TYBMS SEM :5 Finance : Direct Taxes (Q.P. November 2024 with Solution)

  Paper/Subject Code: 46018/Finance: Direct Taxes

TYBMS SEM :5 

Finance 

Direct Taxes

(Q.P. November 2024 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.

Q1(A): Choose the correct alternative and rewrite the sentence: (any 8)         (08)

1. Mr. Nikhil received a gift of Rs. 52,000 from his friend. The t t of gift is ________.

Rs. 2000

b. Rs. 1,10,000

c. Rs. 52,000

d. Nil

2. Salary received by manager of agricultural farm is ________

a. Fully exempt

b. Fully taxable

c. Partly exempt

d. Partly taxable

3. A new business was set up on 1-10-2023 previous year will end on ________.

a. 31-3-2024

b. 30-9-2024

c. 31-12-2023

d. 31-10-2023

4. Entertainment allowance in case of  of Government employee is _______

a. Fully exempt

b. Fully taxable

c. 50% taxable

d. 80% taxable

5. Capital gain arises from the transfer of ________. 

a. Any asset

b. Any fixed asset

c. Any capital asset

d. Any investment

6. Share of income received by a member of HUF is _______.

a. Fully exempt

b. Fully taxable

c. 50% taxable

d. 80% taxable

7. Nagpur university is assessable under the Income tax Act as _______.

a. A local authority

b. A company

c. An artificial Juridical person

d. A Cooperative society

8. Mr. Dinesh earns saving bank interest of Rs. 12,000 during the previous year 2023-24. He is entitled to a deduction under section 80TTA of ________.

a. Rs. 12,000

b. Rs. 10,000

c. Rs. 5,000

d. NIL

9. Income earned in India by a Non-Resident is _______.

a. Tax free in India

b. Taxable in India

c. Not an income

d. None of the above

10. Mr. Anil is a person with a physical disability of 70%. He is entitled to a deduction under section 80U of _______.

a. Rs. 75,000

b. Rs. 50,000

c. Rs. 1,25,000

d. NIL

b) State whether the following statements are True or False: (any 07)  (07)

1. Deduction for family pension is 33.1/3% or Rs. 5,000 whichever is lower.

Ans: True

2. Municipal taxes paid by the tenant is allowed as deduction from let out property.

Ans: False

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

Ans: False

4. There will be long term capital gain, if shares listed on recognized stock exchange are transferred after being held for more than 12 months.

Ans: True

5. Deduction for entertainment allowance is available to all employees.

Ans: False

6. Income from sub letting of house property is taxable under the head of Income from other sources

Ans: True

7. Commuted pension is taxable in the hands of all individual assesses

Ans: False

8. Income means any receipt in cash.

Ans: False

9. Residential status depends only on nationality

Ans: False

10. Assessment includes reassessments

Ans: True

Q2: Mr. Jack was born in UK in the year 1991. He came to India for the first time on 1" April, 2019 and started business in India. He went back to UK on 10th August, 2023.         15

He again came back to India in 14th November, 2023 and returned to his country UK, on 28th January, 2024.

Determine his residential status for the assessment year 2024-25.

OR

Q2: From the following information of Mr. Vijay for the PY 2023-24. Compute his gross total income for the Assessment Year 2024-25 if he is:

a. Resident & Ordinary Resident

b. Resident but not Ordinary Resident

c. Non Resident

Particulars	RS
1. Income from business in Dubai, controlled from London.	50,000
2. Rent from house in UK received in Spain	60,000
3. Salary earned in New Zealand in the past, but brought to India during the current previous year.	20,000
4. Dividend from German Company received in London.	80,000
5. Income from Agriculture in Japan, received in India.	90,000
6. Royalty from a company in Singapore, received in Melbourne	1,00,000
7.Interest credited to HSBC bank, New York branch.	1,10,000
8. Interest on UK Development Bond (Received in India)	2,00,000

Q3: Mr. Ranade is a physically disabled person (90% disability). He is employed with Ganesh printers. He gives you the following information for the year ended 31 March, 2024.                         15

Particulars	Rs
Basic Salary	6,00,000 per annum
Bonus	50 000 per annum
Entertainment allowance	48,000 per annum
House Rent allowance (exempt Rs. 17,900)	1,20,000 per annum
Conveyance allowance (Amount spent on official conveyance Rs. 21,600)	24,000 per annum
Perquisites value of subsidized meal at workplace	24,000 per annum
Profession Tax deducted	2,500

Other information:

1. Interest received on government securities Rs. 18,000

2. Dividend from HDFC Mutual fund Rs. 5,000

3. Interest on saving bank account Rs. 12,000

4. Gifts from friends on occasion of his 50th birthday Rs. 50,000 

Compute his taxable income for the assessment year 2024-25.

OR

Q.3 Mr. Akhil is a physically disabled person (70% disability). He is employed with Ganesh printers. He gives you the following information for the year ended 31 March, 2024,

Particulars	Rs
Basic Salary	50,000 per month
Dearness allowances	20,000 per month
Entertainment allowance	62,500 per annum
House Rent allowance (exempt Rs. 12,000)	60,000 per annum
Conveyance allowance (Amount spent on official conveyance Rs. 46,000)	48,000 per annum
Perquisites value of subsidized meal at workplace	28,000 per annum
Profession Tax deducted	2,500

Other information:

1. Winning from lotteries Rs. 30,000

2. Interest received on saving bank account Ra. 25000

3. Interest accrued on Kisan Vikas Patra Rs. 5,000

Compute his taxable income for the assessment year 2024-25.

Q.4 Mr. Samar acquired a residential house in January, 2023 for Rs. 10,00,000 and made some improvements by way of additional construction to the house, incurring expenditure of Rs. 2,00,000 in October 2024. He sold the house property in October, 2023 for Rs. 80,00,000 and paid brokerage of Rs. 50,000. He acquired a residential house in January, 2024 for Rs. 25,00,000.                     15

Compute the capital gain chargeable to tax for the AY 2024-25.

Cost Inflation Index
2002-03	105
2004-05	113
2010-11	167
2023-24	348

OR

Q.4 Mr. Raman who is 80% physically disabled provides the following information for the previous year ended 31st March, 2024. You are required to compute his net taxable income for the Assessment Year 2024-25.                     15

Profit & Loss account for the year ended 31-3-2024

Expenses	Rs	Income	Rs
To office rent	60,000	By Gross profit	15,50,000
To Salaries	3,20,000	By interest on bonds	60,000
To Advertisement expenses	50,000	By dividend from foreign Companies	70,000
To Motorcar car expenses	1,20,000
To Income tax	52,000
To Printing & Stationery	20,000
To Conveyance	72,000
To Depreciation	70,000
To Donations	50,000
To Net profit	8,66,000
Total	16,80,000	Total	16,80,000

Additional information;

1. Depreciation as per income tax rules is Rs. 76,000.

2. Advertisement includes Rs. 20,000 as advertisement in the souvenir of political party.

3. Salaries include Rs . 40,000 which was withdrawn by Mr. Raman for personal use. 

4. He paid Medical Insurance premium for self Rs. 12,000 and spouse Rs. 8,000.

5. 1/6th of Motor car expenses were for personal use.

Q.5 Answer the following

a) Explain any four deductions under Section 80.            (8) 

Here are four significant deductions available under Section 80 of the Income Tax Act in India:

1. Section 80C: This is one of the most popular deductions. It allows you to reduce your taxable income by investing in various specified avenues. The maximum deduction you can claim under Section 80C is ₹1.5 lakh per financial year. Some of the common investments and expenditures that qualify for this deduction include:

   • Contributions to Public Provident Fund (PPF) and Employees' Provident Fund (EPF).
   • Premiums paid for life insurance policies for yourself, your spouse, or your children.
   • Investments in Equity Linked Savings Schemes (ELSS).
   • Principal repayment of a home loan.
   • Tuition fees paid for the full-time education of up to two children.
   • Investments in National Savings Certificates (NSC).
   • Payments towards Sukanya Samriddhi Yojana.
   • Investments in tax-saving fixed deposits (with a lock-in period of 5 years).

2. Section 80D: This section provides a deduction for the premiums you pay for health insurance policies. This deduction is available for policies taken for yourself, your spouse, dependent children, and your parents. The maximum deduction allowed under Section 80D depends on the age of the insured individuals:

   • For individuals below 60 years, the maximum deduction is ₹25,000. This limit increases to ₹50,000 if the insured person is a senior citizen (60 years or older).
   • You can claim an additional deduction of ₹25,000 (or ₹50,000 for senior citizen parents) for the health insurance premiums paid for your parents, over and above the limit for yourself and your family.
   • A deduction of up to ₹5,000 is also allowed for expenses incurred on preventive health check-ups for yourself, your spouse, dependent children, and parents, within the overall limits mentioned above.

3. Section 80G: This section allows you to claim a deduction for donations made to various charitable institutions and relief funds. The amount of deduction can be either 50% or 100% of the donated amount, depending on the specific organization or fund to which the donation is made. Some donations have a qualifying limit based on a percentage of your adjusted gross total income, while others do not. To claim this deduction, you need to have a valid receipt from the donee organization, which should include their name, address, and PAN.

4. Section 80E: This section provides a deduction for the interest paid on an education loan taken for higher education. The loan must have been taken from a recognized financial institution or an approved charitable institution for yourself, your spouse, your children, or a student for whom you are the legal guardian. A significant benefit of this deduction is that there is no upper limit on the amount of interest that can be claimed as a deduction. The deduction is available for a maximum of ¹ 8 assessment years, starting from the year you begin repaying the loan or until the interest is fully repaid, whichever is earlier. Only the interest component of the loan repayment qualifies for deduction under this section, not the principal amount.

b) Explain in brief any seven exempted income under Section 10 of Income Tax Act 1961?                                (7)

Agricultural Income [Section 10(1)]: Income derived from agricultural land situated in India is exempt. This includes rent or revenue derived from such land, income from carrying out agricultural operations, and income from processing or marketing agricultural produce.

Receipts from a Hindu Undivided Family (HUF) [Section 10(2)]: Any sum received by a member of an HUF out of the income of the family, or in the case of impartible estate, any sum received out of the income of the estate belonging to the family, is exempt in the hands of the member. This prevents double taxation at both the family and individual member levels.

Share of Profit from a Partnership Firm [Section 10(2A)]: If you are a partner in a firm, your share of the profit from the firm is exempt from tax. The firm itself is taxed on its profits, so this provision avoids taxing the same income again in the hands of the partners.

Interest on Non-Resident (External) Account [Section 10(4)(ii)]: Interest earned by a Non-Resident Indian (NRI) on a Non-Resident (External) (NRE) account held with any bank in India is exempt from income tax. This encourages NRIs to keep their foreign earnings in Indian banks.

Leave Travel Concession (LTC) [Section 10(5)]: Certain amounts received by an employee from their employer as Leave Travel Concession or Assistance (LTA) for travel within India are exempt, subject to specific conditions and limits. The exemption is generally available for journeys undertaken by the employee and their family.

Death-cum-Retirement Gratuity [Section 10(10)]: Gratuity received by an employee upon retirement or death is exempt from income tax up to certain limits specified under the Act and related rules. The exemption limit varies based on whether the employee is covered under the Payment of Gratuity Act, 1972, or not.

Payment from Provident Funds [Section 10(11) & 10(12)]: Amounts withdrawn from a recognized Provident Fund (RPF) or the Public Provident Fund (PPF) are generally exempt from income tax, subject to certain conditions regarding the period of service and other rules. This encourages long-term savings for retirement.

OR

Q.5 Write Short notes on: (Any three)                    (15)

1. 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.

2. 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).

3. Deductions 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."

4. Gratuity

Gratuity is a lump-sum payment made by an employer to an employee in recognition of their past services to the organization. It's typically paid upon retirement, resignation (after completing at least five years of continuous service), death, or disablement.   

In India, the Payment of Gratuity Act, 1972 governs the payment of gratuity to employees working in establishments with 10 or more employees. The Act specifies the eligibility criteria, the formula for calculation, and the maximum amount payable.   

Key aspects of Gratuity:

• Eligibility: Generally, an employee who has completed at least five years of continuous service is eligible for gratuity. However, this condition is waived in case of death or disablement.   
• Calculation: The formula for calculating gratuity under the Act is:

  Gratuity = (Last Drawn Salary × 15 × Number of Completed Years of Service) / 26
  

Here, "Last Drawn Salary" includes basic pay and dearness allowance, and 26 represents the number of working days in a month. For employees not covered under the Act, a slightly different formula based on 15/30 is often used.   

• Maximum Limit: The maximum amount of gratuity payable under the Payment of Gratuity Act, 1972 is currently ₹20 lakh.
• Taxability: Gratuity received by government employees is fully exempt from income tax. For non-government employees, the tax exemption is subject to certain limits based on whether they are covered under the Gratuity Act or not. Generally, the least of the actual gratuity received, a specified formula-based amount, and ₹20 lakh is exempt.   

Gratuity serves as a significant social security benefit for employees, providing financial support upon cessation of employment and acknowledging their dedication to the organization over a sustained period.

5. Annual value

In direct tax, specifically under the head "Income from House Property" in India, Annual Value (AV) serves as the primary basis for determining the taxable income from a property. As per Section 23(1) of the Income Tax Act, 1961, the Annual Value of a property is essentially the amount for which the property might reasonably be expected to be let out on a year-to-year basis. It represents the notional earning potential of the property, irrespective of whether it is actually rented out or not.   

Key aspects of Annual Value:

• Notional Rent: For self-occupied properties (up to two as per current rules), the Annual Value is generally considered to be nil. However, if an individual owns more than two properties and all are self-occupied, the Annual Value of the property(ies) not considered self-occupied is determined as if they were let out.   
• Determination for Let-Out Properties: For properties that are let out, the Annual Value is usually the higher of:
  • The actual rent received or receivable.   
  • The reasonable expected rent, which takes into account factors like the municipal value, fair rent in the locality, and standard rent (if applicable under rent control laws).  
• Gross Annual Value (GAV): The Annual Value determined as above is often referred to as the Gross Annual Value.   
• Net Annual Value (NAV): To arrive at the taxable income from house property, the Net Annual Value is calculated by deducting the municipal taxes actually paid by the owner during the previous year from the Gross Annual Value.   
• Significance: The Annual Value is crucial because it forms the starting point for calculating the income chargeable to tax under the head "Income from House Property." Subsequent deductions, such as the standard deduction (30% of NAV) and interest on home loans, are applied to the NAV to arrive at the final taxable income from the property.