TYBMS SEM :5 Finance : Direct Taxes (Q.P. November 2018 with Solution)

 Paper/Subject Code: 46018/Finance: Direct Taxes

TYBMS SEM :5 

Finance 

Direct Taxes

(Q.P. November 2018 with Solution)

                    

Note: 

1. All Questions are compulsory

2. Figure to the right indicate full marks 

3. Use of simple calculator is allowed.

Q.1 (A) Choose correct alternative and rewrite the statement: (Any 8)            (8)

1) The Income Tax Act extends to ________ of India.

a) States

b) Union territories

c) Citizens

d) Whole

2) The Financial year in which the income is earned is called as the _______.

a) Assessment year 

b) Present year

c) Previous year

d ) Current year

3) Income deemed to accrue or arise in India is taxable in case of ________. 

a) Resident only

b) Both ordinary resident and NOR

c) Non-Resident

d) All the assesses

4) Gratuity received by the Government employee is _______.

a) Fully taxable

b) Fully exempt

c) Partly taxable

d) Partly exempt

5) Medical reimbursement by employer is not taxable upto Rs. ________.

a) 5,000 

b) 10,000

c) 15,000

d) 20,000

6) Municipal tax is deducted from _________.

a) Net Annual Value 

b) Gross Annual Value

c) Municipal Valuation

d) Fair rent

7) Bonus paid to employee is allowed as deduction on _______

a) Accrual basis

b) Payment basis

c) Declaration

d) None of the above

8) Capital gain arises from the transfer of _________.

a) An asset

b) Any fixed asset

c) A capital asset

d) House property only

9) Gift received by an Individual/ HUF from relatives shall be ________

a) Exempt upto Rs 25,000

b) Exempt upto Rs 50,000

c) Fully Exempt

d) Fully Taxable

10) Deduction u/s 80C is allowed to the maximum limit of _________.

a) Rs. 50,000

b) Rs. 75,000

c) Rs. 1,00,000

d) Rs. 1,50,000

Q.1 (B) State whether given statements are True or False: (Any 7)                (7)

1. Income tax in India is governed by the Income Tax Act, 1961.

Ans: True

2. Thane Municipal Corporation is a local authority.

Ans: True

3. There are 5 heads of Income under Income Tax Act, 1961.

Ans: False

4. Employer-Employee relationship is necessary for taxing the remuneration under the head Income from Salary.

Ans: True

5. Reasonable letting down value is higher of fair rent or municipal valuation.

Ans: False

6. Past untaxed profits brought into India is always taxable.

Ans: False

7. Entertainment Allowance deduction is only allowed to Non-government employees.

Ans: False

8. Dividend declared by Indian company is fully taxable in the hands of shareholders.

Ans: True

9. The quantum of deduction allowed under section 80D shall be limited to Rs. 1,00,000.

Ans: False

10. In case of short term capital asset indexation is applicable.

Ans: False

Q.2 Mr. Santosh Mankame is a Sales Manager in Akruti Pvt. Ltd. He gives you the following information for the year ended 31 March, 2018. (15)

Particulars	Rs.
Basic Salary (Gross)	Rs. 6,00,000 per annum
Dearness Allowance	Rs. 1,20,000 per annum
Bonus	Rs. 1,00,000
Commission on Sales	Rs. 84,000
Reimbursement of Medical expenses	Rs. 45,000
Conveyance Allowance received (Amount spent Rs. 30,000)	Rs. 36,000 per annum
Professional Tax deducted from Salary	Rs. 2,500 per annum

Other Information:

Dividend received from Reliance Industries Rs. 30,000

Interest received on Debentures Rs. 12,000

He paid by cheque mediclaim premium of Rs 18,000 on health of himself, spouse and dependent children. He had taken loan from SBI for higher education of his son who is pursuing MBA with Mumbai University. During the year 2017-18 he paid Rs 60,000 as interest on loan.

Compute his taxable income for the Assessment Year 2018-19.

OR

Q.2. Mr Peter Florrick is a U.S.A. citizen. He came to India on 15th September, 2017 for a visit and was in India till 31 March, 2018. In earlier previous years, he is in India as under: (15)

Previous Year	Days
2007-08	198
2008-09	200
2009-10	182
2010-11	190
2011-12	50
2012-13	220
2013-14	185
2014-15	190
2015-16	110
2016-17	205

Find out the residential status of Mr. Peter Florrick for the assessment year 2018-19 assuming that he is not a person of Indian origin.

Q.3 Mr. Kaustubh Munj gives you following information regarding house property owned by him. for previous year 2017-18                    (15)

Particulars	House I (Self-Occupied)	House II (Let Out Property)
Fair rent (per month)	25,000	20,000
Municipal Valuation (per month)	37,500	24,000
Municipal Taxes Paid	30,000	25,000
Rent received (per month)	-	30,000
House II was vacant for 2 months
Repairs	30,000	20,000
Interest on Borrowed Capital (loan taken on 1-4-2013)	1,00,000	70,000

 Other information:

1) Interest on deposits with Bank Rs. 75,000

2) Winning from lottery Rs. 25,000

He invested Rs 70,000 in PPF A/c,  Rs 10,000 in NSC & Rs 20,000 as LIC premium paid for self & spouse, Compute his Taxable Income for the Assessment Year 2018-19.

OR

Q.3 Mr. Rohit (75% disability) is a proprietor of RP & Co. following is the Profit and Loss Account for the year ended 31 March, 2018. (15)

Particulars	Rs.	Particulars	Rs.
To Salaries	2,80,000	By Gross Profit	15,60,000
To Conveyance	60,000	By Dividend from Indian Co.	20,000
To Printing & Stationery	40,000	By Interest on Bank Deposit	40,000
To Staff welfare	1,20,000
To Depreciation	60,000
To Motor car expenses	50,000
To Advertisement	30,000
To Audit Fees	20,000
To Embezzlement by Employee	30,000
To Drawings	80,000
To Income Tax	60,000
To Net Profit	7,90,000
	16,20,000		16,20,000

Additional Information:

1) Depreciation as per Income Tax Rules Rs 65,000.

2) Advertisement includes Rs 10,000 paid for souvenir published by a political party.

3) 1/5th of Motor Car expenses are considered personal.

4) During the year he invested Rs 50,000 in pension fund.

You are required to compute his Taxable income for the assessment year 2018-19.

Q.4 Ms. Netra purchased a house property for Rs 10,00,000 on 26th August 1994. She made the following additions/alterations to the house property.

Cost of construction of First Floor in Financial year 2006-07        Rs. 5,00,000

Cost of improvement in Financial year 2012-13        Rs. 8,00,000

Cost of construction of Second Floor in Financial year 2013-14    Rs. 12,00,000

She sold the property on 15th January, 2018 for Rs. 1,50,00,000. She paid a brokerage of Rs. 3,00,000 for the sale transaction. Fair market value of the property as on 1-4-2001 was Rs 15,00,000. Investment in new house property was Rs 50,00,000 on 15-3-2018.

Relevant Cost Inflation Indices are as follows:

Financial Year	Cost Inflation Index
2001-02	100
2006-07	122
2012-13	200
2013-14	220
2017-18	272

Compute the capital gains for Assessment year 2018-19.            (15)

OR

Q.4 Mr. Siddheshwar has earned the following incomes during the financial year ended on 31" March, 2018. Compute his Gross Total Income for the assessment year 2018-19. (15)

a) Resident and Ordinary Resident

b) Resident but not Ordinarily Resident

c) Non Resident

Particulars	Rs.
1. Rent from a property in Mumbai, received in London	1,50,000
2. Income from agriculture in Sri Lanka	1,00,000
3. Dividend from Japanese Company, received in India	75,000
4. Income received in USA for services rendered in India	1,20,000
5. Income from business in Mumbai, controlled from New York	2,00,000
6. Royalty Income received from Indian Companies	1,30,000
7. Income from Profession in Bangladesh, received in Bangladesh (Profession was set up in India)	1,25,000
8. Income accrued in New York and received in London	2,50,000
9. Amount brought to India, out of past untaxed profits earned in London	1,50,000

Q.5 (a) Define Capital Assets under Section 2(14).            (8)

Under Section 2(14) of the Income Tax Act, 1961, a Capital Asset is broadly defined as property of any kind held by an assessee, whether or not connected with their business or profession.

This definition is very wide and includes:

• Immovable property: Land, buildings, house property.
• Movable property: Jewellery, vehicles, machinery, furniture.
• Tangible property: Assets that can be physically touched.
• Intangible property: Goodwill, patents, trademarks, copyrights, shares, securities.
• Any rights in or in relation to an Indian company, including rights of management or control.
• Securities held by a Foreign Institutional Investor (FII) which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.   

However, the definition specifically excludes the following items from being treated as capital assets:

1. Stock-in-trade: Any stock-in-trade, consumable stores, or raw materials held for the purposes of the business or profession of the assessee (other than the securities held by an FII mentioned above).
2. Personal effects: Movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of their family dependent on them. However, this exclusion does not include:
   • Jewellery
   • Archaeological collections
   • Drawings
   • Paintings
   • Sculptures
   • Any work of art
      
3. Rural agricultural land in India: Agricultural land situated in any area which is not within the jurisdiction of a municipality or cantonment board having a population of ten thousand or more, or within a certain aerial distance of such areas depending on their population.
4. Certain Government Bonds:
   • 6½ per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government.   
   • Special Bearer Bonds, 1991, issued by the Central Government.
   • Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates issued under the Gold Monetisation Scheme, 2015, notified by the Central Government.

(b) Write any seven exempted Income u/s 10 of Income Tax Act 1961.        (7)

1) Agricultural Income [Section 10(1)]: Income derived from agriculture in India is exempt from income tax. This includes rent or revenue derived from land used for agricultural purposes, income from agricultural operations, and income from processing or marketing of agricultural produce.

2) Amount Received from Life Insurance Policy [Section 10(10D)]: Any sum received under a life insurance policy, including bonus allocated on such policy, is generally exempt. However, there are certain exceptions, such as amounts received under keyman insurance policies or policies that do not meet specific conditions regarding premium and sum assured.

3) Retirement Benefits (within specified limits):

• Death-cum-Retirement Gratuity [Section 10(10)]: Gratuity received by a government employee is fully exempt. For non-government employees, exemption is limited to the least of: (a) ₹ 20,00,000, (b) actual gratuity received, or (c) half month's salary for each completed year of service.
• Commuted Value of Pension [Section 10(10A)]: For government employees, the commuted value of pension is fully exempt. For non-government employees, the extent of exemption depends on whether they also receive gratuity.
• Leave Encashment [Section 10(10AA)]: For government employees, cash equivalent of leave salary on retirement is fully exempt. For non-government employees, the exemption is subject to certain limits.

4) Scholarships [Section 10(16)]: Scholarships granted to meet the cost of education are exempt from tax.

5) Income of a Minor Child [Section 10(32)] (subject to clubbing provisions): While the income of a minor child is generally clubbed with the income of the parent with the higher income, Section 10(32) provides an exemption of up to ₹ 1,500 per minor child per annum to the parent whose income is clubbed.

6) Allowances to Government Employees Outside India [Section 10(7)]: Any allowance or perquisite paid or allowed outside India by the Government to a citizen of India for rendering services ¹ outside India is exempt from tax.  

7) Dividends from Indian Companies [Section 10(34)]: Dividends received by shareholders from Indian companies are exempt from tax in the hands of the shareholders. (Note: The company distributing the dividend is subject to Dividend Distribution Tax under Section 115-O, although this has been abolished and dividends are now taxable in the hands of shareholders from FY 2020-21 onwards. However, for historical context and understanding of Section 10, this was a significant exemption).

OR

Q.5 Write a short note on (any three):                    (15)

i. Person

Under the Indian Income Tax Act, 1961, the term "person" is broadly defined in Section 2(31). It includes not just individuals but also various entities that can be assessed for tax purposes. The purpose of this inclusive definition is to bring a wide range of entities within the tax net.

The term "person" includes:

1. An individual – a single human being.

2. A Hindu Undivided Family (HUF) – a joint family structure prevalent in India.

3. A company – both Indian and foreign companies.

4. A firm – including partnerships and LLPs.

5. An Association of Persons (AOP) or Body of Individuals (BOI) – groups of individuals or entities.

6. A local authority – like municipalities or panchayats.

7. Every artificial juridical person – entities not covered above but recognized by law (e.g., deities, trusts).

Each "person" is treated as a separate entity for income tax purposes and is liable to pay tax based on their income and applicable rates.

ii. Residential Status of an individual

The residential status of an individual under the Income Tax Act determines their tax liability in India. An individual can be classified as either a Resident or a Non-Resident. Residents are further categorized into Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).   

The primary basis for determining residential status is the physical presence of the individual in India during the relevant financial year (April 1st to March 31st).   

Here are the basic rules:

• Resident: An individual is considered a resident in India if they meet at least one of the following conditions:

  • They have been in India for 182 days or more during the previous financial year.   
  • They have been in India for 60 days or more during the previous financial year and have been in India for 365 days or more during the four years immediately preceding the previous financial year. (This condition has exceptions for certain individuals like Indian citizens leaving India for employment abroad or as a crew member of an Indian ship).

• Non-Resident (NR): An individual who does not meet either of the conditions for being a resident is considered a non-resident.   

• Resident and Ordinarily Resident (ROR): A resident individual is classified as ROR if they satisfy both of the following additional conditions:

  • They have been a resident in India for at least 2 out of the 10 financial years immediately preceding the relevant financial year.
  • They have been present in India for 730 days or more during the 7 financial years immediately preceding the relevant financial year.   

• Resident but Not Ordinarily Resident (RNOR): A resident individual who does not satisfy both of the additional conditions for being an ROR is classified as RNOR.

The residential status has significant implications for taxation. A Resident and Ordinarily Resident is taxed on their global income, while a Resident but Not Ordinarily Resident and a Non-Resident are generally taxed only on income that is received in India, accrues or arises in India.   

It's important to note that these are brief outlines, and the Income Tax Act contains detailed provisions and exceptions that should be considered for accurate determination of residential status.

iii. Gross Annual Value of House Property

The Gross Annual Value (GAV) of a house property serves as the initial benchmark for calculating income from house property under the Income Tax Act in India. It essentially reflects the potential annual earning capacity of the property.   

For properties that are let out, the GAV is typically the higher of:

1. The Expected Rent (Reasonable Rent), which is the rent the property could reasonably fetch annually. This is determined by considering the municipal value, fair rent of similar properties, and the standard rent (if applicable under rent control laws).
2. The Actual Rent Received or Receivable, excluding any unrealized rent that meets specific conditions.

Conversely, for self-occupied properties, the GAV is generally considered to be Nil, with this benefit available for a maximum of two properties. If an individual owns more than two houses for self-occupation, the excess properties are treated as deemed to be let out, and their GAV is determined based on the expected rent.   

Similarly, properties that remain vacant throughout the year are also considered deemed to be let out, and their GAV is the expected rent.

In essence, the GAV aims to establish a fair notional rent for the property, whether it's actually rented out or not. Once the GAV is determined, the municipal taxes paid by the owner are deducted to arrive at the Net Annual Value (NAV), which is then used to calculate the taxable income from house property after further deductions. Understanding the GAV is a fundamental step for property owners in accurately computing their tax obligations related to their real estate.  

iv. Entertainment Allowance

Entertainment Allowance is a specific allowance granted by an employer to their employees to meet expenses incurred on entertaining clients, customers, or other business associates. Unlike some other allowances, it's taxable in the hands of all employees, whether government or non-government.   

However, there's a special deduction available under Section 16(ii) of the Income Tax Act, specifically for government employees. This deduction is the least of the following three amounts:   

1. ₹ 5,000   
2. 20% of the employee's basic salary   
3. The actual amount of entertainment allowance received.   

It's crucial to understand that this deduction is exclusively for government employees. For non-government employees, the entire amount of entertainment allowance received is taxable as part of their salary income, and no deduction is allowed.   

Therefore, while Entertainment Allowance is a form of compensation, its tax treatment differs significantly between government and non-government employees due to the special deduction provision under Section 16(ii) applicable only to the former.

v. Deduction u/s 80D.

Deduction under Section 80D of the Income Tax Act allows individuals and Hindu Undivided Families (HUFs) to claim a deduction for expenses incurred on medical insurance premiums and certain preventive health check-ups. This provision aims to incentivize individuals to secure health insurance and prioritize preventive healthcare.

• Eligible Assessee: Individuals and HUFs.   
• Eligible Payments:
  • Premiums paid for medical insurance policies for self, spouse, dependent children, and parents.   
  • Contributions to Central Government Health Scheme or other notified schemes.   
  • Expenses incurred on preventive health check-ups (subject to certain limits).   
• Maximum Deduction Limits (for individuals):
  • For self, spouse, and dependent children: Up to ₹ 25,000.   
  • Additional deduction for parents (if their age is below 60 years): Up to ₹ 25,000.   
  • Additional deduction for parents (if their age is 60 years or above): Up to ₹ 50,000.   
  • For preventive health check-ups: Limited to ₹ 5,000 in total, within the overall limits mentioned above.   
• Mode of Payment: Premiums generally need to be paid through modes other than cash to be eligible for deduction. However, payment for preventive health check-ups can be made in any mode, including cash.   
• Specific Situations: There are specific rules regarding deductions for senior citizens, dependent parents, and multi-year policies.