TYBMS SEM :5 Finance Direct Taxes (Q.P. November 2022 with Solution)

  Paper/Subject Code: 46018/Finance: Direct Taxes

TYBMS SEM :5 

Finance 

Direct Taxes

(Q.P. November 2022 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 Winning form lottery is income chargeable under the head income from 

a) Business or Profession 

b) Salary 

c) Other sources. 

d) None of the above 

2 Uncommuted pension is taxable to ________

a) Only government employee 

b) Only private company employee. 

c) Both government and private employees 

d) None of the above. 

3. The maximum quantum of deduction by way of interest on money for construction of self-occupied house property is Rs. ________

a) 1,50,000 

b) 3,00,000 

c) 2,00,000 

d) 1,00,000 

4 Award received from government is ________ 

a) Fully taxable 

b) Fully Exempt 

c) Exempt up Rs 1,00,000 only  

d) None of the above 

5. Monthly remuneration received by Member of Parliament is chargeable under the head income from  ________

a) Business or Profession 

b) Salary 

c) Other sources 

d) Capital gain 

6. Entertainment allowance is allowed as deduction only to ________ employees.

a) Private 

b) Government 

c) Both Private and Government 

d) None of the above 

7. The legal status of Bank of India is ________ 

a) Individual 

b) Company 

c) Partnership firm 

d) Body of Individual 

8. Amount of deduction in case of a person with severe disability under section 80U will be Rs 

a) 50,000 

b) 75,000 

c) 1,25,000 

d) 1,50,000 

9. In case of capital assets acquired on 01/4/1975, Fair market value on this capital asset is determined as on ________

a) 01/04/2001 

b) 04/04/1981 

c) 01/04/1975 

d) None of the above. 

10 For non-government employee governed by the Payment of Gratuity Act, 1972, the maximum monetary limit for exemption is ________ 

a) 5,00,000 

b) 3,50,000 

c)10,00,000 

d) 20,00,000

Q2 State whether the following statement are TRUE or FALSE (ANY 7)     (7)

1 Residential status depend on citizenship. 

Ans: False

2 Advance against salary is not part of gross salary 

Ans: False

3 Dividend received from Indian company is fully taxable 

Ans: True

4 Gratuity received by government employee on retirement is fully taxable 

Ans: False

5 Maximum limit of deduction under section 80C and 80CCC is Rs 2,00,000. 

Ans: False

6 Salary received by partner of the firm is taxable as business income. 

Ans: True

7 Municipal tax paid by tenants is not allowed as deduction for computing Net Annual Value of let out property. 

Ans: True

8 Indexation benefit is not allowed for calculation of short term capital gain. 

Ans: True

9 Reserve for Bad debts is not allowed as expenditure for calculation of Income from Business or Profession. 

Ans: True

10 Foreign Income of ordinary resident is fully taxable.

Ans: True

Q2 Mr. Sanjay an Indian citizen furnishes the following information of his Income earned during the previous year 2018-19.                [15] 

SR No.	Particulars	Amount
1	Professional fees received in India.	10,000
2	Income earned in India and Received in France	15,000
3	Dividend on shares on Indian co-operative bank received in India	25,000
4	Salary earned and received in France	35,000
5	Past untaxed profit brought into India during Previous Year.	85,000
6	Income from a business in USA controlled from India	1,00,000
7	Rent from property in Delhi received in USA	75,000
8	Profit from a business in Delhi managed from Mumbai	1,50,000
9	Interest from bank account in India	30,000

Compute his total Income for the Assessment Year 2019-20 assuming: 

a) He is Resident and Ordinarily Resident 

b) He is Resident but not ordinarily Resident 

c) He is Non-Resident

OR

Q.2 Professor Rajesh, a UK citizen (not a person of Indian Origin) is a visiting faculty at JNO University, provides you the details of his visit to India during the last 7 years.

Previous Year	No. of Days Stay in India
2018-19	179
2017-18	195
2016-17	15
2015-16	130
2014-15	190
2013-14	100
2012-13	125

Prior to 01.04.2012 he did not visit India. Find out his Residential status for the Assessment year 2019-2020.

Q3 Mr. Kamlesh purchased a house property for Rs. 1, 00,000 on 27th August, 1998. He made the following additions/ alternations to the house property.                 [15]

Cost of construction of 1st floor in F.Y. 2003-04 Rs. 13,00,000

Cost of construction of 2nd floor in F.Y. 2010-11 Rs. 14,00,000 

Fair Market Value ofthe property on 01/04/2001 was Rs 15, 00,000; He sold the property on 20th October, 2018 for Rs. 1, 95, 00,000. He paid the brokerage of Rs. 55,000 for the sale transaction. The cost inflation index for F.Y. 2001-02 is 100, for F.Y. 2003-04 is 109, for F.Y. 2010-11 is 167 and for F. Y. 2018-19 is 280. 

Compute the capital gain of Mr. Kamlesh chargeable to tax for the assessment year 2019-20 

OR 

Q.3 Following is the Profit & Loss Account of Mr. Prakash for the year ended 31st March, 2019. Profit & Loss Account for the year ended 31st March, 2019.    [15] 

Particulars	Amount	Particulars	Amount
To Salaries and Bonus	1,54,000	By Gross Profit b/d	5,76,000
To Provision for Doubtful Debts	12,000	By Agriculture Income	25,000
To Printing & Stationery	18,500	By Dividend from Indian Co.	10,000
To Advertisement Expenses	80,000	By Interest on company deposit.	15,000
To Entertainment Expenses	25,000	By Interest on Bank Deposit	10,000
To Miscellaneous Expenses	48,500
To Staff Welfare Expenses	51,500
To Bad Debts	4,500
To Interest on Capital	50,000
To Income Tax	34,000
To Depreciation	25,000
To Drawing	5,000
To Net Profit	1,28000
	6,36,000		6,36,000

Other Information:

1. Advertisement expenses include Rs. 9,000 for advertisement in souvenir of a political party.

2. Deprecation as per Income tax Rule is fts 20,000

3. Mr. Prakash has invested Rs 75,000 in Mutual fund which is eligible for deduction.

4. Printing includes Rs. 2,500 paid for printing marriage invitation cards of his daughter.

You are required to compute his taxable income for the assessment year 2019-20.

Q.4 Mr. Amit owns house at Delhi which is let out. Fair rent of the house Rs 24,000 Municipal Valuation is Rs 20,000, Standard Rent of the house is Rs 30,000 Actual rent received is Rs 2,500, per month for all 12 months. He also received Rs 10,000 from tenants for charges towards life, Generator etc. he makes following expenditure for his house property.                            [15]

Municipal Tax paid by Mr. Amit Rs 4,000. Fire insurance Rs 2,400 Repairs Rs 2,000 Ground Rent Rs 2,000, Funds borrowed on 1 April 2014 Rs 40,000 @10% interest pa, were used for construction of house which was completed on 31 March 2017. Interest on borrowed capital during the previous year 2018-19 is Rs 4,000. Compute the income from house property of Mr. Amit for the assessment year 2019-20.

OR

Q.4 Mr Anand an employee of XYZ Itd at Mumbai and covered by Payment of Gratuity Act retires at the age of 64 years on 31/12/2018, after completing 33 years and 7 month service. At the time of retirement his employer pays Rs 20,51,640 as gratuity. He is also entitled to monthly pension of Rs 8,000. He gets 75% of pension commuted for Rs 4,50,000 on 1" February 2019 Calculate the taxable salary for the assessment year 2019-20 from the following details assuming he is covered by Payment of Gratuity Act.

Basic salary 80000 pm.

Bonus Rs 36,000

HRA (Taxable) Rs 1,17,000

Employer contribution to recognized provident fund Rs 1, 10, 000 (Exempt Rs 86,400).

Professional tax paid by Mr Anand Rs 2,000.                                        [15]

Q.5. A Explain different items eligible for deduction Under Section 80C.            (8)

Under Section 80C of the Income Tax Act, you can claim deductions for investments and expenditures up to a maximum limit of ₹1.5 lakh per financial year. These deductions help reduce your taxable income. Here are the different items eligible for deduction:

Investments:

• Life Insurance Premium: Premiums paid for life insurance policies for yourself, your spouse, or your children are eligible.
• Public Provident Fund (PPF): Contributions made to your PPF account.
• Employees' Provident Fund (EPF): Your contribution to EPF.
• Equity Linked Savings Scheme (ELSS): Investments in ELSS mutual funds.
• National Savings Certificate (NSC): Investments in NSC.
• Sukanya Samriddhi Yojana (SSY): Deposits made in the name of a girl child under this scheme.
• Senior Citizens Savings Scheme (SCSS): Investments made by senior citizens in this scheme.
• 5-year Tax Saver Fixed Deposits: Investments in fixed deposits with a lock-in period of 5 years in banks or post offices.
• Unit Linked Insurance Plans (ULIPs): Premium paid towards ULIPs.
• National Pension System (NPS): Your contributions to NPS are eligible under Section 80C, and an additional deduction up to ₹50,000 is available under Section 80CCD(1B).
• NABARD Rural Bonds: Investments in bonds issued by the National Bank for Agriculture and Rural Development.
• Infrastructure Bonds: Investment in certain infrastructure bonds.
• Subscription to certain notified deposit schemes of Public Sector Companies engaged in housing finance.
• Subscription to units of Mutual Funds or the Unit Trust of India under specific schemes.

Expenditures:

• Tuition Fees: Tuition fees paid for the full-time education of up to two children in India at any school, college, university, or other educational institution.
• Principal Repayment of Home Loan: The principal amount you pay towards your home loan.
• Stamp Duty and Registration Charges: Expenses incurred for the registration of a new house property. This can be claimed in the year of purchase.

It's important to remember that the total deduction under Section 80C, along with Sections 80CCC (contribution to certain pension funds) and 80CCD(1) (employee's contribution to NPS), cannot exceed ₹1.5 lakh in a financial year. However, the additional deduction of up to ₹50,000 for NPS under Section 80CCD(1B) is over and above this limit.

B Explain different income chargeable under the head income from other sources. (7)

"Income from Other Sources" is a residuary head of income under the Income Tax Act, 1961. Any income that doesn't fall under the other four heads (Salaries, Income from House Property, Profits and Gains of Business or Profession, and Capital Gains) and is not exempt from tax is taxed under this head, as per Section 56 of the Act.

Here are the different types of income chargeable under this head:

Specifically Taxable under Income from Other Sources (regardless of whether it could fall under Business/Profession):

• Dividend Income: Dividends received from both domestic and foreign companies are taxable here. Previously, dividends from domestic companies were exempt in the hands of the shareholders, but now they are taxable.
• Winnings from Lotteries, Crossword Puzzles, Races (including Horse Races), Card Games, Gambling, or Betting: These are considered "casual income" and are taxed at a flat rate (currently 30% plus applicable cess).
• Interest on Compensation or Enhanced Compensation: Any interest received on compensation or enhanced compensation (e.g., from land acquisition) is taxable in the year it is received. A deduction of 50% of such interest income is allowed under Section 57.
• Gifts:
  • Money: If you receive a sum of money exceeding ₹50,000 in a financial year without consideration, the entire amount is taxable.
  • Immovable Property: If you receive immovable property (like land or building) without consideration and its stamp duty value exceeds ₹50,000, the entire stamp duty value is taxable. Even if you receive it for inadequate consideration, the difference between the stamp duty value and the consideration is taxable if the difference is more than ₹50,000 or 10% of the consideration, whichever is higher.
  • Movable Property: If you receive movable property (like jewelry, shares, paintings, etc.) without consideration and its fair market value exceeds ₹50,000, the entire fair market value is taxable. If received for inadequate consideration, the difference between the fair market value and the consideration is taxable if it exceeds ₹50,000.
• Advance Money Forfeited: If you received any advance money during negotiations for the transfer of a capital asset and the transfer does not take place, and you forfeit that money, it is taxable under this head.
• Any sum received by an employer from employees as contributions to provident funds, superannuation funds, or any other fund for the welfare of the employees, if such amount is not deposited in the respective fund within the prescribed time limit.
• Income from subletting of house property by a tenant.

Taxable under Income from Other Sources only if not taxable under Profits and Gains of Business or Profession or Salaries:

• Interest on Securities: Interest received on debentures, bonds, government securities, etc., is taxable here if it's not the main income of your business.
• Income from Letting out of Plant, Machinery, or Furniture: If you are not in the business of leasing these assets, the income you receive from renting them out is taxable under this head.
• Income from Letting out of Plant, Machinery, or Furniture along with Building, where the letting of the two is inseparable.
• Keyman Insurance Policy: Any sum received under a Keyman Insurance Policy, including the bonus amount, is taxable here if it's not taxable under Salaries or Profits and Gains of Business or Profession.
• Compensation received in connection with the termination of employment or modification of the terms and conditions of employment.
• Any amount received from a life insurance policy exceeding the total premium paid, which is not exempt under Section 10(10D).
• Income from undisclosed sources.
• Salary received by Members of Parliament (MPs) or Members of Legislative Assemblies (MLAs).
• Directors' sitting fees for attending board meetings.
• Family Pension: Pension received by the legal heirs of a deceased employee is taxable under this head. A standard deduction of one-third of the pension or ₹15,000, whichever is less, is allowed.

OR

Q5 Write a short notes (Any Three)            (15)

1 Long term capital gain

Long-Term Capital Gain (LTCG) arises from the sale of a capital asset held for a specific period, which is generally more than 12 months for listed shares and equity-oriented mutual funds, and more than 24 months for other assets like immovable property and unlisted shares.   

The profit or gain realized from such a sale is termed LTCG and is subject to taxation under the Income Tax Act, 1961, under the head "Capital Gains." The tax rates for LTCG vary depending on the type of asset.   

Key points to note:

• Holding Period: The duration for which the asset is held is crucial in determining whether the gain is long-term or short-term.   
• Tax Rates: LTCG is generally taxed at 12.5% (plus applicable surcharge and cess) on listed equity shares and equity-oriented mutual funds for gains exceeding ₹1 lakh in a financial year. For other long-term capital assets, the tax rate is also 12.5% without indexation, with an option for individuals and HUFs to choose 20% with indexation for land and buildings acquired before July 23, 2024.
• Indexation: Previously, for certain assets like immovable property and debt mutual funds, the cost of acquisition could be adjusted for inflation using the Cost Inflation Index (CII) to arrive at the indexed cost of acquisition, thereby reducing the taxable gain. However, the indexation benefit has been removed for most assets transferred on or after July 23, 2024.   
• Exemptions: The Income Tax Act provides certain exemptions under sections like 54, 54EC, and 54F, which allow taxpayers to save tax on LTCG if the proceeds are reinvested in specified assets within a stipulated time.   
• Tax Planning: Understanding the rules related to LTCG, including holding periods, tax rates, and available exemptions, is essential for effective tax planning and optimizing investment returns.

2 Deemed to be let out property

Under the Income Tax Act, 1961, a property is considered "deemed to be let out" under specific circumstances, even if it is not actually rented out. This concept primarily applies when an individual owns more than one residential property for self-occupation.

According to the rules, a taxpayer can choose up to two properties to be treated as self-occupied. Any additional residential properties owned by the individual are deemed to be let out, regardless of whether they are actually rented or lying vacant.

The purpose of this provision is to prevent individuals from avoiding tax on properties they own but do not use themselves. By deeming such properties as let out, the Income Tax Department assesses a notional rental income on these properties.

Key aspects of Deemed to be Let Out Property:

• Applicability: Arises when an individual owns more than two residential properties for self-occupation.
• Notional Rent: Tax is levied on the expected rent that the property could have fetched if it were actually let out. This is determined based on factors like the property's location, size, and prevailing market rent.
• Taxability: The notional rental income is taxable under the head "Income from House Property."
• Deductions: Similar to an actually let-out property, the owner can claim deductions for municipal taxes paid and interest paid on any housing loan taken for the deemed let-out property. However, the standard deduction of 30% on the Net Annual Value is also applicable.
• Choice of Self-Occupied Properties: The taxpayer has the discretion to choose which two properties they wish to treat as self-occupied. This choice can be made annually while filing the tax return.

3 Gross Annual Value

Gross Annual Value (GAV) is the estimated annual rent a property can fetch in the open market if it were let out. It serves as the basis for calculating property tax. Determining the GAV involves considering factors like the property's location, size, condition, and prevailing rental rates in the area. It's essentially the potential earning capacity of a property from rent on a yearly basis.

Gross Annual Value (GAV) is the expected annual rental income from a property, whether it is actually rented out or not. It is a key concept used to compute income under the head "Income from House Property" in the Income Tax Act.

4 Pension

Pension income is subject to direct tax under the Income Tax Act, 1961, in India. It is generally treated as income and taxed according to the applicable income tax slab rates, similar to salary income.   

key aspects:

• Taxability: Both uncommuted (regular monthly) and commuted (lump-sum) pensions can be taxable, although there are specific exemptions for commuted pensions, especially for government employees.   
• Uncommuted Pension: This is fully taxable as salary income.   
• Commuted Pension: The taxability depends on the type of employee and whether gratuity is also received.
  • For government employees, it is generally fully exempt.   
  • For non-government employees, it is partially exempt. The exempt portion is typically one-third if gratuity is received and one-half if no gratuity is received (assuming 100% commutation).
     
• Family Pension: Pension received by family members of a deceased employee is taxed under "Income from Other Sources," with a standard deduction allowed.   
• Reporting: Pension income is usually reported under the "Income from Salary" head in the Income Tax Return (ITR). Family pension is reported under "Income from Other Sources."   
• Deductions: Pensioners can claim various deductions under the Income Tax Act, such as the standard deduction, deductions under Section 80C for investments, Section 80D for medical insurance, and Section 80TTB for interest income (for senior citizens).   
• TDS: Tax Deducted at Source (TDS) may be applicable on pension income. Form 16 or Form 16A is usually provided by the pension disbursing authority.   
• Senior Citizens: There are specific provisions and higher basic exemption limits for senior and super senior citizens. In some cases, senior citizens above 75 years with only pension and interest income from the same bank may be exempt from filing ITR.

5 Profit in Lieu of salary

"Profit in lieu of salary" refers to certain payments received by an employee that are considered as part of their taxable income under the head "Income from Salaries," even if they are not strictly regular salary. Section 17(3) of the Income Tax Act, 1961 defines what constitutes profits in lieu of salary.

Key inclusions under this category are:

• Compensation for termination or modification of employment terms: Any amount received from an employer or former employer due to the end of employment (resignation, retirement, removal, etc.) or changes in the conditions of employment. For example, severance pay.
• Payments from unrecognised provident or superannuation funds: To the extent that these payments don't include the employee's own contributions or interest on those contributions.
• Amount received under a Keyman Insurance Policy: Including any bonus on such a policy.
• Payments received before joining or after cessation of employment: Any amount received by an employee from a prospective or former employer, even if not directly related to the active employment period. For instance, a signing bonus or a payment after retirement that isn't a standard pension.
• Other amounts received from the employer: Any other sum paid by the employer to the employee that is not part of the regular salary or specifically exempt under the Income Tax Act.

Taxability:

Profits in lieu of salary are taxed in the same manner as regular salary income, according to the individual's applicable income tax slab rates. Employers are generally required to deduct Tax Deducted at Source (TDS) on these payments.

Exclusions:

Certain payments are specifically excluded from the definition of "profits in lieu of salary" to the extent they are exempt under Section 10 of the Income Tax Act. These typically include:

• Death-cum-retirement gratuity
• Commuted value of pension
• Retrenchment compensation (within specified limits)
• Payments from statutory and recognised provident funds
• Payments from approved superannuation funds
• House Rent Allowance (HRA)