TYBMS SEM :5 Finance Direct Taxes (Q.P. November 2023 with Solution)

  Paper/Subject Code: 46018/Finance: Direct Taxes

TYBMS SEM :5 

Finance 

Direct Taxes

(Q.P. November 2023 with Solution)

                    

N.B. 1) Q. I is compulsory.

2) Q.2 to Q.5 are compulsory with internal choice.

3) Figures to the right indicate full marks.

4) Workings should form part of your answer.

5) Use of simple calculator is allowed.

Q.1 (A) Match the Columns: (Any 8)                        (8)

Column A	Column B
1. Kalyan-Dombivli Municipal Corporation	a. Does not satisfy basic condition
2. Assessee	b. Always taxable
3. Thane sports club	c. Finance Act
4. Non-Resident	d. Association of Persons
5. Uncommuted Pension	e. Local Authority
6. Standard Deduction	f. Person liable to pay tax
7. Pre-construction interest on house	g. Depreciation at 50% of normal rate
8. Assets used by the assessee for less than h 180 days	h. Rs. 1,25,000
9. Rate of Tax	i. Allowed in five equal instalments
10. Severely handicapped resident individual	j. Rs. 50,000

Ans:

Column A	Column B
1. Kalyan-Dombivli Municipal Corporation	e. Local Authority
2. Assessee	f. Person liable to pay tax
3. Thane sports club	d. Association of Persons
4. Non-Resident	a. Does not satisfy basic condition
5. Uncommuted Pension	b. Always taxable
6. Standard Deduction	j. Rs. 50,000
7. Pre-construction interest on house	i. Allowed in five equal instalments
8. Assets used by the assessee for less than h 180 days	g. Depreciation at 50% of normal rate
9. Rate of Tax	c. Finance Act
10. Severely handicapped resident individual	h. Rs. 1,25,000

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

1. The constitution of India empowers Central Government to levy tax on Income.

Ans: True

2. Adani Enterprises Ltd. is a person as per Income tax Act, 1961.

Ans: True

3. Income deemed to accrue or arise in India is taxable in case of all assessee.

Ans: False

4. Gratuity paid to government employees is always fully exempt from tax.

Ans: True

5. Entertainment allowance deduction is only allowed to Non-government employees.

Ans: False

6. Reasonable letting down value is higher of fair rent and municipal valuation.

Ans: False

7. Export incentives received by an assessee are exempt for tax.

Ans: False

8. Income from subletting shall be chargeable to tax under the head income form house property.

Ans: False

9. Total deduction u/s 80C and 80CCC cannot exceed Rs. 1,50,000.

Ans: True

10. Family pension received by a widow of a deceased employee is income from other sources.

Ans: True

Q.2 Mr. Mike Ross, a U.S.A. citizen, came to India for the first time on 1" May, 2018 and started business in India. He went back to his country U.S.A. on 2nd September 2022. He again came back to India on 16th December 2022 and returned to his country U.S.A., on 5th February, 2023.     (15)

Determine the residential status of Mr. Mike Ross for the Assessment Year 2023-24.

OR

Q.2 Mr. Dipen Parab has earned the following incomes during the financial year ended on 31 March, 2023. Compute his Gross Total Income for the assessment year 2023-24. (15)

a) Resident and Ordinary Resident

b) Resident but not Ordinarily Resident

c) Non-Resident

Particulars	Rs.
1. Payments received in India, for services rendered in Dubai.	11,00,000
2. Income from business in Shanghai, controlled from India.	23,00,000
3. Interest on Debentures received from Indian Company	2,00,000
4. Amount brought to India, out of past untaxed profits earned in UK	2,75,600
5. Income from agriculture in Bangladesh.	2,75,000
6. Rent from House property in India, received in UK	3,00,000
7 . Dividend from a Korean Company, received in India.	1,30,000
8. Salary earned and received in UK.	13,50,000

Q.3 Mrs. Sharen works as a manager with Nishtha Private Ltd. She gives you following information for the year ended 31 March 2023. (15)

Particulars	Rs.
Basic Salary (Gross)	Rs. 12,00,000 per annum.
Dearness Allowance	Rs.6,00,000 per annum.
House Rent Allowance (Exempt u/s 10 Rs.50,000)	Rs.90,000 per annum.
Entertainment Allowance (Amount spend on entertainment Rs.2000)	Rs.30,000 per annum.
Conveyance Allowance (Amount spend on conveyance for official purposes Rs.65,000)	Rs.88,000 per annum.
Arrears of Salary (Not taxed earlier)	Rs.2,50,000
Profession Tax deducted from Salary	Rs.2,500 per annum.
Employees Provident Fund deducted from Salary	Rs.90,000 per annum.

Other Information:

Interest on Debentures received from Savita Chemicals Ltd. Rs. 60,000

Interest received from Government Securities Rs. 50,000

Royalty received for writing Management Books Rs. 40.000

(Expenses incurred for writing manuscript of this book Rs. 3,500)

He spent Rs. 34,000 on medical treatment of his dependent handicapped brother (60% disability). He paid Mediclaim premium of Rs. 28,876 by cheque on health of himself, spouse and son.

Compute his Taxable Income for the Assessment Year 2023-24.

OR

Q.3 Mr. Lala Patel owns two houses in Mumbai. The particulars of these houses are as follows for the previous year ended 31-3-2023 are as follows: (15)

	Particulars	House Property I (let out Property)	House Property II (Self-occupied Property)
1	Gross Municipal Valuation	4,50,000	6,00,000
2	Fair Rent	5,00,000	7,00,000
3	Actual Rent received	6,00,000	-
4	Municipal Taxes – Due	50,000	60,000
	paid	10,000	12,000
5	Repairs	5,000	8,000
6	Insurance Premium – Due	1,500	1,800
7	Ground Rent due	500	700
8	Interest on Funds borrowed for construction of house property	80,000	60,000

He also received the following income during the previous year 2022-23.

Accrued Interest on N.S.C. (VIII issue)            Rs. 16,000

Winning from lottery                Rs.50,000

Interest on Saving Bank A/c.        Rs. 16,000

Interest on Public Provident Fund        Rs. 13,000

He had taken a loan from HDFC Bank for higher education of his daughter pursuing an Engineering degree course from IIT. During the year he had paid 1,40,000 as interest on this loan.

Compute his Taxable Income for the Assessment Year 2023-24.

Q.4 Following is Profit & Loss Account of Mr. Manoj Shinde who is physically handicapped (85% disability) for the year ended 31 March, 2023.                    (15)

Particulars	Rs.	Particulars	Rs.
To Salaries	19,20,000	By Gross Profit	85,74,000
To Printing & Stationery	3,00,000	By Interest on Bonds	1,80,000
To Conveyance	3,60,000	By Gift from friend	56,000
To Rent	2,88,000	By Dividend from Co-op. Bank	1,20,000
To Depreciation	3,84,000	By Interest on Government	2,50,000
To Repairs & Maintenance expenses	1,80,000
To Advertisement	5,40,000
To Audit Fees	1,20,000
To Embezzlement by Employee	24.000
To Drawings	3,36,000
To Selling Expenses	10,20,000
To Income Tax	1,20,000
To Net Profit	35,88,000
	91,80,000		91,80,000

Additional Information:

1) Depreciation allowable as per Income Tax Rules Rs 4,20,000.

2) Advertisernent includes advertisement of Rs. 72,000 in a Souvenir published by a political party.

3) 1/3rd of the Rent is for her residential flat.

You are required to compute her Taxable income for the assessment year 2023-24.

OR

Q.4 Mr. Raghu acquired residential house property on 15.4.1995 for Rs.3,00,000. information pertaining to property was as follows:

1. Fair market value as on 1.4.2001 was Rs.9,60,000

2. Cost of improvement made by him as follows:

1998-99	Rs.2,00,000
2010-11	Rs.4,80,000
2016-17	Rs. 10,00,000
2020-21	Rs.5,40,000

3. He sold residential property on 27.12.22 for Rs.1,80,00,000 

4. He acquired new residential house for Rs.93,00,000 on 29.3.2023

5. He also invested Rs.15,00,000 in Rural Electrification Corporation (REC) Bonds on 11.03.2023

6. Expenses on transfer amounted to Rs.3,00,000

Relevant Cost Inflation Indices are as follows:

Financial Year	Cost Inflation Index
2001-02	100
2010-11	167
2016-17	264
2020-21	301
2022-23	331

Compute the Capital Gains of Mr. Raghu for Assessment year 2023-24.

Q.5 (a) Explain different items eligible for deduction under section 80C

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 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.

OR

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

1) Capital Assets.

A capital asset broadly refers to any kind of property held by an assessee, whether or not it is connected with their business or profession. This definition is wide-ranging and includes:   

• Immovable property: Land, buildings, house property.   
• Movable property: Jewellery, vehicles, machinery, furniture.   
• Financial assets: Shares, debentures, mutual funds, bonds.   
• Intangible assets: Goodwill, patents, trademarks, copyrights.   
• Any rights in or related to an Indian company, including management or control rights.

However, the Income Tax Act, 1961 specifically excludes certain items from the definition of a capital asset:   

• Stock-in-trade, consumable stores, or raw materials held for business purposes (excluding certain securities held by Foreign Institutional Investors).   
• Personal effects, which are movable property held for personal use by the assessee or their dependent family members. However, this exclusion does not apply to jewellery, archaeological collections, drawings, paintings, sculptures, or any work of art.   
• Agricultural land in rural areas of India (subject to certain conditions based on population and distance from municipal limits).
• Certain specified government bonds.

For taxation purposes, capital assets are classified into short-term capital assets and long-term capital assets based on the period of holding. Generally:   

• Assets held for 36 months or less are considered short-term capital assets.
• Assets held for more than 36 months are considered long-term capital assets.

However, there are specific exceptions to this general rule. For instance, in the case of listed shares, certain securities, and units of specified mutual funds, the holding period for them to be considered long-term is more than 12 months. For unlisted shares and immovable property, the threshold is generally more than 24 months (this was reduced from 36 months in Financial Year 2017-18).

Profits or gains arising from the transfer of capital assets are subject to capital gains tax. The tax treatment differs based on whether the asset is a short-term capital asset or a long-term capital asset, and the type of asset being transferred. Short-term capital gains are generally taxed at the normal income tax slab rates applicable to the assessee, while long-term capital gains are usually taxed at specific rates (e.g., 10%, 12.5%, or 20%) and were previously eligible for indexation benefits to account for inflation (this benefit has been removed for transfers made on or after July 23, 2024, with some exceptions).

2) Deduction U/s 16.

Section 16 of the Income Tax Act, 1961, provides deductions from salary income to arrive at the taxable salary. These deductions are allowed to salaried individuals and help reduce their taxable income. The deductions under this section include:

1. Standard Deduction [Section 16(ia)]:
   A flat deduction of ₹50,000 (as of FY 2023-24) is available to all salaried individuals and pensioners, irrespective of actual expenses incurred.

2. Entertainment Allowance [Section 16(ii)]:
   This deduction is available only to government employees. The least of the following is allowed as a deduction:

   • ₹5,000,

   • 20% of basic salary,

   • Actual entertainment allowance received.

3. Tax on Employment/Professional Tax [Section 16(iii)]:
   The amount actually paid as professional tax during the year is allowed as a deduction.

These deductions help reduce the overall salary income that is subject to tax under the head "Income from Salaries."

3) Residential Status of an Individual.

The residential status of an individual is a crucial factor in determining their tax liability in India. The Income Tax Act, 1961, categorizes individuals into three residential statuses:   

1. Resident and Ordinarily Resident (ROR): An individual is considered ROR if they satisfy two basic conditions and two additional conditions.

   • Basic Condition 1: They have been in India for 182 days or more during the relevant financial year.
   • Basic Condition 2: They have been in India for 60 days or more during the relevant financial year AND have been in India for 365 days or more during the four years immediately preceding the relevant financial year. (Note: This condition has exceptions for certain individuals like Indian citizens leaving India for employment abroad or as a crew member of an Indian ship, and Indian citizens or Persons of Indian Origin visiting India).   
   • Additional Condition 1: They have been a resident in India in at least 2 out of the 10 years immediately preceding the relevant financial year.   
   • Additional Condition 2: They have been present in India for 730 days or more during the 7 years immediately preceding the relevant financial year.   

   An individual satisfying both basic conditions and both additional conditions is an ROR.

2. Resident but Not Ordinarily Resident (RNOR): An individual is considered RNOR if they meet at least one of the basic conditions but fail to meet either or both of the additional conditions. Certain other categories of individuals, even if they meet both basic conditions, can still be RNOR, such as:

   • An individual who has been a non-resident in India in 9 out of the 10 previous years.
   • An individual who has, during the 7 previous years, been in India for a total period of 729 days or less.   
   • A citizen of India or a person of Indian origin who is deemed to be resident in India under clause (1) of Explanation 1 to clause (1) of section 6.

3. Non-Resident (NR): An individual is considered a non-resident if they fail to satisfy either of the two basic conditions mentioned above.

Significance: The residential status determines the scope of an individual's taxable income in India.   

• An ROR is taxed on their global income (income earned in India and outside India).   
• An RNOR is taxed on income earned in India and income earned outside India that is derived from a business controlled in or a profession set up in India.
• A Non-Resident is taxed only on income received or accrued in India.

4) Pension

A pension is a regular income stream that a person receives after retirement. It's essentially a way to replace the salary earned during one's working years, providing financial security in later life. Pensions can be funded through contributions made by an employer, the employee, or both, often accumulated in a pension fund over the course of employment.   

There are various types of pension schemes available in India, including:

• Defined Benefit Plans: These plans guarantee a specific pension amount based on factors like salary and years of service.   
• Defined Contribution Plans: Here, the retirement benefit depends on the contributions made and the investment returns earned. Examples include the National Pension Scheme (NPS) and Employee Provident Fund (EPF).   
• Annuity Plans: These plans involve a lump-sum investment that provides a regular income stream, either immediately or at a future date.   
• Government-backed Schemes: Schemes like the Atal Pension Yojana (APY) aim to provide a minimum guaranteed pension to workers in the unorganized sector.   

Pension income is generally taxable under the Income Tax Act, considered as 'Income from Salaries' or 'Income from Other Sources' depending on the type of pension. However, there are certain exemptions and deductions available, particularly for commuted pensions (received as a lump sum) and for senior citizens. Investing in pension schemes can also provide tax benefits on the contributions made.

5) Gross Annual Value

The Gross Annual Value (GAV) is a crucial concept under the head "Income from House Property" in the Income Tax Act, 1961 in India. It essentially represents the notional annual rent that a property is expected to generate, even if it's not actually rented out. It serves as the starting point for calculating the taxable income from house property.   

• Determination: The GAV is generally the higher of the following:

  • The actual rent received or receivable (if the property is let out).   
  • The reasonable expected rent. This is determined by considering factors like:
    • Municipal Value: The value assessed by the local authorities for property tax.
    • Fair Rent: The rent a similar property in the same locality would fetch.   
    • Standard Rent: The maximum rent chargeable under the Rent Control Act (if applicable). The expected rent cannot exceed the standard rent.
       

• Self-Occupied Property: For a self-occupied property (up to two properties in some cases), the Gross Annual Value is usually taken as nil.   

• Deemed Let-Out Property: If an individual owns more than the permissible number of self-occupied properties, the excess properties are considered "deemed to be let out." In such cases, the GAV is the amount for which the property might reasonably be expected to be let out.   

• Significance: The GAV is the basis upon which further deductions are allowed to arrive at the Net Annual Value (NAV). Municipal taxes paid by the owner during the year are deducted from the GAV to arrive at the NAV. Subsequently, a standard deduction of 30% of the NAV and deduction for interest paid on housing loans can be claimed.