Académique Documents
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Culture Documents
IFOS
CHAPTER - 7
INCOME FROM OTHER SOURCES
Section
Particulars
56(1)
56(2)
56(2)(ib)
56(2)(vi)/(vii)
56(2)(viia)
57(i)
57(ii)
57(iia)
58
59
2(22)
Deemed dividend.
10(35)
94
115BB
2(28B)
Interest on securities
145
Method of accounting
This is the last and residuary head of income. Any income which is taxable under the Act but
does not find place under any of the remaining four heads of income (i.e. Salaries, House
Property, Business and Capital Gains) will be taxable under this residuary head 'Income from
Other Sources'.
DIVIDEND
Main points of dividend income is discussed below in brief :
(i)
(ii)
(iii)
Dividend income from Domestic Company is exempt from tax for shareholder u/s 10(34).
The Domestic company is liable to pay Dividend tax u/s 115-O @ 16.2225% [ 15% + 5%
surcharge + 2% EC + 1% SHEC]. Surcharge is being computed on basic rate of 15% &
EC/SHEC being calculated on Basic rate + surcharge. It is payable within 14 days of
declaration or distribution, whichever is earlier.
Dividend income is taxable as income from other source if such income is from a foreign
company or from a cooperative society. From the gross dividend income, interest on
borrowed capital to invest in such shares & brokerage etc. is fully deductible. Here
income can be negative.
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(iv)
(v)
IFOS
Such dividend from foreign company is taxable as income from other source even if
shares are held as stock-in-trade.
Deemed dividend u/s 2(22)(e) is still taxable for recipients as IFOS. TDS applicable u/s
194 @ 10%.
DIVIDEND
The dividend is the distribution of divisible profits by a joint stock company to its shareholders by
way of return on investments in the shares of the company.
DIVIDEND UNDER THE INCOME TAX ACT (DEEMED DIVIDENDS)
Sec. 2(22) gives the definition of Deemed dividend which is chargeable to tax under
the head Income from other source even if the receipt is not regarded as dividend under
the Companies Act.
Under section 2(22), following payments or distribution by a Company to its
shareholders is deemed as dividends to the extent of accumulated profits of the
company.
ACCUMULATED PROFITS
Accumulated profits should include the credit balance of the Profit and loss account, general
reserves, investment allowance, capitalised profits (Bonus shares) and profits of the year upto
the date of distribution/ liquidation.
Even Reserve created out of agriculture income, Capital redemption reserve, Dividend
equalisation reserve, Workmen Compensation reserve, Debenture redemption reserve, shipping
reserve, Reserve for contingency etc. form part of Accumulated reserves.
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IFOS
However, provisions and reserves meant for specific liability, to the extent of the liability shall
not be included. Provision for Income tax, provision for dividend, reserve for depreciation do not
form a part of the accumulated profits.
Share premium a/c shall not form part of accumulated profits.
Accumulated profits includes tax free incomes e.g. agricultural income.
SECTION 2 (22) (a) - ANY DISTRIBUTION BY A COMPANY TO THE EXTENT OF
ACCUMULATED PROFITS INVOLVING THE RELEASE OF THE ASSET OF THE
COMPANY:
DIVIDEND INCLUDES any distribution by a company of accumulated profits, whether
capitalised or not, if such distribution entails the release by the company to its shareholders of
all or any part of the assets of the company. It basically includes distribution of assets whether
in cash or in kind.
Example: A Ltd has share capital of Rs 50 lacs. The Company has General Reserves of Rs 20
lakhs and has distributed dividends. One of the shareholder Mr Ajay has received dividends of
Rs 67,000 and is holding 4% of the shares. In this case, his share in accumulated profits is Rs
80,000 and hence entire amount of Rs 67,000 received by him shall be considered to be
dividend.
Held in Shashibala Navnitlal that Issue of bonus shares does not entail release of any assets of
the company as the asset side remains intact. Hence it is not treated as dividend u/s 2(22)(a).
Held in Central India Industries Ltd. (SC) When assets are distributed under section 2 (22) (a),
the market value of the asset on the date of distribution has to be taken for computing the
dividend.
Question 1: A Ltd has accumulated profits of Rs 4,00,000 excluding capitalized profits i.e.
bonus shares of Rs 1,00,000 issued in the past. The company distributed assets of Rs 3,50,000
to the shareholders. Compute the amount taxable as dividend if the market value of the asset
on the date of distribution is :
a) Rs 3,00,000
b) Rs 4,40,000
c) Rs 6,70,000
Note: The taxable amount is basically taxable for company @ 16.2225%.
Section 2 (22) (b) Distribution of Debenture/ Deposit Certificates to Shareholders and
bonus shares to preference shareholders:
DIVIDEND INCLUDES
(i)
(ii)
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IFOS
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IFOS
Situation III : AB Pvt Ltd. gives loan to Mr. A/relatives of A in the form of Medical
facility/Housing facility/Telephone facility or any other facility
It is taxable for Mr. A as Income from other sources.
Company will deduct TDS @10% on 5,00,000.
Example 2 : AB Pvt. Ltd. is a closely held company in which Mr. A is having 60% of share
holding & Mr. B is having the remaining 40% of the shareholding.
AXY Pvt Ltd./AXY (a partnership firm)/AXY(Any other concern) in which Mr. A has a share of
30%, Mr. X has a share of 50% , Mr. Y has a share of 20%.
AB Pvt Ltd. gives loan of Rs. 5,00,000 to such concern. It is taxable for AXY as deemed
dividend U/s 2(22) (e) under the head Income from other sources
Company will deduct TDS @10% on 5,00,000.
Special points:
U/S 2 (22) (e), if loan is given to a Shareholder and on date of loan, his share holding was
less than 10% and subsequently it is increased to 10% or more than Sec. 2 (22) (e) is
not attracted. Thus, 10% or more shareholding is to be seen as on the date of loan.
Even trade deposit to a shareholder will be treated as dividend u/s 2(22)(e).
Payment on behalf of shareholder: Section 2(22)(e) covers not only advances and loans to
shareholders but any other payments by the company on behalf of or for the benefit of
individual shareholders, such as payments of shareholders personal expenses like air
tickets etc., insurance premium, etc., to the extent of the accumulated profits of the
company.
If any such loan was given to more than one such shareholders, accumulated profits shall
be reduced by the amount of the loan given to the earlier shareholder. As decided in CIT
v. G. Narasimhan (1979)(Mad HC).
Example : A Ltd has General reserves of Rs 20,00,000. The company has given a loan of
Rs 15,00,000 on 18.7.2012 to Mr P holding 10% of the voting power and the company
has given a loan of Rs 7,00,000 to Mr Q on 11.12.2012 who is holding 10% of the voting
power. In this case, dividends in the hands of Mr P shall be Rs 15 lacs and in the hands
of Mr Q, it will be Rs 5 lacs.
If loan or advance was given to any such shareholder and subsequently the loan amount
was repaid by him, even in such cases the loan or advance shall be considered to be
dividend. As decided in Tarulata Shyam v. CIT (1977)(SC).
Following are exempt u/s 2(22)(e)
Any advance or loan made to a shareholder or a concern by a company in the ordinary
course of it business where money lending is substantial part of the business of the
company. Ordinary course of business shall mean that the loan or advance should be
given to such shareholder at the same rate and terms as it is given to other borrowers.
Any dividend paid by a company which is set off by the company against the whole or any
part of the loan which has been deemed as dividend under section 2(22)(e)
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IFOS
Example : AB Pvt. Ltd. an Indian company gives loan to Mr. A who is having 15% of
shareholding in the company on 10th July 2012 of Rs.5,00,000. This amount will be taxable in
the hands of Mr. A as Income from other sources. Now, the company at its AGM held on 28
Sep. 2012 declares dividend. Mr. A received Rs.3,00,000 as amount of dividend which is set off
against the loan taken by from the company. This dividend is exempt in the hands of Mr. A U/s
10(34). No Corporate Dividend Tax U/s 115-O is payable by the company.
More points:
Dividend does not include any payment made by a company on purchase of its own
shares in accordance with the provisions contained in section 77A of the Companies
Act, 1956.
Dividend does not include any distribution of shares made in accordance with the
scheme of demerger by the resulting company to the shareholders of the demerged
company whether or not there is a reduction of capital in the demerged company.
Deductions for expenses from dividend income [Section 57(i) and 57(iii)]
The following expenses can be claimed as deductions from gross dividend income:
(a)
(b)
Interest on loan: Interest on money borrowed for purchasing the shares can be claimed
as deduction. This deduction can exceed the amount received by way of dividend. It
interest is payable outside India, TDS must be done, otherwise deduction is not
available.
BASIS OF CHARGE
Method of accounting regularly employed by the assessee does not effect basis of charge of
dividend income fixed by Section 8:
Normal Dividend-Normal dividend declared at annual general meeting is deemed to be the
income of the previous year in which it is declared.
Deemed dividend-Notional dividend under section 2(22) is treated as the income of the
previous year in which it is so distributed or paid.
Interim dividend- Interim dividend is deemed to be the income of the previous year in which
the amount of such dividend is unconditionally made available by the company to a
shareholder.
Corporate Dividend Tax Section 115 O
The Corporate Dividend tax payable by companies during financial year 2012 -13 is 16.2225%.
[basic rate 15% + 5% surcharge + 2% education cess + 1% secondary & higher education
cess].
This is payable by a company on equity dividend, preference dividend & deemed dividend u/s
2(22)(a)-(d). No CDT on 2(22)(e) deemed dividend.
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IFOS
Note : Surcharge on Corporate Dividend Tax is applicable irrespective of the Amount declared.
Place of Accrual [Sec 9(1)(iv)] : Dividend paid by an Indian company is deemed to accrue or
arise in India.
Capital gain on distribution of assets by companies in liquidation [Section 46]
Notwithstanding anything contained in Section 45, where the assets of the Company are
distributed to its shareholders on its liquidation, such distribution shall not be regarded as a
transfer by the company.
Section 46(2) Where a shareholder on the liquidation of a company receives any money and/
or other assets from the company, then he shall be chargeable to income tax under the head
capital gains and the sales consideration for such purpose shall be as under:
Money received [+] Market value of the assets received as on the date of distribution
Less: Amount assessed as Dividend u/s 2(22)(c)
-----------------------------------------------------------------------------=
Deemed Sales consideration for the shares in the liquidating company
Less: Cost/ Indexed cost of shares
------------------------------------------------------------------------------=
STCG / LTCG or [STCL / LTCL]
For determining the nature of capital gains arising from the shares in liquidating
company the period subsequent to the date on which the company goes into
liquidation shall not be considered.
Sales of assets received on liquidation [Section 55]
Where the capital asset became the property of the assessee on distribution of capital assets by
a company on its liquidation and the shareholder has been assessed to income tax under the
head capital gains in respect of that asset u/s 46, the cost of acquisition of the asset will be the
fair market value of the asset on the date of distribution.
Question 2: X purchase 6,000 equity shares in A Ltd. on May 18, 1987 at the rate of Rs 15 per
shares. A Ltd. goes into liquidation on October 31, 2012. The balance sheet of the company as
on October 31, 2012 is as follows
Accumulated profit
Provision for dividend tax
Rs.
6, 00,000 10,000 non listed shares in B
Ltd.
(cost:
Rs
5,00,000,
acquired in 2006)
40, 00,000 Cash in hand
6, 48,900
52, 48,900
Rs.
35, 00,000
17, 48,900
52, 48,900
The assets are distributed to the shareholders. Consequently, X gets 1,000 shares in B Ltd.
(Market value Rs 3,50,000) and Rs 1,10,000 in cash on October 31, 2012. He transfers 1,000
shares on March 22, 2013 for Rs 4,40,000. Find out the tax consequence of these transactions.
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IFOS
Question 3: X holds 400 shares in A Ltd. since 1987 88 (Cost of acquisition: Rs 8,000). A Ltd.
goes into liquidation on October 31, 2012. The balance sheet of the company as on October 31,
2012 is as follows
Rs.
20,000 5 plots in Surat (cost of each
plot: Rs 40,000 acquired on
March 1, 2008)
22, 00,000 Cash in hand
3, 56,895
25, 76,895
Rs.
20,00,000
5, 76,895
25,76,895
At the time of liquidation, X gets 1 plot and Rs 44,000 in cash. X transferred the flat for Rs
5,20,000 on March 16, 2013. Ascertain the tax consequence of these transactions in hands of X
and A Ltd.
Question 4. Explain the Law Relating to Taxation of Gifts?
TAXATION OF GIFT [SECTION 56(2)(vii)]
Before studying the law relating to taxation of gifts, first understand the following basic terms as
applicable to this concept:
Immovable property : It includes land or building or both
Movable property : It includes
(i)
(ii)
Jewellery
(iii)
(iv)
Drawings
(v)
Paintings
(vi)
Sculptures
(vii)
(viii)
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Relative means
1. Spouse of the individual
2. Brother or sister of individual
3. Brother or sister of the spouse of the individual
4. Brother or sister of either of the parents of the individual
5. Any lineal ascendant or descendant of the individual
6. Any lineal ascendant or descendant of the spouse of the individual
7. Spouse of the person referred to in (2) to (6)
The law
1. Gift of Cash / Cheque / Draft : If, through one or more transactions, gift received is upto
Rs 50,000 per financial year, then nothing is taxable. If gift is Rs 50,001 or above, then it
is fully taxable. For example, if gift of Rs 70,000 is received in cash, then taxable amount
is Rs 70,000 and not Rs 20,000.
2. Gift of immovable property : In this case, if Stamp duty value is upto Rs 50,000 then
nothing is taxable. If it is above Rs 50,000, then fully taxable. It is applicable for each
individual transaction. Unlike above, if more than one transaction of Gift, below Rs
50,000, than they shall not be aggregated. Similarly, if there is consideration, may be
less or say if difference between the actual selling price and Stamp duty value is more
than 50,000, then the above law is not applicable. It is applicable only in case of gift i.e.
when property is transferred without consideration.
3. Gift of movable property (one or more transactions) : If fair market value of all
movable properties gifted in one financial year is upto Rs 50,000, then nothing is
taxable. But if it is more than Rs 50,000, then it is fully taxable.
4. Movable property transferred for inadequate consideration : If difference between
actual consideration and fair market value is more than Rs 50,000, all transactions of
one financial year combined together, then the difference is fully taxable. If difference is
upto Rs 50,000, than nothing is taxable.
Exempted Gifts :
1.
2.
3.
4.
5.
6.
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IFOS
Special points
1. Gift on the occasion of birthday, marriage anniversary etc is not exempt.
2. Donor / Recipient may be resident or non resident.
3. Gift of non capital asset is not covered like personal car, rural agl land, stock in trade etc.
Valuation of Jewellery, archaeological collections, drawings, paintings, sculptures or any
work of art :
Situation 1 : Purchased from a registered dealer : The invoice value shall be treated like fair
market value.
Situation 2 : In any other case : The price which such items would fetch if sold in the open
market on the date of receipt of gift.
EXAMPLES TO EXPLAIN THE LAW:
1. Gift before 1/10/2009 : The above law is not applicable. For example, Mr X gifts a plot
to Mr Y on 22/9/2009. Stamp duty value is Rs 6 lacs. Mr X is not taxable under capital
gains as it is not a transfer. Section 50C is not applicable. Mr Y is also not taxable as the
gift is before 1/10/2009. If subsequent Mr Y sells the plot, the concept of previous owner
is applicable.
2. Immovable property Stamp duty value upto Rs 50,000 Say Mr X gifts a plot
having stamp duty value of Rs 45,000 to Mr Y. In this case, no transfer, so Mr X is not
taxable. Mr Y is also not taxable as gift is upto Rs 50,000. In case of sale of plot by Mr Y,
the concept of previous owner shall apply.
3. Immovable property Stamp duty value above Rs 50,000 Say Mr X gifts a property
having stamp duty value of Rs 30,00,000 to Mr Y. Mr Y is taxable under the head IFOS
for Rs 30,00,000. Mr X is not taxable as it is not a transfer. If Mr Y subsequently sells the
property, COA shall be Rs 30,00,000 and period of asset shall be counted from the date
of gift. Concept of previous owner not applicable.
Question 5: Mr A purchased a building for Rs 5,00,000 in 2004-05. Cost of improvement in
2006-07 of Mr B sold the building on 13.1.2013 for Rs 50,00,000 (SDV is Rs 52,00,000).
Compute taxable incomes for both Mr A & Mr B.
4. Immvoable property Inadequate consideration Gift law not applicable in this case.
Normal provisions shall apply.
Question 6: Mr A purchased a building for Rs 5,00,000 in 2004-05. Cost of improvement in
2006-07 is Rs 7,00,000. He sold it to his friend Mr B on 10.4.2012 for Rs 30,00,000. (SDV on
this date is Rs 45,00,000). Mr B sold the building on 13.1.2013 for Rs 50,00,000 (SDV is Rs
52,00,000). Compute taxable incomes for both Mr A & Mr B.
(CII for 2004-05 : 480, 2006-07 : 519)
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IFOS
5. Gift of Rural Agl Land / Motor car This law not applicable as gift of non-capital
assets is not covered.
6. Purchase of Jewellery etc. from registered dealer : Suppose Jewellery is purchased
from registered dealer against proper bill (invoice) at a price which is less than market
value. In this case nothing is taxable for the purchaser. For example, Jewellery is
purchased for Rs 6 lacs while market value is easily Rs 6,70,000. In this case, no
deemed gift income.
7. Purchase of Jewellery etc from a person other than registered dealer : In this case,
difference, if above Rs 50,000, then difference is taxable. Like in above case, if purchase
is not from registered dealer, Rs 70,000 shall be taxable as IFOS. In case of subsequent
sale by purchaser, Rs 6,70,000 shall be taken as COA.
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IFOS
Question 7: X receives the following gifts during the previous year 2012-13
1. On the occasion of marriage of X, he gets Rs.3,00,000 as gift on April 2, 2012 (out of
which Rs.2,40,000 is received from friends of X and Mrs. X and remaining amount is
received from close relatives of X and Mrs. X )
2. On June 22, 2012, he gets a gifts of Rs.30,000 from P, who is cousin of his mother.
3. On July 24, 2012, he gets a gift of Rs.16,000 from D, who is elder brother of his
grandfather.
4. On September 23, 2012, he gets a gift of Rs. 5,00,000 from his grandmother.
5. A computer received from his employer (it was purchased for Rs.57,000 by the employer
on June 1, 2012 and given as gift to on September 27, 2012)
6. On November 3, 2012, purchases a house property from his friend D for Rs.89,000
(stamp duty value of the property is Rs. 8,90,000)
7. On November 27, 2012, X gets a gift of a building from his grandfather (stamp duty
value is Rs.12,00,000).
8. In December 11, 2012, X gets by gift a commercial plot from the elder brother of his
father-in-law (stamp duty value is Rs.22,00,000).
9. On January 8, 2013, he gets a gift of Rs.3,00,000 (cash gift of Rs.25,000 and gift of a
work of art whose market value is Rs.2,75,000) from a notified public charitable
institution.
10. X receives on January 15, 2013 a house property under will of a person known to him.
The stamp duty value is Rs.45,50,000.
11. On January 24, 2013, he gets a wrist watch by gift (fair market value : Rs.33,000) from
his friend B.
12. On January 29, 2013, he purchases a work of art for Rs.22,00,000 from an exhibition in
London (the fair market value of the work of art on the date of purchase is
Rs.23,00,000).
13. On February 2, 2013, he purchases an Office for Rs.9,00,000 (stamp duty value is Rs.
10,60,000).
14. On February 7, 2013, he gets a birthday gift of a gold chain (fair market value :
Rs.22,000) from his friend.
15. On February 9, 2013, X gets by way of gift a plot of land in Pune from a partnership firm.
The partnership firm has only two partners father of X and Mrs. X. The stamp duty value
of the plot of land is Rs.22,00,000.
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IFOS
16. On February 17, 2013, X purchases 400 shares in Bata Chemicals from his friend D at
Rs.80 per share (outside stock exchange). The lowest market quotation in the Bombay
Stock Exchange on the date of purchase is Rs.400.
17. On March 3, 2013, X gets a gift of gold ring from a cousin of his father-in-law. The fair
market value is Rs.22,000.
18. On March 22, 2013, X gets a paining by way of gift from PQR Ltd. Mrs X holds 60 per
cent shares in PQR Ltd. The fair market value of paining is Rs.22,000.
19. On March 29, 2013, X gets a small plot of land by way of gift from a cousin of Mrs. X
(stamp duty value is Rs.43,000).
Compute the amount chargeable to tax in the hand of X under the head Income from
other sources for the assessment year 2013-14.
Question 8 . X receives the following gifts during the previous year 2012-13 :
September 8, 2012 Cash gift of Rs.78,000 from a friend on marriage anniversary/ Birthday
September 29,2012 Purchase of a house property from a friend for Rs.12,00,000 (stamp
duty value is Rs.38,00,000)
December 22, 2012 Purchase of a house property from Mrs. X for Rs.17,00,000 (stamp duty
value is Rs.67,00,000)
December 27, 2012 Purchase of a painting from an art gallery (being registered dealer
under HARYANA VAT) for a concessional price of Rs.70,000 (invoice
value is Rs.70,000, however, this painting can be easily sold for
Rs.1,80,000)
Cash gift of Rs.30,000 from a colleague
March 11, 2013
Purchase of a second hand car for Rs.1,70,000 (fair market value is
March 14, 2013
Rs.3,40,000)
Cash gift of Rs.60,000 from a non-resident friend.
March 29, 2013
Find out the amount chargeable to tax under the head Income from other sources for the
assessment year 2013-14. Does it make any difference if X is a dealer in second hand cars
and on March 14, 2013 the car is purchased as stock-in-trade?
Question 9: How will you treat the gift of shares received by a closely held company.
Ans: Receipt of shares by a firm or a closely held company Clause (viia) has been
inserted in section 56(2) with effect from June 1, 2010. This clause is applicable, if the following
conditions are satisfied
1. Recipient is a firm or a closely held company (i.e., a company in which the public are not
substantially interested).
2. The asset (which is received) is in the form of shares in a closely held company (i.e. a
company in which the public are not substantially interested).
3. These shares are received from any person.
4. Such shares are received on or after June 1, 2010.
5. Such shares are received without consideration or for an inadequate consideration.
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IFOS
Nature of asset
1
2
3
4
Consider
ation
paid by
XYZ Co.
Rs.
Nil
Nil
Fair
market
value
Rs.
Date of
transfer
9,00,000
22,00,000
July 7, 2012
July 8, 2012
10,000
5,30,000
July 6, 2012
Nil
7,00,000
May29,
2010
Nil
10,000
June 1,
2012
Nil
40,000
September
1, 2012
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IFOS
70,000
1,50,000
October 11,
2012
9,000
19,000
November
11, 2012
N.A.
8,00,000
December
11, 2012
The above provisions are not applicable in the following two cases
a. Where the consideration for issue of shares is received by a venture capital
undertaking from a venture capital company or a venture capital fund; or
b. Where the consideration for issue of shares is received by a company from a class
or classes of person as notified by the Central Government.
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IFOS
The fair market value of the shares shall be the higher of the value
a. As may be determined in accordance with the method as may be prescribed; or
b. As may be substantiated by the company to the satisfaction of the Assessing Officer,
based on the value of its assets, including intangible assets, being goodwill, knowhow, patents copyrights, trademarks, licences, franchises or any other business or
commercial rights of similar nature.
Question 11: What is the tax treatment of income from units of UTI / Mutual funds.
Ans: Income from Units of UTI and Mutual Fund :
Income from units of UTI and Mutual Fund is exempt from tax as per section 10(35).
100
Net amount received X -----------------------100 (-) rate of TDS
TDS RATE:
As per section 194B the TDS rate for lottery, crossword puzzles or card games or other games
is 30% [No TDS if lottery etc. upto Rs 10,000 but if amount exceeds Rs 10,000 then TDS on
whole amount].
As per section 194BB, the TDS rate for winning from horse races is 30% [No TDS if winning
upto Rs 5000 but if winnings exceed Rs 5000 then TDS on whole winnings].
Note : No TDS is deducted if Lottery Price is less than Rs.10,000 but still the tax is payable by
the assessee. Similarly no TDS in case of Winning from other races, gambling or betting.
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Question 13. Compute tax liability for assessment year 2013 14:
(a)
Salary income : Rs 20,000 pm
(b)
Dividend income from Indian company: Rs 45,000
(c )
Winning from Lottery : Rs 35,000
(d)
Winning from Horse races: Rs 40,000
(e)
Public provident fund contribution: Rs 20,000
Question 14. Compute tax liability for assessment year 2013 -14
(a)
Business income: Rs 1,60,000
(b)
Winning from card games: Rs 20,000
(c)
Winning from betting: Rs 15,000
(d)
Life insurance premium paid: Rs 26,000
Question 15: How will you tax the interest on securities.
Ans: INTEREST ON SECURITIES:
Such income is taxable under the head Profit and gains of business or profession, if the
securities are held as stock-in-trade. And if they are held as investment, the interest will be
taxable under the head Income from other sources.
Interest on securities is taxable for the registered owner of securities, i.e. who is
registered owner on the date, on which the interest falls due, even if he is not the owner
of security for the period for which the Interest is being paid. For example, if the due date
of interest for Debentures of XYZ Ltd. is 31st March, then who so ever is the owner of
debentures on 31st March, shall be entitled to receive the interest for the full year, as well
as he is taxable for the same, even though he might have purchased these debentures
just one or two month back.
Grossing up of Interest:
Interest is paid after TDS at following rates:
Govt. Securities: Nil (In case of 8% saving bonds, if amount of interest exceeds Rs
10,000 then there is a TDS @ 10%)
Listed / Non listed securities: 10%
100
Formula for grossing up:
Net amount received X -----------------------100 (-) rate of TDS
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IFOS
2.
3.
4.
5.
6.
7.
Question 16: Discuss the various tax avoidance measures taken by investors to avoid tax on
interest on securities.
Ans: Bond Washing transactions and Chargeability of Interest (Section 94)
Section 94(1) : The holder of securities is normally assessable on the whole interest, which falls
due on the date of interest. But this rule is not applicable to bond washing transactions.
A bond washing transaction consists of selling of securities just on the eve of due date of
interest and buying back securities after the due date of interest is over. Thus, a high-income
group assessee may avoid or reduce his tax liability by transferring the securities before the due
date of interest to a person (generally a friend or relative) who has no taxable income or whose
rate of tax is quite low.
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IFOS
As a result, the whole interest is includible in the income of the transferee who holds the
securities on the due date of interest. Thus the tax liability may be wholly avoided or
substantially reduced depending upon the total income of the transferee.
To prevent this, it has been provided [under Sec. 94(1)] that the whole interest in respect of a
bond washing transaction is deemed to be the income of the transferor and not that of
transferee.
Section 94(2): Another method of avoiding tax is sale of securities cum-interest. Section 94(2)
provides that if an assessee, having beneficial interest in securities during the previous year,
sells them in such a way that either no income is received or income received is less than the
sum he would have received if interest had accrued from day to day, then income from such
securities for such year would be deemed as income of such person.
Exceptions:
The assessing officer shall not apply the above rule in the following cases:
(1) If the assessee proves to the satisfaction of the Assessing Officer that there has been no
avoidance of income tax; or
(2) If the assessee proves that the avoidance of income tax is exceptional and not systematic;
and there was no avoidance of income tax in any of the three preceding years.
Question 17: Family pension is taxable as IFOS. If there any deduction allowed against such
income ?
Ans: Standard deduction in the case of family pension [Sec. 57(iia)]
In the case of income in the nature of family pension, the amount deductible is Rs. 15,000 or
331/3 per cent of such income, whichever is less.
For this purpose family pension means a regular monthly amount payable by the employer to
a person belonging to the family of an employee in the event of his death.
Question 18: Whether income from letting of machinery, plant, furniture are IFOS.
Ans: Income from letting out of machinery, plant or furniture [Section 56(2)(ii)]
Income from machinery, plant or furniture, belonging to the assessee and let on hire, is
chargeable as income from other sources, if the income is not chargeable to Income-tax under
the head Profits and Gains of Business or Profession.
In case any such assets are hired out as a part of the business activity carried on by the
assessee or as commercial assets belonging to the assessee, the income derived there from is
assessable as business income u/s 28 and not as income from other source u/s 56.
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IFOS
Question 19: Discuss the taxation of composite letting of building and furnitures.
Ans : Income from composite letting of machinery, plant or furniture and buildings
[Section 56(2)(iii)]:
Where an assessee lets on hire the machinery, plant or furniture belonging to him and also
buildings, and the letting of the buildings is inseparable from the letting of the said machinery,
plant or furniture, the income from such letting, known as composite rent, if it is not chargeable
to Income tax under the head Profits and gains from Business or profession, shall be
chargeable as income from other sources.
Deductions permissible from letting out of machinery, plant or furniture and buildings
[Section 57(ii) and (iii)]:
The following deductions are allowable:
(a) Current repairs, rates and taxes of the building if given to others on composite rent. {Rent
and taxes, however, shall be subject to Section 43B as in the case of Business or
Profession}.
(b) Insurance premium against risk of damage or destruction of the premises.
(c) Repairs and insurance of machinery, plant or furniture.
(d) Depreciation as per section 32
(e) Any other expenditure, expanded wholly and exclusively for the purpose of making or
earning such income.
Question 20: Write a note on tax treatment of Deep Discount bonds.
Ans : Deep discount bonds :
Vide Circular No. 2/2002, dated February 15, 2002, the Board has issued certain clarifications.
Position before issue of circular no. 2/2002 : The Board had earlier clarified that the difference
between the bid price (subscription price) and the redemption price (face value) of such bonds
will be treated as interest income assessable under the Income-tax Act. On transfer of the
bonds before maturity, the difference between the sale consideration and the cost of acquisition
would be taxed as income from capital gains where the bonds were held as investment, and as
business income where the bonds were held as trading assets. On final redemption, however,
no capital gains will arise.
Example : Subscription Price
Face Value
=
5,000
= 1,00,000
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IFOS
(1) Every person holding a Deep Discount Bond will make a market valuation of the bond as
on the March 31 of each financial year.
(2) The difference between the market valuations as on two successive valuation dates will
represent the accretion to the value of the bond during the relevant financial year and
will be taxable as interest income (where the bonds are held as investments) or business
income (where the bonds are held as trading assets).
(3) Where the bonds is transferred at any time before the maturity date, the difference
between the sale price and the cost of the bond will be taxable as short-term capital
gains in the hands of an investor or as business income in the hands of a trader. For
computing such gains, the cost of the bond will be taken to be the aggregate of the cost
for which the bond was acquired by the transferor and the income, if any, already offered
to tax by such transferor upto to the date of transfer.
(4) Where the bond is redeemed by the original subscriber, the difference between the
redemption price and the value as on the last valuation date immediately preceding the
maturity date will be taxed as interest income in the case of investors, or business
income in the case of traders.
(5) Investors holding Deep Discount Bonds up to an aggregate face value of Rs. 1,00,000
may, at their option, continue to offer income for tax in accordance with the earlier
clarifications issued by the Board referred to in para above.
Example : Subscription Price on 8th October 2012 = Rs.10,000
Market Value on 31st March, 2013
= Rs.18,000
On 31st March, 2014
= Rs.29,000
Treatment for Previous Year 2012-13,
interest income will be = Rs.18,000 (-) Rs.10,000 = Rs.8,000
Interest Income for Previous year 2013-14 = 29,000 (-) 18,000 = 11,000
If Bonds sold during Previous Year 2012-13 the cost shall be taken as 10,000.
If Bonds sold during 2013-14 then cost shall be =18,000.
If Bonds sold during 2014-15, then cost shall be = 29,000.
Interest on National Savings Certificates:
REFER CHAPTER DEDUCTIONS UNDER SECTION 80C TO 80U.
Question 21: Discuss various deductions and disallowances in the chapter IFOS.
Ans: DEDUCTIONS AGAINST INCOME FROM OTHER SOURCE U/S 57
a.
b.
c.
d.
e.
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3.
4.
5.
6.
IFOS
Any fees or commission received by an employee from a person other than his employer.
(2)
Any annuity received under a Will. It does not include an annuity received by an employee
from his employer.
(3)
All interest other than interest on securities, e.g., interest on bank deposits, interest on
loan, or interest on provident fund, etc.
(4)
Income of a tenant from sub-letting the whole or a part of the house property.
(5)
(6)
Income of Royalty.
(7)
(8)
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(9)
IFOS
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IFOS
Question 24: Whether any deduction is allowed against interest received on compensation.
Ans : Amount deductible from interest on compensation [Sec.57 (iv)] Income by way of
interest received on compensation or on enhanced compensation, shall be assessed under the
head Income from other sources in the year in which it is received. This rule is applicable from
the assessment year 2010-11. Under section 57(iv), 50 per cent of such interest is deductible.
However, no other deduction is permitted.
Provisions illustrated X owned a house property at Madurai. It was acquired by the
Government in 2005-06. Compensation is awarded during 2010-11. Along with compensation, a
sum of Rs.1,60,000 is payable by the Government for late payment of compensation
(expenditure incurred by X for getting interest sanctioned is Rs.15,000)). The interest belongs to
the previous years 2005-06 to 2010-11. Out of this interest, Rs.1,30,000 is received by X on
March 31, 2012 and Rs.30,000 is received on April 10, 2012. The following income will be
taxable under the head Income from other sources
Interest received
Less : Amount deductible under section 57(iv) [50% of
interest)
Less : Actual expenditure of Rs.14,000
Income taxable under the head Income from other
sources
Assessment
year 2012-13
Rs.
1,30,000
65,000
Assessment
year 2013-14
Rs.
30,000
15,000
Nil
Nil
65,000
15,000
Date
declaration
dividend
Rs.
60,000
Interest paid
by
X
on
capital
borrowed to
invest
in
shares
Rs.
70,000
Net
amount
paid to
X
No
of Amount
of of TDS
under
section
194@
10%
Rs.
Nil
Jun 20, 2012
No
July 8, 2012
Nil
40,000
5,000
No
Nil
20,000
1,000
Yes
3000
27000
4,000
Rent from letting a factory along with plant and machinery (letting out of factory cannot be
separated from letting out of plant and machinery): Rs. 50,000. Collection charges in respect of
rent: Rs. 500. Fire insurance premium in respect of building: Rs. 800. Fire insurance premium in
respect of plant and machinery: Rs. 600. Repairs is respect of building: Rs. 2,000. Depreciation
of building, plant and machinery: Rs. 7,000. Winnings from lottery on October 5, 2012: net
amount: Rs. 56,000; tax deducted of source: Rs. 24,000.
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IFOS
Date of gift
June 13, 2012
August 19, 2012
September 11, 2012
October 10,2012
November 18, 2012
December 5, 2012
Amount Rs.
1,50,000
70,000
80,000
8,00,000
3,00,000
30,000
Determine the income chargeable under the head Income from other sources for the
assessment year 2013-14 & Compute the tax liability.
Question 26. X, a resident and ordinarily resident in India, gives the following particulars of his
income and expenditure for the previous year ending March 31, 2013:
Rent from letting a building (in Ajmer) along with plant and machinery (letting out of building
cannot be separated from letting out of plant and machinery): Rs. 89,000; depreciation of
building in Ajmer: Rs. 4,000; repairs and insurance of building (in Ajmer) and plant and
machinery: Rs. 5,000.
Dividend on Preference shares from an Indian company declared on July 31, 2012 : Rs. 20,000.
Loan from another Indian company which is deemed as dividend under section 2(22) (e) is
given on August 20, 2012 [net amount received: Rs. 36000, tax deducted at source: Rs. 4,000].
Royalty income : Rs. 20,000
Winnings from camel races on September 2, 2012 [net amount received: Rs. 25,000, tax
deducted at source: Nil]
Interest on 7 per cent Capital investment Bonds: Rs. 33,000.
Gift received on Feb 20,2013 in foreign currency from a school friend : Rs. 30,000. Gift from
another friend on March 31, 2013: Rs. 20,000
Determine the income chargeable under the head Income from other sources for the
assessment year 2013-14. Also compute tax liability
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IFOS
Rs. 70,000
Rs. 40,000
In september 2012, he received interest of Rs 18,000 from Relief Bonds. On Oct 19, 2012, X
sells Rs. 40,000 10% debentures of ABX Ltd, Calculate the taxable income of X for the
assessment year 2013-14 on the assumption that he has capital gain of Rs 50,000 and he has
received a gift of Rs. 3 lakhs in foreign currency from a friend on March 30, 2013 on his
marriage anniversary which is also his birthday. He also received a gift of Rs 60,000 from his
wife & a diamond ring from his uncle worth Rs 70,000 on the same day
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IFOS
(ii)
(iii)
Cash gift of Rs.51,000 received from her friend on the occasion of her Shastiaptha
Poorti, a wedding function celebrated on her husband completing 60 years of age.
This was also her 25th wedding anniversary.
On the above occasion, a diamond necklace worth Rs.2 lacs was presented by her
sister living in Dubai.
When she celebrated her daughters wedding on 21.2.2013, her friend assigned in
Mrs. Hemalis favour, a fixed deposit held by the said friend in a scheduled bank; the
value of the fixed deposit and the accrued interest on the said date was Rs.51,000.
Question 31. Rahul holding 28% of equity shares in a company took a loan of Rs.5,00,000
from the same company. On the date of granting the loan, the company had accumulated profit
of Rs.4,00,000. The company is engaged in some manufacturing activity.
(i)
Is the amount of loan taxable as deemed dividend in the hands of Rahul, if the
company is a company in which the public are substantially interested?
(ii)
What would be your answer, if the lending company is a private limited company
(i.e.) a company in which the public are not substantially interested?
Question 32. From the following particulars of Pankaj for the previous year ended 31st March,
2013, compute the income chargeable under the head Income from other sources .
Rs.
10,000
Directors fee from a company
(i)
3,000
Interest on bank deposits
(ii)
12,000
Income from undisclosed source
(iii)
35,000
Winnings from lotteries (Net)
(iv)
9,000
Royalty on a book written by him
(v)
5,000
Lectures in seminars
(vi)
7,000
Interest on loan given to a relative
(vii)
3,600
Interest on debentures of a company
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(viii)
(ix)
(x)
(xi)
IFOS
500
2,200
33,000
Question 34. State whether True/False with proper reasons of the following statements with
regard to provisions of Income-tax Act, 1961:
A receives Rs.2 lakh from his friends on the occasion of his marriage on 22.12.2012 and Rs.1
lakh from the brother of his father-in-law on 31.12.2012. As income includible under other
sources for the previous year 2012-13 would be Rs.3 lakh.
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IFOS
Question 35. Check the taxability of her marriage gifts received by Mrs. Rashmi during the
previous year 2012-13 and compute the taxable income from gifts for Assessment Year 201314:
(i)
On the occasion of her marriage on 14.8.2012, she has received Rs.90,000 as gift
out of which Rs.70,000 are from relatives and balance from friends.
(ii)
On 12.9.2012, she has received gift of Rs.18,000 from cousin of her mother.
(iii)
A cell phone worth Rs.21,000 is gifted by her friend on 15.8.2012.
(iv)
She gets a cash gift of Rs.25,000 from the elder brother of her husbands
grandfather on 25.10.2012.
(v)
She has received a cash gift of Rs.12,000 from her friend on 14.4.2012.
QUESTIONS BASED ON STUDY MODULE
Question 36. Mr. A, a dealer in shares received the following without consideration during the
P.Y. 2012-13 from his friend Mr. B
1. Cash gift of Rs.75,000 on his anniversary, 15th April, 2012.
2. Bullion, the fair market value of which was Rs.60,000, on his birthday, 19th June, 2012.
3. A plot of land at Faridabad on 1st July, 2012, the stamp value of which is Rs.5 lakh on
that date. Mr. B had purchased the land in April, 2007.
Mr. A purchased from his friend C, who is also a dealer in shares, 1000 shares of X Ltd. @ Rs.
400 each on 19th June, 2012, the fair market value of which was Rs.600 each on that date. Mr.
A sold these shares in the course of his business on 23rd June, 2012.
Further, on 1st November, 2012, Mr. A took possession of property (building) booked by him two
years back at Rs.20 lakh. The stamp duty value of the property as on 1st November, 2012 is
Rs.32 lakh.
On 1st March, 2013, he sold the plot of land at Faridabad for Rs.7 lakh.
Compute the income of Mr. A chargeable under the head Income from other sources and
Capital Gains for A.Y.2013-14.
Question 37. Interest on enhanced compensation received by Mr. G during the previous year
2012-13 is Rs.5,00,000. Out of this interest Rs.1,50,000 relates to the previous year 2007-08,
Rs.1,65,000 relates to previous year 2008-09 and Rs.1,85,000 relates to previous year 2009-10.
He incurred Rs.50,000 by way of legal expenses to receive the interest on such enhanced
compensation.
Discuss the tax implication, if any, of such interest income for A.Y.2013-14.
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IFOS
EXAMINATION QUESIONS
PCC MAY-2012
Question 38
(1 Marks)
State whether the following are chargeable to tax and the amount liable to tax.
A sum of Rs.1,20,000 was received as gift from non-relatives by Raj on the occasion of the
marriage of his son Pravin.
IPCC MAY-2011
Question
PCC MAY-2011
Question (5 Marks) Already covered in Practice Manual questions
IPCC NOV-2011
Question (4 Marks) Already covered in Practice Manual questions
IPCC NOV-2010
Question39.
State under which heads the following incomes are taxable:
(i) Rental income in case of dealer in property
(ii) Dividend on shares in case of a dealer in shares
(iii) Salary by a partner from his partnership firm
(iv) Rental income of machinery
(v) Winnings from lotteries by a person having the same as business activity
(vi) Salaries payable to a Member of Parliament
(vii) Receipts without consideration
(4 Marks)
IPCC JUNE-2009
Question 40.
(2 Marks)
Mr. P, a shareholder of a closely held company, holding 16% shares, received advances from
that company which is to be deemed as dividend from an Indian Company, hence exempted
under section 10(34) of the Income-tax Act, 1961. State whether it is true or false.
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IFOS
Rs.
Assets
10,00,000 Land
40,00,000 Cash at bank
2,50,000
52,50,000
Rs.
42,00,000
10,50,000
52,50,000
The tax liability (towards dividend distribution tax) was ascertained at Rs. 3,00,000. The
remaining assets were distributed to the shareholders in the proportion of their shareholding.
The market value of land as on 31.07.2012 is Rs.100,00,000.
The land received above was sold by Mr. X on 28.02.2013 for Rs. 15,00,000.
Discuss the tax consequences in the hands of the company and Mr. X
PE-II MAY-2008
Question Already covered (1 Mark)
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