Success-Gurus

INTERMEDIATE EXAMINATION
(REVISED SYLLABUS - 2008)
GROUP - I
Paper-7 : APPLIED DIRECT TAXATION
Q1. (a) Choose the correct answer with reference to the provisions of the Income-tax Act, 1961.
Surcharge of 10% is payable by an individual where the total income exceeds :
(i) Rs.7,50,000
(ii) Rs.8,50,000
(iii) Rs.10,00,000
(iv) None of these
(b) Additional surcharge (Education cess) of 2% is payable on
(i) Income-tax
(ii) Income-tax plus surcharge, if any
(iii) Surcharge
(iv) Not payable by any assessee
(c) Write short notes on: “Income accruing” and “Income due”. Can an income which has
been taxed on accrual basis be assessed again on receipt basis?
(d) Write short notes on: Association of persons
(e) Difference between Application of Income and Diversion of Income
(f) Write short notes on: Basis of charge.
Answer 1.
(a) (iii) when the income exceeds Rs.10,00,000
(b) (ii) i.e. income tax plus surcharge if any
(c) ‘Accrue’ refers to the right to receive income, whereas ‘due’ refers to the right to enforce
payment of the same. For e.g. salary for work done in December will ‘accrue’ throughout
the month, day to day, but will become ‘due’ on the salary bill being passed on 31st December
or 1st January. Similarly, on Government securities, interest payable on specified dates
arise during the period of holding, day to day, but will become due for payment on the
specified dates.
Income which has been taxed on accrual basis cannot be assessed again on receipt basis, as
it will amount to double taxation. For example, when a loan to a director has already been
treated as dividend under section 2(22)(e) and later dividend is declared, distributed and
adjusted against the loan, the same cannot be treated as dividend income again.
(d) When persons combine together for promotion of joint enterprise they are assessable as
association of persons (AOP) when they do not in law constitute a partnership.
In order to constitute an association, persons must join in a common purpose, common
action and the object of the association must be to produce income. It is not enough that
the persons receive the income jointly. Co-heirs, co-legatees or co-donees joining together
for a common purpose or action would be chargeable as an association of persons.
100 Revisionary Test Paper (Revised Syllabus-2008)
(e) Application of Income : An obligation to apply income, which has accrued or has arisen or
has been received amounts to merely the apportionment of income. Therefore the essentials
of the concept of application of income under the provisions of the Income Tax Act are:
1. Income accrues to the assessee
2. Income reaches the assessee
3. Income is applied to discharge an obligation, whether self-imposed or gratuitous.
Diversion of Income : An obligation to apply the income in a particular way before it is
received by the assessee or before it has arisen or accrued to the assessee results in diversion
of income. The source is charged with an overriding title, which diverts the income. Therefore
the essentials are the following :
1. Income is diverted at source,
2. There is an overriding charge or title for such diversion, and
3. The charge / obligation is on the source of income and not on thereceiver.
Examples of diversion by overriding title are -(a) Right of maintenance of dependants or of
coparceners on partition(b) Right under a statutory provision(c) A charge created by a decree
of a Court of law.
(f) Section 4 of the Income-tax Act provides that income-tax shall be charged (a) for any
assessment year at the rate or rates specified in the annual Finance Act for that year (b) in
respect of the total income of the previous year of every person.
Thus income-tax is levied for every assessment year at rates specified in the relevant Finance
Act.
The liability to tax arises by virtue of the charging section alone and it arises at the close of
the previous year, though quantification of the amount payable is postponed. It therefore
follows, that the liability to tax is not dependent upon assessment. In respect of income
chargeable to tax, tax shall be deducted at source or paid in accordance with the relevant
provisions. Further, though the Finance Act naturally prescribes the rates of tax, in respect
of certain incomes, the Income-tax Act itself has prescribed specific rates. For example,
Section 112 in the case of long term capital gains @ 20%; Section 115BB in the case of
winnings from lotteries, etc @ 30%.
Q2. (a) What does the term “substantial interest” denote under Income-tax Act?
Answer 2. (a)
The term ‘substantial interest’ is relevant under the Income-tax Act, 1961.Section 2(32) says
that in relation to a company means a person who is the beneficial owner of shares, not being
shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits,
carrying not less than 20% of the voting power. In the case of a non-corporate entity, a person
can be said to have substantial interest if 20% or more share or profit is held by him.
Q2. (b) Define the term “assessee” and state in this connection the different classes of assessees
under the Income-tax Act, 1961.
A single letter of enquiry was issued by the Income-tax Department to Mr. Shoumik of
Pune. In this letter there was no specific mention of any provision of the Income-tax Act.
Can Mr. Shoumik be treated as an “assessee” under the Income-tax Act ?
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Answer 2. (b)
Assessee means a person by whom any tax or any other sum of money is payable under the Act.
It includes every person in respect of whom any proceeding has been taken for the assessment of
his income or assessment of fringe benefits. It includes a person who is assessable in respect of
the income of any other person or of the loss sustained by him or by such other person or of the
amount of refund due to him or to such other person.
This term also includes every person who is deemed to be an assessee or an assessee in default
under any provision of this Act.
Under the Income-tax Act, the different classes of assessees are : (a) Individual, (b) Hindu undivided
family, (c) Partnership firms, (d) Companies, (e) Association of Persons (AOP) or body of individuals
(BOI) whether incorporated or not (f) Local Authority, and (g) every artificial juridical person not
falling within any of the preceding category.
According to sec 2(7) of the Income-tax Act, 1961, where any proceeding is initiated against a
person according to the relevant provisions of the Act, such a person is termed as an “assessee”.
It is to be noted here that a simple enquiry letter issued by the Income-tax Department to a person
without reference to any specific provision of the Act does not constitute any proceeding under
the Act and as such the person cannot be treated as an “assessee” within the ambit of section
2(7) of the Act. In the given problem, Mr. Shoumik cannot therefore, be treated as an “assessee”.
Q2. (c) What are the exceptions to the general rule that income of the previous year alone is
taxed in an assessment year? Discuss.
What are the exceptions to the rule that the income of the previous year is chargeable to
tax in the immediately following assessment year?
Answer 2. (c)
1. Shipping business of nonresident [Section 172]
2. Persons leaving India [Section 174]
3. AOP or BOI or Artificial Juridical Person formed for a particular event or purpose
[Sec. 174A]
4. Persons likely to transfer property to avoid tax [Section 175]
5. Discontinued business [Section 176]
Q3. (a) Chocos Ice-cream Private Limited gives you the following details for the accounting year
ended 31st March, 2009 :
Paid up equity share capital is divided into shares of Rs.10 each.
Sarvashri Ray Gandhi, Dikesh Ranka, Prasant Shroff and Tanmay Shah are registered
shareholders, each holding 10,000 equity shares fully paid up.
Reserves of accumulated profits on 1st April, 2008 were Rs. 40 lakhs.
Current year’s surplus was Rs. 10 lakhs.
Current liabilities and provisions at year end amounted to Rs.1 lakh.
Fixed assets consisted of only one item, viz., office buildings (at cost) of Rs. 11 lakhs.
Preliminary expenses not written off (at year end) Rs. 40,000.
Current assets on 31st March, 2009 amounted to Rs. 30 lakhs.
102 Revisionary Test Paper (Revised Syllabus-2008)
Loans and advances granted in the year and outstanding at year end were Rs. 13,60,000.
These included :
(a) trade deposit of Rs. 1 lakh given to Ray Gandhi. He supplied a ‘softy’ ice machine in
April, 2009 and the advance was adjusted against the cost of machinery supplied ;
(b) loan of Rs. 3 lakhs given to Dikesh Ranka on 10th January, 1999, out of which Rs. 1
lakh was repaid by him on 30th March, 2009
(c) loan of Rs. 3 lakhs given to Smt. Kanta Prasant Shroff at the specific request of
Shri Prasant Shroff;
(d) loan of Rs. 4 lakhs to Tanmay Shah (H.U.F.) who are the beneficial owners of shares
registered in the name of Tanmay Shah.
Required :
Discuss the tax implications of the above transactions in the hands of :
Shareholders and Chocos Ice-cream Private Ltd.
Answer 3. (a)
Loans to shareholders of closely held companies to the extent the said company possesses
accumulated profits are to be treated as “deemed dividend” under section 2(22) (e) of the Incometax
Act. Each of the shareholders in the present case holds an equal interest viz. 25% of the
equity capital of the company and thus come within the scope of the above statutory provision.
(i) Trade deposit of Rs. 1,00,000 to Ray Gandhi adjusted against the supply of machinery/
goods does not amount to dividend. The trade deposit represents deposit in the ordinary
course of its business by the company.
(ii) Rs. 3,00,000 given to Dikesh Ranka will be deemed to be dividend. Even though Rs. 1,00,000
had been repaid by the shareholder by the end of the accounting year, the deeming is for the
distribution and the availability of accumulated profits. In the present case the entire advance
of Rs. 3,00,000 will be taxed as deemed dividend. It is not exempt under section 10(33) in
the hands of the shareholder.
(iii) Rs. 3,00,000 given to Smt. Kanta will also be treated as deemed dividend since the advance
was made at the specific request of the beneficial shareholder viz. Shri Prasant Shroff.
(iv) The amount of loan given to Tanmay Shah (HUF) is also liable to tax as deemed dividend as
beneficial ownership of shares in the company vest in HUF and it is only registered in the
name of Tanmay Shah. Section 2(22)(e) covers any person who is beneficial owner of
shares having substantial interest in the company.
Thus in the following cases, shareholders will be assessed for deemed dividend in respect of the
amounts received as given below :
Dikesh Ranka Rs. 3,00,000
Prasant Shroff Rs. 3,00,000
Tinmay Shah Rs. 4,00,000
In the hands of the company, there will be no tax liability under section 115-O, since that section
does not include any distribution under section 2(22) (e) as dividend for its coverage. Also it may
be noted that the company has accumulated profits much more than the amount advanced as loan
to various shareholders.
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Q3. (b) State the activities and operations, income from which is not deemed to accrue or arise in
India.
Answer 3. (b)
Explanation 1 to section 9(1)(i) lists out income which shall not be deemed to accrue or arise in
India. They are given below :
1. In case of a business of which all the operations are not carried out in India [Explanation 1(a)
to section 9(1)(i)]
In the case of a business of which all the operations are not carried out in India, the income
of the business deemed to accrue or arise in India shall be only such part of income as is
reasonably attributable to the operations carried out in India. Therefore, it follows that
such part of income which cannot be reasonably attributed to the operations in India is not
deemed to accrue or arise in India.
2. Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]
In the case of a non-resident, no income shall be deemed to accrue or arise in India to him
through or from operations which are confined to the purchase of goods in India for the
purpose of export.
3. Collection of news and views in India for transmission out of India [Explanation 1(c) to
sec.9(1)(i)]
In the case of a non-resident, being a person engaged in the business of running a news
agency or of publishing newspapers, magazines or journals, no income shall be deemed to
accrue or arise in India to him through or from activities which are confined to the collection
of news and views in India for transmission out of India.
4. Shooting of cinematograph films in India [Explanation 1(d) to sec.9(1)(i)]
In the case of a non-resident, no income shall be deemed to accrue or arise in India through
or from operations which are confined to the shooting of any cinematograph film in India, if
such non-resident is –
(i) an individual, who is not a citizen of India or
(ii) a firm which does not have any partner who is a citizen of India or who is resident in
India; or
(iii) a company which does not have any shareholder who is a citizen of India or who is
resident in India.
Q3. (c) Mr. John had estates in Rubber, Tea and Coffee. He derives income from them. He has
also a nursery wherein he grows and sells plants. For the previous year ending 31.3.2009,
he furnishes the following particulars of his sources of income from estates and sale of
Plants. You are requested to compute the taxable income for the Assessment year
2009-2010 :
Rs.
(i) Manufacture of Rubber 5,00,000
(ii) Manufacture of Coffee grown and cured 3,50,000
(iii) Manufacture of Tea 7,00,000
(iv) Sale of plants from Nursery 1,00,000
104 Revisionary Test Paper (Revised Syllabus-2008)
Answer 3. (c)
Computation of taxable income of Mr.John for A.Y. 2009-10
Particulars Non-Agr. Inc Agr. Inc.
Rs. Rs.
(a) Income from manufacture of rubber (Rule 7A)
Business income is 35% of Rs.5,00,000 1,75,000
Agricultural income is 65% of Rs.5,00,000 3,25,000
(b) Income from growing and curing of coffee (Rule 7B)
Business income is 25% of Rs.3,50,000 87,500
Agricultural income is 75% of Rs.3,50,000 2,62,500
(c) Income from manufacture of tea (Rule 8)
Business income is 40% of Rs.7,00,000 2,80,000
Agricultural income is 60% of Rs.7,00,00 4,20,000
(d) Income from sale of plants in nursery is agricultural
income, assuming that plants from nursery were grown
on land in the nursery Nil 1,00,000
(CIT v. Soundarya Nursery 241 ITR 350 (Mad)
5,42,500 11,07,500
Q4. (a) State the provisions relating to the exemption in respect of long-term capital gains on
transfer of listed Equity Shares.
Answer 4. (a)
Section 10(38) says that any income arising from the transfer of a long term capital asset being
equity shares in a company or a unit of an equity oriented fund is exempt from tax, subject to
following conditions.
(a) The transaction of sale is entered into after the introduction of securities transaction tax;
and
(b) Such transaction is chargeable to securities transaction tax.
The proviso to section 10(38) says that the income though exempt from tax is to be taken into
account while computing book profit and income tax payable under section 115 JB (applicable for
companies).
(ii) Exemption in respect of encashment of leave salary.
Q4. (b)
(i) Write short notes on: Taxability of Retrenchment Compensation received by Workmen.
(ii) Describe the following exempt incomes which do not form part of the total income under
the Income-tax Act, 1961: Retrenchment Compensation.
Answer 4. (b)
As per section 10(10B), any compensation received by a workmen at the time of retrenchment is
exempt to the extent of the lowest of the following :
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(i) any amount calculated in accordance with the provisions of section 25F(b) of the Industrial
Disputes Act, 1947; or
(ii) Such amount as notified by the Government i.e Rs.5,00,000; or
(iii) The actual amount received.
Under the Industrial Disputes Act, 1947 the workman is entitled to retrenchment compensation
equal to 15 days average pay for every completed year of continuous service or any part thereof
in excess of six months.
Any compensation in excess of aforesaid limits is taxable as salary or profits in lieu of salary.
However, the aforesaid limit is not applicable in cases where compensation is paid under any
scheme approved by the Government, having regard to the need for extending special protection
to the workmen in the undertaking to which the scheme applies.
For the purposes of this clause, compensation received at the time of closing down of an undertaking
or transfer of ownership or management of the undertaking shall be deemed to be retrenchment
compensation.
Q4. (c) What tax benefits are derived by an Industrial Undertaking, which is established in Free
Trade Zone? Enumerate the conditions which are required to be satisfied by such a unit.
Answer 4. (c)
Profits and gains derived by an undertaking which begins to manufacture or produce articles or
things or computer software in any special economic zone is eligible for deduction under section 10A.
The quantum of deduction is as under :
(a) 100% of the profits derived from export of such articles or things or computer software for
five consecutive assessment years beginning with the assessment year in which the
undertaking begins to manufacture or produce such articles or things or computer software.
(b) 50% of such profits and gains for further two consecutive assessment years.
(c) Not exceeding 50% of the profits for the next three consecutive assessment years subject
to the amount debited to profit and loss account and credited to Special Economic Zone Reinvestment
Allowance Reserve Account.
The following conditions have to be satisfied -
(a) The undertaking must commence production or manufacture of articles or things or computer
software after 01-04-2003 in any special economic zone.
(b) It should not have been formed by the splitting up or the reconstruction, of a business
already in existence.
(c) It is not formed by the transfer to new business of machinery or plant used for any purpose.
However, any machinery or plant so transferred to the new business if does not exceed
20% of the total value of machinery or plant then it would be deemed that this condition
has been complied with by the undertaking.
(d) No deduction is admissible unless the return of income is furnished on or before the due
date specified in section 139(1).
(e) An assessee may make a declaration in writing for any assessment year for not applying the
provisions of section 10A and such declaration must be furnished before the due date for
filing the return specified in section 139(1).
106 Revisionary Test Paper (Revised Syllabus-2008)
Q5. (a) What are the benefits available to a 100% Export Oriented unit (E.O.U. Discuss the eligibility
conditions for availing such benefits under section 10 B of the Income-tax Act,1961.
Answer 5. (a)
As per section 10B, 100% of profits and gains derived by an assessee from a 100% export
oriented undertaking from the export of articles or things or computer software is deductible for
10 consecutive assessment years beginning with the assessment year in which the undertaking
begins to manufacture or produce articles or things or computer software. The assessee must
satisfy the following conditions.
(i) It manufactures or produces any article or thing during the previous year ;
(ii) It has not been formed by the splitting up, or the reconstruction of, a business already in
existence;
(iii) It is not formed by the transfer to a new business of machinery or plant previously used for
any purpose. Further, where the total value of plant or machinery transferred to the new
unit does not exceed 20% of the total value of plant or machinery used in the new business,
this condition will be deemed to have been complied with.
(iv) For the purpose of getting deduction under this section the assessee must furnish his return
of income on or before the due date specified in section 139(1).
Further, in computing the depreciation allowance on any assets in the assessment years, following
the relevant assessment years, the written down value of the assets will be computed as if the
assessee had claimed and had been allowed the depreciation in accordance with the provisions of
the Act during each one of the assessment years.
The term 100% EOU means an undertaking which has been approved as such by the Board
appointed in this behalf by the Central Government in exercise of the powers conferred by section
14 of Industries (Development and Regulation) Act, 1951 and the rules made thereunder.
No deduction will be allowed under section 80-IA or section 80-IB in relation to profits and gains of
the undertaking coming under the provisions of section 10B.
Q5. (b) Explain the provisions relating to tax exemption to political parties. What are the obligations
of the political parties under the provisions of Income Tax Act, 1961?
Answer 5. (b)
Section 13A of the Income-tax Act grants exemption from tax to political parties in respect of
their income specified below :
(i) Income from house property ;
(ii) Income from other sources ;
(iii) Income by way of voluntary contributions received by the political parties from any person;
and
(iv) Capital gains.
The aforesaid four categories of income would qualify for exemption without any monetary or
other limit and the income so exempted would not even be includible in the total income of the
political party for purposes of assessment. The incomes, if any, derived by the political party by
way of profits and gains of business and profession would not, however, qualify for tax exemption.
The tax exemption will be applicable only if the following conditions are fulfilled.
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(i) The political part must be registered under section 29A of the Representation of the People
Act, 1951. A political party not registered will not be eligible for the exemption. The treasurer
of such political party or any other person must submit for every financial year a report
under section 29C(3) of the Representation of People Act, 1951. Otherwise, exemption
shall not be available to the political party for such financial year.
(ii) The political party must keep and maintain such books of account and other documents as
would enable the Assessing Officer to properly deduce its income therefrom.
(iii) The political party must keep and maintain such records in respect of each such voluntary
contribution which is in excess of Rs.20,000/- with details of the amount received, the
name and address of the person who has made the contribution.
(iv) The accounts of the political party must be audited by a chartered accountant who is
authorised under section 288 of the Income-tax Act to appear as an authorised representative
in Income-tax proceedings before any Income-tax authority.
Political parties are under an obligation to file their return of income as per the provisions of
section 139(4B) and should also apply to the Assessing Officer for the allotment of a permanent
account number.
Q5. (c) Write short note on : Keyman Insurance Policy.
Answer 5. (c)
Explanation to section 10(10D) says ‘Keyman Insurance Policy’ means a life insurance policy
taken by a person on the life of another person who is or was an employee of the first mentioned
person or is or was connected in any manner whatsoever with the business of the first mentioned
person.
Any sum received under an insurance policy, including the sum allocated by way of bonus on such
policy, is exempt from tax. But this exemption does not apply to any sum received under a
keyman insurance policy.
Therefore, the sum received under a keyman insurance policy including the sum allotted by way of
bonus on such policy is taxable. Section 2(24)(xi) covers directly the receipt of sum under a
keyman insurance policy within the definition of income. Also, as per section 17(3) any sum
received by an employee under the Keyman Insurance Policy is deemed to be profits in lieu of
salary.
Similarly, for persons on receipt of income from business, profession or vocation, any sum received
under a keyman insurance policy, including bonus, has been deemed to be income chargeable
under the head “Profits and gains of business or profession” – Section 28 Clause (vi).
Q6. (a) Mani is employed in a public company and is paid a sum of Rs.6,00,000 on Voluntary
Retirement from service. The normal age of retirement in the company is 60 and John,
who was 45 at the time of retirement had completed 20 years of service. His monthly
salary at the time of retirement was as follows :
Rs.
Basic pay 10,000
Dearness allowance (50 p.c. includible for pension) 6,000
H.R.A. 3,000
Conveyance allowance 800
What is the amount of compensation taxable under the Act?
108 Revisionary Test Paper (Revised Syllabus-2008)
Answer 6. (a)
Under section 10(10C) read with Rule 2BA the compensation received by an employee at the time
of voluntary retirement from service is exempt to the extent prescribed under the guidelines
issued by the Government and approved by the Chief Commissioner/Director General of Incometax.
The limits prescribed under the guidelines are the lowest of the following :-
(i) 3 months ‘salary for each completed year of service :
Salary for this purpose includes dearness allowance if the terms of employment so provide
but not other allowances or perquisites i.e.,
Rs.10,000 + 3,000 = 13,000
Salary = 13,000 × 3 × 20 (years) = Rs.7,80,000
(ii) Actual compensation received Rs. 6,00,000
(iii) Monetary limit Rs. 5,00,000
Hence, a sum of Rs.5 lakhs will be exempt and the balance of Rs.1,00,000 will be taxed.
Q6. (b) State the conditions for claiming exemption in the case of an infra-structural company.
Answer 6. (b)
Section 10(23G) providing exemption to infrastructure capital company or infrastructure capital
fund has been omitted by the Finance Act, 2006 w.e.f. the assessment year 2007-08.
If an entity is engaged in infrastructure development, it is eligible for deduction under section 80-
IA. Students may note that the question seeks ‘exemption’ in the case of infrastructural company
and not ‘deduction’ and hence the provisions of section 80-IA could not be referred here.
Q6. (c) Write short notes on: Venture capital fund
Answer 6. (c)
Income of venture capital fund set up to raise funds for investment in venture capital undertakings
is exempt from tax under section 10(23FB).
The expression “venture capital fund” has been defined to mean a fund, operating under a trust
deed registered under the provisions of the Registration Act, 1908, or operating as a venture
capital scheme made by the Unit Trust of India established under the Unit Trust of India Act, 1963
and which has been granted a certificate of registration under the Securities and Exchange Board
of India Act, 1992 and regulations made thereunder and which fulfils the conditions as may be
prescribed with the approval of Central Government, by Securities and Exchange Board of India
by notification in the official gazette.
Thus the following conditions are to be satisfied.
(a) The fund should be operating under a trust deed duly registered under the Indian Registration
Act, 1908 or operating as a venture capital scheme made by UTI.
(b) The fund should have obtained certificate of registration and SEBI Act, 1992 and
(c) It must fulfill the condition as may be specified by SEBI, with the approval of the Central
Government.
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Q7. (a) State whether True or False, with reasons, having regard to the provisions of the Incometax
Act, 1961 (Answers without reasoning will not be given any mark) –
Where the Commissioner of Income-tax is satisfied that the activities of the charitable
trust, which has been accorded registration is not genuine, he can cancel the registration
by passing an order in writing.
Answer 7. (a)
True. As per section 12AA(3), the Commissioner has power to cancel the registration of the
trust, by passing a written order, where he is satisfied, inter alia, that the activities of the trust are
not genuine. However, the trust should be given a reasonable opportunity of being heard.
Q7. (b) When a charitable trust can avail benefits under section 11 & 12 of the Income Tax Act,
1961?
Answer 7. (b)
A charitable trust can avail the benefits under section 11 & 12 of the Act if it satisfies the
following conditions –
(i) The trust has been granted registration by the Commissioner of Income-tax under section
12AA of the Income-tax Act on an application in the prescribed form (Form 10A) before
the expiry of one year from the date of its creation.
(ii) The property from which income is derived should be held under a trust or other legal
obligation.
(iii) The property should be held for charitable or religious purposes. According to section
2(15), charitable purpose includes relief of the poor, education, medical relief and the
advancement of any other object of general public utility.
(iv) In the case of a charitable trust created on or after 1.4.1962, the further conditions are:
(a) the trust should not be created for the benefit of a particular religious community or
caste;
(b) no part of the income should enure, directly or indirectly, for the benefit of the settlor or
other specified persons ; and
(c) the property should be held wholly for charitable purposes.
The conditions mentioned in (b) and (c) would also apply to religious trusts created on or after
1.4.1962.
(1) Where the total income of the trust without giving effect to sections 11 & 12 exceeds
Rs. 50,000, then the accounts of the trust have to be audited and an audit report in Form
No.10B must be filed along with the return of income.
(2) At least 85% of the income is required to be applied for the approved purposes.
(3) 15% of the income, which can be accumulated or set apart, should be invested or deposited
in the forms or modes specified in section 11(5).
Q7. (c) Distinguish between foregoing of salary and surrender of salary.
Answer 7. (c)
Foregoing of salary – Waiver by an employee of his salary is foregoing of salary. Once salary
accrues, subsequent waiver does not absolve him from liability to income-tax.
110 Revisionary Test Paper (Revised Syllabus-2008)
Surrender of salary – If any employee surrenders his salary to the Central Government under the
Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the surrendered salary
would not be included in computing his taxable income, whether he is a private sector/public
sector or Government employee.
Q7. (d) Write short note on: Specified Employee
Answer 7. (d)
As per section 17(2)(iii) the following person shall be “specified employee”.
(i) An employee who is a director of a company. It is immaterial whether he is a full time
director or a part-time director, whether he is a nominee of management, workers, Govt. or
financial institution. It is also not material whether or not he is a director throughout the
previous year.
(ii) An employee who has a substantial interest in the company. A person has a substantial
interest in a company if he is a beneficial owner of equity shares carrying 20% or more of
the voting power of the company. For determining whether a person has a substantial
interest in a company, it is the beneficial ownership that is relevant rather than the legal
ownership.
(iii) An employee (not covered by above) whose income chargeable under the head ‘salaries’
(excluding all benefits or amenities not provided by way of monetary payment) exceeds
Rs. 50,000.
For computing the limit of Rs. 50,000, the following items have to be excluded/deducted.
1. All non-monetary benefits and
2. Monetary benefits which are not taxable u/s.10
Where salary is received from more than one employer during the relevant previous year, the
aggregate salary from all the employers is to be considered for determining the above ceiling limit
of Rs. 50,000.
Q8. (a) Under what circumstances and to what extent is the provision of medical facilities or
assistance by an employer not treated as a perquisite in the hands of an employee?
Answer 8. (a)
The provision of medical facilities/assistance will amount to perquisite but the value thereof will be
exempt if the following conditions are satisfied :
(i) The value of any medical treatment provided in any hospital maintained by the employer is
exempt.
(ii) Any sum paid by the employer towards expenditure actually incurred by an employee on his
medical treatment or the medical treatment to any member of his family.
(a) in any hospital maintained by government or any local authority or any other hospital
approved by the government.
(b) in respect of prescribed disease or ailments in any hospital approved by the Chief
Commissioner of Income-tax.
(iii) Premium paid by an employer to effect or keep in force an insurance on the health of the
employee or any member of his family.
Group-I : Paper-7 : Applied Direct Taxation 111
(iv) Any sum paid by the employer in respect of expenditure incurred by the employee on his
medical treatment or the medical treatment of any member of his family to the extent to
which it does not exceed Rs.15,000 per year.
(v) Any expenditure incurred or paid by the employer on medical treatment of the employee or
any member of his family outside India and
(a) Travel and stay outside India of the employee or any member of his family for such
treatment.
(b) Travel and stay abroad of one attendant who accompanies the patient in connection
with treatment.
These are subject to the following conditions :
(A) The expenditure on medical treatment and stay shall be excluded from perquisite only to the
extent permitted by R.B.I. and
(B) The expenditure on travel shall be excluded from perquisite only in the case of employees
whose gross total income does not exceed Rs. 2 lakhs (before including the said expenditure).
Q8. (b) Mr. X and and Mr. Y are working for M/s. Gama Ltd. As per salary fixation norms, the
following perquisites were offered :
(i) For Mr. X, who engaged a domestic servant for Rs.500 per month, his employer reimbursed
the entire salary paid to the domestic servant i.e. Rs.500 per month.
(ii) For Mr. Y, he was provided with a domestic servant @ Rs.500 per month as part of
remuneration package.
You are required to comment on the taxability of the above in the hands of Mr. X and Mr. Y,
who are not specified employees.
Answer 8. (b)
In the case of Mr. X, it becomes an obligation which the employee would have discharged even if
the employer did not reimburse the same. Hence, the perquisite will be covered under section
17(2)(iv) and will be taxable in the hands of Mr. X. This is taxable in the case of all employees.
In the case of Mr. Y, it cannot be considered as an obligation which the employee would meet.
The employee might choose not to have a domestic servant. This is taxable only in the case of
specified employees covered by section 17(2)(iii). Hence there is no perquisite element in the
hands of Mr. Y.
Q9. (a) State the difference between Capital Receipts and Revenue Receipts.
Answer 9. (a)
Capital Receipts Revenue Receipts
1. Any amount received towards fixed capital
or for fixed asset is capital receipt.
2. Any receipt towards substitution of a source
of income is a capital receipt.
3. The amount received as a compensation for
surrender of any rights of ownership is a
capital receipt.
1. Amount received towards working capital
or for floating asset is a revenue receipt.
2. Any receipt towards substitution of income
is a revenue receipt.
3. Any compensation received for the loss of
future profit is a revenue receipt.
112 Revisionary Test Paper (Revised Syllabus-2008)
Notes:
(i) Nature of receipt in the hands of the recipient : Whether a receipt is a capital receipt or a
revenue receipt is determined by its nature, in the hands of the recipient and not its character
in the hands of the payer.
(ii) Not based on records : The nature of receipt should not be based on the name given to the
amount received by the assessee in his records.
(iii) The capital receipt may be received in instalments and the revenue receipts may be received
in lump sum.
Q9. (b) Define Royalty.
Answer 9. (b)
“Royalty” for the purpose of Section 9(1)(vi) has been defined as the consideration for
1. The transfer of all or any rights in respect of a patent, invention, model, design, secret
formula or process or trade mark in similar property.
2. The Imparting of any information covering the working of or the use of a patent, invention,
model, design, secret formula or process or trade mark or similar property.
3. The use of any patent, invention, model, design, secret formula or trademark or similar
property.
4. The imparting of any information regarding technical, industrial, commercial or scientific
knowledge or skill.
5. The use or right to use any industrial, commercial or scientific equipment other than the
amount referred to u/s 44BB (i.e.) from the business of prospecting, extraction or, production
of mineral oils.
6. The transfer of all or any rights in respect of any copyright~ literary artistic or scientific
work, including films or video tapes for use in connection with television or tapes for use in
connection with radio broadcasting but not consideration for the sale, distribution or exhibition
of cinematographic films, or
7. The rendering of services in connection with any of the above activities.
Royalty includes any lump sum consideration but excludes consideration, which would constitute
income by way of capital gains.
Q9. (c) State the procedure for computing Agricultural Income and Business Income of the same
assessee.
Answer 9. (c)
Agricultural produce is used as a raw material in a manufacturing concern :
If agricultural produce is used as a raw material in a manufacturing concern, for the purpose of
Income Tax, it will be treated as follows :
1. Deductible Expense = Average Market Price : Where agricultural produce is used as raw
material in manufacturing operations, the average market price of the agricultural produce
consumed during the previous year shall be debited to the manufacturing account of the
business. No other deduction towards agricultural operations shall be allowed. [Rule 7]
Group-I : Paper-7 : Applied Direct Taxation 113
2. Average market price is Equivalent to:
(a) Where it is determinable: Average Price at which raw material has been sold;
(b) Where it is not determinable: Expenses of cultivation + Land revenue / Rent + Reasonable
profit as determined by the Assessing Officer.
Q10. (a) Dscuss the year of chargeability of Salary
(b) Place of accrual of salary
Answer 10.
(a) Sec.15: Year of Chargeability of Salary
• Due or receipt whichever falls earlier: Salary is taxable on due basis or on receipt basis,
whichever is earlier. Hence,
(a) salary due in a previous year is taxable, even if it not received.
(b) Salary received in a previous year is taxable, even if it is not due.
(c) Arrears of salary received during the current previous year shall be taxable in the
current year if not charged to tax in an earlier previous year.
• No double taxation: once salary is taxed on due/receipt basis, it will not be taxed again on
receipt/falling due, as the case may be.
• The assessee can claim relief u/s 89(1) for arrears or advance salary.
• Loan from employer is not salary. Advance salary is taxable, while advance against salary
is not taxable.
• For Government employees, the period of chargeability of salary is from March to February.
For example, salary from 1st March 2008 to 29th February 2009 is chargeable as Income
of the Assessment Year 2009-10.
(b) “Place of accrual of salary”
• The place of accrual of salary is the place of employment.
• Service rendered in India: U/s 9(1)(ii), salary earned in India is deemed to accrue or arise
in India even if –
(a) it is paid outside India,
(b) it is paid or payable after the contract of employment in India comes to an end.
• If an employee gets pension paid abroad in respect of services in India, the same will be
deemed to accrue or arise in India
• Leave salary paid abroad in respect of leave earned in India is deemed to accrue or arise
in India.
• Services rendered outside India : Sec.9(1)(iii) provides that income chargeable under the
head “Salaries” payable by the Government to a citizen of India for service provided
outside India will be deemed to accrue or arise in India.
• U/s 10(7), any allowance or perquisites paid or allowed outside India by the Government
to a citizen of India for rendering services outside India will be fully exempted.
114 Revisionary Test Paper (Revised Syllabus-2008)
Q11. Discuss the provisions relating to Medical Treatment facilities.
Answer 11.
MEDICAL FACILITIES
• Fixed medical allowance is fully taxable
• Medical payments include reimbursements also [ circular no.603/6.6.1991]
• W.e.f. A.Y.2006-07, Medical Reimbursement is subject to Fringe Benefit Tax except first
aid facilities in hospital or dispensary run by the employer.
MEDICAL TREATMENT IN INDIA
1. Local treatment to employee or any member of his family in:
• Hospital maintained by employer
• Government Hospital
• Notified hospital for prescribed diseases [Sec.17(2)(v)]
Family includes spouse, children(whether dependent or independent) and parents, brothers
and sisters wholly dependent on the employee.
2. Group Medical insurance paid u/s36(1)(ib) & Medical Insurance paid u/s 80D- which are
approved by the Central Govt. or IRDA w.e.f.A.Y.2007-08.
3. Any other medical expenditure reimbursed subject to a maximum of Rs.15,000
MEDICAL TREATMENT ABROAD (for the patient and the attendant)
If the employee underwent medical treatment abroad and the expenditure is met by the employer,
the exemption will be subject to the following:
1. Medical treatment and stay expenses abroad(both for the patient and the attendant) is
exempt from tax, subject to the maximum amount permitted by the Reserve Bank of India.
2. Travel expenditure of the patient and the attendant:
Gross Total Income, before including reimbursement Amount of Exemption
of Foreign Travel Expenditure
Upto Rs. 2,00,000 Fully exempted
Above Rs. 2,00,000 Fully taxable
3. Computation of exemption for foreign travel expenditure
Step 1 : Compute Gross Total Income of the assessee without considering foreign travel
reimbursement but after set-off loss and unabsorbed depreciation.
Step 2 : If the Gross Total Income does not exceed Rs. 2 lakhs, Foreign Travel
Reimbursement is not taxable otherwise fully taxable.
Step 3 : If Foreign Travel reimbursement is taxable as per Step 2, recomputed the income
under the head Salary after including foreign travel reimbursement and Gross
Total Income must also be recomputed.
Group-I : Paper-7 : Applied Direct Taxation 115
Q12. Discuss the provisions relating to accommodation facilities.
Answer 12.
1. Value of Unfurnished Accomodation: Explanation 1 to Sec.17(2), Rule 3(1)
Nature of Perquisite Taxable Value of Perquisite
Provided by Central Govt. or State Govt. Licence fee determined by the Government
Less: Rent recovered from employee
Provided by Employer other than Central or State Government
(a) owned by employer In cities having population exceeding 25 lakhs as per 2001
census
15% of Salary Less Rent actually paid by employeeIn cities
having population exceeding 10 lakhs but not exceeding
25 lakhs as per 2001 census :
10% of Salary Less Rent actually paid by employee
In other places : 7.5% of Salary Less Rent actually paid
by employee
(b) taken on lease by the employer Rent paid by the employer or 15% of Salary whichever is
lower
Less Rent recovered from employee
(c) Accommodation in a hotel 24% of salary paid/payable or actual charges paid/payable
whichever is lower
Less Amount paid or payable by the employee
Hotel Accommodation: 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.
2. Value of Furnished Accommodation
Particulars Rs.
Value of unfurnished accommodation as above xxx
Add : Value of Furniture provided :
• If owned by employer, 10%p.a. of original cost of such furniture xxx
• If hired from third party, then Actual hire charges
Less : Any charges paid or payable by the employee (xxx)
Value of Furnished Accommodation xxx
Note : Furniture includes Television sets, radio, refrigerator, other household appliance, airconditioning
plant or equipment.
116 Revisionary Test Paper (Revised Syllabus-2008)
3. Valuation not applicable:
(a) Employees working at mining site, onshore oil exploration site, offshore site, project execution
site, dam site, power generation site.
(b) Conditions to be fulfilled:
• The accommodation should be of a temporary nature, and
• Plinth area should not exceed 800 square feet
• Accommodation should be located at least 8 kms away from local limits of municipality/
cantonment or located in a remote area
Remote area means area located at least 40 kms away from town having a population not exceeding
20,000 based on latest published All-India census.
4. Valuation of accommodation in case of Employees on transfer :
(a) For the first 90 days of transfer : Where accommodation is provided both at existing place
of work and in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days : Both accommodations shall be taxable.
5. Salary for Valuation of Accommodation facilities :
Salary includes Salary excludes
• Basic Salary • Other D.A
• D.A.(if considered for retirement benefits) • Employer’s contribution to PF
• All taxable allowances • Exempted allowances
• Bonus or commission or ex-gratia • Perquisites u/s 17(2)
• Any other monetary payment • Perquisites u/s 17(2)(iii) or its provisions
Q13. Discuss the provisions relating to perquisites and other facilities provided to an employee
and his household, other than accommodation facilities.
Answer 13.
The nature of perquisites and the taxable value of perquisites as applicable to an employee-assessee
are :
Rule Nature of Perquisite Taxable Value of Perquisite(TVP)
3(3) Service of sweeper, gardener or Actual cost to the employer
watchman or personal attendant Less: Amount paid by employee
3(4) Supply of gas, electricity or water for Procured from outside agency
household consumption Amount paid to outside agency
Resources owned by employer himself
Manufacturing cost per unit
Less: amount paid by the employee
Group-I : Paper-7 : Applied Direct Taxation 117
3(5) Education facilities to members of his If the cost of education per child does not
household exceed Rs.1,000 p.m.- then not taxable
(a) free education to children in the
school maintained by the employer
or the school sponsored by the
employer For points (b) & (c)
(b) other schools In other case, cost to the employer
(c) for other members of the household Less: amount recovered from employee
3(7)(i) Housing Loan/Vehicle Loan- for acquiring Interest charged by employer is equal to or
capital assets and not for repairs. higher than SBI rates. It is not a taxable
SBI Rate= SBI Rate prevailing on the perquisite
first day of the previous year Interest charged is lower than SBI rates:
Interest charged at SBI rates on maximum
outstanding balance
Less: Interest paid by the employee on that
loan
Other Loans Similar treatment as above.
Exceptions :
(a) Medical loan for treatment of diseases
specified in Rule 3A except loan reimbursed
by medical insurance
(b) Loan not exceeding Rs. 20,000 in
aggregate
3(7)(vii) Use of any movable asset other than 10% of Actual Cost if owned by the employer;
computer or laptops or other assets or
already mentioned Actual rental charge paid/payable by the
employer
Less: Amount recovered from employee
Q14. (a) State the provisions relating to transfer of movable asset to employees.
Answer 14. (a)
3(7)(viii) Computers & Electronic Items Motor Car Other Assets
Actual Cost Actual Cost Actual Cost
Less: Depreciation @50% Less: Depreciation @20% Less: Depreciation
for every completed year for every completed year @10% for every
under WDV method under WDV method completed year under
SLM method
Value of the Asset Value of the Asset Value of the Asset
Less: Amount recovered from Less: Amount recovered Less: Amount
employee from employee recovered from
employee
Value of the perquisite Value of the perquisite Value of the perquisite
Rule Nature of Perquisite Taxable Value of Perquisite(TVP)
118 Revisionary Test Paper (Revised Syllabus-2008)
Note :
(a) Electronic gadgets include computer, digital diaries and printers, but excludes washing
machines, microwave ovens, hot plates, mixers, ovens, etc.
(b) Transfer of Assets, which are 10 years old, shall not attract tax liability.
(c) Member of household includes : Spouse(s), children and their spouses, parents, servants and
dependents.
(d) Completed year means actual completed year from the date of acquisition of the asset to the
date of transfer of such asset to the employees.
Q14. (b) State the treatment of tax on non-monetary benefits paid by employer
Answer 14. (b)
The treatment of tax on non-monetary benefits paid by an employer are :
1. Payment of tax by employer on non-monetary perquisites :
(a) U/s 192(1A), the employer may, at his option, pay income tax on the whole or part of
perquisite provided by way of non-monetary payments.
(b) Such payment of tax is not taxable as a perquisite in the hands of the employee [Sec.10(10CC)]
(c) The payment of income tax in such case is not allowable as expenditure in the hands of the
employer. [Sec.40(a)(v)]
(d) Such tax shall be determined at the average rate of income tax computed on the basis of the
rates in force for the financial year, on the income chargeable under the head “Salaries”
including non-monetary payments. The tax so payable shall be construed as if it were, a tax
deductible at source, from income under the head “Salaries” and shall be subject to the
provisions of Chapter XVII [COLLECTION AND RECOVERY OF TAX].
2. Determination of tax payable by employer u/s 192(1B) i.e. Tax on Non-monetary benefits :
Step 1: Average Rate of Income Tax =







- ×
Step 2: Tax payable on Non-monetary benefits=Average Rate of Income Tax
(Step 1)×Value of Non-monetary benefits
Q15. (a) Discuss the taxability of perquisites provided by employers who are subject to FBT (Fringe
Benefit Tax).
Answer 15. (a)
Taxability of other perquisites provided to employee or his household members by an Employer
who is not liable to pay FBT [Rule 3]
Group-I : Paper-7 : Applied Direct Taxation 119
Taxability of Motor Car Benefits [Rule 3(2)(A)]
Owner of Car Expenses Purpose Taxable Value of Perquisite
borne by
1(a) Employer Employer Fully official Not a perquisite provided the documents as
specified in Rule 3(2)(B) are maintained.
1(b) Employer Employer Fully private Total of :
(i) Actual expenditure on car
(ii) Remuneration to chauffeur
(iii) 10% of the cost of car (normal wear &
tear)
Less: Amount charged from employee
1(c)(i) Employer Employer Partly official Cubic Capacity of Car Engine upto 1.6 litres
and partly Rs.1,200 p.m+ Rs.600 p.m. for chauffeur
personal Cubic Capacity of Car Engine above 1.6 litres
Rs.1,600 p.m.+ Rs.600 p.m. for chauffeur
1(c)(ii) Employer Employee Partly for Cubic Capacity of Car Engine upto 1.6 litres
official and Rs.400 p.m+ Rs.600 p.m. for chauffeur
partly for Cubic Capacity of Car Engine above 1.6 litres
personal Rs. 600 p.m.+ Rs. 600 p.m. for chauffeur
2(i) Employee Employer Fully official Not a perquisite provided the documents as
use specified in Rule 3(2)(B) are maintained.
2(ii) Employee Employer Partly official Subject to Rule 3(2)
and partly (B)Actual expenditure incurred
personal Less: Car cubic capacity upto 1.6 litres [i.e.
value as per 1(c)(i)]
OR
Car cubic capacity upto 1.6 litres above 1.6
litres [ i.e. value as per 1(c )(i)
3(i) Employee owns Employer Fully official Not a perquisite provided the documents as
other auto-motive use specified in Rule 3(2)(B) are maintained.
but not car
3(ii) Employee owns Employer Partly for Subject to Rule 3(2)
other auto-motive official and (B)Actual expenditure incurred by employer
but not car partly for Less: Rs.600 p.m.
personal
Note :
1. Using cars from pool of cars owned or hired by Employer :
The employee is permitted to use any or all cars for both official and personal use :
For one car Valued as per 1(c )(i)
For more than one car Valued as per 1(b) as if fully used for personal purpose
120 Revisionary Test Paper (Revised Syllabus-2008)
2. Documents to be maintained for claiming ‘not taxable perquisite’ or higher deduction wherever
applicable [Rule 3(2)(B)]
(a) Employer should maintain complete details of journey undertaken for official purpose, which
includes date of journey, destination, mileage and amount of expenditure incurred thereon.
(b) Certificate of supervising authority of the employee, wherever applicable, to the effect that
the expenditure incurred for wholly and exclusively for performance of official duties, should
be provided.
Q15. (b) Discuss the taxability of any other benefits provided to an employee-assessee by the
employer.
Answer 15. (b)
The taxability of any other benefits may be discussed on the following lines:
Rule Nature of Perquisite Taxable Value of Perquisite(TVP)
3(6) Transportation of goods or passengers at Value at which offered to public
free or concessional rate provided by the Less: amount recovered from the employee
employer engaged in that business
(other than railways/airlines)
3(7)(ii) Traveling, touring, accommodation and Amount recovered by employer or Value at
other expenses met by the employer other which offered to public
than specified in Rule 2B. (this shall be Less: amount recovered from the employee
calculated only for the period of vacation)
3(7)(iii) Free meals during office hours Actual cost to the employer in excess of
Free meal in remote area or offshore Rs. 50 per meal or tea or snacks
installation area is not a taxable perquisite Less: amount recovered from the employee.
Tea or non-alcoholic beverages and snacks
during working hours is not taxable.
3(7)(iv) Value of any gift or voucher or taken other Value of giftIn case the aggregate value of
than gifts made in cash or convertible into gift during the previous year is less than
money (e.g. gift cheques) on ceremonial Rs. 5,000, then it is not a taxable perquisite
occasion
3(7)(v) Expenditure incurred on credit card or add Actual expenditure to employer is taxable
on card including membership fee and Less: amount recovered from employee
annual fee If it is incurred for official purpose and
supported by necessary documents then it
is not taxable.
3(7)(vi) Expenditure on club other than health club Actual expenditure incurred by the employer
or sports club or similar facilities provided Less: amount recovered from employee
uniformly to all employees If the expenditure is incurred exclusively for
official purposes and supported by necessary
documents then it is not taxable.
Initial fee of corporate membership of a club
is not a taxable perquisite
3(7)(ix) Any other benefit or amenities or service or Cost to the employer
right or privilege provided by the employer
other than telephone or mobile phone Less: amount recovered from employee
Note : Members of household includes: spouse(s), children and their spouses, parents, servants
and dependents.
Group-I : Paper-7 : Applied Direct Taxation 121
Q16. (a) State the difference between Contracts of service vs. Contract for service
Answer 16. (a)
Basis Contract of Service Contract for Service
Q16. (b) Discuss the taxability of Provident Fund receipts.
Answer 16. (b)
The taxability of provident funds are as follows :
Particulars Statutory Recognized Unrecognized Public
Meaning Employer-employee relationship In this contract, a person offers his services
to any person who is willing to pay the
charges therefor
Control Control and supervision vests with
the employer. The employee is
bound to follow the employer’s
directions
The day-to-day control is normally absent in
the case of contract for service
Execution of
work
Employee works under the close
supervision of his employer who
determines the manner of
execution of work (control over
what should be done and how)
The person executing the job is answerable
only for the work to be carried out in
accordance with the terms of contract. He
has discretion to do the work in his own way.
(control over what should be done and now
how to do it)
Remuneration An employee works for
remuneration, which may be paid
monthly or in lump sum or any
suitable basis as per agreement
The person rendering the service is entitled
to the fruits of his labour and also liable for
the losses
Charge of tax Income from salaries Profits & Gains from Business or Profession
Example Kajol, an actress, is an employee
of RK Productions Pvt.Ltd. She
gets a remuneration of Rs.8 lakhs
p.m. She acts in several films but
the producers pay the fees for
those services directly to the
studios. Here, employer-employee
relationship exists between Kajol
and RK Productions. Hence her
remuneration will be assessed as
salary.
Shahrukh is an actor. He acts in several films
at a time with remuneration ranging from
Rs.10 crores to Rs.40 crores. The producers
of films pay him directly for his services.
There is no employer-employee relationship
between the producers and Shahrukh.
Constituted
under
Provident
Funds Act,
1952
EPF and Misc,
Provisions Act, 1952
& recognized by the
Commi-ssioner of PF
and CIT
Not recognized by
the Commissioner
of Income Tax
Public Provident
Fund Act,1968
Account in SBI or
Post Offices
122 Revisionary Test Paper (Revised Syllabus-2008)
Note : Sum received by an Employee under approved Superannuation Fund is also exempt from tax
u/s 10(13).
Question 17(a) Discuss the chargeability of Income from House Property
(b) Discuss Deemed Owner
Answer:
(a) The chargeability of Income from House Property is based on [Section 22]:
1. The basis of chargeability under the head income from house property is Annual Value.
2. The property must consist of Building or Lands Appurtenant thereto.
3. The assessee must be the owner of such property.
4. The property may be used for any purpose other than the assessee’s business or profession.
(b) DEEMED OWNER [Section 27]
1. Owner: An Individual shall be considered as owner of a property when the document of title
to the property is registered in his name.
2. Deemed Owner: Under the following circumstances, Income from House Property is taxable
in the hands of the Individual, even if the property is not registered in his name
Particulars Statutory Recognized Unrecognized Public
Contribution
by
Employer and
Employee
Employer and Employee Employer and
Employee
All assessees independently
Assessee’s
Contribution
Deduction u/s
80C
Deduction u/s 80C No Income Tax
Benefit
Deduction u/s 80C
Employer’s
Contribution
Not taxable Amount exceeding
12% of salary is taxable
Not taxable at the
time of contribution
Not applicable
Interest
credited
Fully
exempted
Exempted upto 9.5%
p.a. Any excess is
taxable
On Employee’s contribution
taxable
under the head
“Other Sources”
On Employer’s contribution
not taxable at
the time of credit
Fully exempt
Withdrawal
at the time
of retirement/
resignation/
termination,
etc
Exempted
u/s10(11)
Exempted u/s10(12)
Subject to conditions
E m p l o y e e ’ s
contribution and
interest thereon is not
taxable.
E m p l o y e r ’ s
contribution and
interest thereon is
taxable as Profits in
lieu of Salary, under”
Salaries”
Exemptedu/s 10(11)
Group-I : Paper-7 : Applied Direct Taxation 123
(a) Where the Property has been transferred to spouse for inadequate consideration other
than in pursuance of an agreement to live apart.
(b) Where the Property is transferred to a minor child for inadequate consideration (except a
transfer to minor married daughter)
(c) Where the Individual holds an impartible estate.
(d) Where the Individual is a member of Cooperative Society, Company, or other Association
and has been allotted a house property by virtue of his being a member, even though the
property is registered in the name of the Society / Company / Association.
(e) Where the property has been transferred to the individual’s name as partperformance of
a contract u/s 53A of the Transfer of Property Act, 1882. (i.e. Possession of the Property
has been transferred to Individual, but the Title Deeds have not yet been transferred).
(f) Where the Individual is a holder of a Power of Attorney enabling the right of possession
or enjoyment of the property.
(g) Where the property has been constructed on a leasehold land.
(h) Where the ownership of the Property is under dispute.
(i) Where the property is taken on a lease for a period of not less than 12 years, then the
lessee shall be deemed as the owner of the property.
Q18. (a) Discuss the taxability of Recovery of Unrealized Rent
(b) Receipt of Arrears of Rent
(c) Treatment of Unrealised Rent
(d) Interest on Loan
Answer 18.
(a) Recovery of unrealized rent [Section 25AA]
1. Chargeability : Recovery of Unrealized Rent is chargeable to tax as “Income from House
Property”.
2. Year of Taxability : Unrealized Rent recovered is taxable in the financial year in which it is
recovered.
3. Non Subsistence of Ownership : It will be taxable in the hands of Individual even if he does
not own the property to which such rent pertains.
4. Deduction : No deduction will be allowed against such receipt.
(b) Receipt of Arrears of Rent [SECTION 25B]
1. Meaning: Arrears of Rent means the incremental rent relating to earlier financial years
which has not been offered to tax in those financial years itself, but received during the
current financial year,
2. Changeability : Receipt of Arrears of Rent will be chargeable to tax under the head Income
from House Property only.
3. Year of receipt : It is taxable as income of the financial year in which he receives the arrears
of rent.
4. Nonsubsistence of ownership : It is taxable in the hands of the Individual even if he does not
own the prop” at the time of receipt of arrears of rent.
124 Revisionary Test Paper (Revised Syllabus-2008)
5. Deduction : A standard deduction of 30% of the amount of arrears received will be allowed
as deduction
(c) Unrealized rent (rule 4)
Unrealized Rent means the rent not paid by the tenant to the owner and the same shall be deducted
from the Actual Rent Receivable from the property before computing income from that property,
provided the following conditions are satisfied:
1. The tenancy is bonafide.
2. The defaulting tenant should have vacated the property.
3. The assessee has taken steps to compel the defaulting tenant to vacate the property.
4. The defaulting tenant is not in occupation of any other property owned by the assessee.
5. The assessee has taken all reasonable steps for recovery of unrealised rent or satisfies the
Assessing Officer that such steps would be useless.
(d) Interest on loan u/s 24(b)
1. Purpose of loan : The loan shall be borrowed for the purpose of acquisition, construction,
repairs, renewal or reconstruction of the house property.
2. Accrual basis : The interest will be allowed as a deduction on accrual basis, even though it is
not paid during the financial year.
3. Interest on interest : Interest on unpaid interest shall not be allowed as a deduction.
4. Brokerage : Any brokerage or commission paid for acquiring the loan will not be allowed as a
deduction.
5. Prior period interest : Prior Period Interest shall be allowed in five equal installments
commending from the financial year in which the property was acquired or construction was
completed.
Note : Prior period interest means the interest from the date of borrowal of the loan upto
the end of the financial year immediately preceding the financial year in which
acquisition was made or construction was completed.
6. Interest on fresh loan to repay existing loan: Interest on any fresh loan taken to repay the
existing loan shall be allowed as a deduction. [Circular 28 / 20.9.1969]
7. Inadmissible interest : Interest payable outside India without deduction of tax at source and
in respect of which no person in India is treated as an agent u/s 163 shall NOT be an allowable
expenditure. [Section25]
8. Certificate : The assessee should furnish a certificate from the person from whom the amount
is borrowed.
Q19. (a) A Company issued discount coupons to its shareholders which entitled them to purchase
the products of the Company at a discount. The Assessing Officer feels that this is a
disguised dividend. What are the arguments for and against such a treatment?
(b) Discuss the taxability of Family Pension.
Answer 19. (a)
Arguments for treating discount coupons as Deemed Dividend u/s 2(22) (e):
i. Entitlement to such coupons arises only on account of shareholding and therefore coupons
can be considered as release of profits otherwise than by way of actual disbursement.
Group-I : Paper-7 : Applied Direct Taxation 125
ii. The Company suffers a reduction in the gross value of sales to the extent the discount
coupons are used and therefore it can be inferred that the assets to that extent get released
indirectly in favour of the shareholders.
Arguments against treating discount coupons as Deemed Dividend u/s 2(22) (e) :
i. Issue of discount coupons is a managerial decision and can be revoked at its discretion and
therefore it cannot be treated at par with dividend.
ii. There is no certainty that each shareholder will use the discount coupons. The coupons may
be used or may not be used or it may be given to others who in turn may or may not use
them. Again, it may be used wholly or partly.
iii. The discount coupons do not necessarily confer any vested right in favour of the Shareholder
and it does not create any liability for the Company to the Shareholder.
Answer 19. (b)
1. Meaning: Family pension means pension received by the family members of the deceased
employee.
2. Taxability: It is chargeable to tax under the head ‘Income from Other Sources’.
3. Deduction u/s 57: Least of the following is allowed as a deduction
(a) 33 1/3 % of gross pension
(b) Rs.15,000
4. Exemptions :
(a) Family pension received by family members of Army personnel who are recipient of
gallantry awards [Section 10(18)].
(b) Family pension received by the widow or children or nominated heirs of a member of the
armed forces (including paramilitary forces) whose death has occurred in the course of
operational duties [Section 10(19)].
Q20. Compute Total Income for the Assessment Year 2009-10
Subhash discloses following particulars of his receipts during the financial year 2008-2009 :
(i) Salary income earned at Pune but received in Srilanka 2,50,000
(ii) Profits earned from a business in Kenya which is controlled in India, half of
the profits being received in India. 2,20,000
(iii) Income from property, situated in Nairobi and received there 75,000
(iv) Income from agriculture in Bangladesh and brought to India 68,000
(v) Dividend-paid by an Indian company but received in London on 15 May 2008. 22,000
(vi) Interest on USA Development Bonds and one half of which was received
in India 44,000
(vii) Past foreign untaxed income brought to India 2,10,000
(viii) Gift of $1000 from father, settled in USA, received in India 80,000
(ix) Land sold in Delhi, consideration received in Canada, resulting into capital gain 2,50,000
(x) Income from structure-designing constancy service, set up in Germany,
controlled from India, profits being received outside India 4,00,000
126 Revisionary Test Paper (Revised Syllabus-2008)
(xi) Loss from foreign business, controlled from India, sales being received in India (-) 2,00,000
Determine his taxable income for the previous year 2008-2009 if he is (i) resident and ordinarily
resident, (ii) resident but not ordinarily resident, (iii) non-resident.
Solution :
Particulars of Income ROR RNOR NR
Rs Rs Rs
(i) Salary earned at Pune but received at Sri Lanka: 2,50,000 2,50,000 2,50,000
Salary is deemed to accrue or arise at a place where
services are rendered, place of receipt being immaterial
[Sec. 9(1)(ii)]. Hence, it is taxable in all cases
(ii) Profits earned from a business in Kenya, controlled
in India:
(a) One half of profits are taxable on receipt basis 1,10,000 1,10,000 1,10,000
(b) Other half profits—from foreign business controlled 1,10,000 1,10,000 —
in India (in case of resident and ordinarily resident,
place of control is of no relevance)
(iii) Income from property in Nairobi and received there:
Income accruing or arising outside India 75,000 — —
(iv) Income from agriculture in Bangladesh and brought 68,000 — —
to India: It is not income received in India as receipt
means first receipt. Hence, it is not taxable in case of
“not ordinarily resident” and “non-resident”.
In case of “ordinarily resident”, it is income accruing
or arising outside India. Hence, it is taxable.
It should be noted that it is not agricultural income/
as it is not derived from land, situated in India, and
hence not derived from under Sec. 10(1).
(v) Dividend paid by an Indian company but received — — —
in London:
Dividend paid by an Indian company is deemed to
accrue or arise in India. However, any dividend paid,
declared or distributed by a domestic company on or
after 1st April 2004 is exempt from tax under Sec.
10(34). Therefore, such dividend is not taxable.
(vi) Interest on USA Development Bonds:
(a) One half is taxable on receipt basis 22,000 22,000 22,000
(b) Other half is taxable only in case of “ordinarily 22,000 — —
resident” as it is foreign income accruing or arising
outside India
(vii) Past untaxed foreign income brought to India. It is — — —
not income received in India. Furthermore, it is not
the income of the previous year 2008-2009. Hence,
it is not taxable in any case.
Group-I : Paper-7 : Applied Direct Taxation 127
(viii) Gift from a relative is not taxable. — — —
(ix) Capital gain is deemed to accrue or arise in India 2,50,000 2,50,000 2,50,000
[Sec. 9(1)(i)]
(x) Income from consultancy profession, set up outside 40,000 — —
India, profits being received outside India: Taxable in
case of “ordinarily resident”, as income accruing
arising outside India and received outside India
[Sec. 5(1)(c)]
In case of “not-ordinarily resident”, as it is not income
from profession set up in India, control and management
applies to business and not to professions.
Hence, it is not taxable [Sec. 5(1) (c) r. w. Proviso]
(xi) Loss from foreign business, controlled from India-: (-)2,00,000 (-)2,00,000 (-)2,00,000
Income includes loss also. Profits are imbedded in
sales. As sales were received in India, the place of
control and management is not relevant.
Business loss can be set off against business profits
and thereafter against the income of any other head
except income from salary and chance winnings
(Sec. 70)
Total income 11,07,000 5,42,000 4,32,000
Q21. (a) Mr. Som owns two houses, which are occupied by him for his own residence. The detailed
particulars of houses and his other incomes for the pervious year 2008-2009 are given
below :
Particulars House A House B
Rs. Rs.
Fair rent 5,00,000 5,00,000
Municipal value 4,20,00 4,50,000
Standard rent 4,50,000 6,20,000
Municipal taxes paid 50,000 60,000
Interest on loan for the FY 2008-2009 1,60,000 2,20,000
Date of loan 1.12.1998 1.04.2000
Date of completion 31.03.2001 31.03.2002
Certificate of interest attached with return of income No Yes
Mr.Som earns income from other sources amounting to Rs 2,00,000
Compute his total income and advise him which house should be opted for self-occupation.
128 Revisionary Test Paper (Revised Syllabus-2008)
Solution :
Computation of income from house property under different options
Particulars House A House B
Rs. Rs.
(a) Assuming both properties are self-occupied (SO)
Annual value Nil Nil
Less : Interest on loan (-) 30,000 (-) 1,50,000
Loss from house property (-) 30,000 (-) 1,50,000
(b) Assuming both properties as deemed let out (DLO)
Gross annual value 4,20,000 6,00,000
Less : Municipal taxes paid (-) 50,000 60,000
Net annual value 3,70,000 5,40,000
Less : Permissible deduction :
(i) Statutory deduction : 30% of Net annual value (-) 1,11,000 (-) 1,62,000
(ii) Interest on loan (-) 1,60,000 (-) 2,20,000
Income from house property 99,000 1,58,000
(c) Criteria for selection of house for self-occupied : Lowest Option I Option II
taxable income
Income from house A (-) 30,000 99,000
Income from house B 1,58,000 (DLO)
(DLO) (SO)
Income from other sources 2,00,000 2,00,000
Total income 3,28,000 1,49,000
Conclusion : House B should be treated as self-occupied.
Q21. (b) Dr.(Ms) Priyanka Chopra is the owner of a big house consisting of three units. Unit I
consist of 40% area and Unit II and III are equal dimension, each occupying 30% area.
The construction of house was completed on 1 April 2003 at a cost of Rs. 10,00,000.
The municipal value of the house for the previous year 2008-2009 has been fixed at
Rs. 2,00,000. Municipal taxes have been levied and paid @ 15% of rateable value. The
rent under the Rent Control Act is Rs. 1,50,000. Unit I is let out @ 10,000 p.m. for
residential purposes. Unit II is self-occupied. Unit III is used by her for her professional
purposes. The rent did not pay two months rent and conditions of Rule 4 are satisfied.
She paid ground rent, Rs. 9,000; interest on loan, taken during 1999-2000 for the
construction of the house and payable during the PY 2008-2009 Rs. 1,50,000; insurance
premium, Rs. 6,000. She spent Rs. 30,000 on repair of the house. Depreciation for the
clinic portion is Rs. 15,000. Her gross receipt from professional during the previous year
2008-2009 amount to Rs. 5,60,000.
Compute her gross total income for the assessment year 2009-2010
Group-I : Paper-7 : Applied Direct Taxation 129
Solution :
Computation of Income from House Property for the Assessment Year 2009-2010
Particulars House House
Let-out Self-occupied
Rs. Rs.
Gross annual value :
(a) ALV : House let out
(i) 40% of municipal value : Rs. 80,000 or
(ii) 40% of the standard rent : Rs. 60,000
ALV is restricted to Rs. 60,000
(b) Actual rent for 40% portion for 10 months : Rs. 1,00,000 1,00,000 Nil
Gross annual value
Less : Municipal taxes paid by the owner for 40%
Portion 12,000 Nil
Net annual value 88,000 Nil
Less : Deduction from net annual value (Sec. 24)
1. Statutory deduction: 30% of net annual value (-) 26,400
2. Interest on loan: 40% of Rs. 1,50,000 (-) 60,000 (–) 30,000
Taxable income 1,600 (–) 30,000
Computation of Taxable Income from Profession :
Gross professional income 5,00,000
Less : Expenses for 30% portion used for profession
1. Municipal taxes (Sec. 30) 9,000
2. Repair : 30% of Rs 30,000 (Sec. 30)* 9,000
3. Ground rent : 30% of Rs 9000 (Sec. 30)* 2,700
4. Interest on loan : 30% of Rs. 1,50,000 [Sec. 36(1)(iii)]* 45,000
5. Insurance premium : 30% of Rs 6000 (Sec.30)* 1,800
6. Depreciation (Sec. 32) 15,000
82,500 82,500
4,17,500
Computation of total income:
1. Income from house property:
(a) Let out 1600
(b) Self-occupied (–) 30,000
(–) 28,400 (–) 28,400
2. Income from profession 4,17,500
Gross Total Income/Total Income 3,89,100
130 Revisionary Test Paper (Revised Syllabus-2008)
Q22. (a) Mr. Z has joined ICC Ltd. on 1st July 2005 in the scale of Rs.15,000-1,500-21,000-
2,500-31,000. Compute gross salary for the previous year 2008-09.
Solution :
Previous Year: 2008-09
Salary for (i) April 2008 to June 2008 = 18,000 × 3 = 54,000
(ii) July 2008 to March 2009 = 19,500 × 9 =1,75,500
Gross Salary 2,29,500
Workings :
Previous Year April to June July to March
2005-06 Nil 15,000
2006-07 15,000 16,500
2007-08 16,500 18,000
2008-09 18,000 19,500
Q22. (b) Mr. Kabir is getting a salary of Rs. 12,000 p.m. w.e.f. 1.4.2008. He is promoted w.e.f.
31.12.2007 and got arrears of Rs. 75,000. Bonus for the year 2008-09 is Rs. 15,000
remains outstanding but bonus of Rs. 12,000 for the year 2007-08 was paid on 1st
January 2009. In March 2009, he got two months salary i.e. April and May 2009 in
advance. Compute the gross salary for the assessment year 2009-10.
Solution:
Gross Salary for the Assessment Year 2009-10
Salary: Rs.12,000 × 12 1,44,000
Arrears of Salary 75,000
Bonus for the year 2008-09: (Receivable) —
Bonus for the year 2007-08: (Received) 12,000
Advance of Salary: April & May 2009 (12,000 × 2) 24,000
Gross Salary 2,55,000
Q23. (a) X, is employed at Delhi as Finance Manager of R Ltd. The particulars of his salary for the
previous year 2008-09 are as under: Basic Salary Rs. 16,000 p.m. Dearness allowance
Rs. 12,000 p.m. Conveyance Allowance for personal purpose Rs. 2,000p.m.; Commission
@2% of the turnover achieved which was Rs. 9,00,000 during the previous year and the
same was evenly spread. HRA Rs.6,000 pm. The actual rent paid by him Rs. 5,000 pm
for an accommodation at till 31.12.08. From 1.1.08 the rent was increased to Rs. 7,000
pm. Compute taxable HRA.
Note : If there is an increase in rent paid, it is advisable to calculate the exemptions separately
based on the time period. Rent before and after increase.
Salary for HRA (for 9 months)= Basic Pay + DA(considered for retirement benefits) + Commission
(if received as a fixed percentage on turnover as per terms of employment)
= (16,000 × 9) + (12,000 × 9) + (2% of 9,00,000 × 9/12) = 2,65,500
Taxable HRA: (April to December 2008). Total time=9 months
Group-I : Paper-7 : Applied Direct Taxation 131
Particulars Rs. Rs.
Amount received during the financial year for HRA 54,000
Less : Exemption u/s 10(13A) Rule 2A. Least of the followings:
(a) Actual amount received 54,000
(b) 50% of Salary 1,32,750
(c) Rent paid less 10% of Salary 18,450 18,450
[5,000 × 9 – 10% of 2,65,500]
Taxable HRA 35,550
Salary for HRA (for 3 months)= Basic Pay + DA(considered for retirement benefits) + Commission
( if received as a fixed percentage on turnover as per terms of employment)
= (16,000 × 3) + (12,000 × 3) + (2% of 9,00,000 × 3/12)=88,500
Computation of Taxable HRA :
Particulars Rs. Rs.
Amount received during the financial year for HRA 18,000
Less: Exemption u/s 10(13A) Rule 2A. Least of the followings :
(a) Actual amount received 18,000
(b) 50% of Salary 44,250
(c) Rent paid less 10% of Salary
[7,000 × 3 – 10% of 88,500] 12,150 12,150
Taxable HRA 5,850
Q23. (b) Z is employed in A Ltd. As on 31.3.09, his basic salary Rs. 6,000 p.m. He is also entitled
to a dearness allowance of 50% of basic salary. 70% of the dearness allowance is
considered for retirement benefits. The company gives him HRA Rs. 3,000 pm. With
effect from 1/1/09 he receives an increment of Rs.1,000 in his basic salary. was staying
with his parents till 31.10.2008. From 1.11.08 he takes an accommodation on rent in
Delhi and pays Rs. 2,500 pm as rent for the accommodation. Compute taxable HRA for
the assessment year 2009-10.
Computation :
Salary for the purpose of HRA shall cover the time period for which the assessee, who is in receipt
of HRA, resided in a rented accommodation and the rent paid by such assessee, is more than 10%
of salary.
Salary for HRA (for 5 months)= Basic Pay + DA(considered for retirement benefits) + Commission
( if received as a fixed percentage on turnover as per terms of employment)
Basic Pay = (5,000 × 2) + (6,000 × 3) 28,000
DA = 50% of Basic Pay × 70% forming part of retirement benefits
[ 50 % × 28,000 × 70%] 9,800
Total Salary for HRA 37,800
132 Revisionary Test Paper (Revised Syllabus-2008)
Computation of Taxable HRA :
Particulars Rs. Rs.
Amount received during the financial year for HRA (3,000×12) 36,000
Less: Exemption u/s 10(13A) Rule 2A.
Least of the followings:
(d) Actual amount received 36,000
(e) 50% of Salary 18,900
(f) Rent paid less 10% of Salary
[2,500 × 5 – 10% of 37,800] 8,720 8,720
Taxable HRA 27,280
Q24. (a) Mr. Hari retires on 15th October 2008, after serving 30 years and 7 months. He gets
Rs. 3,80,000 as gratuity. His salary details are given below :
FY 2008-09 Salary Rs. 16,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits.
FY 2007-08 Salary Rs. 15,000 pm D.A. 50% of salary. 40% forms part of retirement
benefits
Determine his gross salary in the following cases:
(i) He retires from government service
(ii) He retires from seasonal factory in a private sector, covered under Payment of Gratuity
Act, 1972.
(iii) He retires from non-seasonal factory, covered by Payment of Gratuity Act, 1972
(iv) He retires from private sector, not covered by payment of Gratuity Act
Computation:
(i) The amount of gratuity received as a Government employee is fully exempt from
tax u/s 10(10)(i)
(ii) As an employee of a seasonal factory, in a private sector, covered under the Payment
of Gratuity Act, 1972
Solution :
Computation of Taxable Gratuity
Particulars Rs. Rs.
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the followings:
(i) Actual amount received 3,80,000
(ii) 7/26 x Last drawn salary x No. of years of completed service
or part thereof in excess of 6 months [31 × 7/26 × 24,000] 2,00,308
(iii) Maximum Limit 3,50,000 2,00,308
Taxable Gratuity 1,79,692
Group-I : Paper-7 : Applied Direct Taxation 133
(iii) As an employee of a non-seasonal factory, covered by Payment of Gratuity Act, 1972
Computation of Taxable Gratuity
Particulars Rs. Rs.
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(ii) Least of the followings:
(i) Actual amount received 3,80,000
(ii) 15/26 × Last drawn salary × No. of years of completed 4,29,231
service or part thereof in excess of 6 months
[15/26 × 31 × 24,000]
(iii) Maximum Limit 3,50,000 3,50,000
Taxable Gratuity 30,000
Note : Salary = Basic Pay + Dearness Allowance
In case of seasonal employment, instead of 15 days, 7 days shall be considered.
(iv) As an employee of a private sector, not covered by Payment of Gratuity Act,1972
Computation of Taxable Gratuity
Particulars Rs. Rs.
Amount received as Gratuity 3,80,000
Less: Exemption u/s 10(10)(iii) Least of the followings:
(i) Actual amount received 3,80,000
(ii) 1/2×Average salary×No. of fully completed years of service
[½×18,720×30] 2,80,800
(iii) Maximum Limit 3,50,000 2,80,800
Taxable Gratuity 99,200
Note: Salary = 10 months average salary preceeding the month of retirement.
= Basic Pay + Dearness Allowance considered for retirement benefits + commission
(if received as a fixed percentage on turnover)
Salary for the months December’06 till September ’07 shall have to be considered.
Basic Salary : Rs.
December ’07 to March ’08 = 15,000 × 4 = 60,000
April ’08 to September ’08 = 16,000 × 6 = 96,000
Total Basic Salary 1,56,000
Add: D.A. [ 50% of 1,56,000 × 40%, forming part of
superannuation benefits] 31,200
Salary for 10 months 1,87,200
Therefore, Average salary for 10 months = 1,87,200/10 = 18,720
134 Revisionary Test Paper (Revised Syllabus-2008)
Q24. (b) Mr.Surya was an employee of IAWCI. After 38 years of service, he retired on 29.2.09.
He was drawing a monthly salary of Rs. 15,000 in 2007, Rs. 16,500 in 2008 and Rs. 18,000
from 1.1.09 to 29.2.09. On retirement he received a gratuity of Rs. 4,00,000. Compute
taxable gratuity.
Computation: Assuming employee not covered by Payment of Gratuity Act, 1972
Computation of Taxable Gratuity
Particulars Rs. Rs.
Amount received as Gratuity 4,00,000
Less: Exemption u/s 10(10)(iii) Least of the followings:
(i) Actual amount received 4,00,000
(ii) 1/2×Average salary×No. of fully completed years of service
[½ × 18,000 × 38] 3,42,000
(iii) Maximum Limit 3,50,000 3,42,000
Taxable Gratuity 58,000
Note: Salary = 10 months average salary preceeding the month of retirement.
= Basic Pay + Dearness Allowance considered for retirement benefits + commission (if
received as a fixed percentage on turnover)
In this case, Average salary for 10 months preceeding the month of retirement is Rs. 18,000 only.
Q25. (a) Mr. King is getting a salary of Rs. 5,400 pm since 1.1.08 and dearness allowance of
Rs. 3,500 pm, 50% of which is a part of retirement benefits. He retires on 30th November
2008 after 30 years and 11 months of service. His pension is fixed at Rs. 3,800 pm. On
1st February 2009 he gets 3/4ths of the pension commuted at Rs. 1,59,000. Compute
his gross salary for the previous year 2008-09 in the following cases :
(i) If he is a government employee, getting gratuity of Rs. 1,90,000
(ii) If he is an employee of a private company, getting gratuity of Rs. 1,90,000
(iii) If he is an employee of a private company but gets no gratuity.
Computation :
Previous Year 2008-09. Tenure of Service: 1.4.08 to 30.11.08 = 8 months
Post-retirement period: December’08 to March ‘09= 4 months
Particulars Case (i) Case (ii) Case (iii)
Salary 43,200 43,200 43,200
D.A 28,000 28,000 28,000
Taxable Gratuity Exempted 82,750 Nil
Uncommuted Pension [(3,800×2)+(950×2)] 9,500 9,500 9,500
Commuted Value of Pension Exempted 88,333
Gross Salary
Group-I : Paper-7 : Applied Direct Taxation 135
Case(ii) Gratuity received by an employee of a private company
Rs. Rs.
Actual amount received 1,90,000
Less: Exempted amount(least of the followings):
(i) Actual amount received 1,90,000
(ii) ½ × Avg.Salary × No.of years of Completed service
[½ × 7,150 × 30] 1,07,250
(iii) Maximum Limit 3,50,000 1,07,250
Taxable Gratuity 82,750
Commuted Value of Pension
(Non-govt employee, gratuity received)
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A)
1/3rd of Full Value of Commuted Pension
[1/3 × 2,12,000] 70,667
Full Value of Commuted Pension
Amount received on commutation
Percentage of pension commuted


= =
Taxable Commuted Value of Pension 88,333
Case(iii) Commuted Value of Pension
(Non-govt employee, gratuity not received)
Actual commuted value of pension received 1,59,000
Less: Exempted u/s 10(10A)

of Full Value of Commuted Pension
[
× 2,12,000] 1,06,000
Full Value of Commuted Pension
Amount received on commutation
Percentage of pension commuted


= =
Taxable Commuted Value of Pension 53,000
Q25. (b) Mrs. Vandana retires on 16th October 2008 after 30 years and 8 months of service.
Salary structure is given below :
FY 2008-09 Salary Rs. 15,000 pm D.A. Rs. 7,500 pm
FY 2007-08 Salary Rs. 12,000 pm D.A. Rs. 6,000 pm
136 Revisionary Test Paper (Revised Syllabus-2008)
40%of dearness allowance forms a part of superannuation benefits. Record of Earned Leave is
given below :
Leave allowed for one year of completed service -20 days; Leave taken while in service-150 days;
Leave encashed during the year-60 days.
Determine the gross salary in the following cases:
(i) He retires from government service
(ii) He retires from the service of Delhi Municipal Corporation
(iii) He retires from the service of Life Insurance Corporation of India
(iv) He retires from private sector
Particulars Case(i) Case(ii) Case(iii) Case(iv)
Salary for 6months & 16 days 98,000 98,000 98,000 98,000
Dearness Allowance 49,000 49,000 49,000 49,000
Taxable amount of Leave encashment Exempted 1,24,980 1,24,980 1,24,980
Gross Income from Salary 1,47,000 2,71,980 2,71,980 2,71,980
Working Notes :
Average monthly salary for 10 months, prior to retirement:
Salary of 6 months 16 days: (1st April 2008 to 16th October 2008) = 98,000
Salary of 3 months 14 days: (14th December 2007 to 31st March 2008) = 41,600
Total Basic Salary 1,39,600
Add : Dearness allowance
For 6 months 16 days: (1st April 2008 to 16th October 2008) = 49,000
For 3 months 14 days: (14th December 2007 to 31st March 2008) = 20,800
Total D.A. 69,800
D.A. [40% of 69,800, forming part of retirement benefits] 27,920
Total salary of 10 months 1,67,520
Average Salary=

=
Taxable amount of Leave Encashment :
Amount of encashment received :
(30 × 20) – (150 +60) × (15,000 + 7,500)/ 30 = 2,92,500
Less: Exempted u/s 10(10AA) [Least of the followings]
(i) Actual amount received 2,92,500
(ii) 10 months salary(preceeding the month 1,67,520
of retirement)
(iii) Leave credit on the date of retirement
[(30 × 20) – (150 + 60) × (16,752 / 30)] 2,17,776
(iv) Maximum Limit 3,00,000 1,67,520
Taxable amount of Leave encashment 1,24,980
Group-I : Paper-7 : Applied Direct Taxation 137
Q26. (a) Ms. Parineeta retired from service after 28 years from ABC Ltd. Leave sanctioned by
employer 45 days p.a. Leave availed during service 400 days. Leave encashment received :
Rs. 4,30,000. Average salary for 10 months preceeding the month of retirement
Rs. 15,000.Compute taxable amount of Leave encashment for the Previous year
2008-09.
Computation : Since leave sanctioned by the employer is more than 30days p.a., the following
calculation is required, to determine the amount of leave credit on the date of retirement.
Particulars Rs.
(i) Leave credit available on the date of retirement 860
= Total Leave sanctioned during tenure of employment – Total leave
availed during service
= [( 28 × 45) – 400] 420
Less : Excess leave sanctioned by the employer
[(45 – 30 days) per year × 28)
Leave credit on the basis of 30 days credit for completed years of service 440
(ii) Leave salary on the basis of 30 days credit = Step (i) × Average 2,20,000
Salary= 440 × (15,000/30)
Computation of Taxable Leave Salary on Retirement
Particulars Rs. Rs.
Amount Received on Leave Encashment 4,30,000
Less: Exemption u/s 10(10AA):Least of the followings:
(i) Actual amount of Leave encashment received 4,30,000
(ii) Average salary of the individual for the past 1,50,000
10 months × 10 months
(iii) Maximum Limit 3,00,000
(iv) Leave at credit at the rate of 30 days p.a.
for every Completed year of service as calculated 2,20,000 1,50,000
in Step (ii)
Taxable Value of Leave Encashment 2,80,000
Q26. (b) Calculate the perquisite value of the expenditure on medical treatment, which is assessable
in the hands of an employee of a company, inclusive of the conditions to be satisfied :
Gross total income, inclusive of salary Rs. 2,00,000
(a) amount spent on treatment of the employee’s wife in a hospital maintained by the employer
Rs. 20,000
(b) amount paid by the employer on treatment of the employee’s child in a hospital Rs.14,000
(c) medical insurance premium reimbursed by the employer on a policy covering the employee,
his wife and dependent parents Rs. 7,000
(d) (i) amount spent on medical treatment of the employee outside India Rs. 2,50,000
(ii) amount spent on travel and stay abroad Rs. 90,000
(e) amount spent on travel and stay abroad of attendant Rs. 60,000
138 Revisionary Test Paper (Revised Syllabus-2008)
Answer 26. (b)
Nature of Perquisites Amount Taxability/Non-taxability
Taxable
Treatment of employee’s wife in a hospital Nil Fully exempted
Maintained by employers Nil Not taxable: since the amount
Reimbursement of expenses incurred is less than Rs. 15,000
on treatment of employee’s child in hospital
Reimbursement of medical insurance Nil Not taxable: since medical insurance
premium paid premium referred to u/s 80D is paid on
the employee and members of his family
Medical treatment outside India Nil It is assumed that the whole of such
expenditure is permitted by RBI
Amount spent on travel and stay Nil Not taxable: as the Gross total income
abroad for the employee does not exceed Rs. 2,00,000
(herein referred as the patient)
Amount spent on travel and stay Nil Not taxable : as the Gross total income
abroad of the attendant does not exceed Rs. 2,00,000
Q27. (a) R submits the following information regarding his salary income for the year 2006-07:
Basic salary Rs. 15,000 p.m.; D.A(forming part of salary) 40% of basic salary; City
Compensatory Allowance Rs. 300 p.m.; Children Education Allowance Rs. 400 pm per
child for 3 children; Transport Allowance Rs. 1,000 p.m. He is provided with a rent free
unfurnished accommodation which is owned by the employer. The fair rental value of the
house is Rs. 24,000 p.a. Compute the gross salary assuming accommodation is provided
in a city where population is (a) exceeding 25 lakhs (b) exceeding 10 lakhs but not
exceeding 25 lakhs (c) less than 10 lakhs
Computation of Income from Salary
Particulars Amount Amount
Basic salary 15,000×12 1,80,000
D.A. (40% of 1,80,000) 72,000
City Compensatory Allowance (fully taxable) (300×12) 3,600
Children Education Allowance
Actual amount received (400×12×3) 14,400
Less : Exemption u/s 10(14)
@ Rs.100 per month per child subject to a maximum of 2 children 2,400 12,000
(100×12×2)
Transport Allowance 12,000
Actual amount received ( 1,000×12) 9,600 2,400
Less: Exemption u/s 10(14) @ Rs.800 p.m. (800×12)
Gross Income from Salary u/s 17(1) 2,70,000
Add : Value of Unfurnished accommodation u/s 17(2) rule 3(1) explanation 1
Case (a) Population exceeding 25 lakhs
15% of salary
Salary = Basic pay+DA (forming part of retirement benefits)+all other
taxable allowances =1,80,000+72,000+3,600+12,000+2,400=2,70,000 40,500
Total Income from Salary 3,10,500
Group-I : Paper-7 : Applied Direct Taxation 139
Note: Case (b): where population is exceeding 10 lakhs but not exceeding 25 lakhs
10% of Salary shall be considered as the value of taxable perquisite
= 10% of Rs. 2,70,000 = Rs. 27,000
Case (c) : where population is less than 10 lakhs
7.5 % of salary shall be considered as the value of taxable perquisite
= 7.5% of Rs. 2,70,000 = Rs. 20,250
Q27. (b) Mr. Kushal submits the following information regarding his salary income which he gets
from ABC Ltd. Basic salary Rs. 15,000 pm; D.A. 40% of basic salary (forming part of
retirement benefits); City Compensatory Allowance Rs. 300 pm; Children Education
Allowance Rs. 400 pm( for 3 children); Transport allowance Rs.1,000 p.m; Reimbursement
of Medical Expenses Rs. 25,000. He is also entitled to HRA of Rs. 6,000 p.m. from
1.4.2008 to 31.8.2008. He was paying a rent of Rs. 7,000 p.m. for a house in Delhi.
From 1.9.2008 he was provided with an accommodation by the company for which the
company was paying the rent of Rs. 5,000 pm. The company charged him Rs. 1,000 pm
as rent for the accommodation. Compute gross salary for the a.y. 2009-10.
Computation of Income from Salary
Particulars Amount Amount
Basic salary 15,000×12 1,80,000
D.A. (40% of 1,80,000) 72,000
City Compensatory Allowance (fully taxable) (300×12) 3,600
House Rent Allowance (April to August 2008)
Actual amount received ( 6,000×5) 30,000
Less : Exemption u/s 10(13A) Rule 2A
Least of the followings :
(a) Actual amount received 30,000
(b) 50% of salary 52,500
(c) Rent paid – 10% of Salary
[7,000 x 5 – 10% of 1,05,000] 24,500 24,500 5,500
Note : Salary for HRA (5 months)
Basic salary : 15,000×5= 75,000
D.A. = 40% of 75,000 = 30,000
Total 1,05,000
Children Education Allowance
Actual amount received (400×2×3) 14,400
Less: Exemption u/s 10(14)
@ Rs.100 per month per child subject to a maximum of 2 children 2,400 12,000
(100×12×2)
140 Revisionary Test Paper (Revised Syllabus-2008)
Transport Allowance
Actual amount received (1,000×12) 12,000
Less: Exemption u/s 10(14) @ Rs.800 p.m. (800 ×12) 9,600 2,400
Gross Income from Salary u/s 17(1) 2,75,500
Add: Value of Unfurnished accommodation
u/s 17(2) rule3(1) explanation 1
Assuming Population exceeding 25 lakhs (as accommodation
provided in a Metro city)
15% of salary for 7 months (September 2008 to March 2009)
Salary = Basic pay + DA (forming part of retirement benefits)+
all other taxable allowances
= [(15,000×7)+(40% of 1,05,000)+(300×9)+
{(400×9×3) – (100×9×2)}+{(1000 – 800)×9}]
= 1,60,500 24,075
Total Income from Salary 2,99,575
Q28. (a) Mr.Sambhu was provided an accommodation in a hotel by his employer for 22 days
before providing him a rent free accommodation which is owned by the employer. The
hotel charges paid Rs. 6,000. Salary for the purpose of accommodation for the period of
22 days is Rs. 11,000. Compute the value of accommodation.
Computation :
In case of accommodation provided to the assessee on account of transfer, which is exceeding 15
days cumulatively, such shall be taxable as a perquisite. The company recovered Rs.1,000 from
the employee. Compute taxability.
Lower of the following :
(i) 24% of salary paid/payable= 24% of 11,000 = 2,640
(ii) Actual charges paid/payable = 6,000 2,640
Less Amount paid or payable by the employee 1,000
Taxable value of perquisite 1,640
Q28. (b) Value of unfurnished accommodation (computed) Rs. 50,000. Cost of furniture provided
by the employer Rs. 80,000. Hire charges of furniture provided in the accommodation
Rs. 500 p.m. Amount recovered from employee Rs. 200 p.m. Compute taxability.
Computation: Value of Furnished Accomodation (provided at Concessional rates)
Particulars Rs.
Value of unfurnished accommodation as above 50,000
Add: Value of Furniture provided:
• 10%p.a. of original cost of such furniture 8,000
• If hired from third party, then Actual hire charges 6,000
Less: Any charges paid or payable by the employee (200×12) (2,400)
Value of Furnished Accomodation 61,600
Group-I : Paper-7 : Applied Direct Taxation 141
Q29. Mr.Ritesh is provided with an accommodation in Kolkata since April 2008. Salary Rs. 40,000
p.m. Cost of furniture provided Rs. 80,000. On 1st September, 2008, following a promotion
with a increase in Salary by Rs. 15,000, he was transferred to Jharkhand (population less
than 25 lakhs but more than 10 lakhs),and was also provided an accommodation there.
Mr. Ritesh was allowed to retain the Kolkata accommodation till March, 2009. Compute
taxability.
Computation:
Phase 1: Value of Furnished Accommodation (Kolkata) (April to September 2008)
Particulars Rs.
Value of unfurnished accommodation (15% of 40,000×6 months) 36,000
Add : Value of Furniture provided :
• 10%p.a. of original cost of such furniture
(10% of 80,000×6 months) 8.000
Value of Furnished Accommodation 44,000
Phase 2: Valuation of accommodation (October 2008 to December 2008)
(a) For the first 90 days of transfer: Where accommodation is provided both at existing place
of work and in new place, the accommodation, which has lower value, shall be taxable.
(b) After 90 days: Both accommodations shall be taxable.
Computation for the first 90 days of transfer: (October 2008 to December 2008)
Lower of :
(i) Value of accommodation at existing place of work
(ii) Value of accommodation at new place
Value of accommodation at existing place of work (Kolkata)
15% of salary for 3 months (i.e. 90 days) = 15% of 55,000 × 3 months =24,750
Add: Cost of furniture provided: 10% of 80,000 × 3 months =24,000
Total Value of Perquisite 48,750
Value of accommodation at new work place(Jharkhand)
10% of salary for 3 months (i.e. 90 days) = 10% of 55,000×3 months=16,500
Therefore, the assessee shall be assessed to tax on Rs. 16,500 (being the lower)
Phase 3 : Valuation of accommodation (after 90 days) (January 2009 to March 2009)
For Kolkata accommodation: 15% of 55,000 × 3 months = Rs.24,750
Add : Cost of furniture provided: 10% × 80,000 × 3 months = Rs.24,000
Total value of perquisite Rs.48,750
For Jharkhand accommodation: 10% of 55,000 × 3 months = Rs.16,500
Total value of perquisite:
Particulars Taxable value of
perquisite
Phase 1: Accomodation in Kolkata 44,000
Phase 2: Accomodation in Jharkhand (being the lower during 90 days) 16,500
Phase 3: Accomodation in Kolkata 48,750
16,500
Total Value of Taxable Perquisite 1,25,750
142 Revisionary Test Paper (Revised Syllabus-2008)
Q30. (a) Mr. E is employed with N Ltd. he also gets the services of sweeper and watchman.
Determine his gross salary in the following cases:
1) His salary is Rs. 4,200 pm. Employer provides the services of sweeper and watchman. He
pays them Rs. 600 pm and Rs. 500 pm;
2) His salary is Rs. 4,200 pm. Sweeper and watchman are engaged by N at the rates given in
clause(1) above but their wages are reimbursed by the employer;
3) His salary is Rs. 4,210 pm. Employer provides the services of sweeper and watchman at the
above rates but he recovers from N Rs. 200 pm and Rs. 300 pm respectively.
E has paid employment tax of Rs. 400.
Computation :
Particulars Case (1) Case (2) Case (3)
[Ref.Sec.17(2)(iv), [Ref.Sec.17(2)(iii)
Rule 3(3)] Rule 3(3)]
Salary 50,400 50,400 50,520
Wages of sweeper Sec.17(2)(iii) not taxable 7,200 4,800
Wages of watchman Sec.17(2)(iii) not taxable 6,000 2,400
Gross salary 50,400 63,600 57,720
Working Note :
Case (1): He is a non-specified employee. Perquisites provided by employer u/s 17(2)(iii) are not
chargeable to tax :
Salary : 4,200×12 = 50,400
Less: Professional tax paid u/s 16(iii) = 400
Monetary income not exceeding Rs. 50,000 = 50,000
Case (2): If the facility is engaged by the employee but reimbursed by the employer, it is an
obligation of employee, discharged by employer u/s 17(2)(iv), it is always taxable.
Case (3): He is a specified employee, as his monetary income, chargeable under the head “salaries”
exceeds Rs. 50,000.
Gross salary; 4,210×12 = 50,520
Less: Professional tax paid u/s 16(iii) = 400
Monetary income exceeding Rs.50,000 Rs. 50,120
Q30. (b) G Ltd. provides electricity to its employee, P. Annual consumption as per meter reading
comes to 2,250 units. Determine the value of the perquisite in the following cases:
1) Electricity meter is in the name of P and the rate of electricity is Rs. 3 per unit
2) Electricity meter is in the name of G Ltd. the rate of electricity is Rs. 3 per unit.
3) G Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied
to public @ Rs. 2 per unit. However, it charges 30 paise per unit from employees.
Solution : With reference to Rule 3(4)
1) Perquisite value of free electricity is Rs. 6,750 (2,250×3 ). As the electric meter is in the
name of the employee, it is his obligation to pay the bill. However, as the bill has been paid
Group-I : Paper-7 : Applied Direct Taxation 143
by the employer, it is an obligation of employee, discharged by the employer. It is always
taxable u/s 17(2)(iv).
2) Perquisite value of free electricity will be Rs. 6,750. It shall be assessed to tax, if the
employee is a specified employee as per Sec.17(2)(iii)
3) Perquisite value of electricity supplied = 2,250 (0.90 – 0.30) = Rs. 1,350
Q31. Mr Sudhir Sharma, resident in India, for the year ending on 31 March 2009. Compute his
income from business and his gross total income for the assessment year 2009-2010.
Profit & Loss Account for the year ended 31.3.09
Expenditure Rs. Receipts Rs.
To Purchases 1,90,000 By Sales less returns 5,69,300
To Salaries and wages 1,40,000 By Bad debts recovered, 2,000
To Trade expenses 1,000 allowed in earlier years
To Purchase of trademarks 50,000 by the Assessing Officer
To Registration of trademarks 2,000 By Interest on securities (gross) 892
To Rent, rates and taxes 5,000 By Dharmada, mandir and 2,000
To Discount allowed 1,500 gaushala receipts
To Household expenses 6,000 By Refund on income tax 1,008
To Advertisement bill paid in cash 30,000 By Proceeds of life insurance 43,500
To Income tax 10,000 policy on maturity
To Sales tax paid 3,000
To Purchased technical know-how 12,000
To Expenses incurred on income 15,100
tax and sales tax proceedings
To Contribution paid to a trust for 1,000
staff welfare
To Staff welfare expenses incurred 700
To OYT deposit 5,000
To Postage and telegrams 1,300
To Donation to National Defence Fund 2,500
To life insurance premium on the 2,000
life of the assessee
To interest on capital 5,000
To interest on loan taken to pay 500
income tax
To wealth tax 500
To audit fee 1,000
To entertainment expenditure 30,000
To gifts and present to five customers, 15,000
costing Rs 3,000 each
To expenses on apprentice training 4,000
To emergency risk insurance 200
To fire insurance premium for stock 200
To provision for bad and doubtful debts 3,000
To reserve for pecuniary losses 5,000
To net profit 76,000
Total 6,18,700 6,18,700
144 Revisionary Test Paper (Revised Syllabus-2008)
Computation of Gross Total Income for the Assessment Year 2009-2010
Particulars Rs. Rs.
Income from Business
Net profit as per profit and loss account 76,000
Add: Expenses inadmissible in computing profits and gains from
business or profession:
Purchase of trademarks 50,000
Household expenses [Sec. 37(1)] 2,500
Advertisement bills paid in cash [Sec. 37(1) r.w. Sec. 40A(3)] 30,000
Income tax [Sec. 40(a)(ii)] 10,000
Purchase of technical know-how 12,000
Contribution to a Trust for staff welfare fund [Sec. 40A(9)] 1,000
Donation for National Fund [Sec. 37(1)] 2,500
Life Insurance premium [Sec. 37(1)] 2,000
Interest on capital [Sec. 36(1)(iii)] 5,000
Interest on loan to pay income tax [Sec. 37(1) r.w. 40{a)(ii)] 500
Wealth tax [Sec. 40(a)(iii)] 500
Provision for bad and doubtful debts [Sec. 37(1) r.w. 36(1)(vii)(2)] 2,000
Reserve for pecuniary losses [Sec. 37(1)] 6,000
1,24,000 1,24,000
2,00,000
Less:
(a) Income not relating to business or profession: [Sec. 28(i)] 892
Interest on government securities
(b) Dharada, mandir and gaushala receipts 2,000
(c) Refund of income tax 1,008
(d) Proceeds of L.I.P.: It is not a business receipt and exempt 43,500
[Sec. 10(10)]
(e) Depreciation on trademarks; 25% of Rs 50,000 12,500
(f) Depreciation on know-how: 25% of 12,000 3,000 59,400
Income from business 1,40,600
Statement of Gross Total Income for the Assessment Year 2009-2010
1. Income from business 1,40,600
2. Income from other sources— Interest on securities 892
Gross total income 1,41,492
Group-I : Paper-7 : Applied Direct Taxation 145
Note:
1. Bad debts deducted in earlier years and now recovered, has been rightly included in the
profit and loss account as business income [Sec. 41(4)].
2. Since payment of income tax is not deductible, its refund cannot be taxed as deemed profits
[Sec. 41(1)].
3. OYT (own your telephone) deposit is an allowable deduction in the year in which it is paid.
4. “Dharmada”, “mandir” and “gaushala” receipts are customarily levies by trader for charitable
purposes. Amount received under these heads are not trading receipts. The fact that the
amount collected under these heads are spent for other purposes would amount to breach
of trust but it would not affect the initial nature and character of the receipt. Such receipts
are not taxable
5. The assessee is entitled to the deduction in respect of donation to National Defence Fund
under Sec. 80G.
6. Life insurance paid by assessee on his life is allowed to be deducted in imputing total income
under Sec. 80C.
7. Any payment on advertisement exceeding Rs. 20,000 should be made by on account payee
cheque or account payee bank draft. Since the payment has been made in cash, 20% of
advertisement has been disallowed [Sec. 37(1) r.w. Sec. 40A(3)]. ‘Crossed cheque’
requirement has been amended by ‘account payee’ cheque. It is opera-tive from 13-07-
2007.
8. From the assessment year 2000-2001, intangible assets also fall within the scheme of
depreciation. Hence, depreciation has been allowed on trademarks and know-how.
9. Registration expense of trademarks is revenue expenditure, allowed under Sec. 37(1).
Q32. Dr L.Kochagaway is a renowned medical practitioner. He furnishes his receipts and payments
account for the financial year 2008-2009 :
Receipts Rs. Expenditure Rs.
To Balance b/d 35,000 By Rent of clinics:
To Consultation fees : 2006-2007 13,600
2006-2007 25,000 2007-2008 44,800
2007-2008 1,80,000 2008-2009 26,600 85,000
2008-2009 2,62,000 4,67,000 By Electricity and water 12,000
To Visiting fees 1,30,000 By Purchase of professional books18,000
To Loan from bank for 2,25,000 By Household expenses 97,800
professional purposes By Municipal taxes paid in respect12,000
To Sale of medicines 1,73,000 of property
To Gift/presents from patients 15,000 By purchase of motor car 2,45,000
To Remuneration from articles 26,000 By Telephone Charges 10,000
published in professional By fire insurance in respect of 3,200
magazines property
To rent from house property 96,000 By surgical equipment 44,700
146 Revisionary Test Paper (Revised Syllabus-2008)
To Interest on Post Office 17,000 By advance income tax 43,000
National Savings Certificates By salary and perquisite 72,000
to compounder
By Entertainment expenses 16,000
By Purchase of X-ray machine 2,00,000
By Expenses of income-tax 15,000
proceedings
By Life insurance premium 25,000
By Gifts to wife 25,000
By Interest on loan 12,000
By Loan a/c—instalment paid 25,000
By Donation to Political Party 2,500
By Car expenses 36,000
By Purchase of medicines 1,05,000
By Balance c/d 79,800
11,84,000 11,84,000
Compute his income from profession and gross total income for the assessment year 2009-2010
after taking into account the following additional information :
1. One-third of the car expenses are in connection with personal use.
2. Depreciation on motor car is allowed at the rate of 15%.
3. The construction of the house property was completed in March 2004. It was let out for
residential purposes.
4. Expenses on income tax proceeding include Rs. 1,000 paid for the preparation of return of
income.
5. Receipts outstanding from patients for 2008-2009, amount to Rs. 8,000.
6. Closing stock of medicines is Rs. 8,000 but its current market price is Rs. 12,000.
7. Books purchased include annual publications of Rs. 12,000, purchased in December 2008.
Solution :
(a) Computation of Income from Profession for the Assessment Year 2009-2010 :
Particulars Rs. Rs.
(a) Receipt from profession :
1. Consultation fees: [Sec. 28(i)]: (Rs. 25,000+Rs. 1,80,000 4,67,000
+ Rs. 2,62,000)
2. Visiting fees [Sec. 28(i)] 1,30,000
3. Sale of medicines [Sec. 28(i)] 1,73,000
4. Gifts and presents from patients [Sec. 28(iv)] 15,000
5. Remuneration from articles published in professional 26,000
magazines [Sec, 28(i)] 8,11,000 8,11,000
Receipts Rs. Expenditure Rs.
Group-I : Paper-7 : Applied Direct Taxation 147
(b) Closing stock of medicines 8,000
Total receipts and closing stock 8,19,000
Less: Expenses allowable:
1) Rent of clinic [Sec. 30] 85,000
2) Electricity and water [Sec. 37(1)] 12,000
3) Salary of compounder [Sec. 37(1)] 72,000
4) Entertainment expenses [Sec. 37(1)] 16,000
5) Expenses on income-tax proceedings [Sec. 37(1)] 15,000
6) Interest on loan [Sec. 37(1)(iii)] 12,000
7) Purchase of medicines [Sec. 37(1)] 1,05,000
8) Car expenses [Sec. 37(1)] (2/3× Rs. 36,000) 12,000
9) Depreciation on professional books:
• Annual publications: 12,000 × 100% × 50% 6,000
• Other books: 6,000 x 60% 3,600
10. Depreciation on car [Sec. 32 r.w. Sec. 38] :
15% of 2,45,000×2/3 24,500
11. Depreciation on plant and machinery:
(i) X-ray machine 2,00,000
(ii) Surgical equipment 44,700
Depreciation @ 15% of 2,44,700
36,705
12. Telephone Charges 10,000
4,09,805
Taxable profits from profession
(b) Computation of income from house property:
Gross annual value on the basis of rental valuation 96,000
Less: Full municipal taxes paid by the owner 12,000
Net annual value 84,000
Less: Statutory deduction: 30% of net annual value 25,200
58,800
Income from house property 58,800
Gross total income 4,67,995
Less: Deduction u/s 80C (LIC premium paid) 25,000
Less: Deduction u/s 80GGC 2,500
Actual amount of donation to political party
Total Income 4,40,495
Total Income rounded off u/s 288A 4,40,490
148 Revisionary Test Paper (Revised Syllabus-2008)
Notes:
1. Purchase of motor car is capital expenditure. Hence, it is not deductible. Depreciation has
been allowed on motor car.
2. Plant includes books and surgical equipment. Depreciation on professional books is allowed
@ 60% but annual publications are written off @ 100%. However, as annual publications
have been put to use for less than 180 days during the year, depreciation has been allowed
@ 50%. The assessee can claim depreciation on surgical equip-ment at general rate.
3. Contribution of articles to periodicals and magazines constitutes income from vocation of
the assessee.
4. Expenses in income-tax proceedings are wholly deductible [Sec. 37(1)].
5. One-third of car expenses and proportionate deprecation in respect of motor car have been
disallowed as they are in connection with the personal use of the assessee.
6. Interest on Post Office National Saving Certificates is exempt from income tax [Sec. 10(15)].
7. Profits and gains of the business or profession are computed according to the method of the
accounting regularly followed by the assessee (Sec. 145). Since the assessee has adopted
cash system of accounting. “Income” is tax-able on receipt basis and “expenditure” is allowed
to be deducted on payment basis, irrespective of the previous year to which the receipt of
payment belongs. Receipts outstanding for the previous year 2008-2009 will not be taken
into consideration.
8. Profits and gains of business profession is required to be computed according to the system
of accounting regu-larly followed by the assessee but if the income cannot be properly
deduced therefrom, the Assessing Officer may compute the income on such basis and in
such manner as he may deem fit [Proviso to Sec. 145(1)].
In view of this, the Assessing Officer may take into account the value of closing stock while
determining profits even under cash system of accounting
9. Donation to Political Party is allowed to be deducted from gross total income under Sec.
80GGC.
Q33. (a) XY & Co., a partnership concern had established an undertaking for manufacturing
computer software in Free Trade Zone. It furnishes the following particulars of its second
year operations, ending on 31-03-2009 :
Particulars Rs (in lakh)
Total sales of business 100.00
Export sales 80.00
Profit of the business 10.00
Out of the total sales, realisation of sale of Rs. 5 lakh is difficult because of the deficiency of the
buyer. Realisation of rest of the sales is received in time.
The plant and machinery used in the business had been depreciated @ 15% on SLM basis of
depreciation and depreciation of Rs 3 lakh was charged to the Profit and Loss Account.
Compute the taxable income of XY & Co; for the assessment year 2009-2010.
Group-I : Paper-7 : Applied Direct Taxation 149
Solution:
Particulars Rs (in lakh)
Profit of business 10,00,000
Add : Depreciation charged on SLM basis 30,000
1,30,000
Less : Depreciation on WDV basis @ 15% of 17,00,000 – [Sec Note below] 2,55,000
10,45,000
Less : Deduction under Sec. 10A : 10,45,000×75÷100 7,83,750
Taxable income 2,61,250
Note :
Rs.
1. Computation of Depreciation :
Total purchase price of machine : 3,00,000 15 × 100 20,00,000
Less : Depreciation in the first year @ 15% 3,00,000
WDV at the end of first year 17,00,000
Less: Depreciation for second year @ 15% 2,55,000
WDV at the end of second year 14,45,000
2. Export Turnover:
Export Sales 80,00,000
Less: Remittance not received due to insolvency of buyer 5,00,000
75,00,000
Q33. (b) B Ltd. owns a new industrial undertaking, located in industrially backward State. It has
been approved 100% EOU by the Board, constituted by the Central Government. It is
engaged in the export of computer software and started functioning from the previous
year 2004-2005.
During the first three years it earned a profits and claimed deduction under Sec. 10B.
During the fourth year it suffered a loss of Rs 10 lakh.
It furnishes the following particulars for the previous year 2008-2009.
Rs (in lakh)
(i) Business profit 40
(ii) Export sales – FOB 100
(iii) Domestic sales 50
(iv) Receipt of convertible foreign exchange in India :
(a) Receipt up to 30 September 2009 70
However, foreign exchange of Rs 10 lakh is on account of sale to a
foreign customer in India and Rs 5 lakh is on account of reimbursement
of freight, insurance, relating to export and expenses incurred in
Malaya in foreign exchange in providing technical services.
150 Revisionary Test Paper (Revised Syllabus-2008)
(b) Receipt in November 2009 but approved by the competent authority 10
(c) Receipt in January 2010 but competent authority has not granted its 10
approval
(v) Converted foreign exchange kept in Malaya in State Bank of India in a 10
separate account with the approval of RBI.
Compute its total income in the following cases :
(a) it claims deduction under Sec. 10B;
(b) it revises its option under Sec. 10B(8) and wants not to claim deduction
under Sec. 10B. it proposes to claim deduction under Sec. 80 IB.
Solution :
(i) Claiming deduction under Sec. 10B
Rs. (in lakh)
Business profits 40
Less : Deduction for export profits : 20
20
Less : Carried forward business loss [Sec. 72 (2)] 10
Total income 10
Working Note :
1. Export turnover :
Convertible foreign exchange received up to 30 September 2009
Less : (i) Convertible foreign exchange received from a foreign customer 70
for sale in India
(ii) Reimbursement of foreign insurance relating to export and (–) 10
expenses incurred in foreign exchange outside India in providing (–) 5
technical services.
Q34. (a) Mekon Ltd., an Indian company, starts an industrial undertaking on 1 April 2008. During
the previous year, it earns profits of Rs 80 lakh before allowing any deduction for wages.
Compute its total income for the previous year 2008-2009 taking into account the following
employment schedules of workers :
Date of employment Number of workers Status of workers Rate of wages
1-5-2008 90 Casual 300 p.m.
1-6-2008 20 Reuglar 4000 p.m.
1-7-2008 10 Regular 4000 p.m.
Group-I : Paper-7 : Applied Direct Taxation 151
Computation of total income for the AY 2009-2010
Particulars Rs. Rs.
Profits before allowing deduction for wages 80,00,000
Less: Wages paid to workers [Sec. 37(1)] :
(i) 90 × Rs 3000 × 11 29,70,000
(ii) 20 × Rs 4000 × 10 8,00,000
(iii) 10 × Rs4000 × 9 3,60,000 (-) 41,30,000
Business Profits and Gross Total Income 38,70,000
Less: Deduction in respect of employment of new workmen (-) 1,20,000
[Sec. 80 JJAA] 30% (Rs. 4000×10×10)
Total Income 37,50,000
Q34. (b) Mr. R has developed an improved economical model of a motor cycle and got it patented
on 31-3-2008 under the Patent Act, 1970. He allowed Z Ltd. to use his patent rights and
licenses has been granted to it under the Patent Act, 1970. He has received royalty of
Rs. 8,00,000 during the previous year 2008-2009. However, the royalty in accordance
with the terms and conditions of the license settled by the Controllers under the said Act
is Rs. 2,80,000.
He has incurred Rs. 1,00,000 expenses in developing his invention and getting it patented.
Compute his total income for the assessment year 2009-2010 (i) if he is resident in India, (ii)
non-resident India.
Computation of Total Income for the Assessment Year 2009-2010
Particulars (i) (ii)
Rs. Rs.
Income from other sources 8,00,000 8,00,000
Less : Expenses 1,00,000 1,00,000
Gross Total Income (GTI)
Less : Deduction for respect of royalty on patent (Sec. 80-RRB)
Least of the followings :
(a) Income from royalty 5,00,000; or
(b) Royalty under the terms of license settled by the
Controller 2,80,000;
(c) Maximum limit Rs. 3,00,000
Whichever is less, is to be deducted 2,80,000 xxx
Total Income 2,20,000 7,00,000
152 Revisionary Test Paper (Revised Syllabus-2008)
Q35. (a) Mr. J is suffering with 60% locomotor disability which is certified by medical authority.
He is employed as Techni-cal Supervisor with Air Tel at a salary of Rs. 20,000 p.m.
Particulars Rs.
(i) Income from government securities 20,000
(ii) Long-term capital loss (-) 40,000
(iii) Short-term capital gain (Sec. 111A) 1,00,000
(iv) Insurance commission (gross) 1,00,000
(v) Interest on Saving Fund a/c from bank 10,000
He has incurred the following expenses :
(i) Medical insurance paid by cheque for his father, resident in India and 70 years 18,000
(ii) Deposit with LIC for maintenance of father, mainly dependant on him for
support and maintenance and suffering from low-vision with a severe disability
of 80%, as per certificate of the medical authority
(iii) Rent paid for the year 2008-2009 for accommodation hired by him. 40,000
Compute his total income for the assessment year 2009-2010.
Computation of Total Income for the assessment year 2009-2010
Particulars Rs. Rs.
1. Income from salaries 2,40,000
2. Income from capital gains :
(a) Short-term capital gains (Sec. 111A)
(b) Long-term capital loss to be carried forward 1,00,000
3. Income from others sources : Nil
(a) Interest government securities 20,000
(b) Interest on savings fund a/c with Bank 10,000
(c) Insurance commission 1,00,000 1,30,000
Gross Total income 4,70,000
Less : Deductions under Chapter VIA:
Medical insurance (Sec. 80D) 18,000
Deduction in respect of maintenance including medical 75,000
treatment of a department, a person with severe
disability (Sec. 80DD)
Deduction in case of a person with disability (Sec. 80U) : 50,000
Deduction u/s 80GG :( Least of the followings)
(a) (i) Rent paid less 10% of Adjusted Gross Total Income
40,000-23,300 = 16,700,
(b) (ii) 25% of 2,33,000 Adjusted Gross Total Income=58,250,
(iii) 2,000 p.m. × 12 = 24,000 16,700 1,59,700
Whichever is less, is or be deducted
Total income 3,10,300
Group-I : Paper-7 : Applied Direct Taxation 153
Q35. (b) Following are the particulars of the two undertakings X and Y of C Ltd., an Indian company.
Undertaking A com-mences its business on 1 January 2005 and is eligible to claim deduction
u/s 80-IA.
Previous year Particulars X Y
2004-2005 Business profits or loss before depreciation (–) 6,00,000 14,00,000
Depreciation 4,00,000 2,00,000
2005-2006 Business profits or loss before depreciation 5,00,000 2,00,000
Depreciation 4,00,000 1,00,000
2007-2008 Business profits or loss before depreciation 8,00,000 10,00,000
Depreciation 4,00,000 2,00,000
2008-2009 Business profits or loss before depreciation 28,00,000 12,00,000
Depreciation 4,00,000 6,00,000
Compute the amount of deduction for X u/s 80-IA and total income of C Ltd. for all four previous
years.
Computation of deduction u/s 80-IA for undertaking X
Particulars 2004-2005 2005-2006 2007-2008 2008-2009
Profits or loss before depreciation (-) 6,00,000 5,00,000 8,00,000 28,00,000
Less: Depreciation xxx (-) 4,00,000 (-) 4,00,000 (-) 4,00,000
1,00,000 4,00,000 24,00,000
Set-off of carry forward business loss (-) 1,00,000 (-) 4,00,000 (-) 1,00,000
Set-off of carry forward depreciation xxx xxx (-) 4,00,000
Profits eligible for deduction u/s 80-IA Nil Nil Nil 19,00,000
Amount of deduction @ 100% of profits Nil Nil Nil 19,00,000
Computation of profits of undertaking Y and total income of C Ltd.
Particulars 2004-2005 2005-2006 2007-2008 2008-2009
Profits or loss before depreciation: 14,00,000 2,00,000 10,00,000 12,00,000
Less: Depreciation of Y (-) 2,00,000 (-) 1,00,000 (-) 2,00,000 (-) 6,00,000
12,00,000 1,00,000 8,00,000 6,00,000
Profits of X after depreciation Nil 1,00,000 4,00,000 24,00,000
Set-off of business loss of X (-) 6,00,000
Set-off of unabsorbed (-) 4,00,000
depreciation of X
Gross Total Income 2,00,000 2,00,000 12,00,000 30,00,000
Less: Deduction u/s80-IA Nil Nil Nil 19,00,000
Total income of C Ltd. 2,00,000 2,00,000 12,00,000 11,00,000
154 Revisionary Test Paper (Revised Syllabus-2008)
Note:
1. Even though the business loss and unabsorbed depreciation of X were set-off during the PY
2005-2006 itself in computation of total income of C Ltd., for the purpose of deduction u/s
80-IA, they will still be carried forward on notional basis and set-off only against the profits
of business eligible u/s 80-IA.
2. The deduction is available for a period of 10 consecutive assessment years out of 15 years
from the commence-ment of business by the undertaking. Therefore, since all the carry
forward losses and allowances have been set off by PY 2008-2009 and if profits are anticipated
to be higher from PY 2009-2010 onwards, it will be to assesssee’s benefit t o forego the
deduction of Rs. 19,00,000 for the AY 2009-2010 and claim it for 10 years commencing
AY 2010-2011.
Q36. (a) B Ltd. grows sugarcane to manufacture sugar. The data for the financial year 2007-08 is
as follows :
Cost of cultivation of sugarcane Rs. 6,00,000
Market value of sugarcane when transferred to factory Rs. 10,00,000
Other manufacturing cost Rs. 6,00,000
Sales of sugar Rs. 25,00,000
Salary of Managing Director who looks after all operations of the Company Rs. 3,00,000
Solution :
Rs.
(1) Business Income :
Sales of Sugar 25,00,000
Less : Market value of sugarcane when transferred to factory 10,00,000
Other manufacturing cost 6,00,000
Salary of Managing Director 3,00,000
6,00,000
(2) Agricultural Income:
Market value of sugarcane when transferred to factory 10,00,000
Less : Cost of cultivation 6,00,000
4,00,000
Q37. (b) RP Bros., an HUF, furnishes the following particulars of its income and outgoing for the
previous year 2008-2009. Receipts.
Receipts :
(i) Short-term capital gain 4,00,000
(ii) Gross winning from lottery 1,00,000
(iii) Sale consideration of 3/4th of agriculture produce, derived from land 12,00,000
located in India, the balance produce has been kept for family use.
(iv) Net sale proceeds of wild grass and fruits from trees of spontaneous growth 50,000
Group-I : Paper-7 : Applied Direct Taxation 155
Payments:
(i) Repair of tube-well 60,000
WDV of tuble-well on 1-4-2007 10,00,000
(ii) Wages paid to agriculture labour 6,00,000
(iii) Manuring and spraying charges 50,000
(iv) Rent of the building, used for storing agriculture produce on site 50,000
(v) Petrol, repair, salary of driver and insurance of motor car. 1,50,000
WDV of motor car on 1-4-2007 2,00,000
50% use of the motor car is for personal purpose of the family
(vi) LIP paid to insure members of the family 20,000
(vii) School fees paid for 3 children of the family @ Rs 15,000 per child 45,000
(viii) Purchase of infrastructure bonds, covered under Sec. 80C(2)(xix) 90,000
(ix) Deposit with LIC for maintenance of a dependant member with disability:
Unabsorbed losses brought forward:
AY: 1998-1999 40,000
AY: 1999-2000 5,00,000
AY: 2003-2004 1,00,000
Determine the total income of the HUF and its tax liability for the assessment year 2009-2010.
Computation of Total Income: AY 2008-2009
Particulars Rs. Rs.
Computation of net agriculture income for the purpose
of aggregation to determine the rate of tax applicable to
non-agriculture income of the HUF. Such computation is
done under the head business profession :
Sale proceeds of agriculture produce 12,00,000
Add : Market value of produce kept for family use : 4,00,000
12,00,000× (4/3)×(1/4) 16,00,000
Less : Permissible deductions :
(i) Repair of tube-well 60,000
(ii) Wages 6,00,000
(iii) Rent 50,000
(iv) Petrol, repair, salary of driver— 50% 75,000
(v) Manuring and spraying 50,000
(vi) Depreciation on tube-well @ 10% on WDV 1,00,000 9,50,000
(vii) 50% depreciation on motor car: (15% of 2,00,000)×50% 15,000
Less : Carried forward : Losses :
(i) Loss 1999-2000-not allowed
(ii) Loss from AY 2000-2001 1,00,000
156 Revisionary Test Paper (Revised Syllabus-2008)
(iii) Loss from AY 2004-2005 45,000 1,45,000
Net Agriculture Income 5,05,000
(b) Computation of Total Income
(i) Short-term capital gain 4,00,000
(ii) Income from other sources:
(a) Winnings from lottery 1,00,000
(b) Net sale proceeds of non-agriculture produce 50,000 1,50,000
Gross Total Income
Less: 1. Contributions paid for approved savings [Sec. 80C(2)]:
(i) LIP on the life of members 20,000
(ii) School fees for 3 children of the HUF [Sec. 80(4)(c)] Nil
(iv) Purchase of infrastructure bonds 90,000
1,10,000
But deduction restricted upto a maximum of Rs.1,00,000 1,00,000
2. Deposit for maintenance (including medical treatment) of a 50,000
dependant with disability (Sec. 80DD)
Total income 4,00,000
Computation of Tax Liability
(i) Income tax on winnings 30% 30,000
(ii) Income tax on non-agriculture + agriculture income:
3,00,000 + 5,05,000 at slab rates
(Non-agricultural income=3,00,000=5,50,000–1,00,000
– 1,00,000 – 50,000)
(a) Income tax on 8,05,000 as if it is the total income 1,90,500
(b) Income tax on agriculture income + exemption limit as if
it is the total income: 5,05,000 + 1,10,000 = 1,31,500
Income tax on non-agriculture income: a - b 60,000 60,000
Tax on total income 90,000
Add : (i) Surcharge on income tax Nil
(ii) Education cess @ 2% 1,800
(iii) SHEC @ 1% 900
Tax payable 92,700
Particulars Rs. Rs.
Group-I : Paper-7 : Applied Direct Taxation 157
Q38. Discuss the exceptions of transfer.
Answer 38.
The exceptions of transfer are :
Section Nature of transaction not considered as a Transfer
46(1) Distribution of a capital asset in specie on liquidation of a company by a liquidator to its
shareholders Is not a transfer.
47(1) Any distribution of caoital assets on the total or oartial partition of a HUF.
47(iii) Any transfer of a capital asset under a gift or will or an irrevocable trust.
Exception is also applicable In case of shares or securities received by employees from
the company free of cost or at a concesslonal rate.
However, a provision has been added to provide that this clause shall not apply to transfer
under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants
allotted by a company directly or Indirectly to its employees under ESOS or ESOP of the
company offered to such emoloyees in accordance with the auldelines Issued by the
Central Government in this behalf.
47(iv) Transfer of any capital asset by a holding company to Its 100% subsidiary company
which is an Indian comoanv.
47(v) When a transfer has been made by a 100% subsidiary to its Indian holding company.
Both the sections 47(iv) and (v) are subject to the restrictive conditions imposed u/s
47A(1), which is as follows:
a) If within the course of 8 years from the date of transfer, holding company looses Its
100% stake on the subsidiary company.
b) If the transferee comoanv transfers this caoital asset as their stock-In-trade within
8 Years.
In both the above cases, the earlier exemption so granted shall be withdrawn and there
would arise incidence of capital gains, in the original year of transfer, which would be
initiated as per Sec.155 (7B) amendment proceedings.
47(vi) Transfer of a capital asset in a scheme of amalgamation where the amalgamated company
is an Indian company. The conditions of Sec.2(1B) of the Act, must be fulfilled:
(a) All the property and liabilities of the amalgamating company or companies immediately
before the amalgamation becomes the property of the amalgamated company by
virtue of amalgamation.
(b) Shareholders holding not less than 75% in the value of shares in amalgamating
company or companies (other than shares held therein immediately before the
amalgamation or by a nominee for the amalgamated company or its subsidiary)
become shareholders of the amalgamated company by virtue of amalgamation.
Amalgamation as per income-tax includes merger and absorption, provided the conditions
of sec.2 (1B) are satisfied.
47(via) Transfer of shares of an Indian company by an amalgamated foreign company to a
foreign amalgamated company, provided the following conditions are satisfied :
(a) The transfer of shares is under a scheme of amalgamation between two foreign
companies;
158 Revisionary Test Paper (Revised Syllabus-2008)
(b) At least 25% of the shareholders of the amalgamating foreign company continue to
remain Jshareholders of the amalgamated foreign company;
(c) No tax is levied on such capital gain In th country where foreign amalgamating
company is Incorporated.
47(viaa) Transfer of capital asset by a banking company to a banking institution in a scheme of
amalgamation sanctioned b the Central Government u/s 45(7) of the Bankin Act 1949.
47(vib) Transfer of a capital asset by the Demerged Company to the Resulting Indian company,
subject to : the fulfillment of the following conditions:
(a) Transfer of capital asset should be from demerged company to a resulting company;
(b) Resulting company should be an Indian company;
(c) Transfer of ca ital asset should be made In a scheme of demerger.
47(vic) Transfer of shares of Indian company by a demerged foreign company in a demerger to
a foreign company, shall not be treated as transfer provided the following conditions are
fulfilled :
(a) The shareholders holding not less than 75% in value of shares of the demerged
foreign company continue to remain shareholders of the resulting foreign company;
and
(b) No tax Is levied on capital gain in the foreign country in which the demerged company
is Incorporated.
The provisions of Sections 391 to 394 of the Companies Act,1956 shall not apply In
case of demergers referred In this clause.
47(vica) Any transfer in a business reorganization, of a capital asset by the predecessor cooperative
bank to the successor co-operative bank.
47(vicb) Any transfer by a shareholder, in business reorganization, of a capital asset being a
share or shares held by him In the predecessor co”operative bank if the transfer is made
In consideration of allotment to him of any share or shares in the successor co-operative
bank.
47(vid) Transfer/allotment of shares by the resulting company to the shareholders of the demerged
company in a scheme of demerger. Only shares must be exchanged against shares.
47(vii) Allotment of shares in amalgamated company to the shareholders of amalgamating
company, will not be considered as a transfer if :
(a) The transfer is made in consideration of allotment to him of any share or share in
the amalgamated company; and
(b) The amalgamated company is an Indian company.
47(viia) Transfer of shares/bonds or Global Depository Receipts (GDRs) referred to in Section
115AC (1), i.e., those bonds, shares or GDRs of a public company (being an Indian
company) Is’ purchased in foreign currency, outside India by a non-resident to another
non-resident.
47(viii) Transfer of urban agricultural land in India effected before 1.3.1970
47(ix) Transfer of a capital asset being a work of art, archaeological, scientific or art collection,
book, manuscript, drawing, painting, photograph or print to Government or University or
National Museum or National Art Gallery, National Archives or any other public museum
or institution, as may be notified by the Central Government in the Official Gazette to be
of national Importance or to be of renown throughout any State or States.
Group-I : Paper-7 : Applied Direct Taxation 159
47(x) Conversion of bonds or debentures, debentures-stock or deposit certificates in any form,
of a company into shares or debentures of that company
47(xi) Transfer of membership of a recognized stock exchange in India by a person (not being
a company) on or before 31st December 1998, toa company in exchange of shares
allotted by that company, subject to the restrictions of Sec.47A(2)
47(xii) Transfer of capital asset being land of a sick industrial company made under a scheme
prepared and sanctioned u/s 18 of the Sick Industrial Companies (Special Provisions)
Act, 1985, where such sick industrial company is being managed by its worker’s cooperative.
Transfer should be made during the. period commencing from the previous year in which
the said company has become a sick industrial company u/s 17(1) of the Act and ending
with the previous year during which the entire net worth of. such company become
equal to or exceeds the accumulated losses.
47(xiii) Transfer of capital assets or intangible assets or any transfer of capital asset in the
course of demutualizatlon or corporatisation of a recognized stock exchange in India, on
succession of a firm concern by a company, provided the following conditions are fulfilled :
(a) All the assets and liabilities of the erstwhile firm or AOP/BOI, relating to the business
immediately before succession becomes the assets and liabilities of the company;
(b) All the partners of the firm before the succession becomes the shareholders of the
company in the same proportion in which their capital accounts stood in the books
of the firm on the date of succession;
(c) The partners are not in receipt of any other benefit, whether directly or Indirectly,
in any form or manner, other than by way of allotment of shares In the company;
(d) The aggregate of the shareholdlng in the company of the partners of the firm is not
less than 50% of the total voting power in the company;
(e) Their shareholding continues for a period of 5 years from the date of the succession;
(f) The demutualization or corporatisation of a recognized stock exchange in India Is
carried out in accordance with a scheme of corporatisation which is approved by
SEBI.
47(xiiia) Transfer of a capital asset being a membership right held by a member of a recognized
stock exchange In India for acCiulsition of shares and trading or clearing rights acquired
by such member in that recognized stock exchange in accordance with a scheme of
demutuallzation or corporatlsatlon which is approved by SEBI.
47(xiv) Transfer of capital asset or Intangible assets where a sole proprietary concern is succeeded
by a company, provided the following conditions are fulfilled :
(a) All the assets and liabilities of the erstwhile sole proprietary concern, relating to the
business immediately before succession becomes the assets and liabilities of the
company;
(b) The sole proprietor is not in receipt of any other benefit, whether directly or indirectly,
in any form or manner, other than by way of allotment of shares in the company;
(d) The shareholdlng of the sole proprietor in the company Is not less than 50% of the
total voting power in the company;
(e) His shareholding continues for a period of 5 years from the date of the succession;
47(xv) Any transfer under the Securities Lending Scheme,1997 for lending of any securities
under an agreement or arrangement, between the assessee and borrower of securities
as per the guidelines issued by SEBI or RBI.
160 Revisionary Test Paper (Revised Syllabus-2008)
Q39. Shri Dubbawala Charitable Trust (Regd.) submits the particulars of its income/outgoing for
the pervious year 2008-2009 as below :
Rs.
(i) Income from property held under trust for charitable purposes: 10,00,000
(Rs. 5,20,000 out of Rs 10,00,000 is received in PY 2009-2010)
(ii) Voluntary contributions (out of which Rs. 50,000 will form part of the corpus) 2,00,000
The trust spends Rs. 2,77,500 during the previous year 2008-2009 for charitable purposes. In
respect of Rs. 5,20,000, it has exercised its option to spend it within the permissible time-limit in
the year of receipt or in the year, immediately following the year of receipt.
The trust spends Rs. 2,00,000 during the previous year 2008-2009 and Rs. 1,00,000 during the
previous year 2009-2010. Compute and discuss the chargeabiliry of the income of the trust.
Solution :
Computation of taxable income and tax liability of the charitable trust for the PY 2008-2009/
AY 2009-2010.
Particulars Rs.
(i) Income from property held under trust for charitable purposes
10,00,000
(ii) Voluntary contributions (Rs 2,00,000 - Rs 50,000) 1,50,000
11,50,000
Less: 15% set apart for future application 1,72,500
Balance 9,77,500
Less: Amount spent during the pervious year for charitable purposes 2,77,500
Balance 7,00,000
Less: Income not received during the previous year 2008-2009 5,20,000
Taxable income 1,80,000
Tax payable: Rate of tax
1,10,000 Nil
40,000 10% 4,000
30,000 20% 6,000
10,000
Add: Education Cess @ 2% 200
Add: SHEC @ 1% 100
Tax payable 10,300
(b) Previous year 2009-2010/AY 2010-2011
Income received during the pervious year 2008-2009 5,20,000
(i) Amount spent for charitable purposes during PY 2008-2009 2,00,000
(ii) Amount spent for charitable purposes during 2009-2010 1,00,000
Taxable income 2,20,000
Group-I : Paper-7 : Applied Direct Taxation 161
Q40. Dinesh Pally Cooperative Society Ltd. furnishes the following particulars of its income for
the previous year ending on 31 March 2009:
(i) Interest on government securities 40,000
(ii) Profits from banking business 3,50,000
(iii) Income from purchase and sale of agricultural implement and seeds 2,50,000
to its members
(iv) Income from marketing of agricultural produce of its members 4,00,000
(v) Profits and gains of business 2,20,000
(vi) Income from cottage industry 3,50,000
(vii) Interest and dividends (gross) from other cooperative societies 30,000
Compute total income of the society and calculate the tax payable by it for the assessment year
2009-2010.
Solution :
Dinesh Pally Cooperative Society Ltd.
Computation of income of the for the previous year 2008-2009 relatinG to the Assessment Year
ending 2009-2010 :
Particulars Rs. Rs.
1. Profits and gains of business or profession:
a) Banking business 3,50,000
b) Income from purchase and sale of agricultural implements 2,50,000
and seeds to its members
c) Income from marketing of agricultural produce of its members 4,00,000
d) Profits and gains of business 2,20,000
e) Income from cottage industry 3,50,000 15,70,000
2. Income from other sources:
a) Interest on government securities 40,000
b) Interest and dividends from other cooperatives 30,000 70,000
Gross Total Income 16,40,000
Less: Deduction allowable from gross total income under Sec. 8OP
1. Banking business 3,50,000
2. Income from purchase and sale of agricultural implement and 2,50,000
seeds to its members
3. Income from marketing of agricultural produce of its members 4,00,000
4. Income from cottage industry 3,50,000
5. Interest on government securities(not eligible for deduction) Nil
6. Interest and dividends from other cooperative societies 30,000 13,80,000
Total Income 2,60,000
162 Revisionary Test Paper (Revised Syllabus-2008)
Computation of Tax Liability:
Particulars Rate Rs.
On first Rs 10,000 10% 1,000
On next Rs 10,000 20% 2,000
On balance Rs 2,40,000 30% 72,000
Income tax payable 75,000
Add: Education cess @ 2% 1,500
Add: SHEC @ 1% 750
Tax payable 77,250
Q41. Following information is extracted from the books of Parthiv Ltd. Determine the taxable
value of Fringe Benefits and ascertain the FBT Liability.
Expenses Rs.
Lease Rent Paid 12,50,000
Vehicle Maintenance 8,00,000
Depreciation on: Motor Cars 3,00,000
Office Furniture 1,50,000
Guest House Building 2,00,000
Gifts 2,50,000
Tea, Coffee & Snacks 1,80,000
Communication Charges 4,00,000
Amenities to Employees 4,50,000
Education Assistance to Employees 50,000
Other Information :
(a) Lease Rent include Rs. 2,50,000 paid towards accommodation furnished to Managing Director,
value of which is included as perquisite in his hands. Balance is attributable to Guest House
of the Company used for accommodating visiting clients and other officials of the Company.
(b) Expenses on Tea, Coffee and Snacks includes Rs. 50,000 spent on Employees Training
Programme conducted by the Company itself.
(c) Gifts includes Rs. 1,75,000 paid to the Sales Executives for achieving the target.
(d) Communication Charges comprises of Rs. 2,50,000 towards Telephone Charges and balance
towards leased internet connection.
Determine value of Fringe Benefits and tax payable thereon.
Solution :
Assessee : Parthiv Ltd
Previous Year: 2008-09
Asst. Year: 2009-10
Group-I : Paper-7 : Applied Direct Taxation 163
Computation of Taxable Fringe Benefits and Tax Payable thereon
Nature of Fringe Benefits Expenditure % considered Value of FB
Incurred for FBT
Lease Rent Paid : 2,50,000 — —
For MD’s Accommodation-Considered as Perquisite 10,00,000 20% 2,00,000
For Guest House (12,50,000 - 2,50,000) 8,00,000 20% 1,60,000
Vehicle Maintenance 3,00,000 20% 60,000
Depreciation on Motor Cars 1,50,000 — —
Depreciation on Office Furniture 2,00,000 — —
Depreciation on Guest House Building 2,50,000 50% 1.25.000
Gifts Tea, Coffee & Snacks: During Office Hours 1,30,000 — —
Employees Training 50,000 — –
Programme
Communication Charges:
Telephone Charges 2,50,000 20% 50,000
Internet Connectivity Charges 1,50,000 — —
Amenities to Employees 4,50,000 100% 4,50,000
Education Assistance to Employees 50,000 50% 25,000
Total Value of Taxable Fringe Benefits 10,70,000
Tax on above at 30% 3,21,000
Add: Surcharge at 10% 32,100
(assuming Total Income exceeds Rs.1 Crore)
Tax and Surcharge Payable 3,53,100
Add: Education Cess @ 2% 7,062
Add: Secondary and Higher Education Cess @1% 3,531
Total Tax Payable (Rounded off) 3,63,690
Q42. R, S and T Ltd. (a widely held domestic company) are members in an AOP for the assessment
year 2009-2010. They share profit and losses in the ratio 30%, 40% and 30%. Taxable
business income of AOP is determined at Rs. 8,00,000. Per-sonal income of the partners
are given below :
Rs.
R - House property 90,000
S – Short-term capital gain 1,00,000
R deposites Rs 20,000 in CTDS-15-year account in Post Office in February 2009. S purchases
NSC VIH-Issue for Rs 25,000 in December 2008.
Determine the tax liability of the AOP and its partners
164 Revisionary Test Paper (Revised Syllabus-2008)
Solution :
(a) Computation of tax liability of AOP for the assessment year 2009-2010
Allocation of AOP income among members :
Particulars R Y T Ltd.
Rs. Rs. Rs.
Business profit 2,40,000 320000 240000
Tax liability of AOP: 8,00,000 × 33.99% 2,71,920
Tax liability of members:
Particulars R Y T Ltd.
Rs. Rs. Rs.
Share income from AOP 2,40,000 320000 240000
AOP charged at maximum marginal rate Exempt Exempt Exempt
Personal income of members 90,000 75,000 Nil
Personal income below taxable limit Exempt Exempt X
Q43. The following details have been supplied by the Karta of an HUF. You are required to compute
its total income and tax liability for the assessment year 2009-2010.
Particulars Rs.
(i) Profits from business (after charging Rs. 1,00,000 salary to Karta for 15,00,000
managing the business).
(ii) Salary received by the member of a family. 60,000
(iii) Director’s fee received by Karta from B Ltd where HUF holds 40,000
20% shares but he became director because of his qualifications,
(iv) Rental income from house property (after deduction of municipal 78,000
taxes Rs 2,000).
(v) Dividends (gross) from Indian companies 15,000
(vi) Long-term capital gain 80,000
(vii) Short-term capital gain 30,000
(viii) Donation to a school, which is an approved institution, 1,00.000
(ix) Deposits in Public Provident Fund 20,000
(x) NSC-VIII issues purchased on 15.3.2009. 40,000
Group-I : Paper-7 : Applied Direct Taxation 165
Solution :
Computation of Total Income
Particulars Rs. Rs.
(i) Income from house property:
Gross annual value (Rs 78,000 + Rs 12,000) 90,000
Less: Municipal taxes paid 12,000
Annual value 78,000
Less: Statutory deduction: 30% ×78,000 23,400 54,600
(ii) Profits and gains from business 15,00,000
(iii) Capital gains (a) long-term + (b) short-term 1,10,000
(iv) Income from other sources—gross dividends from Indian Nil
companies: Exempt [Sec. 10(34)]
Gross total income
Less:
1. Contribution to approved savings (Sec. 80C)
(i) Deposits in Public Provident Fund 20,000
(ii) NSC-VIII Issue 40,000
60,000
2. Donation to recognised school:
(a) Actual donation: Rs 1,00,000 or
(b) 10% of modified total income of
Rs 15,24,600 (16,64,600 - 80,000 - 60000)
whichever is less, is qualifying amount.
Amount of deduction: : 50% of Rs. 1,00,000 50,000 1,10,000
Total income 15,54,600
Computation of tax liability :
Particulars of total income Rate of income tax Rs.
Rs. Rs.
(a) Long-term capital gain 1,10,000 20% 22,000
(b) Balance of total income: Rs 14,44,600
(i) First 1,10,000 Nil —
(ii) Next 40,000 10% 4,000
(iii) Next 1,00,000 20% 20,000
(iv) Balance 11,94,600 30% 358,380
Gross income tax 3,80,380
Add:1. Surcharge on income tax @ 10% surcharge 38,038
4,18,418
2. Education cess @ 2% on the aggregate of 8,368
income tax and
3. SHEC @ 1% 4,184
Tax payable 4,30,970
166 Revisionary Test Paper (Revised Syllabus-2008)
Q44. (a) Discuss the due dates for filling return of income.
(b) Mention the prescribed forms for filling return of income.
Answer 44.
(a) Prescribed time for filing return of Income :
Assessee Due date for filling return
(a) Company
(b) Non-corporate assessees whose accounts are required to 30th September
be audited under the Act or under any other law
(c) Working partner of a firm whose accounts are required to w.e.f 1.4.08
be audited
(d) Any other assessee 31st July
(b) Prescribed Forms :
Forms Applicability
ITR - 1 Return of Income for Individuals havinCi salary and interest income and no other
Income
ITR-2 Return of income for Individuals and HUFs having income from any source except
from business or profession
ITR-3 Return of income for Individuals and HUFs being partners in Firms and not having
Proprietary business or profession
ITR -4 Return of Income for Individuals and HUFs having Proprietary business or profession
ITR-5 Combined form of Return of Income and Fringe Benefits for Firms/AOP/BOI.
ITR-6 Combined Form for Return of Income and Frlnge Benefits for Companies
ITR-7 Combined Form For Return of Income and Fringe Benefits For Charitable/Religious
Trusts, Political parties and other Non-Profit Oraanlsations
ITR-8 Stand alone form for Return of Fringe Benefits for persons who are not liable to file
Return of income but are liable to file Return of Fringe-Benefits
ITR-V Return of Income/Fringe Benefits transmitted electronically without digital signatures
Q45. Write short notes on :
(a) Belated Return
(b) Revised Return
(c) Permanent Account Number
(d) Instances where PAN should be filed
Answer 45.
(a) Sec 139(4): BELATED RETURN :
1. Belated Return : [Section 139(4)] : This is applicable to any person who has not furnished
his return of income within the time allowed u/s 139(1) or in response to a notice issued
u/s 142(1).
Group-I : Paper-7 : Applied Direct Taxation 167
2. Time limit : The belated return can be filed either before:
(a) The expiry of one year from the end of the relevant Assessment Year, or
(b) Completion of assessment, whichever is earlier.
3. Invalid Return : Return of income flied after belated period will be treated as invalid.
(b) Sec.139(5) : REVISED RETURN
1. Conditions:
(a) There should be an omission or wrong statement In the original return Filed.
(b) The original return should have been filed within the due date u/s 139(1) or within the
time limit specified in the notice issued u/s 142(1).
2. Time limit : The revised return shall be filed before
(a) The expiry of one year from the end of the relevant Assessment Year, or
(b) Completion of assessment whichever is earlier.
3. Significance of Revised Return :
(a) The revised return will be considered as having been flied when the original return was
flied.
(b) The effective return for the purposes of assessment is the return ultimately filed by
the assessee.
(c) A revised return replaces the original return.
(d) The assessee is entitled to furnish a second revised return if the assessee discovers
any omission or wrong statement in the revised return, provided such second revised
return Is filed within the time prescribed above.
(e) A return flied in response to notice u/s 158BC cannot be revised.
(f) Intimation made u/s 143(1) will not be treated as assessment for the purpose of this
Section.
(c) SEC.139A: PERMANENT ACCOUNT NUMBER (PAN)
1. Persons required to make application for allotment of Permanent Account Number :
(a) Total Income: Any person whose total income exceeds the maximum amount not
chargeable to tax before given exemptions u/s 1OA / 10AA / 1OB / 10BA and deductions
under Chapter VI-A.
(b) Business Assessee: Any person carrying on business or profession whose turnover /
gross receipts exceeds Rs.5,00,000/- in any previous year.
(c) Trust/ Society: Any person who is required to furnish a return of income of a Trust or
Society u/s 139(4A).
(d) Fringe Benefits: Any Person who is liable to file a return of Fringe Benefits if he was
not allotted a PAN earlier.
(e) Obligation to Pay Tax/Duty: Any person by whom tax is payable under Income Tax
Act, or any tax or duty is payable under any other law, including importers and exporters
whether any tax is payable by them or not.
(f) AO’s Discretion: The Assessing Officer may allot to any other person (W.e.f.
01.06.2006) whether or not tax is payable by him, even without an application.
(g) Collection of information: W.e.f 01.06.2006, any person or class of persons, notified
by the Central Government in its Official Gazette for collecting any information.
168 Revisionary Test Paper (Revised Syllabus-2008)
2. One PAN Only: No person who has already been allotted a PAN under the new series shall
apply, obtain or possess another PAN.
(d) The PAN should be quoted in the following transactions :
(i) Matters relating to Interest of Revenue: Return / Correspondence / Tax Challan / any other
matter in the interest of Revenue.
(ii) All Quarterly returns of TDS / TCS (w.e.f. 01.06.2006)
(iii) Transactions in Assets :
• Sale or Purchase of immovable property involving amounts in excess of Rs. 5,00,000.
• Sale or purchase of Motor Vehicle other than Two Wheeler.
(iv) Transactions with Banks :
• Time Deposit in excess of Rs. 50,000 with Bank or Post Office Savings Bank.
• Opening of a Bank Account.
• Purchase of pay-order or demand draft or banker’s cheque of an amount of RS. 50,000
or more by depositing cash on any day.
• Deposit of cash in any bank account of Rs. 50,000 or more on any day.
(v) Transaction in Securities / Bonds / Units:
• Sale or Purchase of Securities exceeding Rs. 1,00,000.
• Purchase of shares from company (public offer) for Rs. 50,000 or more during relevant
previous year.
• Purchase of mutual funds of Rs. 50,000 or more .
• Purchase of bonds or debentures of company of Rs. 50,000 or more.
• Purchase of RBI bonds of Rs. 50,000 or more.
(vi) Specific Expenses, Applications and Other Documents :
• Telephone Applications.
• All TDS Certificates.
• All TCS Certificates.
• All Sales Tax Registrations.
• Application for credit cards
• Payment of Hotel Bill exceeding Rs. 25,000.
• Expenses in cash exceeding Rs. 25,000 towards foreign travel.
Q46. Sania, a resident Indian, furnishes the details for the assessment year 2009-2010.
Rs.
(1) Income from profession 1,04,000
(2) Share income from a partnership in country X 40,000
(Tax paid in country X for this income in equivalent Indian rupees Rs 8,000)
(3) Commission income from concern in country Y 30,000
(Tax paid in country Y at 20%) converted in Indian rupee)
(4) Interest from scheduled banks 20,000
Group-I : Paper-7 : Applied Direct Taxation 169
Sania wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India
does not have any Double Taxation Avoidance Agreement with countries X and Y.
Solution :
(a) Computation of total income
Particulars Rs. Rs.
(a) Income from business :
(i) Income from profession 1,04,000
(ii) Share income in partnership firm in country X 40,000 1,44,000
(b) Income from other sources:
(i) Interest from schedule bank 20,000
(ii) Commission earned in country Y, assumed from other sources 30,000 50,000
Total income 1,94,000
(b) Computation of tax liability
Particulars Rs.
Tax on total income of Rs. 1,94,000 9.300
Add: Surcharge on income tax Nil
Education cess @ 2% 9,300
SHEC @ 1% 186
93
9,579
Less: Dobule taxation relief : 70,000 × 4.94 3,458
Tax payable 6,121
Rounded off u/s 288B 6,120
Note: (i) Average rate of tax in the foreign country : 20%
(ii) Average rate of tax in India :

× =
Q47. Sanjay discloses the following particulars of his income for the previous year 2008-2009.
Rs.
(i) Profits and gains from business of collecting and processing of (+) 4,50,000
bio-degradable waste, started during PY 2008-2009
(ii) Loss from house property (-) 6,00,000
(iii) Interest on Government Securities (+) 1,50,000
(iv) Dividends received from foreign companies (+) 2,50,000
The Assessing Officer wants to set-off the loss from house property against business profits and
the balance amount against the income of Government Securities. Do you agree?
170 Revisionary Test Paper (Revised Syllabus-2008)
Solution :
Mode of Set-off opted by Mode of set-off beneficial
the Assessing Officer to the Assessee
Particulars Rs. Particulars Rs.
Loss from house property (-) 6,00,000 Loss from house property (-) 6,00,000
Less: Profits from bio-degradable (+) 4,50,000 Less: Income from other
waste sources—
Unabsorbed loss from house (-) 1,50,000 Dividends received from (+) 2,50,000
property to be set-off against foreign companies
Interest from government (+) 1,50,000 Balance of loss from HP (-) 3,50,000
securities Profits from bio-degradable (+) 3,50,000
Loss from house property Nil waste
Dividends from foreign companies 2,50,000 Interest on securities (+) 1,50,000
Gross total income 1,50,000
Less: 100% deduction from 1,50,000
business of bio-degradable
waste (Sec. 80JJA)
Resiceted upto GTI
Total taxable income 2,50,000 Total taxable income Nil
The Income-tax Act does not specify any particular mode of set-off either under intra-head or
inter head adjustment. The assessee is free to adopt a mode of set-off which is most beneficial to
him. The mode of set-off opted by the Assessing Officer is not tenable in law.
Q48. Following are the particulars of the income of Mr. Srikant for the previous year 2008-2009.
Rs.
1. Income from house property
(a) Property R (+) 12,000
(b) Property J (-) 20,000
2. Profits and gains from business:
(A) Non-speculation:
(i) Business X 40,000
(ii) Business Y (-) 50,000
(B) Speculation:
(i) Silver 40,000
(ii) Bullion (-) 10,000
3. Capital gains:
(i) Long-term capital gains (+) 30,000
(ii) Short-term loss (-) 10,000
Group-I : Paper-7 : Applied Direct Taxation 171
4. Income from other sources:
(i) Card games-loss 10,000
(ii) From the activity of owing and maintaining race horses:
(a) Loss at Mumbai (-) 50,000
(b) Profit at Kolkata (+) 40,000
(iii) Dividend from Indian companies 10,000
(iv) Income by letting out plant and machinery 1,11,000
The following losses have been carried forward:
(i) Long-term capital loss from the assessment year 2005-2006: 18,000
(ii) Loss from silver speculation from the assessment year 2005-2006 and
which was discontinued in the assessment year 2006-2007 25,000
Compute the gross total income for the assessment year 2009-2010
Solution :
Computation of Gross Total Income for the Assessment Year 2009-2010
Particulars Rs. Rs.
1. Income from house property (+ 12,000 - 20,000) (-) 8,000
2. Profits from speculation:
(i) Silver-profit 40,000
Less: Current year loss from bullion (-) 10,000
30,000
Less: Carried forward silver speculative loss (-) 25,000
surplus from speculation
5,000
(ii) Add: Business profit X business 40,000
(iii) Less: Business loss Y business (-) 50,000
(-) 5,000
Unabsorbed business loss may be set-off against the income of any other head except ‘salaries’
and ‘winnings from lottery, card games, crossword puzzle, betting on race horses’, etc.
3. Capital gains:
Long-term capital gains 30,000
Less: Short-term capital loss (-) 10,000
Long-term capital gain 20,000 20,000
4. Income from other sources:
(i) Income by letting out plant and machinery 1,11,000
(ii) Card game-loss of Rs. 10,000
172 Revisionary Test Paper (Revised Syllabus-2008)
Neither it can be set-off nor it can be carried forward
(iii) Profit from race horses at Kolkata (+) 40,000
Less: Loss from race horses at Mumbai (-) 50,000
Loss to be carried forward for next four assessment year (-) 10,000
(iv) Dividend from Indian companies: Exempt under Sec. 10(34) Nil
Aggregated income after setting-off current year losses from house 1,18,000
property, profit and business against income from other sources:
Less: Carried forward long-term capital loss, from the assessment 18,000
year 2005-2006 to be set-off against long-term capital gains
Gross total income or total income as there is no deduction 1,00,000
available from GTI
Q49. A Ltd. is engaged in the construction of residential flats. For the valuation date 31.3.2009,
it furnishes the following data and requests you to compute the taxable wealth —
(a) Land in urban area (Construction is not permitted as per Municipal Laws in force)
Rs. 55,00,000
(b) Motor-cars (used on hire by the company) Rs. 10,00,000
(c) Jewellery (Investment) Rs. 25,00,000. Loan taken for purchasing the same Rs. 20,00,000
(d) Cash Balance (as per books) Rs. 2,75,000
(e) Bank Balances Rs. 5,50,000
(f) Guest House (situated in a place which is 30 Kms away from the local limits of the
municipality) Rs. 10,00,000
(g) Residential flats occupied by the Managing Director Rs. 15,00,000. The Managing Director
is on whole time appointment and is drawing remuneration of Rs. 2,00,000 per month.
(h) Residential house were let out on hire for 200 days Rs. 10,00,000
The computation should be supported with proper reasoning for inclusion or exclusion.
Valuation Date : 31.03.2009 Computation of Taxable Wealth
Nature of Asset Rs. Reason
Land in Urban Area NIL Land in which construction is not permitted as
per municipal law is not an asset u/s 2(ea)
Motor Cars NIL Motor cars used in business of hire is not an
asset u/s 2(ea)
Jewellery 25,00,000 Not held as stock in trade
Cash Balance NIL Cash as per books - Not an asset U/s 2(ea)
Bank Balance NIL Not an asset u/s 2(ea)
Guest House 10,00,000 Asset u/s 2(ea)
Residential Flat occupied by MD 15,00,000 Asset u/s 2(ea) since Annual Gross Salary is
greater than Rs. 5,00,000.
Residential House Let-out 10,00,000 Asset U/s 2(ea) as it is not let-out for a period
>300 days.
Total Assets
Less: Debt incurred in relation to 60,00,000
an asset: Loan for Jewellery (20,00,000)
Taxable Net Wealth 40,00,000
Group-I : Paper-7 : Applied Direct Taxation 173
Q50. (a) Hassan, a person of Indian origin was working in Australia since 1985. He returned to
India for permanent settlement in June 2003 when he remitted the moneys into India. He
furnished the following particulars of his wealth as on 31.3.2009. You are required to
arrive at his wealth in respect of Assessment Year 2009-10.
(i) Market Value of Residential house in Jharkhand (let-out for residence) Rs. 10,00,000
with Net Maintainable Rent p.a. of Rs. 1,20,000.
(ii) Share in building owned by a firm in which Hassan is a Partner - used for business
Rs. 5,00,000
(iii) Motor-car purchased in April 2008, out of moneys remitted to India from Australia
Rs. 4,00,000
(iv) Value of interest in Firm excluding item (b) above Rs. 5,00,000
(v) Shares in companies (quoted) Rs. 2,00,000
(vi) Assets purchased out of amount remitted from Australia:
• Jewellery purchased in March 2001 Rs. 5,50,000
• Vacant land purchased in October 2000 Rs. 10,00,000
(vii) Amount standing to the credit of NRE Account Rs. 15,00,000
(viii) Cash on hand (out of sale proceeds of agricultural income) Rs. 65,000
Solution :
Assessee: Hassan Valuation Date: 31.3.2009 Computation of Net Wealth
Nature of Asset Amount Reasons
Taxable
Residential House in Jharkhand NIL Not an Asset u/s 2(ea) - Let-out for whole year -
Hence, not taxable
Share in the building owned by NIL Not an asset u/s 2(ea), used for its own business -
the firm not chargeable to tax
Motor-car 4,00,000
Less: Exempt u/s 5(v)-acquired NIL Asset u/s 2(ea). But, exemption available u/s 5(v),
out of money brouqht into India since acquisition out of money brought into India.
(4,00,000)
Value of Interest in a Firm 5,00,000 Assumed as deemed asset u/s 4(1)(b)
Shares in Companies NIL Not an asset u/s 2(ea)
Value of Jewellery 5,50,000 Asset u/s 2(ea) - Not entitled for exemption
Vacant Land 10,00,000 Asset u/s 2(ea) - Purchased in October 1999
Money in NRE A/c NIL Not an asset u/s 2(ea)
Cash in Hand in excess of 15,000 Asset u/s 2(ea), being an Individual
Rs. 50,000
NET WEALTH 20,65,000
Q50. (b) Abhishek, a person of Indian origin was working in Austria since 1990. He returned to
India for permanent settlement in May 2008 when he remitted money into India. For the
valuation date 31.3.2009, the following particulars were furnished. You are required to
compute the taxable wealth. The reason for inclusion or exclusion should be stated –
174 Revisionary Test Paper (Revised Syllabus-2008)
• Building owned and let-out for 270 days for residence. Net maintainable rent (Rs. 1,00,000)
and the Market Value (Excess of Unbuilt Area over Specified Area is 20% of the Aggregate
Area) Rs. 30 lakhs
• Jewellery: (a) Purchased in April 2008 out of money remitted to India from Austria
Rs. 12,00,000
(b) Purchased in May 2008 out of sale proceeds of motor-car brought from abroad and sold
for Rs.40 lakhs.
• Value of interest in urban land held by a firm in which he is a partner Rs. 10 lakhs
• Bonds held in companies Rs.10 lakhs
• Motor car used for own business Rs. 25 lakhs
• Vacant house plot of 480 sq.mts. (purchased in Dec. 2001) market value of Rs. 20,00,000
• Cash in hand Rs. 45,000
• Urban land purchased in the year 2006 out of withdrawals of NRE Account Rs.15,00,000
Solution :
Assessee: Abhishek Valuation Date: 31.3.2009 Assessment Year: 2009-10
Computation of Net Wealth
Nature of the Asset Rs. Rs. Reasons
Value of the House 18,50,000 18,50,000 Asset u/s 2(ea).
Working Note 1
Jewellery: Purchased in April 2008 12,00,000 Nil Asset u/s 2(ea).
Less: Exempt u/s 5(v) (12,00,000) Purchased out of money
Jewellery brought into India
Less: Exempt u/s 5(v) (40,00,000) Purchased out of sale
proceeds of assets brought into
India
Interest in Urban Land held by firm 10,00,000 10,00,000 Deemed Asset u/s 4(1)(b)
Bonds held in companies — Nil Not an asset u/s 2(ea)
Motor car 25,00,000 Asset u/s 2(ea). Not held as
stock-in-trade
Vacant House Plot (480 sq. mts.) 20,00,000 Nil Asset u/s 2 (ea)
Less: Exempt u/s 5(vi) (20,00,000) House/part of house/plot
less than 500 sq.mts.
Cash in hand Nil Since not exceeding Rs. 50,000
Urban Land Purchased 15,00,000 Nil Purchased out of money
Less: Exempt u/s 5(v) (15,00,000) brought into India
NET WEALTH 53,50,000
(1) Working Notes: Valuation of Building :
Net Maintainable Rent(NMR) = Rs. 1,00,000
Capitalized Value of NMR=NMR×12.5
(Owner of the land)=Rs. 1,00,000×12.5 = Rs.12,50,000
Add: Premium for excess of unbuilt area (20%)
over specified area=40% of CNMR = Rs. 5,00,000
VALUE OF THE HOUSE Rs.18,50,000