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Q1. What are the incomes from house property which are exempted from tax?

Ans:- The term 'House property' consists of buildings or land appurtenant to such buildings.
Income from letting out of vacant plots of land when there is no adjoining building will not be
taxed under this head (but will be taxed as income from other sources). The existence of a
building is, therefore, an essential prerequisite for taxation of income from house property.
'Building' will include residential house (whether let out or self-occupied), office building,
factory building, godowns, flats etc. But, the purpose for which the building is used by the tenant
is also immaterial. It does not make any difference at all if the property is owned by a limited
company or a firm. However, if the building or part thereof is used by the owner himself for the
purpose of his own business then there will be no income from such portion of the house
property.

Under the Income-tax Act, the basis of calculating income from House property is the 'Annual
Value'. This is the inherent capacity of the property to earn income and it has been defined as the
sum for which the property might reasonably be expected to let from year to year. Where the
actual rent received is more than the reasonable return, it has been specifically provided that the
actual rent will be the annual value. Where, however, the actual rent is less than the reasonable
rent , the latter will be the annual value.

The annual value of property consisting of any buildings or lands appurtenant thereto of which
the assessee is the owner shall be subjected to Income Tax under the head 'Income from
property' after claiming deductions (under section 24) provided such property, or any portion
of such property is not used by the assessee for the purposes of any business or profession,
carried on by him, the profits of which are chargeable to income tax.

PROPERTY INCOMES EXEMPT FROM TAX

Some incomes from house property are exempt from tax. They are neither taxable nor included
in the total income of the assessee for the rate purposes. These are:

i. Income from any farmhouse forming part of agricultural income;


ii. Annual value of any one palace in the occupation of an ex-ruler;
iii. Property Income of a local authority;
iv. Property Income of an authority, constituted for the purpose of dealing with and
satisfying the need for housing accommodation or for the purposes of planning
development or improvement of cities, towns and villages or for both. (The Finance Act,
2002, w.e.f. 1.4.2003 shall delete this provision.);
v. Property income of any registered trade union;
vi. Property income of a member of a Scheduled Tribe;
vii. Property income of a statutory corporation or an institution or association financed by the
Government for promoting the interests of the members either of the Scheduled Castes or
Scheduled tribes or both;
viii. Property income of a corporation, established by the Central Govt. or any State Govt. for
promoting the interests of members of a minority group;
ix. Property income of a cooperative society, formed for promoting the interests of the
members either of the Scheduled Castes or Scheduled tribes or both;
x. Property Income, derived from the letting of godowns or warehouses for storage,
processing or facilitating the marketing of commodities by an authority constituted under
any law for the marketing of commodities;
xi. Property income of an institution for the development of Khadi and village Industries;'
xii. Self-occupied house property of an assessee, which has not been rented throughout the
previous year;
xiii. Income form house property held for any charitable purposes;
xiv. Property Income of any political party.

Q2. Define the term tax holidays. What are the different tax incentives for new units
established in SEZ?

Ans:- A tax holiday is a temporary reduction or elimination of a tax. Governments usually


create tax holidays as incentives for business investment. The taxes that are most commonly
reduced by national and local governments are sales taxes. In developing countries, governments
sometimes reduce or eliminate corporate taxes for the purpose of attracting Foreign Direct
Investment or stimulating growth in selected industries..

The tax holiday has been often used by developing and transition countries. It is directed to new
firms and is not available to existing operations. With a tax holiday, new firms are allowed a
period of time when they are exempt from the burden of income taxation. Sometimes, this grace
period is extended to a subsequent period of taxation at a reduced rate. For transition countries,
one advantage of tax holidays is that they provide a simple regime for foreign investors because
there is no need to calculate taxes in the early years of operation, at a time when the tax systems
are not yet fully developed. This view is certainly not valid for long-term investors, for whom the
tax treatment after the holiday has expired is as important as the treatment during the holiday in
determining the after-tax profitability of the investment. In addition, the tax treatment of the
initial capital expenditures made before and during the holiday period must be determined so that
appropriate records will be available for the calculation of depreciation when the holiday ends.

A number of technical issues are important in determining the impact of tax holidays on the
return on investments. The first issue is determining when the holiday starts. It could be when
production starts, the first year in which the firm makes a profit, or the first year that the firm
achieves a positive cumulative profit on its operations. For large projects in particular, losses are
usually generated in the early years of production, when the highest capital costs are incurred,
including special costs that are linked to the start-up period, training the workforce, and
developing the local market. For such projects, a tax holiday that starts when production occurs
may actually increase the taxes paid over the life of the project and so act as a disincentive for
investment. If losses are experienced during the holiday period they may not be allowed to be
carried forward beyond the holiday period (it would be overly generous to allow losses to be
carried forward from a year in which income would not have been subject to tax). Thus, the
holiday may occur when no taxes would have been paid in any event and taxes may be increased
following the holiday because no losses are available to offset the profits. A similar situation can
occur if the holiday starts when profits are first generated. Income may be sheltered that would
have been eliminated in any case by the use of the tax losses. This may result in an overall
increase in taxation in circumstances when the loss-carryforward period is short or the use of
losses is restricted in some way. Tax laws usually specify that the holiday commences when
profits first occur. However, they are often ambiguous as to whether this means the first year that
is in itself profitable or the first year that cumulative net profits are positive.6 A related question
is the treatment of depreciation during the holiday period. Should it be deducted during the
holiday period or can it be deferred until after the holiday has terminated?

Depreciation represents a cost in the calculation of income, and so its deduction is necessary to
accurately measure the amount of income that should be subject to the holiday. Allowing a
deferral of the deduction effectively overestimates the costs associated with the postholiday
period and so leads to a further reduction in tax, which can result in a very generous incentive.
The issue is more complicated if some form of accelerated depreciation is also offered with
respect to the investment. Forcing the use of the accelerated deductions during the holiday period
at the least reduces their value and can actually increase the level of taxation relative to the
situation where no incentives are provided. A complete deferral of the deduction, however, can
again lead to a generous incentive and an effective tax holiday that is much longer than intended.
Another design question is the length of the holiday. Most of the holidays offered in transition
countries have been of short duration, and, as discussed below, are of little benefit to long-term
capital-intensive projects. Longer holidays would be of greater benefit; for example, there is
some evidence in Asia and Hungary that the longer holidays succeeded in attracting some long-
term investment.7 However, the longer the holiday, the higher the revenue cost and the greater
the vulnerability to tax planning schemes.8 The opposite problem arises when a tax holiday
provision providing a lengthy tax-free period is repealed. Because an existing company can
continue to take advantage of the holiday for which it qualified, new investment can be
structured so as to use the corporate form of these existing companies, sometimes by bringing
new investors in or even by selling the holiday company to new investors planning a substantial
investment. It is therefore desirable, on repeal of a tax holiday, to stipulate that companies
currently taking advantage of a tax holiday will cease to quality if a substantial change in the
ownership of the company takes place. Such a provision would prevent at least the most flagrant
abuses.

Tax incentives for new units established in SEZ:


As per circular Epces circular no. 39 dated 28-2-2007, issued by EXPORT PROMOTION
COUNCIL FOR EOUs & SEZ UNITS (Ministry of Commerce & Industry, Government of
India)

SEZ units are provided exemption from Income Tax under Section 10AA of the Income Tax Act,
as given in the 2nd Schedule of the SEZ Act, 2005. Section 10AA of the Income Tax Act, as
given in 2nd Schedule of the SEZ Act, 2005 has been amended by the Finance Bill, 2007. The
Finance Bill, 2007,

Accordingly, Tax benefit has been provided only for new units in Special Economic Zones :
Sections 10AA of the Income-tax Act, provides that in computing the total income of an
entrepreneur, from his unit in the special economic zone, the following deduction shall be
allowed:—

• Duty free import/domestic procurement of goods for development, operation and


maintenance of SEZ units
• 100% Income Tax exemption on export income for SEZ units under Section 10AA of the
Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the
ploughed back export profit for next 5 years.
• Exemption from minimum alternate tax under section 115JB of the Income Tax Act.
• External Commercial Borrowing by SEZ units up to US $ 12500 billion in a year without
any maturity restriction through recognized banking channels.
• Exemption from Central Sales Tax.
• Exemption from Service Tax.
• Single window clearance for Central and State level approvals.
• Exemption from State sales tax and other levies as extended by the respective State
Governments.

The major incentives and facilities available to SEZ developers include:-

• Exemption from customs/excise duties for development of SEZs for authorized


operations approved by the BOA.
• Income Tax exemption on income derived from the business of development of the SEZ
in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.
• Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.
• Exemption from dividend distribution tax under Section 115O of the Income Tax Act.
• Exemption from Central Sales Tax (CST).
• Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Q3. What are the key steps to calculate the tax liability of an individual ?

Ans:- Steps to calculate the tax liability of an individual are:

Determine residential status- First of all to determine the residential status of the assessee. The
incomes are taxed according to residential status i.e. Resident in India, Not Ordinarily resident,
or Non resident.

Calculation of gross total income- For the calculation of the gross total income we should have
to calculate the income of five heads according to the provisions of Income Tax Act.

Exempted Incomes- While calculating the incomes of the different heads, the incomes which
are exempted will not be included.

Income of other persons to be included in the income of assessee- Few incomes of other
persons (Sec. 64) includes in the income of assessee.

Set-off of losses- If there is negative income in a particular head then it is to be set off according
to the provisions of Income Tax Act.

Deductions u/s 80- After the above steps, the aggregate amount of income is known as Gross
Total Income. From the gross total income few deductions which are provided under section 80
of income tax act will be deducted. After deductions, the balance of income is known as Total
Income or Taxable Income. The list of deductions available to an individual are as follows:

1. Investments and deposits (sec 80C)


2. Contribution to certain pension funds (sec 80CCC)
3. Contribution of new pension scheme (sec 80CCD)
4. Payment to medical insurance premium (sec 80D)
5. Medical treatment of handicapped dependents and amount deposited for maintenance of
handicapped dependents (sec 80DD)
6. Expenditure on medical treatment of certain diseases (sec 80DDB)
7. Repayment of loan and interest thereon taken for higher education (sec 80E)
8. Donations to certain funds/charitable institutions etc. (sec 80G)
9. Deductions in respect of rent paid (sec 80GG)
10. Donations for scientific research and rural development (sec 80GGA)
11. Contribution to political parties (80GGC)
12. Profit and gain of new industrial undertaking set up for infrastructure development (sec
80IA)
13. Profit and gains of new industrial undertakings (sec 80IB)
14. profit and specific industrial undertakings establish in specific states (sec 80IC)
15. Deduction in respect of profits and gains from business of collecting and processing of
bio gradable waste (sec 80JJA)
16. Deduction in respect of certain incomes of offshore banking unit (sec 80LA)
17. Deduction in respect of royalty income to authors (80QQB)
18. Deduction in respect of royalty on patent (sec 80RRB)
19. Deduction in case of person with disability (sec 80U)

Total Income rounded off in the multiple of 10 – The total income calculated will rounded
off in multiple of Rs. 10. For this rupee five or more than Rs. 5 will be treated as Rs. 10 and less
than Rs. 5 will be deleted.

Key steps to calculate the tax liability of an individual

1. Income from salaries xxxxxxx


2. Income from house property xxxxxxx
3. Profits and gains of business or profession xxxxxxx
4. Income from Capital gainst xxxxxxx
5. Income from other sources xxxxxxx
Total(1+2+3+4+5) xxxxxxx
Less:adjustment for set off and carry forward of losses xxxxxxx
Gross total income xxxxxxx
Less: Deductions under Sec.80C to 80u (Chapter VI A) xxxxxxx
Total Income (Rounded off to the nearest Rs.10) xxxxxxx

Q 4. Define the treatment of remuneration paid to partners under income tax act.

Ans:- Treatment of remuneration and interest to a partner as business income : Clause (v)
of section 28

Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be
chargeable to income-tax as profits and gains of business. The proviso clarifies that where the
remuneration, interest, etc., is in excess of the ceiling fixed under the new section 40(b) and is
disallowed in part for that reason then the income under the head referred to in section 28(v)
shall be adjusted to the extent of the amount not so allowed to be deducted.
Any expenditure incurred in order to earn such income can be claimed as a deduction from such
income. For example, if a partner borrows money to make his capital contribution to the LLP and
he is paid interest on his capital contribution, the amount of such interest will be taxed under the
head “Profits and gains of business or profession”, but the interest paid by him on the borrowed
money will have to allowed as a deduction. If the whole or a part of salary/interest is not allowed
as deduction in the hands of the LLP, than the whole or that part of salary/ interest is not taxable
in the hands of the partners. In other words, in the hands of partners the entire remuneration/
interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is
chargeable to tax.

Ceiling as to remuneration payable to working partners and interest to partners :


Section 40(b)

Section 40(b) is a disallowance provision and disallows remuneration, interest, etc.,


received by the partners from the firm provided the same exceeds the ceiling prescribed in
the same provision. It also specifies as to how the matter of deductibility of interest and
remuneration is to be dealt with where a partner is a partner in representative capacity.

The Explanation 3 defines the term “book profit” which is relevant for computing the upper
ceiling of remuneration payable to all the working partners put together. The Explanation 4
defines “working partners” who alone are made entitled to remuneration if the deductibility of
the related amount in the hands of the LLP is not to be barred by section 40(b).

Limits of Remuneration to Partners:

The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus,
commission or remuneration will be allowed as deduction for income of LLP,

the limits of remuneration as proposed by budget are outlined below:

On First Rs 3,00,000
Rs 1,50,000 or at the rate of 90% of the book-
of book profit or in
profit, whichever is more
case of loss
On the balance of book
at the rate of 60%
profit

Signing of Income tax Return:

• The designated partner shall be responsible for signing the income tax return of LLP,
where for unavoidable reasons, such designated partner is not able to sign the same or
where there is no designated partner, any partner will sign the return.

 No capital gain on conversion


 LLP and general partnership is being treated as equivalent (except for recovery
purpose) in the Act, the conversion from a general partnership firm to an LLP will have
no tax implication, if the rights and obligation of the partners remain the same after
conversion and if there is no transfer of any asset or liability after conversion. If there is a
violation of these conditions , the provision of capital gain will apply.

Q 5. Describe in brief the provisions for set off and carry forward of losses.

Ans:- ‘Loss’ in common parlance is understood as excess of expenses over income. The Income-
Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to
some restrictions. Let us see the relevant provisions relating to set-off of losses under the
different heads of income:

Provision relating to carry forward and set-off losses:

Loss from Business/profession [Sec 72]

• Any loss under the head, ‘profit and gain of business,’ other than speculation loss and
depreciation can be set off against any other business income or any other head of
income, except salary income, in the same assessment year.
• After such setting off, if the resultant figure is yet a loss (business loss): If the loss in
greater than income from any other business or income from any other head, then such
loss can be carried forward up to eight assessment years. On carrying forward to
subsequent years, this loss can be set off only against business income and not against
any other head of income.
• Speculation loss can be set off only against speculation profit in the same assessment
year. But even after such setting off if the resultant figure is a loss, then it can be carried
forward for set off in subsequent years up to four assessment years. From assessment
year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for eight
assessment year. In subsequent years, setting-off of the loss is allowed only against
speculation profit [Section 73].

Transactions in derivatives entered into on recognised stock exchange through a broker or a


Securities and Exchange Board of India (Sebi)-recognised intermediary and supported by a time-
stamped contract note is excluded from the definition of speculative transaction [Section 43(5)
(d)]. Thus, such loss is to be treated in the same manner as ‘non speculative business loss’.

Speculative business loss can be set off against only speculative business income. But non-
speculative business loss can be set off against any business income (whether speculative or non
speculative).

• Depreciation can be set off in the same assessment year as well as in the subsequent
assessment years against business income or any other head of income except salary
income. Further, depreciation can be carried forward indefinitely for set-off in subsequent
years [Section 32(2)].
• As unabsorbed depreciation can be carried forward for any number of years. In
subsequent years, one must first set off current year’s depreciation, then brought forward
business loss and then the unabsorbed depreciation.
• Continuity of business is now not necessary for the purpose of set-off and carry-forward.

Loss from a house property [Sec 71B]

• Loss arising from a house property can be set off against income from any other house
property or income from any other head in the same assessment year.
• If income from house property is negative even after such set-off, then such loss can be
carried forward up to eight assessment years for set-off. But in subsequent years, it can be
set off only against income from house property.

Loss from capital gains (Section 70 & 74)

• Short-term capital loss can be set off against any capital gain income, long term or short
term, in the same assessment year. It should be noted that such loss can be set off only
against capital gain income and not against any other head of income. Balance short-term
capital loss if any can be carried forward up to eight assessments years. In the subsequent
years also, it can be set off against any capital-gain income.

Long-term capital loss

• Long-term capital loss arising on sale of capital asset other than equity shares and units of
equity-oriented mutual fund which are subject to securities transaction tax (STT) can be
set off in the same assessment year as well as in subsequent assessment years (in case of
carry-forward) only against long-term capital gain income. Carry-forward of loss is
allowed up to eight assessment years.
• Long-term capital loss arising on sale of equity shares and units of equity-oriented mutual
fund, which is subject to securities transaction tax (STT), is not allowed to be either set
off or carried forward (as income from such source is exempt from tax) [Section 14A].

Loss under the head ‘Other sources’ (Section 71) : Any loss under the head, ‘Other sources’
can be set off in the same assessment year against income from any other source or income from
any other head. Salary, business/profession. The loss cannot be carried forward for set-off in
future.

Loss from owning and maintaining race horses [Section 74A] : Any loss arising from owning
and maintaining race horses can be set off against income from such activity only in the same
assessment year or in subsequent assessment years (in case of carry- forward). In case of this
loss, it is allowed to be carried forward up to four assessment years.

Loss under any head can be set off against speculative income, capital gain income, income from
maintaining race horses. But the reverse is not possible. Loss from speculation, loss under capital
gain and loss from maintaining race horses can be set off only against the respective specific
income. In other words, loss from speculation can be set off only against speculation income.
Loss from capital gain can be set off only against capital gains income and so on.

A loss from any source cannot be set off against winnings from lotteries, crossword puzzles,
races (including horse races), card games, other games or any sort of gambling or betting. Loss
on bonus stripping/dividend stripping cannot be set off against any income.

Return of loss must be filed within due date of filing of return or else carry-forward of loss to the
subsequent year is not allowed. However, this condition does not apply in case of house property
loss and unabsorbed depreciation.

Q 6. Compute the net wealth and wealth tax liability of Golden Jewellers ltd. as on 31-3-11.
The company is engaged in the jewellery business export and domestic sales
Rs
Factory 520000
buildings
Bank Balance 140000
Unaccounted 25500
cash balance
Silver ware 1200000
Gold 3500000
ornaments
Motor cars 150000

The company has taken a loan of Rs. 600000.00 for factory premise

Ans:-

Assessee : Golden Jewelers Ltd

Valuation Date : 31-03-2011

Assessment Year : 2010-11

Nature of Asset Rs. Reasons

Factory Building 520000 Asset u/s 2(ea)

Bank Balance 140000 Not an asset under WT Act.

Unaccounted cash balance 25500 An asset u/s 2(ea)


If Silver ware Not held as stock in
Silver Ware 1200000 trade
If Gold ornaments Not held as stock
Gold Ornaments 3,500,000 in trade

Motor cars 150000 Not an asset under WT Act.

Total Asset 5,395,500


Less: Debt incurred in relation
to an asset: Loan for Factory
premise 600,000

Net Wealth 4,795,500

Less: Basic Exemption 3,000,000

Taxable Net Wealth 1,795,500


Tax Payable @ 1 % 17,955

Note:
1.While calculating the net wealth it is assumed that gold ornaments of Rs. 35 Lacs and silver ware
of Rs. 12 Lacs are not part of stock in trade so accordingly it is treated as part of the asset of Golden
Jewelers Ltd.

2. It is tendered to increase the threshold limit for payment of wealth tax from Rs.15.00. lakhs to Rs.
30.00 lakhs because of inflation-adjustment, The recommended amendment will apply for the value
of net wealth as on 31st March, 2010 and will apply in relation to assessment year 2010-11.
Q1. Write a short note on :

a) Cost of acquisition

b) Cost of improvement

c) Expenditure on transfer

d) Transfer

Ans:- a) Cost of Acuisiton : Cost of acquisition of an asset is the value for which it is acquire by
the assessee. It means that whatever cost incurred for getting an asset plus all expenses incurred to
acquire it is the cost of acquisition. Interest paid on money borrowed for the purchase of a cpital
asset would constitute part of the cost of acquisition, provided such interest has not been deducted
under any other provision. However, in the following cases the above meaning of cost of acquisition
does not good and cost of acquisition is taken as a notional figure.

Cost to the previous owner deemed to be the cost of acquisition. If the asset is acquired by an
assessee in the following circumstances the cost of acquisition of the asset shall be deemed to be the
cost for which the previous owner of the property acquired it. It will be increased by the cost of any
improvement of the assets incurred by the previous owner of the assessee.

Circumstances when cost to previous owner is taken as cost of acquisition of asset: sec.49(1)

On any distribution of asset on the total or partial partition of a Hindu undivided family;

Or under gift or will;


Or by succession, inheritance or devolution;

Or on any distribution of assets on the liquidation of a company;

Or under a transfer to a revocable or an irrevocable trust;

Or on transfer by a parent company to its Indian subsidiary company which is wholly owned by the
parent company;

Or on the transfer by a subsidiary company to its Indian holding company which owns the whole of
the share capital of the subsidiary company;

Or on the transfer of capital asset by the amalgamating company to the amalgamated company if the
amalgamated company is an Indian company;

Or an transfer of shares of an Indian company by amalgamated foreign company to the amalgamated


foreign company;

Or when any of the members of a H.U.F. converts his self-acquired property into H.U.F. property.
( The cost of the property to the H.U.F. will be taken as the cost of the property to the individual
converting the property).

Cos of acquisition of a Capital asset acquired before 01-04-1981

Where capital asset became the property of the assessee before 1st April 1981, the cost of acquisition
of the asset may, at the option of the assessee, be taken to be any one of the following:

i)The cost of the asset to the assessee; or

ii)The fair market value of the asset on 1st April 1981.

Cost of acquisition of an asset acquired by the previous owner before 1 st April 1981 by any
mode u/s 49(1)

If the capital asset (other than asset on which depreciation has been allowed) became the property of
the assessee by any of the modes specified in section 49(1) and the capital asset became the property
of the previous owner before 1st April, 1981, the cost of acquisition of the asset may, at the option of
the assessee, be taken to be any one of the following:

i)The cost of acquisition of the asset to the previous owner; or

ii)The fair market value of the asset on 1st April, 1981.


b) Cost of improvement : Cost of improvement is capital expenditure incurred by an assessee
in making any additions/improvement to the capital asset. It also includes any expenditure
incurred to protect or complete the title to the capital assets or to cure such title. To put it
differently, any expenditure incurred to increase the value of the capital asset is treated as cost of
improvement. Special provisions under the Income-tax Act in respect of cost of improvement
should be noted as under:

• Expenditure incurred before April 1, 1981 not considered - Any cost of improvement
incurred before April 1, 1981 is not taken into consideration for calculating capital gain
chargeable to tax. This rule does not have any exception. In other words, cost of
improvement includes only expenditure on improvement incurred on or after April 1,
1981. Expenditure incurred on improvement of a capital asset before April 1, 1981 is
always taken as equal to zero.
• Double deduction not permitted - Cost of improvement does not include any expenditure
which is deductible in computing the income chargeable under the heads “Interest on
securities”, “Income from house property”, “Profits and gains of business or profession”
and “Income from other sources”.

COST OF IMPROVEMENT IN DIFFERENT SITUATIONS - Keeping in view the above


provisions, cost of improvement shall be determined in the different situations as follows:

When the capital asset was


acquired by gift, will, etc.,
Different Situations In any other case
under the provisions of
section 49(1)
Cost of improvement in relation to
good-will of a business or a right to
manufacture, produce or process any
article/thing or right to carry on any
business
• when these assets are self-
NIL NIL
generated
• when these assets are purchased
NIL NIL
and later on transferred
Cost of improvement in relation to any
other asset acquired
Cost of improvement Cost of improvement
incurred by the assessee and incurred by the assessee
• before April 1, 1981 the previous owner (ignoring (ignoring the expenditure
the expenditure incurred incurred before April 1,
before April 1, 1981) 1981)
Cost of improvement
Cost of improvement
• on or after April 1, 1981 incurred by the assessee and
incurred by the assessee
the previous owner

INDEXED COST OF IMPROVEMENT


Indexed cost of improvement is defined as an amount which bears to the cost of improvement,
the same proportion as the cost inflation index for the year in which the asset is transferred bears
to the cost inflation index for the year in which the improvement to the asset took place.

c) Expenditure on transfer : Expenditure incurred wholly and exclusively in connection with


the transfer of a capital asset is deductible from full value of consideration. The expression
“expenditure incurred wholly and exclusively in connection with such transfer” means
expenditure incurred which is necessary to effect the transfer. Examples of such expenses are
brokerage or commission paid for securing a purchaser, cost of stamp, registration fees borne by
the vendor, traveling expenses incurred in connection with transfer, litigation expenditure for
claiming enhancement of compensation awarded in the case of compulsory acquisition of assets.
One should also keep in view the following propositions:

• Vague claim for expenses is not allowable


• Expenditure in connection with transfer need not necessarily have been incurred prior to
passing of title.
• If a sum has already been subject-matter of deduction under other heads, the same cannot
be allowed as deduction under section 48.

d) Transfer : Capital gain arises on transfer of capital asset; so it becomes important to


understand what is the meaning of word transfer. The word transfer occupy a very important
place in capital gain, because if the transaction involving movement of capital asset from one
person to another person is not covered under the definition of transfer there will be no capital
gain chargeable to income tax. Even if there is a capital asset and there is a capital gain. The
word transfer under income tax act is defined under section 2(47). As per section 2 (47) Transfer,
in relation to a capital asset, includes sale, exchange or relinquishment of the asset or
extinguishments of any right therein or the compulsory acquisition thereof under any law.

In simple words Transfer includes:

• Sale of asset
• Exchange of asset
• Relinquishment of asset (means surrender of asset)
• Extinguishments of any right on asset (means reducing any right on asset)
• Compulsory acquisition of asset.
• The definition of transfer is inclusive, thus transfer includes only above said five ways. In
other words, transfer can take place only on these five ways. If there is any other way
where an asset is given to other such as by way of gift, inheritance etc. it will not be
termed as transfer.

Whether the following transactions are transfer in relation to capital asset.

1. A house transferred by way of will to son.


2. Bonus shares given by a company to its shareholders.
3. Giving away jewellery for a piece of land.
4. Getting money in lieu of shop in a shopping complex.
5. Giving the rights to use the asset.

Q 2. Write a short note on deductions under section:

a) 80 DD
b) 80 G

c) 80 GG

d) 80lb

e) 80 U

Ans:- a) 80 DD- Deduction in respect of dependent relative Section

Following are the provisions under this section:

• This deduction is available to only Individuals and HUF, who is resident in India.
• This deduction is given to the assessee if a person with disability is dependent upon him.
• A person with disability means disabilities like autism, cerebral palsy, mental retardation,
etc. as specified in Persons with Disabilities Act 1995.
• The assessee has incurred expenditure by way of medical treatment (including nursing),
training and rehabilitation of a disabled dependent: or/and
• He has paid or deposited any amount under any scheme framed by the LIC of India or
any other insurer for the payment of an annuity or a lump sum amount for the benefit of
such dependent in the event of the death of the assessee.
• For claiming the deduction the assessee shall have to furnish a certificate by the
prescribed medical authority with the return of income.

Amount of Deduction

If the above mentioned conditions are satisfied the amount of deduction is fixed at Rs. 50,000
irrespective of actual expenditure.

In case of a person with severe disability (over 80 %) a higher deduction of Rs. 75,000 shall be
allowed irrespective of actual expenditure.

Explanation: Dependent means


i) In case of an individual, the spouse children, parents, brothers, sisters of the individual
or any of them.

ii) In case of HUF, a member of the HUF wholly or mainly dependent on such individual
or HUF for support and maintenance.

b) Section 80G
To encourage donations for social cause all assessees are entitled to this deduction from their
gross total income, if the donation is made in the previous year to the following funds or
charitable institutions. For the sake of convenience we have divided the donations into four
categories depending on the quantum of deduction.

A. Donations made to following are eligible for 100% deduction without any qualifying
limit.

1. Prime Minister’s National Relief Fund


2. National Defence Fund
3. Prime Minister’s Armenia Earthquake Relief Fund
4. The Africa (Public Contribution - India) Fund
5. The National Foundation for Communal Harmony
6. Approved university or educational institution of national eminence
7. The Chief Minister’s Earthquake Relief Fund, Maharashtra
8. Donations made to Zila Saksharta Samitis
9. The National Blood Transfusion Council or a State Blood Transfusion Council.
10. The Army Central Welfare Fund or the Indian Naval Benevolent Fund or The Air Force
Central Welfare Fund.

B. Donations made to the following are eligible for 50% deduction without any qualifying
limit.

1. Jawaharlal Nehru Memorial Fund


2. Prime Minister’s Drought Relief Fund
3. National Children’s Fund
4. Indira Gandhi Memorial Trust
5. The Rajiv Gandhi Foundation.

C. Donations to the following are eligible for 100% deduction subject to qualifying limit
(i.e. 10% of adjusted gross total income).

1. Donations to the Government or a local authority for the purpose of promoting family
planning.
2. Sums paid by a company to Indian Olympic Association

D. Donations to the following are eligible for 50% deduction subject to the qualifying limit
(i.e. 10% of adjusted gross total income).
1. Donation to the Government or any local authority to be utilized by them for any
charitable purposes other than the purpose of promoting family planning.

Amount of deduction

The quantum of deduction is as follows :-


• Category A- 100 % of amount donated
• Category B -50 % of the amount donated in the funds
• Category C – 100% of the amount donated in the funds subject to maximum limit
of 10% of Adjusted GTI.
• Category D – 50% of the amount donated in the funds subject to maximum limit
of 10% of Adjusted GTI.

The total of these deductions under categories A,B,C, & D is the quantum of deduction under
this section without any maximum amount.

Adjusted gross Total income for this purpose means his gross total income minus long-term
capital gain, short term capital gain taxable u/s 111A, and all deductions u/s 80CCC to 80U
except any deduction under this section.

c) Section 80GG
This deduction is allowed to an individual assessee in respect of rent paid by him for an
accommodation used for his residential purposes provided the following conditions are fulfilled:

• The assessee is either a self-employed person or such a salaried employee who


is not in receipt of house-rent allowance from any source.
• The actual rent paid by him is in excess of 10% of his total income.
• He or his spouse or minor children or the HUF, of which he is a member, do not own any
residential accommodation at the place where the assessee resides, performs the duties of
his office or employment or carries on his business or profession. Where, however, the
assessee owns any residential accommodation at any other place and claims the
concessions of self-occupied house property for the same, he will not be entitled to any
deduction u/s 80GG even if he does not own any residential accommodation at the place
where he ordinarily resides, performs the duties of his office or employment or carries on
his business or profession.
• The assessee files a declaration in Form No. 10BA regarding the payment of
rent.

Note:
Deduction under this section can be claimed even if accommodation at concessional rent is
provided by the employer. In such a case the deduction will be given if the actual rent paid by the
employee exceeds 10% of his total income. Where a rent-free house is provided to the employee,
no deduction will be allowed under this section.

Amount of Deduction
The assessee, who fulfils the above mentioned conditions, is allowed a deduction
equal to least of the following three:
• excess of actual rent paid over 10% of adjusted gross total income:
• 25% of his adjusted gross total income; and
• Rs. 2,000 p.m.

Adjusted Gross Total income( Adj.GTI) for this purpose means his gross total income minus
long-term capital gain, short term capital gain taxable u/s 111A, and all deductions u/s 80CCC to
80U except any deduction under this section.

d) 80lb
Deduction in respect of profits and gains from certain industrial undertaking othe than
infrastructure development undertakings.

Case 1 Business of an industrial undertaking

Case 2 Operation of ship

Case 3 Hotels

Case 4 Industrial research

Case 5 Production of mineral oil

Case 6 Developing and building housing projects

Case 7 Business of processing, preservation and packaging of fruits or vegetables or


integrated handling, storage and transportation of food grains units

Case 8 Multiplex theatres

Case 9 Convention centre

Case 10 Operating and maintaining a hospital in rural area

Case 1: Business of an industrial undertaking

Amount of deduction

Industrial
Unit or Cold
Same in
Cold Chain Any
Assessee SSI Backward
Storage in for Agri Other
District
Backward goods
State
100% for 25%
25% for first 5 for
Company first years and Same Same first
12 years 25% for 12
next 7 years years
100% for
25 %
first
25 % for for
Any Other 5 years and
first Same Same first
Person 25% for
10 years 10
next
years
5 years

Case 2: Operation of ship- 30 percent of the profit is deductable for the first 10 years.

Case 3: Hotel

% of profit
Assessee Period of deduction
deductible
in a notified
50 First 10 years
area
Any other
30 First 10 years
hotel

Case 4: Engaged in Industrial Research


Approved by the If the company is
prescribed approved by the
authority at any time prescribed authority
before after March 31, 2000
April 1, 1999 but before April 1, 2007
100 % of profit from such 100 % of profit from
Amount of deduction
business such business
10 years beginning with
5 years beginning with
Period of deduction the initial assessment
the initial assessment year
year

Case 5 : Production of mineral oil:-Amount of deduction 100% of the profit is deductable for
the first 7 years.

Case 6: Developing and building housing projects – If all the aforesaid conditions are satisfied
100% of the profit derived in any previous year relevant to any assessment year from such
housing project is deductable.

Case 7 : Business of processing, preservation and packaging of fruits or vegetables or


integrated handling, storage and transportation of food grains units

Enterprises % of profit deductable Period


100 First 5 years
Owned by a company
30 Next 5 years
Owned by any other 100 First 5 years
person 25 Next 5 years

Case 8: Multiplex theatres- 50% of the profits and gains derived from the business is
deductable from the assessment year 2003-04 for a period of 5 consecutive years beginning
from the initial year.

Case 9: Convention centre-50% of the profits and gains derived from the business is
deductable from the assessment year 2003-04 for a period of 5 consecutive years beginning from
the initial year.

Case 10: Operating and maintaining a hospital in a rural area – 100% of the profits and
gains of such business is deductable for a period of 5 consecutive assessment years.

e) SECTION 80U
To help a disabled person by reducing his tax burden, this section has been incorporated.
Following are the provisions.
• The assessee is an individual being a resident
• He is a person with disability.
• He is certified by the medical authority to be a person with disability, at any time during
the previous year.
• He furnishes a certificate issued by the medical authority in the prescribed form along the
return of income

Amount of deduction
A fixed deduction of
Rs. 50,000 in case of a person with disability
Rs. 75,000 in case of a person with severe disability.( having any disability over 80%)

Note: If deduction u/s 80DD is claimed no deduction is allowable under this section
Q.3:- Explain the tax provisions for dividend , interest and royalty.

Ans:- Tax provision for dividend

In India as per Income tax Act, 1961 upto 31-05-1997, the company was not liable to pay any
income tax on the amount of dividends declared, distributed or paid by such company. However,
such dividend was included in the income of the shareholders under the head "income from other
sources". The finance act, 1997 has introduced changes in this rule.

A) Tax on distributed profits of the Domestic company: The domestic company shall
be liable to pay additional income tax on any amount declared, distributed or paid by
such company by way of dividend (whether interim or otherwise) on or after 1-06-1997,
whether out of current or accumulated profits. Such additional income tax shall be
payable @ 10% of the amount so ditributed. Thsi additional tax shall be payable even if
no income tax is payable by such company on its total income.

B) Exemption of dividend in the hands of shareholders : In view of the income tax


now payable by the domestic company, any dividends declared, distributed or paid by
such company, on or after 01-06-1997 shall be exempt in the hands of the shareholders.

Time limit for deposit of additional income tax : Such additional tax will have to be paid by the
principal officer of the domestic company within 14 days from the date of :

a) Declaration of any dividend


b) Distribution of any dividend
c) Payment of any dividend, whichever is earlier

Additional income-tax is not allowed as deduction : The company shall not be allowed any
deduction on account of such additional income tax under any provisions of the income tax act.

Tax Provision for Interest on securities

Interest on securities is charged to tax under this head if the securities are held by the assessee as
fixed assets. If the securities are held as stock in trade then the interest is taxable under the head
profit and gains of business or profession. The gross interest (net interest plus tax deducted at
source) is taxable. If net interest is given, it should be grossed up in the hands of recipient if tax
is deducted at source by the payer.
Net interest X 100
100- Rate of TDS
No Particulars TDS Rate
1 Interest on any security of central or state government No TDS
2 Interest on debentures listed in a recognized stock exchange, 10%
statutory bodies and local authority
3 Any other interest on security[unlisted] 20%
4 Winnings from lottery, crossword puzzles, card games, horse race etc 30%

For the purpose of income tax purpose, the securities can be classified into
1. Government securities:
a. Tax-free securities
i. Interest fully exempted
ii. Not included in the total income
b. Less- tax securities
i. Issued by central govt. or state govt.
ii. Non TDS
iii. Taxable securities
iv. Interest received should not be grossed up
2. Commercial securities
a. Tax-free securities
i. Local authority, statutory corporation and company issues in the from of
debentures and bond
ii. Tax is paid by the issuer
iii. Since tax is paid by the issuer it is termed as tax-free securities
iv. Interest should be grossed up
b. Less tax commercial securities
i. Taxable securities
ii. TDS is collected
iii. Interest should be grossed up if net amount is given

Tax Provision for Royalties

Sometimes, running royalties, or private sector taxes are usage-based payments made by one
party (the "licensee") and another (the "licensor") for ongoing use of an asset, sometimes
an intellectual property (IP). Royalties are typically agreed upon as a percentage of gross or net
revenues derived from the use of an asset or a fixed price per unit sold of an item of such.

Royalty income of authors [u/s Sec 80 QQB] : This deduction is allowable up to


maximum Rs. 3.00,000 for a resident individual. Assessee should furnish a certificate in
Form 10CCD from the person responsible for paying the person responsible for paying
the income. The book authored by him/her is a work of literary, artistic or scientific
nature and it does not include guides, textbook of schools and other similar publication.

Royalty on Patents [Sec 80 RRB]: This deduction is allowable up to, Rs.300000 or


actual amount (which ever is less) for a resident individual. The assessee should furnish a
certificate in Form 10 CCE duly signed by controller of Patents Act along with the return
of income. If it is received from outside India the income should brought into India in
convertible foreign exchange within 6 months from the end of the relevant PY.

Q. 4:- Company A is proposed to be merged with company B . the following are the
particulars of the former company

Unabsorbed depreciation Rs. 45600000.00


Unabsorbed business loss Rs. 145000.00

Consider which of the benefit can be availed of by the company and advice the latter on the
conditions to be fulfilled to claim each such benefit.

Ans:- Both of the benefit can be availed by the company and following conditions are satisfied,
then the unabsorbed loss & depreciation of the amalgamating company shall be deemed to be
loss/depreciation of the amalgamated company for the previous year in which the amalgamation
is effected-
a. There has been
(a) an amalgamation of a company owing an industrial undertaking or a ship or a
hotel with another company or
(b) an amalgamation of banking company referred to in section 5
(c) of the Banking Regulation Act,1949 with a specified bank; or (c) (from the
assessment year 2008-09) an amalgamation of a public sector airlines with
another public sector airlines;

b. The amalgamation company has been engaged in the business in which the
accumulated loss occurred or depreciation remains unabsorbed for 3 years or more years;

c. The amalgamation company has held continuously as on the date of the amalgamation
at least three –fourth of the book value of fixed assets held by it two years prior to the
date of amalgamation;

d. The amalgamated company continues to hold at least three-fourths in the book value
of fixed assets of the amalgamating company which it has acquired as a result of
amalgamation for five years from the effective date of amalgamation;
e. The amalgamation company continues the business of the amalgamated company for a
minimum period of 5years; and

f. The amalgamated company fulfils such other conditions as may be prescribed to


ensure the revival of the business of the amalgamating company or to ensure that the
amalgamation is for genuine business purpose.

In case the above specified conditions are not fulfilled, then that part of brought forward loss and
unabsorbed depreciation which has been set off by the amalgamated company shall be treated as
the income of the amalgamated company for the year in which the failure to fulfill the conditions
occurs.
Q. 5:- Discuss the provisions relating to set off of losses in the following cases:

i) Speculation loss

ii) Short term capital loss

iii) Long term capital loss

iv) Losses from horse race, gambling and cross word puzzeles

Ans:- The various provisions of the Income-tax Act of 1961 regarding set-off losses

i) Speculation loss

Speculation loss can be set off only against speculation profit in the same assessment year. But
even after such setting off if the resultant figure is a loss, then it can be carried forward for set off
in subsequent years up to four assessment years. From assessment year 2006-07 up to assessment
year 2005-06 such loss could be carried-forward for eight assessment year. In subsequent years,
setting-off of the loss is allowed only against speculation profit [Section 73]. Speculative
business loss can be set off against only speculative business income. But non-speculative
business loss can be set off against any business income

ii) Short term capital loss:

Short-term capital loss can be set off against any capital gain income, long term or short term, in
the same assessment year. It should be noted that such loss can be set off only against capital
gain income and not against any other head of income. Balance short-term capital loss if any can
be carried forward up to eight assessments years. In the subsequent years also, it can be set off
against any capital-gain income.

iii) Long term capital loss

Long-term capital loss arising on sale of capital asset other than equity shares and units of
equity-oriented mutual fund which are subject to securities transaction tax (STT) can be set off in
the same assessment year as well as in subsequent assessment years (in case of carry-forward)
only against long-term capital gain income. Carry-forward of loss is allowed up to eight
assessment years.

iv) Losses from horse race, gambling and cross word puzzles

Losses from cross word puzzles, lotteries, gambling, card games races including horse races, etc.
cannot be set off either against the income from the same source or against the income under
any other head of income. This is because each of these specified sources is regarded as separate
from others (i.e, other sources).

Q6. What are the deductions available from gross salary income?

Ans:- Deduction from gross salary income follows:

1. Entertainment Allowance
2. Tax On Employment
3. Deduction U/S 80c Out Of Gross Total Income
4. Deduction Of Tax From The ‘Salary’

1. Entertainment Allowance [ U/s 16(ii)]

Some employees are required to incur expenditure on the entertainment ( tea etc.) of customers,
clients etc. who came to meet them in connection with their official or business work. In case
employee is given a fixed amount every month to meet this type of expenditure then it is fully
added in salary and out of Gross total Salary , a deduction u/s 16(ii) shall be allowed only to
Govt. employees.

This means that in case this allowance is given to employee working in private sector, it is fully
taxable.

But in case any amount is reimbursed against any expenditure incurred by employer, it shall be
fully exempted.
Deduction u/s 16(ii) admission to govt. employee shall be an amount equal to least of following:

1. Statutory Limit of Rs.5,000 p.a.


2. 1/5 th of Basic Salary
3. Actual amount of entertainment allowance received during the previous year.

2. Tax on Employment u/s 16(iii)

In case any amount of professional tax is paid by the employee or by his employer on his behalf
it is fully allowed as deduction.

3. Deduction U/S 80c Out Of Gross Total Income

Savings play a vital role in the fast economic development of nay country. To encourage savings,
an incentive in the form of a deduction out of one’s taxable income has been allowed. To
channelise those savings, various schemes have been framed and if the assessee deposits those
savings in these approved saving schemes, a deduction shall be allowed.

Section 80C has been inserted from the assessment year 2006-2007 onwards. Section 80C
provides deduction i8n respect of specified qualifying amounts paid deposited by the assessee in
the previous year.
The following are the main provisions of the newly inserted Section 80C. :

1. Under Section 80C , deduction would be available from Gross Total Income.
2. Deduction under section 80C is available only to individual or HUF.
3. Deduction is available on the basis of specified qualifying investments / contributions /
deposits / payments made by the taxpayer during the previous year.
4. The maximum amount deduction under section 80C , 80CCC, and 80CCD can not
exceed Rs.1 lakh.

Deduction u/s 80C shall be allowed only to the following assessee :

1. An Individual
2. A Hindu Undivided Family (HUF)

The Deduction is calculated as per the following steps –


Step-1: Gross qualifying Amount which is the aggregate of the following…

1. Life Insurance Premium


2. Payment in respect of non-commutable deferred annuity.
3. Any sum deducted form salary payable to Govt. employee for the purpose of
securing him a deferred annuity.
4. Contribution towards Statutory Provident Fund and Recognised Provident Fund.
5. Contribution towards 15-year Public Provident Fund
6. Contribution towards an Approved Superannuation Fund.
7. Subscription to National Saving Certificates, VIII Issue.
8. Contribution for participating in the Unit-linked Insurance Plan (ULIP) of UTI.
9. Contribution for participating in the Unit-linked Insurance Plan (ULIP) of LIC
Mutual Fund.
10. Payment to notified annuity plan of LIC
11. Subscription towards notified Units of Mutual Fund or UTI.
12. Contribution to notified Pension Fund set up by Mutual Fund or UTI.
13. Any sum paid as subscription to Home Loan Account Scheme of the National
Housing Bank.
14. Any sum paid as Tuition Fees for full time education of any 2 children of an
individual.
15. Any payment towards the cost of purchase / construction of a residential Property.
16. Amount invested in approved Debenture of , and equity shares in, public company
engaged in infrastructure.
17. Amount deposited in as Term Deposit for a period of 5 years or more in
accordance with a scheme framed by the Government.
18. Subscription to any notified Bonds of National Bank for Agriculture and Rural
Development ( NABARD)
19. Amount deposited under Senior Citizens Saving Scheme.
20. Amount deposited in 5 Year Time Deposit in Post Office.

Step-2: Net Qualifying Amount :


Deduction u/s 80C is available on the basis of Net Qualifying Amount which is determined as
under …

1. Gross Qualifying Amount ; or


2. Rs. 1,00,000

Whichever is LESS.
Step-3: Amount of Deduction:
Amount Deduction u/s 80C is computed as under:

1. Net Qualifying Amount ; or


2. Rs. 1,00,000

Whichever is LESS.
The aggregate deduction u/s 80C, 80CCC, and 80 CCD can not exceed Rs. 1,00,000.
4. DEDUCTION OF TAX FROM THE ‘SALARY’ [SECTION-192]

The summarized provisions of Sec. 192 are given below :

Who is the taxpayer Employer


Who is the recipient Employee
Payment covered Taxable salary of the employee
At what time tax has to be deducted at
At the time of payment
source
The amount of exemption limit ( i.e.
Maximum amount which can be paid
Rs.1,80,000 / Rs.2,25,000/Rs.1,50,000 for the
without Tax Deduction
assessment year 2009-10.)
Rate of tax deducted at source Normal Rates applicable to an individual
The employee can make an application in
Is it possible to get the payment without tax Form No.-13 to the Assessing Officer to get a
deduction or with lower tax deduction certificate of lower tax deduction or no tax
deduction.

Note: - Rs. 1,80,000 is for Resident Women below 65 years


- Rs. 2,25,000 is for Senior Citizen 65 years or more.

RELIEF IN RESPECT OF SALARY IN ARREARS, ADVANCE, ETC.


If an individual receives any portion of his salary in arrears or in advance or receives profit in
lieu of salary, he can claim relief in terms of Sec.89