies to Political Parties is allowed as deduction if paid by Account Payee Cheque. It is assumed that contributions made by Company to Political Party by Cheque. Therefore, deduction U/s 80 GGB will be allowed.
(ii) Interest of ₹ 80,000 paid to Bank on loan taken and utilised for payment of dividend will be allowed u/s 36 (1) (iii).
(iii) 30% of ₹ 75,000 i.e. ₹ 22500 will be disallowed due to non deduction of TDS u/s 194 J (ba) @ 10%.
(iv) Interest of ₹ 40,000 on Bank Overdraft utilised for payment of dividend will be allowed u/s 37.
(v) Provision for Bad and doubtful Debts will not be allowed as deduction.

Question 26.
Under Section 43B of the Income-tax Act, certain items are allowed only on actual payment basis, regardless of the method of accounting followed by the assessee. Name four such items and the due date by which they can be paid to claim deduction in the current year itself. (Dec 2016, 5 marks)
Answer:
Expenses allowed on actual payment basis u/s 43 B:

• Bonus & commission.
• Interest on loan or advances taken from Schedule Banks.
• Any sum payable by the assessee to the Indian Railways for the use of Railway Assets.
• Any sum payable by the assessee by way of tax, duty, less or fee whatever name called, under any law for time being in force.
• Any Interest on any loan or borrowings from public financial institutions or state financial corporations.
• Any sum payable by an employer in lieu of any leave at the credit to his employee.
• Due date for payment is on or before the due date for furnishing of Return of Income u/s 139(1).

Question 27.
Express Shipping Inc., a foreign company operating its ships in Indian ports during the previous year 2022-23 had collected the revenue as follows:

Freight (including ₹ 40 lakhs collected in US dollar for the cargo booked for Pradeep Port from UK)	₹ 200 lakhs
Demurrages	₹ 40 lakhs
Handling charges	₹ 20 lakhs

The expenses of operating its fleet during the year for the Indian ports were ₹ 110 lakhs which includes an expense of ₹ 0.40 lakhs paid in cash to an agency. Compute income of the company under the head ‘Profits and Gains from business or profession’ for Assessment Year 2023-24. (Dec 2016, 5 marks)
Answer:

Question 28.
Gopi Industries furnishes you the following details:

Particulars	Machinery	Computers	Furnitures
WDV as on 01.04.2022	20,00,000	6,00,000	2,00,000
Purchased during the year and used for more than 180 days	4,00,000	1,00,000	40,000
Purchased and used w.e.f. 01.01.2023	1,00,000	2,00,000	20,000
Sold a group of assets on 01.03.2023	2,00,000	1,00,000	50,000

Compute depreciation allowable for the assessment year 2023-24. Ignore additional depreciation.’ (June 2017, 6 marks)
Answer:

Question 29.
Ahuja Industries Ltd. engaged in manufacturing activity and generation of power, gives you the following information for the year ended 31st March, 2023:

Compute the depreciation and additional depreciation for the assessment year 2023-24. The computation must be such that the same is most beneficial to the assessee. (June 2018, 9 marks)
Answer:
Assessee in the business of generation or generation and distribution of power, have the option to claim depreciation on:
(i) Straight line method on each assets or
(ii) Written down value method or block of assets.
Computation of depreciation allowance under section 32 and 32(1) (IIA) for the Assessment Year 2023-24

Where any assets is acquired by the assessee during the previous year and is put to use for the purpose of business for a period of less than 180 days in that previous year, the depreciation allowance in respect of such asset shall be restricted to 50% of the amount calculated at the prescribed percentage.

Question 30.
Mr. Rhushan, engaged in manufacture of chemicals, furnishes his Manufacturing, Trading, and Profit & Loss Account for the year ended 31st March, 2023 as under

Particulars	₹	Particulars	₹
To Opening stock	3,40,000	By Sales	1,14,00,000
To Purchases	1,00,20,000	By Closing stock	19,00,000
To Manufacturing Expenses	10,40,000
To Gross Profit	19,00,000
	1,33,00,000		1,33,00,000

To Salary	4,30,000	By Gross Profit	19,00,000
To Bonus	80,000	By Discount	25,000
To Bank term loan interest	90,000	By Agricultural Income	1,50,000
To Factory rent	1,20,000	By Dividend from Indian Companies	75,000
To Office rent	2,10,000
To Administration Expenses	3,30,000
To Net Profit	8,90,000
	21,50,000		21,50,000

Additional information:
(i) The total turnover of Mr. Bhushan for the Financial Year 2021-22 was ₹ 132 lakhs.
(ii) Salary includes ₹ 1,80,000 paid to his daughter. The excess payment considering her qualifications and experience is ascertained as ₹ 40,000.
(iii) Factory rent was paid to his brother. Similar portions are let out to others by him for a rent of ₹ 96,000 per annum.
(iv) No tax was deducted at source from the office rent paid during the year.
(v) Purchases include ₹ 70,000 paid by cash to an agriculturist for purchase of grains (being raw material).
(vi) Depreciation allowable under section 32 of the Income-tax Act, 1961
amounts to ₹ 45,000 for assets held as on 01.04.2022. During the year, a machinery costing ₹ 5,00,000 was acquired on 01.07.2022 and was put to use from 15.10.2022.
(vii) Administration expenses include commission paid to a purchase agent of ₹ 12,000 for which no tax was deducted at source.
(viii) The following expenses debited above were not paid till 31.03.2023 and up to the ‘due date’ for filling the return specified in section 139(1)
(i) Term loan interest of ₹ 35,000;
(ii) Demurrages to Indian Railways for using their clearing yard beyond stipulated hours (disputed by the assessee) forming part of manufacturing expenses ₹ 30,000.
Compute the income of Mr. Bhushan chargeable under the head “Profits and gains of business or profession” for the Assessment Year 2023-24: (Dec 2018, 10 marks)
Answer:

Note:
1. According to Sec. 40(a)(ia), non-compliance of provision of T.D.S where payment is made to a resident 30% of any sum payable to a resident is to be disallowed.

2. As per section where the assessee incurs any expenditure in respect of which a payment or aggregate of payment made to a person in a day, otherwise than by an account payee cheque drawn on a bank or use of electronic clearing system through a bank account, exceed ₹ 10,000, no deduction ‘shall be allowed in respect of such expenditure. Cash payment made to agriculturist for purchase of grains covered under Rule 6DD.

3. According to Sec. 438, any tax, duty, cess, or, mt. fee is allowed as deduction if they are paid up to the date of return of income u/s 139(1).

4. According to Sec. 43B, demurrages charge paid to Indian Railway allowed as deduction only if it is paid up to the due date of filing return of income u/s 139(1).

Question 31.
Explain with brief reasons, the allowability or taxability of the following expenditure/income in computation of income under the head “Profits and gains of business or profession”:
(i) Compensation of ₹ 30 lakhs received by Mr. Jam, a businessman, under an agreement for not carrying on business of software development.
(ii) Vikram Ltd., engaged in growing and manufacturing tea in India, deposits 10 lakhs in NABAR D. Profit before considering such deposit is ₹ 15 lakhs.
(iii) Construction of toilets in a rural area by Sigma Ltd. for ₹ 10 lakhs in compliance with Corporate Social Responsibility (CSR) under the Companies Act, 2013.
(iv) Plot purchased for ₹ 20 lakhs and construction of a building for ₹ 82 lakhs by Mr. Madhusucian for storing sugar, in the course of business of warehousing of sugar. Expenditure has been capitalized in the books.
(v) Depreciation on a machine acquired for business purpose by Mr. Anand for ₹ 2,50,000, out of which an amount of ₹ 50,000 was paid in cash. (June 2019, 2 x 5 = 10 marks)
Answer:
Particulars
(i) As per section 28, any sum whether received or receivable, under an agreement for not carrying out any activity in relation to any business or profession is chargeable to tax under the head “Profits and gains from business or profession”. Therefore, compensation of ₹ 30 lakhs received by Mr. Jam under an agreement for not carrying out software development business
is taxable as business income.

(ii) As per section 33AB, in case of assessee engaged in growing and manufacturing tea in India, deduction allowed in respect of deposit in NABARO is lower of the amount of such deposit or 40% of profit of such business computed under the head “Profits and gains of business or profession” (before this deduction and before adjusting brought forward business loss). Therefore, ₹ 6 lakhs, being 40% of profit (lower than actual deposit) is allowable as deduction.

(iii) Under section 37(1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2043 shall not be deemed to have been incurred for the purpose of business and hence, shalt not be allowed as deduction. In view of above, expenditure of ₹ 10 lakhs on construction of toilets in rural area shall not be allowed as deduction.

(iv) Business of warehousing of sugar is a specified business under section 35AD. As per section 35AD, in case of specified business capital expenditure incurred for construction of building for storage of sugar is allowable as deduction, provided such expenditure is capitalized in the books. Land cost is not allowable as deduction. Therefore, the whole amount of 82 lakhs spent on building shall be allowed as deduction.

(v) As per section 43(1), any payment exceeding ₹ 10,000 on a single day otherwise by account payee cheque or draft or by electronic mode towards acquisition of asset shall not form part of the actual cost. Therefore, depreciation shall be allowed on ₹ 2,00,000 (i.e. ₹ 2,50,000 – ₹ 50,000)

Question 32.
Mr. Sarath commenced business of operating goods vehicles on 01.04.2022. He purchased the following vehicles during the P.Y. 2022-23.

	Gross Vehicle Weight (in kilograms)	Number of vehicles	Date of purchase
1	7,500	2	10.04.2022
2	5500	1	15.03.2023
3	10,500	3	16.07.2022
4	11,500	1	02.01.2023
5	15,000	2	29.08.2022
6	17,000	1	23.02.2023

Compute his income under section 44AE.
Would your answer change, if the goods vehicles purchased in April, 2022 were put to use only in September, 2022? (Dec 2019, 7 marks)
Answer:
As per Section 44AE, If assessee engaged in the business of playing, hiring leasing, such goods carriage then PGBP will be:
For Heavy goods Vehicles: ₹ 1,000/ ton of gross vehicle weight or unladen weight as the case may be for every month or part of a month.
For Other Vehicles: ₹ 7,500 for every month or part of a month.
Note: Heavy goods Vehicle means any goods carriage, the gross Vehicle weight of which exceeds 12,000 Kilograms.

There will be no change in answer, if the goods vehicles purchased in April, 2022 were put to use only in September 2022.

Question 33.
Ram Balaji is engaged in manufacture of electronic spares which are used in computers. His aggregate turnover for the year ended 31.03.2023 was ₹ 1,71,00,000. His profit as per profit and loss account extracted from the books is ₹ 12,45,000. His sale proceeds were realized as under.

	Up to the end of the previous year	From 01.04.2023 and up to the ‘due date’ for filing return under section 139(1)
Sales realized in cash	40,00,000	73,00,000
Sale realized through banking channel	11,00,000	26,00,000

(i) Current year depreciation under section 32 allowable ₹ 2,75,000.
(ii) Cash payment made exceeding ₹ 10,000 per day and the aggregate payment for the year in such manner ₹ 4,1 1,000.
(iii) Interest on term loan debited in profit and loss account of the assessee for the year ended 31.03.2023 ₹ 1,05,000. Amount actually up to 31.03.2023 ₹ 15,000 and amount paid from 01.04.2023 and up to the ‘due date’ for filing the return under section 139(1) ₹ 40,000.
(iv) He has brought forward business loss of the assessment year 201 9-20 of ₹ 1,40,000 and unabsorbed depreciation of ₹ 50,000 of the assessment year 2022-23.
Compute his income from business for the assessment year 2023-24 under section 44AD and as per regular provisions. (Dec 2019, 10 marks)
(b) Mr. Bhat acquired a generator for ₹ 3 lakhs on 30.11.2022 by taking a bank loan of ₹ 2 lakhs. Interest on bank loan payable for the year ₹ 7,500 and it was not paid up to the ‘due date’ for filing the return specified in section 139(1). He paid salary to operator @ ₹ 12,000 per month in cash for 4 months. Hire charges received up to 31.03.2023 was ₹ 2,25,000. Compute income of Mr. Bhat from the generator for the year ended 31.03.2023. (Dec 2019, 5 marks)
Answer:

Note:
Expenditure incurred in contravention of section 40A(3), is not liable for disallowance while computing the income under section 44AD. Also, interest on term loan deductible under section 43B on actual payment basis will not impact computation of income under section 44AD.

When assessed as business income:
The answer will change. When assessed as business income, section 43B will come into play ₹ 7,500 being interest on bank loan remaining unpaid will be disallowed.
Hence the income will be ₹ 1,95,000 + ₹ 7500 = ₹ 2,02,500.

Question 34.
M/s. Sridhar & Co., a sole proprietary concern (owned by Mr. P) is converted into a company, Sridhar Co. Ltd. w.e.f. November 29, 2022. The written down value of assets as on April 1st, 2022 are as follows:

Items	Rate of Depreciation	WDV as on 1 April, 2022
Building	10%	₹ 3,50,000
Furniture	10%	₹ 50,000
Plant & machinery	15%	₹ 2,00,000

Further, on 15.10.2022, M/s. Sridhar & Co, purchased a plant for ₹ 5,00,000 (rate of depreciation 15%). After conversion, the company added another plant worth ₹ 2,50,000 (rate of depreciation 15%). The payments in all cases were through account payee cheques. Compute the depreciation available to (i) Mr. P and (ii) Sridhar & Co. Ltd. for the AY. 2023-24 Assume that the assessee’s are not eligible for additional depreciation. (Dec 2021, 8 marks)
Answer:

Question 35.1
State the income-tax consequence of the following transactions:
Mr. A wrote off ₹ 3 lakhs due from a customer G as bad debt in the previous year 2019-20. He died on 23 June, 2020. His son, doing some other business, received ₹ 1, 40,000 as final settlement from G in March, 2023 in the capacity of being the only legal heir of late Mr. A. (Dec 2021, 3 marks)
Answer:
Recovery against any deduction [section 41(1)]:

• Where an allowance or deduction is allowed in any assessment year in respect of loss, expenditure or trading liabîty incurred by the assessee.
• Subsequently during any previous year such assessee has obtained, whether in cash or in any other manner any amount in respect of such loss, expenditure, or any benefit in respect of such trading liability by way or remission or cessation thereof.
• Treatment: The amount obtained or benefit accrued shall be deemed to be the income from profits and gains of business or profession and chargeable to tax.
• The amount received by the son of late Mr. A is chargeable to tax under section 41(1) under the head “Profits and gains of business or profession”.

Question 36.
State the income-tax consequence of the following transactions:
Charlie & Co is a partnership firm consisting of 4 equal partners. The firm took Keyman Insurance Policy and paid premium of ₹ 1, 50,000 annually. Upon the death of one partner in January, 2023, the firm received ₹ 50 lakhs from the insurance company in respect of Keyman Insurance Policy. (Dec 2021, 3 marks)
Answer:
Keyman Insurance Policy:
As per section 10(1 OD), any sum received under a Keyman Insurance Policy would not be exempt from tax. In other words, it is chargeable to tax as income.

The firm while paying premium on Keyman Insurance Policy would have claimed the same as expenditure under section 37.
When the amount is received from the policy, the amount so received becomes chargeable to tax as income of the firm. Therefore, the sum of ₹ 50 lakhs received upon the death of one partner of the firm is chargeable to tax.

Question 37.
Abhijit & Co. is a partnership firm engaged in manufacturing activity. The firm furnishes you the following details:

Particulars	Plant & Machinery (₹)	Furniture & Fitting (₹)	Building (₹)
WDV as on 01.04.2022	20,00,000	1,40,000	9,90,000
Acquired (new)	10,00,000 (10.01.2023)	60,000 (30.09.2022)	20,00,000 (includes land ₹ 5,00,000) acquired on 20.07.2022
Acquired (old)	5,00,000 (25.08.2022)

Note: Plant & Machinery as on 01.04.2022 includes a new machine whose cost was ₹ 8,00,000 and which was acquired on 22.01.2022 but put to use from 01.02.2022. Compute the eligible amount of depreciation under section 32 of the Act. (Dec 2022, 7 marks)

Question 38.
Laxman engaged in textile trade reports a turnover of ₹ 170 lakhs for the year ended 31.03.2023. It includes ₹ 60 lakhs received by way of cash and ₹ 40 lakhs received through banking channel up to 31st March, 2023. 01 the balance of turnover, ₹ 30 lakhs was realized by cheque up to the due date for filing the return specified in section 139(1). On 25.05.2022, he acquired two heavy goods vehicles with each vehicle having capacity to carry goods up to 12000 kilos. Vehicles were operated for carrying goods of customers on hire. Vehicles were acquired through bank loan for which interest due for the year amounts to ₹ 3,70,000. He wants to admit both the business incomes as referred above as per applicable
presumptive provisions. Compute total income of Laxman for the assessment year 2023-24. (Dec 2022, 8 marks)

Income From House Property – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Income From House Property – CMA Inter Direct Tax Study Material

Short Notes
Question 1.
Write short note on Difference between unrealized rent and arrears of rent, realised in a subsequent year. (Dec 2021,3 marks)
Answer:
Difference between Subsequent collection of unrealized rent and arrears of rent

Unrealized Rent	Arrears of rent
Rent which could not be realized from the tenant, if subsequently from the tenant, realized, gets taxed in the PY of receipt.	If the assesses has increased the rent payable by the tenant retrospectively’& there is dispute over such increase and later on, the assesses receives the increased rent as arrears, is called arrears of rent. It is taxable in the PY of Receipt.
However, deduction shall be allowed @ 30% of such unrealized rent.	Deduction of 30% is allowed on such arrears.
Taxable @ 70% of amount received	Taxable at 70% of amount received.

Question 2.
Write short note on the following:
Deemed owner under House Property (Dec 2022, 5 marks)

Descriptive Question

Question 3.
How is the unrealized rent dealt with in annual value determination of a house property under the Income-tax Act, 1961? What are the conditions to be satisfied in this regard? (June 2015, 3 marks)
Answer:
Treatment of Unrealized Rent [explanation to Section 23(1)]:
Rule 4
The amount of unrealized rent is not to be includible while determining the annual value of a property. However, the following conditions are to be satisfied for excluding the unrealized rent.

• The tenancy must be bona tide.
• The defaulting tenant has vacated or steps have been taken to compelte him to vacate the property.
• The defaulting tenant is not in the occupation of any other property of the assessee; and
• The assessee has taken all steps to institute legal proceedings for the recovery of unpaid rent or satisfies the Assessing Officer that the legal proceedings would be useless.

Practical Questions

Question 4.
Mr. Nitin completed construction of a residential house on 01.04.2022. Interest paid on loans borrowed for the purpose of construction during the 30 months prior to completion was ₹ 60,000.
The house was let out on a monthly rent of ₹ 18,000.
Annual corporation tax paid is ₹ 35,000.
Interest paid during the year is ₹ 25,000.
Amount spent on repairs is ₹ 6,000.
Fire insurance premium paid ₹ 3,000 p.a.
The property was vacant for 4 months.
Annual letting value as per corporation records is ₹ 1,50,000.
He had also received arrears of rent of ₹ 36,000 during the year, which had not been not charged to tax in the earlier year.
Compute the income under the head “Income from House Property” for the assessment year 2023-24. (Dec 2012, 8 marks)
Answer:

Note (1):

Computation of Gross Annual Value
Municipal value	1,50,000
Actual rent (18,000 x 12)	2,16,000
Higher of the two	2,16,000
Less: Vacancy allowance as property was vacant for four months (2,16,000/12) x 4	76,000
Gross Annual Value	1,44,000

Question 5.
Mr. Sridhar constructed his house on a plot of land acquired by him in Kolkata. The house has two floors of equal size. He
started construction of the house on 1st April 2021 and completed construction on 30th June, 2022. He occupied the ground floor on 1 July 2022 and let out the first floor at a rent of ₹ 20,000 per month on the same date. However, the tenant vacated the first floor on 31st January 2023 and Mr. Sridhar occupied the entire house from 1st February 2023 to 31st March 2023.

Other information
(i) Fare Rent of each floor	₹ 1,20,000 per annum
(ii) Municipal value of each floor	₹ 80,000 per annum
(iii) Municipal tax paid	₹ 10,000
(iv) Repair expenses	₹ 5,000

Mr. Sridhar obtained a housing loan of ₹ 15 lacs at interest of 10% per annum on 1st July, 2021. He did not repay any part of the loan till 31st March, 2023. Compute income from house property in the hands of Mr. Sridhar for the Assessment year 2023-24. (June 2013, 8 marks)
Answer:

Notes: Annual letting value is the higher of fair rent and municipal value. However, as the construction of the house was completed on 30th June, 2022, annual letting value should be considered for 9 months.
Fair Rent = ₹ 1,20,000 x 9/12 = ₹ 90,000
Municipal Value = ₹ 80,000 x 9/12 = ₹ 60,000
Annual letting value = ₹ 90,000
Actual Rent = ₹ 20,000 x 7 = ₹ 1,40,000
Gross Annual Value = Higher of annual letting value or actual rent = ₹ 1,40,000.

Question 6.
Mr. Lai is the owner of a commercial property let out at ₹ 60,000.00 per month. The Corporation tax on the property is ₹ 30,000.00 annually, 60% of which ¡s payable by the tenant. This tax was actually paid on 15.04.2022. He had borrowed a sum of ₹ 40.00 lakhs from his cousin, resident in Singapore (in dollars) for the construction of the property on which interest at 8% is payable. He has also received arrears of rent of ₹ 80,000.00 during the year, which was not charged to tax in the earlier years. What is the property income of Mr. Lai for the assessment year 2023-24? (Dec 2013, 5 marks)
Answer:

Question 7.
Ram and Shyam are members of a firm “R and S” and also joint owners (50% each) of a two-storied house property (of equal area), the details of which are as follows:
(i) Ground Floor – let out at a monthly rent of ₹ 30,000/-
(ii) First Floor-used for partnership business of Ram and Shyam.
(iii) Ram and Shyam received the following amounts in respect of another property which they had sold it on 31.03.2022:
Unrealized Rent of same property pertaining to FY 2022-23 – ₹ 50,000/-
Arrears of rent of sold-out property pertaining to FY 2021-22 – ₹ 1,00,000/-
(iv) Municipal taxes paid for the entire house property – ₹ 15,000/- p.a
(v) Interest on borrowings for the entire house property (Joint loan taken from HDFC)- ₹ 3,00,000/-
Compute the income from house property and also explain how such income will be assessed in the hands of R and S. (June 2014, 6 marks)
Answer:

AS R and S are joint owners (50% each) ₹ 65,875 (50% of 1,31,750) is taxable in R’s hand and ₹ 65,875 is taxable in S’s hand.

Question 8.
Mr. Nitin owns two houses, both of which are occupied by him for residential purposes. The details are given below:

	House-I	House-II
Fair rent	7,20,000	6,30,000
Municipal value	5,00.000	5,00,000
Standard rent	6,00,000	6,00,000
Date of completion	01.01.2005	01.07.2011
Municipal tax paid	10%	12%
Date of loan	01 .07.2002	01.05.2009
Interest on loan for the financial year 2022-23	1,10,000	1,70,000

Compute his income from house property and advise which house should be opted by him as self-occupied. (June 2014, 6 marks)
Answer:

Loss from house property = ₹ 2,00,000
Note 1: If an assessee occupies two house property as self-occupied, he is allowed to treat two house as self-occupied.
Note 2: Interest paid or payable for one or two self-occupied properties subject to a maximum of ₹ 2,00,000.

Question 9.
Mr. Singhania constructed a residential house property in Kanpur. Construction was completed on 1st April, 2022. The house was vacant from 1st April, 2022 to 30th June, 2022. The house was let out at rent of ₹ 7,500 per month from 1st August, 2022. Mr Singhania obtained loan for the purpose of construction, Interest paid on such loan during two years prior to completion of construction amounted to ₹ 30,000. Interest paid during the year 2022-23 is ₹ 16,000. The Fire Insurance premium paid is ₹ 2,000. Municipal value of the property has been assessed at ₹ 40,000. Annual corporation tax paid ₹ 3,000. Compute income under the head 1ncome from House Property” for Assessment year 2023-24. (Dec 2014, 6 marks)
Answer:

Question 10.
Raja is the owner of a residential house property having two independent floors of equal size in Chennai. The ground floor of the property has been let out to a tenant at rent of ₹ 15,000 per month from 1st June, 2022. The first floor of the property is occupied by Raja for his residential purposes.
Other particulars relating to the property are as follows:
Compute income from house property of Raja for the 2023-24.

Particulars	₹
Standard Rent	3,20,000 p.a.
Municipal valuation	3,80,000 p.a.
Fair rent	3,70,000 p.a.
Annual municipal tax (50% paid)	57,000
interest on loan taken for construction of property for the year 2022-23	30,000
Annual insurance premium	5,000

Compute income from house property of Raja for the Assessment Year 2023-24. (Dec 2015, 7 marks)
Answer:

Working Notes:
Calculation of gross annual value:
(a) Municipal value or fair rent (whichever is higher) 3,80,000
(b) Standard Rent 3,20,000
(c) Expected rent whichever ¡s lower in (a) and (b) 3,20,000
(d) Actual rent received 15.000 x 10 (June 22 to March 23) 1,50,000
Gross annual value [whichever is higher in (c) and (d)] = 3,20,000

Question 11.
Mr. Kamal Hasan has two independent residential flats in an apartment, both of them being of identical size. First flat is
self-occupied and the second flat is occupied by his daughter, from whom he does not receive any rent. For each flat, the relevant annual rent details are as under:

Particulars	₹
Municipal Value	6,00,000
Fair Rent	5,70,000
Standard Rent	5,16,000
Municipal Tax (fully paid)	11 % of municipal valuation
Pre-construction period interest (third year)	1,50,000
Interest on housing loan for current year (25% unpaid)	1,65,000
Fire Insurance Premium	2,500
Ceiling amount	2,00,000

Compute income of Mr. Kamal Hasan under the head “income from house property for assessment year 2023 – 24. (June 2016, 8 marks)
Answer:

Loss from house property = ₹ 2,00,000
Note 1: If an assessee occupies two house property as self-occupied, he is allowed to treat two house as self-occupied
Note 2: Interest paid or payable for one or two self-occupied properties subject to maximum of ₹ 2,00,000.

Question 12.
Mr. Ashok owns two buildings which are let out during the financial year 2022-23. The relevant details are as under:

Particulars	House-I Residential ₹	House-II Commercial ₹
Municipal valuation	1,80,000	3,60,000
Standard rent	1,50,000	3,00,000
Actual rent	2,40,000	6,00,000
Municipal taxes – paid	20,000	30,000
Municipal taxes – outstanding	10,000	15,000
Interest on moneys borrowed – paid	60,000	20,000
Interest on moneys borrowed – outstanding	1,00,000	60,000
Housing loan principal repaid to bank	50,000	30,000

You are requested to compute income of Mr. Ashok under the head “Income from House property” for the assessment year 2023-24. (Dec 2016, 9 marks)
Answer:

Question 13.
Surbhi has two houses, both of which are self-occupied. You are required to compute Surbhi’s income form house property for the Assessment Year 2023-24 and suggest which house should be opted by Surbhi to be assessed as self-occupied so that her tax liability is minimum. The particulars of these are given below:

(Value in ₹)
Particulars	House – I	House – II
Municipal Valuation per annum	1,30,000	1,15,000
Fair Rent per annum	1,10,000	1,70,000
Standard rent per annum	1,00,000	1,65,000
Date of completion	31-03-1999	31 -03-2001
Municipal taxes payable during the year (paid for House II only)	12%	8%
Interest on money borrowed for repair of property during current year	–	55,000

(Dec 2017, 6 marks)
Answer:
In the book of Surbhi
Computation of Income from house property for the AY. 2023-24
It can assessee occupies two house property as self-occupied, he is allowed to treat two house as self-occupied

Loss from House Property = ₹ 30,000
Note: In case of loan for acquisition or construction taken prior to 01 -04-1999 or loan taken for repair, renovation or reconstruction at any point of time, interest paid or payable for one or two self-occupied properties subject to maximum of ₹ 30,000.

Question 14.
Two brothers Rama and Shankar are co-owners of a house property with equal shares. The property was constructed during the Financial year 2002-2003. The property consists of 8 identical units and is situated at Salem. During the Financial Year 2022-2023 each owner occupied 1 unit for residence and balance 6 units were let out at a rent of ₹ 14,000 per unit per month. The municipal value of property is ₹ 9,00,000 and municipal tax are 10% of municipal value, paid during the year. The
other expenses are as follows:
(i) Repairs ₹ 90,000
(ii) Insurance premium paid ₹ 15,000
(iii) Interest payable on loan taken ₹’ 3,50,000
One of the let out remained vacant for 4 months during the year. Rama could not occupy his unit for 6 months as he was transferred to Bangalore. He does not own any other house. The other income of Rama and Shankar are ₹ 3,50,000 and ₹ 1,80,000 respectively for the Financial Year 2022-2023.

The co-owners received during the year ₹ 1,40,000 as unrealized rent for 2019-2020 and ₹ 50,000 as arrears of rent.
Compute the income under the head “Income from House Property” and total income of the two brothers for the Assessment Year 2023-2024. (June 2018, 7 marks)
Answer:

Income of both brothers from house property other source	Ram	Shankar
Income from house property
Let out portion	2,44,825	2,44,825
Less: Self-occupied portion (Restricted ₹ 30,000)	(30,000)	(30,000)
Net Income from house properly	2,14,825	2,14,825
Other income	3,50,000	1,80,000
Total income	5,64,825	3,94,825

Question 15.
Mr. Chaturvedi, Delhi has 3 house properties in various parts of India. The details are given below:

Location of Property	Delhi	Chandigarh	Kolkata
Usage	Self-occupied	Let out	Let out
	Amount ₹	Amount ₹	Amount ₹
Rent received	NIL	3,60,000	1,80,000
Fair rent	2,40,000	3,00,000	1,50,000
Municipal value	2,10,000	2,40,000	1,20,000
Standard rent	1,80,000	2,10,000	90,000
Municipal tax – Due	20,000	40,000	30,000
Municipal tax – paid by the assessee	NIL	NIL	20,000
Interest on moneys borrowed	2,80,000	1,40,000	1,50,000

Note: All the properties were acquired/constructed after 01.04.2013. You are required to compute the income of Mr. Chaturvedi chargeable under the head “Income from house property” for the assessment year 2023-24. (Dec 2018, 5 Marks)
Answer:

Question 16.
Tarun, employed in a private company, commenced construction of a commercial complex in July, 2021. He borrowed ₹ 50 lakhs from a bank @ 9% per annum. Interest up to 31.03.2022 was ₹ 2,20,000 and for the period from 01.04.2022 to 31.12.2022 ₹ 2,30,000. ₹ 1,40,000 towards interest for the balance three months remained unpaid. The construction of the building was completed on 31st December 2022. The building was let out w.e.t. 01.01.2023 for a monthly rent ₹ 90,000. Municipal tax of ₹ 1,20,000 was paid by cash on 10.01.2023. He repaid ₹ 1,90.000 towards principal during the previous year 2022-23, of which he paid ₹ 1,20,000 up to 31.12.2022. The municipal value of the property is ₹ 9,00,000. Compute the income from house property of Tarun for the assessment year 2023-24. (June 2019, 6 marks)
Answer:

Question 17.
Mr. Arun furnishes the following details relating to three house properties at Erode, Tamil Nadu, let out by him during the previous year 2022-23:

Particulars	House – 1	House – 2	House – 3
Gross municipal value	2,10,000	3,30,000	2,40,000
Fair rent (₹)	2,40,000	3,60,000	3,00,000
Standard rent (₹)	2,20,000	—	—
Let out period (months)	9	12	11
Vacant during the year for (Months)	3	—	1
Actual rent received (₹)	1,60,000	2,40,000	3,30,000
Interest on money borrowed (₹)	1,05,000	—	2,10,000
Land lease rent (₹)	—	—	24,000
Municipal tax paid being 2 months municipal value

Compute the chargeable income from house property for the assessment year 2023-24. (Dec 2019, 9 marks)
Answer:
Computation of income from house property

Particulars	House -1	House – 2	House – 3
Gross municipal value or fair rent whichever is higher but limited to standard rent (A)	2,20,000	3,60,000	3,00,000
Figure after adjustment of above for vacant period	1,65,000	3,60,000	2,75,000
Actual rent received (B)	1,60,000	2,40,000	3,30,000
Annual value whichever is more	1,65,000	3,60,000	3,30,000
Less: Municipal tax paid	35,000	55,000	40,000
	1,30,000	3,05,000	2,90,000
Less: Deduction U/s 24@ 30%	39,000	91,500	87,000
	91,000	2,13,500	2,03,000
Less: Interest on moneys borrowed	1,05,000	–	2,10,000
Land lease rent (Not deductible)	–	–	Nil
Chargeable Income from house property	(14,000)	2,13,500	(7,000)
Chargeable income from house property (Total)			1,92,500

Question 18.
Mr. Santhosh sold his residential house property at Vadodara in Dec, 2021. In June, 2022, he recovered rent of 25,000 from Mr. Ramesh, to whom he had let out his house for two years from May 2016 to April 2018. He could not realise two months rent of ₹ 50,000 from him and to that extent his actual rent was reduced while computing income from house property for A.Y.2017-18.

Further, he had let out his property from June 2018 to Oct 2021, 2022 to Mr. Satish. In April, 2019, he had increased the rent from ₹ 12,000 to ₹ 15,000 per month, and the same was a subject matter of dispute. In November 2022, the matter was finally settled and Mr. Santhosh received ₹ 99,000 as arrears of rent for the period June 17 to October 2021. Would the recovery of unrealized rent and arrears of rent be taxable in the hands of Mr. Santhosh, and if so, an which year? He spent ₹ 19,000 towards lawyer fees for collecting the arrears of rent. (Dec 2021, 4 marks)
Answer:
Taxability of un realised rent recovered and arrears of rent Since the unrealised rent was recovered in the P.Y. 2022-23, the same would be taxable in the A.Y. 2023-24 under section 25A, irrespective of the fact that Mr. Santhosh was not the owner of the house in that year. Further, the arrears of rent was also received in the P.Y. 2022-23, and hence the same would be taxable as income from house property in the A.Y. 2023-24 under section 25A, even though Mr.Santhosh was not the owner of the house in that year. A deduction of 30% of unrealised rent recovered and arrears of rent would be allowed while computing income from house property of Mr.Santhosh for A.Y. 2023-24.

Computation of income from house property of Mr. Santhosh for A.Y. 2023-24.

Particulars	₹
(i) Unrealised rent recovered	25,000
(ii) Arrears of rent received	99,000
	1,24,000
Less: Deduction @ 30%	37,200
Income from house property	86,800

Note: Any other charge other than standard deduction is not allowed as deduction. Lawyer fees paid is hence not deductible.

Question 19.
Amar (age 50) a resident has the following properties which are let out during the financial year 2022-23.

Particulars	House 1	House 2	House 3
Actual Rent (House 3 vacant for 2 months)	₹ 3,00,000	₹ 3,00,000	₹ 3,00,000
Gross municipal value	₹ 2,40,000	₹ 3,00,000	₹ 3,30,000
Fair rent	₹ 2,70,000	₹ 3,30,000	₹’3,00,000
Standard rent	₹ 2,10,000	₹ 2,70,000	₹ 4,20,000
Municipal tax	10%	10%	10%
Sewerage tax	₹ 14,000	₹ 10,000	₹ 15,500
Water tax	5%	5%	5%
Interest on moneys borrowed	₹ 1,05,000	₹ 1,32,500	₹ 1,65,500

Compute income from house property for the assessment year 2023-24. (Dec 2022, 7 marks)

Income Under Head Salaries – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Income Under Head Salaries – CMA Inter Direct Tax Study Material

Descriptive Question

Question 1.
What are the conditions to be fulfilled by an employee to get his accommodation in a hotel that will not be a taxable perquisite? (June 2013, 2 marks)
Answer:
Accommodation provided in a hotel will not be a taxable perquisite if the following two conditions are fulfilled.

• The period of such accommodation does not exceed 15 days.
• Such accommodation has been provided on the transfer of the employees from one place to another.

Question 2.
“Accommodation provided in a hotel will not be a taxable perquisite” in the hands of employees it correct? Briefly explain. (Dec 2013, 2 marks)
Answer:
Accommodation provided in a hotel will not be a taxable perquisite if the following two conditions are fulfilled.

• The period of such accommodation does not exceed 15 days.
• Such accommodation has been provided on the transfer of the employees from one place to another.

Question 3.
What are “profits in lieu of salary” as per Section 17(3) of the Income Tax Act, 1961? (Dec 2014, 3 marks)
Answer:
As per Section 17(3), “profits in lieu of salary” includes –
(i) The amount of any compensation due to or reàèlved by the assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions, relating thereto;

(ii) Any payment (other than gratuity, commuted pension, compensation received under the Industrial Disputes Act or any other Act, etc., any payment from a provident fund to which the Provident Funds Act, 1925 applies, accumulated balance in recognized provident fund, payment from approved superannuation fund or house rent allowance) to the extent to which ¡t does not consist of contributions by the assessee or interest thereon or any sum received under a Keyman insurance policy including bonus allocated under such policy.

Practical Questions

Question 4.
’R’ who resides at Delhi, gets ₹ 6,00,000 as basic salary. He receives ₹ 1,70,000 as house rent allowance. Rent paid by him is
₹,80,000. Find out the amount of taxable HRA for the assessment year 2023-24. (Dec 2012, 4 marks)
Answer:

Salary for HRA = Basic Salary + DA (forming part of retirement benefits) +
Commission (based on fixed percentage of turnover) = ₹ 6,00,000.

Question 5.
Excel Ltd. allotted 1000 (sweat) equity shares of ₹ 10 each to Mr. Rao, General Manager. The fair market value of the shares computed in accordance with the method prescribed under the Income-tax Act/Rules was ₹ 500 per share, whereas ¡t was allotted at ₹ 300 per share. What is the perquisite value of sweat equity shares allotted to Mr. Rao? In case these shares are sold subsequently, what would be their cost of acquisition in the hands of Mr. Rao? (Dec 2012, 6 marks)
Answer:
As per Section 17(2)(vi), the fair market value of sweat equity shares on the date on which the option is exercised by the assessee is considered as value of perquisite as reduced by the amount actually paid or recovered from him in respect of such shares.

Fair market value of 1,000 equity shares @ ₹ 500 each 5,00,000
Less: Amount recovered from Mr. Rao 1,000 x 300 each 3,00,000
Value of perquisite of sweat equity shares allotted to Mr. Rao 2,00,000

If these shares are sold subsequently, as per Section 49(2AA). Where the capital gain arises from the transfer of specified security or sweat equity shares which was treated as perquisite in the hands the employee, the cost of acquisition of such security or shares shall be the fair market value which has been taken into account for the purposes of valuation of perquisite. Hence, cost of acquisition for Mr. Rao shall be ₹ 5,00,000.

Question 6.
‘X’ a resident of Bengaluru receives ₹ 20,00,000 as basic salary. In addition, he gets ₹ 6 lakhs as dearness allowance (forming part of basic salary), 3.5% commission on sales made by him (sale made by X during the previous year in ₹ 80,00,000); ₹ 2,40,000 is paid to him as house rent allowance. He however pays ₹ 2,80,000 as house rent. Determine the quantum of HRA exempt from tax. (June 2013, 4 marks)
Answer:
Out of the H.A. received i.e., ₹ 2,40,000/-, the least of the following would be exempt

• ₹ 11,52,000/- being 40% of salary, i.e., basic salary, dearness pay, and commission: ₹ 28.80,000/-
• ₹ 2,40,000 being the house rent allowance.
• NIL, being the excess of rent paid (i.e., ₹ 2,80,000/- over 10% of salary, i.e., ₹ 2,88,000/-. As least of the three is NIL, the entire house rent allowance is taxable.

Question 7.
Answer the following sub-divisions briefly in the light of the provisions of the Income-tax Act, 1961:
A Government employee received gratuity of ₹ 16 lakhs upon retirement, ¡n September 2022. How much is taxable? (Dec 2013, 1 mark)
Answer:
As per Section 10 (10) gratuity of a person being a government employee is exempt without any monetary limit.

Question 8.
Raja joined TCI Limited on 1st June. 2021. Emoluments paid and benefits allowed by the company to Raja are as follows:

	₹
Basic Salary	40,000 p.m.
Dearness Allowance	15,000 p.m.
Incentive	30,000 p.m.

A furnished accommodation at Mumbai belonging to the company is provided free. Cost of furniture there in ₹ 3,00,000
Motor car (with engine cc less than 1.6 liters) owned by the company along with a chauffeur for official and personal
purposes Salary of sweeper paid by the company 1,000 p.m.
Education provided for Raj’s son without any fees.
Cost of providing education by the school is 750 p.m.
Admission fee for corporate membership of a club paid 1,20,000
by the company. Bills for club facilities were paid by Raja.
House building loan of ₹ 10,00,000 was given by the company to Raja on 1st December, 2022 at interest rate of 5% p.a.
No repayment was made during the year. Compute the income of Raja chargeable under the head “Salaries”. (Dec 2013, 7 marks)
Answer:

Note 1: Salary for the purpose of computing taxable value furnished accommodation:

Particulars	Amount (₹)
Basic Salary	4,00,000
Dearness Allowance	1,50,000
Bonus	3,00,000
	8,50,000

Assuming, Mr. Raja stays in a city where population is more than 25,00,000 as per 2001 census, value of unfurnished accommodation = 15% of salary
= 15% of ₹ 8,50,000
= 1,27,500

Value of furniture provided = 10% p.a. of actual cost
=10% of’ ₹ 3,00,000 x 10/12
= ₹ 25,000
(Assuming, the value of furniture given in the problem represents actual cost.)

Note 2: Computation of taxable value of perquisite – related to educational facility.
Since tuition fee per month is less than ₹ 1,000.
Amount of perquisite = Nil

Note 3: Computation of taxable value of perquisite – related to interest-free housing loan.
Value of Perquisite = Interest @ 10.75% p.a. less Actual interest charged = (10.75% – 5%) × ₹ 10,00,000 × 4/12 = ₹ 19,167

Note 4: Corporate membership fees of a club are for the business of the employer of the assessee, will not be treated as perquisite in the hand of employee.

Question 9.
Mr. Raghu joined a company at Chennai on 01.07.2022 and was paid the following emoluments:
(i) Basic salary ₹ 50,000 per month.
(ii) Dearness allowance 50% of basic salary (eligible for retirement benefits).
(iii) Furnished accommodation owned by company was provided at Chennai.
(iv) Value of furniture in the accommodation ₹ 2,00,000 (cost).
(v) Motor car owned by the employer (with engine capacity less than 1.6 litres) given for exclusive personal use. Self-driven by Raghu. Expenses incurred by employer on its running and maintenance ₹ 55,950.
(vi) Educational facility for two children provided tree of cost. The school is owned by the company. Tuition fee per month ₹ 600 and ₹ 1200 respectively.
(vii) Annual membership fee for Gymkhana Club paid by the employer ₹ 20,000.
Compute the income from salary of Mr. Raghu for the assessment year 2023-24. (June 2014, 7 marks)
Answer:

Add Club Membership tee paid by employer		20,000
Gross Income from Salary		8,69,000
Less: Standard deduction		50,000
		8,19,000

Question 10.
Mr. Rahim. Director in a MNC Ltd. is entitled to a motor car (1.8 liters.) to be used for both official and private purposes.
Discuss the taxability of perquisite, it
(i) The car is owned by the employee, expenses paid by employer and it is a Chauffeur-driven car.
(ii) The car is owned by Mr. Rahim, expenses incurred ₹ 30,000 and chauffeur is paid a salary of ₹ 90,000 provided by the employer. (June 2014, 3 marks)
Answer:

Tutorial Note:
Had the car been owned by the employer in case of the above, case (i), the calculations would have been as follows:
Expenditure incurred + salary of chauffeur (as per income-tax guidelines)
= ₹ 2,400 pm + ₹ 900 pm = ₹ 3,300 pm
=₹ 39,600 per year.

Question 11.
Mr. Mahim was retrenched from service of ABC Limited. He received retrenchment compensation amounting to ₹ 8,75,000. Amount of compensation determined under the Industrial Disputes Act, 1948 is ₹ 4,80,000. The scheme of retrenchment is not approved by the Central Government. Compute the taxable retrenchment compensation. (Dec 2014, 4 marks)
Answer:

Question 12.
Mr. Ashwin finance manager in Beta Ltd. gives you the following information:
(i) A rent-free accommodation is provided by the employer at Bangalore by taking the accommodation on lease basis whose rent was ₹ 20,000 per month.
(ii) He is provided with a motor car (cubic capacity of engine more than 1.6 liters) both for official and personal use. The expenses on running and maintenance are met by the employee. Assume annual salary for the purpose of perquisite valuation as ₹ 6,00,000. You are requested to compute the perquisite value in the hands of Mr. Ashwin. (June 2015, 4 marks)
Answer:

Question 13.
Mr. Sridhar an employee of XV Ltd. received ₹ 8 lakhs as leave salary on his retirement on 28.02.2023. Average salary drawn during last 10 months ₹ 35,000. Last drawn salary is ₹ 40,000. He rendered service of 24 years and 7 months. Leave taken while in service 9 months. Leave entitlement as per employer’s rules is 1\(\frac{1}{2}\) months for each completed year of service. Calculate the taxable leave salary for the assessment year 2023- 24. (Dec 2015, 4 marks)
Answer:
Taxable leave salary of non government employee received at his retirement will be as under:

₹ 5,00,000 (8,00,000 – 3,00,000) will be taxable leave salary in hands of Mr.Sridhar.

Question 14.
Mr. Harbhajan employed in Gama Ltd. furnishes you the following information for the year ended 31.032023:
(i) Basic salary up to 31.12.2022 ₹ 60,000 per month.
(ii) Basic salary from 01.01.2023 ₹ 70,000 per month.
Note: Salary is due and paid on the last day of every month.
(iii) Dearness Allowance @ 40% of basic salary.
(iv) Bonus equal to one month’s salary paid in February 2023 on basic salary and DA applicable for that month.
(v) Employer’s contribution to Provident Fund account of the employee at 15% of basic salary.
(vi) Profession tax paid ₹ 5,000 of which ₹ 2,000 was paid by employer.
(vii) Facility of laptop and computer was provided to Harbhajan both for official and personal use. Cost of laptop ₹ 35,000 and computer ₹ 25,000 acquired by the company on 01.01.2023.
(viii) A motor, car owned by the employer is provided to the employee meant for both official and personal use from 01.12.2022. Running expenses fully met by the employer which amounts to ₹ 35,000. The motor car (cubic capacity of engine exceeds 1.6 liters) was self-driven by Mr. Harbhajan. Compute the salary income chargeable to tax in the hands of
Mr. Harbhajan for the assessment year 2023-24. (Dec 2015, 7 marks)
Answer:

Working Notes:

1. In case professional tax is paid by employer on behalf of employee, the amount paid shall be included in taxable gross salary of employee, then deduction can be claimed.
2. Employer’s contribution in PF in exempted up to 12%. excess of 12% shall be taxable in hands of employee. Hence, 3% (15% – 12%) will be taxable in hands of Mr. Harbhajan.
3. As per section 17(2)(viii) taxable value of perquisite for use of Laptop and computer shall be Nil.
4. As per Rule 3(2), if the motor car (whose engine cubic capacity is 1.6 liters) is owned by employer and is used for both official and personal purposes by the employee, the value of perquisites would be ₹ 2,400 per months.

Question 15.
Answer the following question with brief reason/working:
(ii) Mr. Ajit is employed with XY Co. Ltd. at Mumbai from 01.04.2021. The company took accommodation on lease basis which cost ₹ 3 lakhs per annum. Mr. Ajit is eligible for salary plus DA of ₹ 1 lakh per month. The employer’s annual contribution to the recognized provident fund account of Mr. Ajit ¡s ₹ 1,20,000. What is the perquisite value of accommodation liable to tax in the hands of Mr. Ajit? (Dec 2016, 2 marks)
Answer:
Value of Perquisite will be: (Rent free Accommodation)
(a) 15% of Salary (12,00,000 x 15%) ₹ 1,80,000
Or
(b) Actual Lease Rent paid by employer ₹ 3,00,000
Whichever is lower i.e. ₹ 1,80,000.

Question 16.
An employee has been given a laptop purchased on 01.04.2022 for ₹ 40,000, which he is allowed to take home and use. What is the value to be treated as perquisite while computing Income under the head ‘salaries’? (Dec 2016, 2 marks)
Answer:
Laptop given by employer to the employee is exempt prerequisite. Therefore, value of perquisite will be NIL.

Question 17.
Mr. Nitin is the marketing manager of M&M Ltd., Mumbai. From the following details compute the salary income of Mr. Nitin for the assessment year 2023-24:
(i) Basic salary (per month) ₹ 60,000
(ii) Dearness allowance = 50% of basic salary
(iii) Motor car owned by employer given to employee. Entire running expenses are met by the employer and the car is used for both official and personal purposes by the employee. The engine cubic capacity is above 1.6 litres.
(iv) Provident fund contribution of both employer and employee at 15% of basic salary.
(v) Accommodation owned by the employer is given to the employee. A sum of ₹ 5,000 per month is deducted towards accommodation from the salary of employee.
(vi) Life insurance premium on policy taken by employee paid by the employer during the year ₹ 45,000.
(vii) The employer provides free education facility for Mr. Nitin’s daughter in a school maintained by the employer. Cost of education in similar school is ₹ 800 per month.
(viii) Cost of lunch provided by the employer during office hours ₹ 18,000. (Dec 2016, 8 marks)
Answer:

Question 18.
Mr. Raghu is employed with Yes Power Co. Ltd. as General Manager (Finance) at Kolkata. He furnishes you the following
information for the year ended 31.03.2023.

	₹
Basic salary (per month)	40,000
Dearness allowance (per month) eligible for retirement benefits	30,000

Rent-free accommodation is provided.
A car was provided to him from 01.06.2022 (engine cubic capacity more than 1.6 liters). It is used both for official and personal purposes. Running expenses are fully met by employer. Mr. Raghu drives the car himself.
Provident fund contribution of both employer and employee 12% of basic pay and dearness allowance.
Fixed tiffin allowance (per annum)	20,000
Fixed medical allowance (per annum)	30,000
Credit card annual fee paid by employer (used for personal purposes)	7,000
Only son of Mr. Raghu is given free education in the school run by the employer. Cost of education is ₹ 1,500 per month.
Loan taken by Mr. Raghu from provident fund during the year	₹ 50,000

Compute the total income of Mr. Raghu for the assessment year 2023-24. (June 2017, 7 marks)
Answer:

Question 19.
Mr. Mohan is sales manager in Steel King (P) Ltd. at Chennai. During the financial year 2022-23, he gets the following
emoluments from his employer:

Particulars	₹
Basic salary up to 30.09.2022	20,000 p.m.
From 01.10.2022	30,000 p.m.
Dearness allowance @ 50% basic salary [it is not eligible retirement benefits]
Transport allowance	2,000 p.m.
Children’s education allowance (for 2 children)	1,000 p.m.
Tiffin allowance (actual expenses ₹ 9,000)	15,000
Tax paid on employment	3,000
Contribution to recognition provident fund by the employer @ 15% of basic salary.
An unfurnished accommodation taken on lease by the employer was given to the employee for the whole year. Lease rent paid by the employer ₹ 1,80,000. Amount recovered from the employee ₹ 2,000 per month. Domestic servant salary reimbursed by the employer as per employment agreement. Compute the salary income of Mr. Mohan for the assessment year 2023 24.	5,000 p.m.

(Dec 2017, 8 marks)
Answer:

Question 20.
Mr. Subramani is Senior Manager (Finance) of VKS Steel Ltd. The particulars of his emoluments for the year ended 31.03.2023 are given below:

Basic Salary	₹ 60000 per month
Dearness Allowance	₹ 40,000 per month (30% is for retirement benefit)
Annual performance Incentive	₹ 1,80,000
House Rent Allowance	₹ 10,000 per month

Mr. Subramani pays rent of ₹ 20,000 per month for a flat occupied from 1st November, 2021 at Erode, Tamil Nadu. He received gift voucher of ₹ 6,000 from the employer on the occasion of his marriage anniversary. The employer provided him a motor car (cubic capacity of the engine exceeds 1.6 litres) without chauffeur with effect from 1 December 2022. Running and maintenance expenses of ₹ 30,000 were fully borne by the employer. The car is used by Mr. Subramani both for official and private purposes.
The employer paid the following premiums for Mr. Subramani.
(i) Medical insurance premium ₹ 12,000
(ii) Life insurance premium ₹ 15,000
(iii) Accident insurance premium ₹ 10,000
Tax on employment paid to Erode Municipal Corporation by Mr. Subramani ₹ 5,000. Compute the income chargeable to tax under the head “Salaries” in the hands of Mr. Subramani for Assessment Year 2023-24. (Dec 2018, 9 marks)
Answer:

Calculation of amount of Salary for the purpose of House Rent allowance Salary means Basic Salary + D.A. if provided under the term of Retirement Benefit
(60,000 x 5) + (40,000 x 30% x 5) = 3,60,000

2. Where the motor car is owned or hired by the employer and is used party in the performance of duties and partly for private or personal purposes, the expenses on maintenance and running are met or reimbursed by the employer, then perquisite value 2,400 month [where cubic capacity of engine exceed 1.6 litres.

Question 21.
Ms. Poorvisha is the HR Manager in Poorni Textiles Ltd. She gives you the following particulars for the year ended 31 -03-2023:
Basic Salary ₹ 1,00.000 p.m.
Dearness Allowance ₹ 24,000 p.m. (30% of which forms part of retirement benefits).
Bonus ₹ 21,000 p.m.
Her employer-company has provided her with an accommodation on 1 April, 2022 at a concessional rent. The house was taken on lease by the company for ₹ 12,000 p.m. Ms. Poorvisha occupied the house from 1st November 2022, ₹ 4,800 p.m. is recovered from the salary of Ms. Poorvisha.
The employer gave her a gift voucher of ₹ 10,000 on her birthday.
She contributes 18% of her salary (Basic Pay plus DA) towards recognised provident fund and the company contributes the same amount.
Uniform allowance ₹ 24,000.
The company pays medical insurance premium to effect insurance on the health of Ms. Poorvisha ₹ 20,000. Motor car owned by the employer (Cubic capacity of engine exceeds 1.6 liters) provided to Ms. Poorvisha from 1 November 2022 which is used for both official and personal purposes. Repair and running expenses of ₹ 70,000 were fully met by the company. The motor car was self-driven by the employee. Compute the income chargeable to tax under the head “Salaries” in the hands of Ms. Poorvisha. Brief note on treatment of each item is required. (June 2019, 10 marks)
Answer:

Working Note:
1. Where the accommodation is taken on lease or rent by the employer, the actual amount of lease rent paid or payable by the employer of 15% of salary whichever is lower, in respect of the period during which the house is occupied by the employee, as reduced by the rent recoverable from the employee, is the value of perquisite. Actual rent paid by the employer from 01.11.2022 to 31.03.2023 = ₹ 60,000 [ ₹ 12,000 x 5 months]
15% of salary = ₹ 96,150 [15% x (₹ 1,00,000 +₹ 7,200 + ₹ 21,000) x 5 months]

Salary = Basic salary + Dearness allowance, to extent it forms part of pay for retirement benefits + Bonus Lower of the above is ₹ 60,000 which is to be reduced by the rent recovered from the employee.
Hence, the perquisite value of concessional rent = ₹ 60,000 – ₹ 24,000 [₹ 4,800 x 5 months] = ₹ 36,000

2. As per Rule 3(7) (iv), the value of any gift or voucher received by the employee or by member of his household on ceremonial occasion or otherwise from the employer shall be determined as the sum equal to the amount of such gift. However, the value of any gift or voucher received by the employee or by member of his household below ₹ 5,000 in aggregate during the previous year would be exempt as per the proviso to Rule 3(7)(iv).

In this case, the gift voucher of ₹ 10,000 was received by Ms. Poorvisha from her employer on the occasion of her birthday. Since the value of the gift voucher exceeds the limit of ₹ 5,000, the entire amount of ₹ 10,000 is liable to tax as perquisites.

3. In case of uniform allowance, it is assumed here that total amount of allowance is incurred for that purpose and hence it is fully exempted from tax.

Question 22.
Krishna is employed in XYZ Limited. He gets a basic salary of ₹ 80,000 per month and dearness allowance. equal to 40% of basic salary. 50% of dearness allowance forms part of pay for retirement benefits. Both Krishna and XYZ Limited contribute 12% of basic salary to new pension scheme referred to in section 80CCD. Examine the tax treatment of employer’s contribution and own contribution in the hands of Krishna (June 2019, 5 marks)
Answer:
Tax treatment of employer’s contribution in the hands of Krishna. Employer’s contribution to pension scheme referred to in section 80CCD would be treated as salary because it is specifically included in the definition of salary” under section 17(1)(viii). Accordingly, ₹ 1,1 5,200, being 12% of basic salary of ₹ 9,60,000 is to be included in the salary of Krishna. Tax treatment of Krishna’s own contribution In the hands of Krishna:
(i) Krishna’s contribution to pension scheme is allowable as deduction under section 80CCD(1). However, deduction is restricted to 10% of salary. Salary for this purpose – basic salary plus DA, if it forms part of pay for retirement benefit.
So, salary for this purpose = ₹ 9,60,000 + (50% of 40% of ₹ 9,60,000) = ₹ 11,52,000. Deduction under section 8OCCD(1) restricted to 10% of salary= ₹ 1,15,200

(ii) As per section 80CCD(!B), no deduction is permissible as the whole amount of contribution (i.e. ₹ 1,15.200) is exhausted under section 80CCD(1) Above deduction of ₹ 1,15,200 will be taken into consideration and be subject to the overall limit of ₹ 1,50,000 under section 80CCE.

Question 23.
Mr. Subramani is the Chief Finance Manager of M/S LHW Ltd. based at Chennai. He has given the following particulars relating to salary:
(i) Basic Salary (60,000 x 12) = 7,20,000
(ii) D.A (₹ 25,000, x 12) = ₹ 3,00,000 (forms part of pay for retirement benefits)
(iii) Bonus – 2 months of basic pay.
(iv) Commission – 0.1% of the turnover of the company. The turnover of the company for previous year 2022-23 is ₹20 crores.
(v) Contribution of the employer and employee to the recognized provident fund ₹ 3,50,000 each.
(vi) Interest credited to Recognized Provident Fund Account at 9.5% ₹ 65,000.
(vii) Rent-free unfurnished accommodation provided by the company for which the company has paid annuàl rent of ₹ 80,000.
(viii) Entertainment Allowance ₹ 30,000.
(ix) Hostel allowance for three children ₹ 5,000 each.
Compute the income chargeable under the head “Salaries” in the hands of Mr. Subramani for the Asssessment Year 2023-24. (Dec 2019, 9 marks)
Answer:

Note:
1. Calculation of exempt amount of Employer’s Contribution to RPF,
= Salary for the purpose of employer contribution
= Basic + D.A. + Commission
= 7,20,000 + 3,00,000 + 2,00,000
= 12,20,000

Exempt Contribution = 12% x 12,20,000 = 1,46,400
Taxable Amount = 3,50,000 – 1,46,400 = 2,03,600

2. Computation of taxable amount of Rent free Unfurnished accommodation lower of following amount taxable

• 15% of salary [1 3,77,800 x 15%] 2,06,670
• Higher charged paid by employer Taxable amount = 80,000 80,000

Salary for the purpose of Rent free accommodation
Salary = Basic + D.A + Bonus + Commission + All taxable allowance = 7,20,000 + 3,00,000 + 1,20,000 + 20,00,000 + 7,800 + 30,000 = 13,77,800

Question 24.
Shri Varun is employed in ABC & Co at Kolkata during the previous year 2022-23. His basic salary per month is ₹ 50,000 and dearness allowance which forms part of salary for retirement benefits is 40% of basic salary. ABC & Co also provided an education allowance of ₹ 3,000 per month for the updation of knowledge by employees.
An accommodation was provided by the ABC & Co. at Kolkata for which rent is paid by the ABC & Co. The rent paid by the ABC & Co. is ₹ 10,000 per month. Along with the accommodation at Kolkata he was also provided with furniture items which was taken on hire and the hire charges was paid by ABC & Co. A television set was hired per annum for ₹ 6000 and furniture were hired for ₹ 12,000 per annum. He was provided Refrigerator and washing machine for which the original cost borne by ABC & Co. was ₹ 1,00,000.

Shri. Varun was given a fixed medical allowance of ₹ 5,000 per month and fixed tiffin allowance of 2,000 per month. The telephone bill including mobile bill paid by the ABC & Co. which costed them ₹ 15,000 per month. Further, a laptop costing ‘ ₹ 70,000 was provided to him to perform his job from home by ABC & Co on 1.01 2023.

The contribution in Recognised provident fund by ABC & Co was @ 15% of basic salary; along with this the contribution of Shri. Varun also contributed ₹ 7,500 per month to Recognised provident fund. Shri. Varun paid medical insurance premium by bearer cheque for ₹ 20,000. He received an interest of ₹ 24,000 from the bank account with UCO Bank for his savings account. He also paid interest on educational loan taken for his son’s education in an Indian college for ₹ 1,00,000 a year.

Shri. Varun wants your advice in computing the following for tax planning purposes:
State taxable allowances paid by ABC & Co to Shri Varun.
Compute perquisite value of rent-free accommodation provided by ABC & Co.
Calculate the tax-free and taxable perquisites provided by the employer ABC & Co. and compute the gross total income of Shri. Varun Compute the quantum of deduction under Chapter VI-A and the total income of Shri. Varun. You are required to make the computations and assist him. (Dec 2021, 12 marks)
Answer:

	₹
Perquisite value of rent-tree accommodation	1,48,000
Tax-free perquisites: Telephone bill reimbursed Laptop	Nil Nil
Taxable perquisite	1,48,000
Gross total income	11,50,000
Deduction under Chapter VI A	2,20,000
Total Income	9,30,000

Question 25.
Shri Manas, Finance Manager of Lighting Co. Ltd. furnishes you the following information:

	₹
Basic Salary (per month)	50,000
Dearness allowance 50% on basic salary Note: Not forming part of retirement benefit
Transport allowance – per month	2,500
Bonus (per annum)	50,000
Commission – for the year	2,00,000
Refreshments during office hours – cost to employer	27,000
Rent-free accommodation provided by the employer at Kolkata
Furniture fittings in the rent-free accommodation. Original cost ₹ 4,80,000 acquired in financial year 2019-20.
Medical facility in clinic maintained by the employer – estimated cost in case it is incurred in outside clinic	65,000
Gardener provided for maintaining the garden – salary of gardener	36,000

The motor car of the employer was sold to Manas for ₹ 5 lakhs in August 2022. The car was acquired by the company on 01.06.2019 for ₹ 11,50,000. Compute income from salary of Shri Manas for the assessment year 2023-24. (Dec 2022, 7 marks)