UCM 54 INCOME TAX LAW & PRACTICE - I Unit-1 Introduction to Income Tax Act 1961 Type:20% Theory 80% Problem Question & Answers

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1 UCM 54 INCOME TAX LAW & PRACTICE - I Unit-1 Introduction to Income Tax Act 1961 Type:20% Theory 80% Problem Question & Answers PART A 1. What is assessment year? (April 2014, 2013, 2012) ASSESSMENT YEAR (A.Y.): Assessment Year has been defined by Section 2 (9), to mean A Financial Year, which immediately succeeds the relevant Previous Year. For e.g.: For Financial Year , Assessment Year will be Income of one financial year is taxed in the next year, which is known as Assessment Year. 2. Who is an assessee? (April 2014) (April 2013) ASSESSEE :Section 2 (7) of the act, defines the term assessee to mean a Person by whom any tax or any other sum of money is payable under the act and includes : (i.) Every person in respect of whom, any proceeding under the act has been taken up, whether in respect of assessment of his own income or income of any other person, (ii.) A person who is deemed to be an assessee under any provision of the act. For e.g.: Representative assessee, Agent of Non-Resident, etc. (iii.) For e.g.: An employer who fails to deduct tax at source from salary paid by him to his employee. 3. Who is called Representative Assessee? In certain cases, a person is liable not only for his own income or loss but also for the income or loss of other persons. In such cases, he is treated as deemed or representative assessee. The following are the situations: a) In the case of deceased person: if a person dies after writing his will, the executors of the property are deemed assesses. b) In case of lunatic or minors or idiot: In the case of these special individual having taxable income, their guardian is deemed assessee. c) Non-residents: In case of non residents having income in India, the person acting on his/her behalf is deemed as assessee. 4. Who is an Assessee in default? If a person fails to fulfil his statutory obligation as per the Income Tax act he is called Assessee in default : a) Employers: An employer paying salary has to deduct tax and remit it to the Govt. Treasury. If he fails to deduct to or does not remit it to the treasury he is called assessee in default. RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 1 of 29

2 b) A person paying interest: A person paying interest is under statutory obligation to deduct tax at source and remit it to the treasury, if he does not remit it to the treasury he is treated as assessee in default. 5. What is capital expenditure? Capital Expenses or Expenditures are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business, like rent, utilities, and insurance. Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year. 6. Write a short note on direct taxes? (April 2013, 2012) A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed in India are Income tax, Corporation tax, Property tax, Gift tax, Inheritance tax. 7. Mention any three property incomes exempt from tax. (April 2013) a) Income from farm house (Sec.2(1A)(c) read with sec. 10(1)). b) Annual value of any one palace of an ex-ruler (Sec.10(19A)). c) Property income of a local authority (Sec.10(20)), d) University/ educational institution (Sec.10(23C)), e) Approved scientific research association (Sec.10(21)), f) Property used for own business or profession (Sec.22). g) One self occupied property (sec.23(2)). h) House property held for charitable purposes (sec.11). 8. What is tax?(nov 2012) A fee charged ("levied") by a government on a product, income, or activity. If tax is levied directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of a good or service, then it is called an indirect tax. The purpose of taxation is to finance government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there cannot be a market in the good or service, and so they need to be provided by the government or a quasi-government agency, which tend to finance themselves largely through taxes. 9. Write a note on previous year? (Nov 2012) Income earned in a particular year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 2 of 29

3 assessment year. In other words, previous year is the financial year immediately proceeding the assessment year. 10. What is assessment? (Nov 2012) The term assessment has not been defined by the act, but it would mean evaluating or computing the income and determining the income tax liability of an assessee. According to Section 2 (8) of the act, the term assessment, includes reassessment. Therefore, one can say that Assessment is quantification of Income and Income Tax Liability of an assessee. 11. Who is a resident? An Individual is called Resident, if he/she satisfies at least one out of the following two Basic conditions :- BASIC CONDITIONS :- 1.) He/She stays in India for 182 days or more during the relevant Previous Year. (whether it s a Leap year or not, limit will be 182 days only) OR 2.) (a.) He/She is in India for 60 days or more during the relevant Previous Year (whether it s a Leap year or not, limit will be 60 days only) and (b.) He/She is in India for 365 days or more during the last four Previous Years, immediately preceding the relevant previous year. 12. Write a short note on residential status. Tax incidence on an assessee depends on his residential status. The residential status of an assessee is determined with reference to his residence in India during the previous year. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability. Residence and citizenship are two different things. The incidence of tax has nothing to do with citizenship. 13. Who is a not ordinarily resident? If an individual satisfies any one of the basic conditions and one or none of the two additional conditions, he is considered to be Not ordinarily resident. It is for the assess to prove that he a Resident but not ordinarily resident because the incidence of Tax is usually less on this category than an ordinarily residents. 14. Who is a non resident? (Apr./May 2015) If an individual does not satisfy any of the basic conditions (i) and (ii) mentioned above, he is said to be Non-Resident. Additional conditions are irrelevant in relation to Non-Residents. 15. When is a company resident/ non-resident? As per section 6(3), an Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. However, a foreign company is treated as non-resident if, during the RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 3 of 29

4 previous year, control and management of its affairs is either wholly or partly situated out of India. 16. Write a note on incidence of tax. The tax incidence of an assessee, depends upon his/her residential status, the tax implication of an income of an assessee under different residential status, namely, Resident and Ordinarily Resident (R.O.R.), Resident but not Ordinarily Resident (R.N.O.R.) and Non - Resident (N.R.). This can be better explained with the help of the following table:- Particulars R.O.R. R.N.O.R. N.R. 1.) INDIAN INCOME Taxable Taxable Taxable 2.) FOREIGN INCOME : a.) Income from Business controlled from India or a Profession set up in India Taxable Taxable Not Taxable b.) Other Foreign Incomes Taxable Not Taxable Not Taxable 17. How will you determine the residential status of Firms & Association of persons? As per section 6(2), a partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India. 18. What are the Incomes deemed to accrue or arise in India? a) Salary earned in India and received outside India b) Dividend paid by the Indian company outside India c) Interest payable by Government of India d) Interest payable by a resident or by a non-resident person e) Royalty income payable by Indian Government f) Royalty payable by Residents or Non-Residents g) Income by way of fees for technical services by Indian Government. 19. What are the incomes deemed to be received in India? a) Annual addition to RPF b) Balance of URPF received at the time of retirement c) Recoupment of any loss d) Bad debts recovered e) Unrecorded Investment, money etc. f) Expenditure not recorded, in books. 20. Write a short note on total income of a resident and ordinarily resident. Total income of an assessee who is resident and ordinarily resident includes: RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 4 of 29

5 (a) any income received or deemed to be received in India during the previous year by or on behalf of the assessee ; or (b)any income accrues or arises or deemed to accrue or arise to him in India during the previous year ; or (c) any income accrues or arises to him outside India during such year. 21. Write a short note on total income of a resident and not ordinarily resident. (a) any income received or deemed to be received in India during the previous year by or on behalf of the assessee ; or (b)any income accrues or arises or deemed to accrue or arise to him in India during the previous year ; or (c) any income accrues or arises to him outside India from a business controlled in or a profession set up in India. 22. Write a short note on total income of a non - resident. (a) any income received or deemed to be received in India during the previous year by or on behalf of the assessee ; or (b)any income accrues or arises or deemed to accrue or arise to him in India during the previous year. 23. What is HUF? The term 'Hindu Undivided Family' has not been defined under the Income Tax Act. It is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. This means membership of a HUF does not come from a contract but from status of the person in such families. 24. Write short note on agricultural income. As per section 2(1A) of the Act, agricultural income is defined as follows: Agricultural income means (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes; (b) A n y income derived from such land by (i) Agriculture; or (ii) the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or (iii) the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of this sub-clause ; (c) Any income derived from any building owned and occupied by the receiver of the rent or revenue of any such land, or occupied by the cultivator or the receiver of rent-in- RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 5 of 29

6 kind, of any land with respect to which, or the produce of which, any process mentioned in paragraphs (ii) and (iii) of sub-clause (b) is carried on: 25. What is casual income? Any receipt which is of a casual and non-recurring nature is called casual income. Casual income includes the following receipts: 1. Winning from lotteries, 2. Winning from crossword puzzles, 3. Winning from races (including horse races), 4. Winning from card games and other games of any sort 5. Winning from gambling or betting of any form or nature. 26. Who is deemed assessee? (Nov. 2014) In certain cases, a person is liable not only for his own income or loss but also for the income or loss of other persons, In such cases, he is treated as deemed or respresentative assessee. 27. Who is ordinary resident? (Nov. 2014) i. Proceedings of the Act: Any person against whom proceedings under the income tax act are going on, irrespective of any tax or any amount payable by the person. ii. A person who filed return of loss: Any person who has made loss and filed return of loss under section 139(3). iii. A person who has to pay amounts: Any person who has to pay interest, tax or penalty under the income tax act. iv. A person who is entitled to refund: Any person who is entitled to refund of tax under the income tax act. 28. Who is a person? (Apr./May, Nov./Dec. 2015) According to sec 2(31) the term person includes the following: A natural person or a human being is an individual. An individual may be male, female or a lunatic. PART B Unit - I 1. How will you determine the residential status of an individual? (April 2014, 2013, 2015, 2012) How would you determine the residential status of a person? Discuss the rules relating to determination of residential status of an assessee An assessee being an individual, could be Resident (R.) in India or Non -Resident (N.R.) in India. If he is Resident in India, then he/she could be Resident and Ordinarily Resident (R.O.R.) or he/she could be Resident but Not Ordinarily Resident (R.N.O.R.) in India. This can be better explained with the help of the following chart:- RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 6 of 29

7 INDIVIDUAL RESIDENT (R) NON-RESIDENT (NR) RESIDENT AND ORDINARILY RESIDENT (R.O.R.) RESIDENT BUT NOT ORDINARILY RESIDENT (R.N.O.R.) Residential Status of an Individual is determined by Section 6 of the act. An Individual is called Resident, if he/she satisfies at least one out of the following two Basic conditions :- BASIC CONDITIONS :- 1.) He/She stays in India for 182 days or more during the relevant Previous Year. (whether it s a Leap year or not, limit will be 182 days only) OR 2.) (a.) He/She is in India for 60 days or more during the relevant Previous Year (whether it s a Leap year or not, limit will be 60 days only) and (b.) He/She is in India for 365 days or more during the last four Previous Years, immediately preceding the relevant previous year. ADDITIONAL CONDITIONS : Under Section 6(6), a Resident, is called as Ordinarily Resident (ROR) in India, if both the additional conditions mentioned below are satisfied, otherwise he/she will be treated as Not Ordinarily Resident (RNOR) in India :- 1.) He has been Resident in India (based on two basic conditions mentioned above) in at least 2 out of last 10 Previous Years immediately preceding the relevant Previous Year. AND 2.) He/She has been in India for a period of 730 days or more during the last 7 Previous Years, immediately preceding the relevant Previous Year. Therefore, we can say that R.O.R. : An Assessee, who satisfies at least one of the two basic conditions plus both the Additional conditions. R.N.O.R. : An Assessee, who satisfies at least one of the two basic conditions and does not satisfy either both or anyone of the Additional conditions. N.R. : An Assessee, who does not satisfy any of the basic conditions. RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 7 of 29

8 2. What are the difference between direct taxes and indirect taxes? (April 2014) (April 2013, 2012) 3. Explain the concept of income and give its features. (Nov 2012) INCOME : The term Income has been defined by Section 2 (24) of the act in a n illustrative manner. According to Section 2 (24), income includes; (a.) Profits and Gains, (b.) Dividend, [Though the term income includes dividend, certain dividends are exempt from income tax under section 10(34)] (c.) Voluntary contributions received by Charitable or Religious Trust or Institution, (d.) Value of any perquisite, Profit in lieu of salary, Special Allowance or any other benefit received by an employee from his employer, (e.) Export Incentive (e.g.: Duty Drawback), (f.) Any Interest, Salary, Bonus, Commission or remuneration received by a partner of a firm from the firm, (g.) Capital Gains, (h.) Winnings from Lotteries, Crossword Puzzles, Card Games, Races including Horse Races, any other game of any sort or from Gambling or Betting of any nature, (i.) Any sum received by the assessee from his employees towards Welfare Fund, Provident Fund, Superannuation Fund, etc. (j.) Any sum received under KEYMAN INSURANCE POICY including any Bonus if any, on such policy, (k.) Non-Compete Fees, Compensation for not sharing any intangible asset such as Know-how, Patent, Trademark, etc. (l.) Any sum referred to in section 56 (2)(v). 4. Write a note on historical background of Income tax act. In India, Income tax was introduced for the first time in 1860, by Sir James Wilson in order to meet the losses sustained by the Government on account of the Military Mutiny of Thereafter; several amendments were made in it from time to time. In 1886, a separate Income tax act was passed. This act remained in force up to, with various amendments from time to time. In 1918, a new income tax was passed and again it was replaced by another new act which was passed in This Act remained in force up to the assessment year with numerous amendments. The Income Tax Act of 1922 had become very complicated on account of innumerable amendments. The Government of India therefore referred it to the law commission in1956 with a view to simplify and prevent the evasion of tax. The law commission submitted its report-in September 1958, but in the meantime the Government of India had appointed the Direct Taxes Administration Enquiry Committee submitted its report in In consultation with the Ministry of Law finally the Income Tax Act, 1961 was RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 8 of 29

9 passed. Income Tax Act 1961 has been brought into force with 1 April It applies to the whole of India including Jammu and Kashmir. Income-tax law in India The income tax law in India consists of the following components: 1. Income tax Acts 2. Income tax rules 3. Finance Act 4. Circulars, notifications etc 5. Legal decision of courts. Finance Act: Every year, the Finance Minister of the Government of India presents the Budget to the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President of India, it becomes the Finance Act. Income-tax Rules: The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). The CBDT is empowered to make rules for carrying out the purposes of the Act. For the proper administration of the Income-tax Act, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, Circulars and Notifications: Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of the provisions. These circulars are issued for the guidance of the officers and/or assessees. 5. State the procedure followed in computing the total income of an assessee. Income tax is a charge on the assessee s income. Income Tax law lays down the provisions for computing the taxable income on which tax is to be charged. Taxable income of an assessee shall be calculated in the following manner: 1. Determine the residential status of the person as per section 6 of the Act. 2. Calculate the income as per the provisions of respective heads of income. Section 14 classifies the income under five heads: (i) Income from salaries (ii) Income from House Property (iii) Profits and gains of business or Profession (iv) Capital Gains (v) Income from other sources 3. Consider all the deductions and allowances given under the respective heads before arriving at the net income. 4. Exclude the income exempt under section 10 of the Act. RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 9 of 29

10 5. Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and making adjustments of set off and carry forward of losses is known as Gross Total Income. 6. Deduct therefrom the deductions admissible under Sections 80C to 80U. The balance is called Total income. The total income is rounded off to the nearest multiple of Rupees ten. (Section 288A) 6. Distinguish between capital receipts and revenue receipts. (Apr./May 2015) No. Revenue Receipt Capital Receipt 1 It has short-term effect. The benefit is enjoyed within one accounting period. It has long-term effect. The benefit is enjoyed for many years in future. 2 It occurs repeatedly. It is recurring and Regular in nature. It does not occur again and again. It is nonrecurring and irregular in nature. 3 It is shown in profit and loss account on the credit side. It is shown in the Balance Sheet on the liability side. 4 It does not produce capital receipt. Capital receipt, when invested, produces revenue receipt e.g. when capital is invested by the owner, business gets revenue receipt (i.e. sale proceeds of goods etc.). 5 This does not increase or decrease the value of asset or liability. The capital receipt decreases the value of asset or increases the value of liability e.g. sale of a fixed asset, loan from bank etc. 6 Sometimes, expenses of capital nature are to be incurred for revenue receipt, e.g. purchase of shares of a company is capital expenditure but dividend received on shares is a revenue receipt. Sometimes expenses of revenue nature are to be incurred for such receipt e.g. on obtaining loan (a capital receipt) interest is paid until its repayment. 7. Distinguish between capital Expenditure and revenue Expenditure. No. Revenue Expenditure Capital Expenditure 1 Its effect is temporary, i.e. the benefit is received within the accounting year. 2 Neither an asset is acquired nor is the value of an asset increased. 3 It has no physical existence because it is incurred on items which are used by the business. 4 It is recurring and regular and it occurs repeatedly. Its effect is long-term, i.e. it is not exhausted within the current accounting year-its benefit is received for a number of years in future. An asset is acquired or the value of an existing asset is increased. Generally it has physical existence except intangible assets. It does not occur again and again. It is nonrecurring and irregular. RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 10 of 29

11 5 This expenditure helps to maintain the business. 6 The whole amount of this expenditure is shown in trading P & L A/c or income statement. 7 It does not appear in the balance sheet. 8 It reduces revenue (profit) of the business This expenditure improves the position of the business. A portion of this expenditure (depreciation on assets) is shown in trading & P & L A/c and the balance are shown in the balance sheet on asset side. It appears in the balance sheet until its benefit is fully exhausted. It does not reduce the revenue of the concern. 8. Explain the basis of charge of Income Tax. Basis Of Charge Of Income Tax Sec : 4 To know the procedure for charging tax on income, one should be familiar with the following: 1. Annual tax - Income-tax is an annual tax on income. 2. Tax rate of assessment year - Income of previous year is chargeable to tax in the next following assessment year at the tax rates applicable for the assessment year. This rule is, however, subject to some exceptions 3. Rates fixed by Finance Act - Tax rates are fixed by the annual Finance Act and not by the Income-tax Act. For instance, the Finance Act, 2013, fixes tax rates for the Assessment year Tax on person - Tax is charged on every person 5. Tax on total income - Tax is levied on the total income of every assessee computed in accordance with the provisions of the Act. 9. How would you determine the residential status of HUF? HUF : Resident or Non-Resident A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India. A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family (in cluding successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b). Additional condition (i) Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in immediately preceding the relevant previous year) Additional condition (ii) Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year. If the Karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India. RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 11 of 29

12 10. What do you understand by tax holiday and explain the provisions relating to newly incorporated company. In order to encourage establishment of export-oriented industries in the free trade zones, the Finance Act, 1981 has provided for complete tax exemption in respect of the profits and gains derived by industrial undertakings set up in the Free Trade Zones. Following provisions are applicable from the assessment year An undertaking must begin manufacture or production in free trade zone: An undertaking must begin to manufacture/produce articles or things or computer software during the following specified years. a) Free Trade Zone: During the previous year relevant to the assessment year or any other subsequent year. b) Electronic Hardware Technology Park or Software Technology Park : During the previous year relevant to the assessment year or any subsequent year. c) Special Economic Zones: During the previous year relevant to the assessment year or any year thereafter. 11. Mr. P, an Indian Citizen, is living in Delhi since 1960, left for Japan on July 1, He comes back on August 7, Determine his residential status for the assessment year Solution: Stay in India for a minimum period of 182 days in the previous year: Mr. P has stayed in India for 236 (viz ) days in the previous year So, this test is satisfied. So, Mr. P shall be a resident in India during the previous year (Assessment year ). Keeping in view the facts of the given case, Mr. P satisfies the two additional conditions also namely: He is resident in two out of ten previous years preceding the relevant previous year His stay in India is also more than 730 days in 7 previous years preceding the previous year. As he left for Japan on 1st July Hence, Mr. P is resident and ordinary resident in India for the assessment year Dr. Q, an Indian Citizen and a Professor in IIM, Lucknow, left India on September 15, 2013 for USA to take up Professor s job in MIT, USA. Determine his residential status for the assessment year Solution: Dr. Q being a citizen of India and who has gone out of the country for employment, RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 12 of 29

13 will be governed by 182 days test only and therefore the second condition under section 6(1), i.e. 60 days during relevant previous year and 365 days during the four previous year immediately preceeding relevant previous year shall not be applicable. Dr. Q stay in India for 168 (viz ) days only in the relevant previous year. Hence, Dr. Q shall be a non-resident in India for the assessment year as condition by stay of 182 days in relevant previous year is not satisfied. 13. Mr. R is a foreign citizen. Determine his residential status for the assessment year on the assumption that during financial years to , he was present in India as follows: P.Y Days P.Y. Days days days days days days days days days days days days days days days days Solution : The facts of the given case may be presented in the form of the following table: Year Presence in India Year Presence in India RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 13 of 29

14 The following facts are now available: (i) Stay of Mr. R during the previous year is 185 days. (ii) Mr. R is resident in India in two out of ten previous years preceding the relevant previous year (viz. resident in on satisfaction of 2nd Basic Condition and resident in on satisfaction of 1st Basic Condition). (iii) Stay of Mr. R in India is also more than 730 days in 7 previous years preceding the relevant previous year. Hence, Mr. R shall be a resident and ordinary resident for the assessment year Mr. A is a foreign citizen. His father was born in Delhi in 1954 and mother was born in England in His grandfather was born in Delhi in Mr. A is coming to India to see Taj Mahal and visit other historical places in India. He comes to India on 1 st November, 2013 for 200 days. He has never come to India before. Determine his residential status for AY Solution: Mr. A falls in exception to basic conditions as he is a Person of Indian Origin (as his grandfather was born in undivided India) and he comes on a visit to India during relevant Previous year. Therefore, only first basic condition of 182 days during relevant previous year would be checked. Stay during relevant PY = 1 st Nov, 2013 to 31 st March, 2014 = = 151 days Mr. A is Non-resident in India for PY as he does not satisfy first basic condition. 15. Who is an assessee? Explain the various types of assessee? (Nov. 2014) ASSESSEE :Section 2 (7) of the act, defines the term assessee to mean a Person by whom any tax or any other sum of money is payable under the act and includes : (iv.) Every person in respect of whom, any proceeding under the act has been taken up, whether in respect of assessment of his own income or income of any other person, RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 14 of 29

15 (v.) A person who is deemed to be an assessee under any provision of the act. For e.g.: Representative assessee, Agent of Non-Resident, etc. For e.g.: An employer who fails to deduct tax at source from salary paid by him to his employee 1. Ordinary Assessee: i. Proceedings of the Act: Any person against whom proceedings under the income tax act are going on, irrespective of any tax or any amount payable by the person. ii. A person who filed return of loss: Any person who has made loss and filed return of loss under section 139(3). iii. A person who has to pay amounts: Any person who has to pay interest, tax or penalty under the income tax act. iv. A person who is entitled to refund: Any person who is entitled to refund of tax under the income tax act. 2. Representative or Deemed Assessee: In certain cases, a person is liable not only for his own income or loss but also for the income or loss of other persons, In such cases, he is treated as deemed or respresentative assessee. a) In the case of deceased person: If a person dies after writing his will, the executors of the property are deemed assessees. b) In case of lunatic or minors or idiot: In the case of these special individuals having taxable income, their guardian is deemed assessee. c) Non-residents: In case of non residents having income in India, the person acting on his/her behalf is deemed as assessee. 3. Assessee-in-default: If a person fails to fulfil his statutory obligation as per the income tax act he is called Assessee in default. a) Employers: An employer paying salary has to deduct tax and remit it to the Govt. Treasury. If he fails to deduct to or does not remit it to the treasury he is called assessee in default. b) A person paying interest: A person paying interest is under statutory obligation to deduct tax at source and remit it to the treasury. If he does not remit it to the treasury he is treated as assessee in default. 16. Mr. Madhan, a senior scientist goes to Nigeria on a job approved by the Govt. for a period of 3 years on 15 th September He has never been out of India before. Determine his residential status for the previous year. (Nov. 2014) AY PY Stay in India during the previous year RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 15 of 29

16 From As an Madhan has to stay in India at least 182 days in the previous year to fulfil basic conditions 1 and 2 under Sec. 6(1) to qualify as Resident. Since he stayed in India only for 167 days in the previous year, he fails to satisfy both the basic conditions. Conclusion: Mr. Madhan is Non Resident for the assessment year Define the term previous year and assessment year. (Apr./May 2015) Assessment Year: The taxpayer s income of the previous year is assessed to tax in the assessment year at the rates prescribed in the Finance Act for the assessment year. Assessment year means the period of twelve months beginning from 1 st April every year and ending on 31 st March of the immediately following year. The current assessment year for example, commences on 1 st April 2016 and will end on 31 st March Previous Year: Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year. Previous year means the financial year immediately preceding the assessment year. A taxpayer s income of the previous year is assessed to tax in the assessment year. Thus, for the current assessment year , the relevant previous year will be the financial year , i.e., 1 st April 2015 to 31 st March Explain deduction u/s 80 E? (Apr./May 2014) Deduction under Section 80E is allowed to an individual assessee who actually pays in the previous year any amount by way of interest on loan taken from a financial institution or from approved charitable institution, interest is paid. Interest is deductible if loan is taken for pursuing assessee s own education or for the education of his relatives. The actual interest paid is deductible in the year in which the assessee starts paying interest on loan and subsequent 7 years or until interest is paid in full. However, interest should be paid out of come chargeable to tax. 19. Describe the provisions u/s 80 GGb? (Apr./May 2014) Any amount contributed by an Indian company in the previous year to any political party or an electoral trust is allowed as deduction u/s 80 GGB. If donation is given to political parties by way of cash, such donation is not RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 16 of 29

17 allowed to be deducted w.e.f AY PART C Unit - I 1. Discuss the various objectives of taxation. (April 2014) (Nov 2012) Tax is permanent instrument for collecting revenues. It is a major source of revenue in the developed world and has been appearing as an important source of revenue in the developing world as well. It has been an instrument of social and economic policy for the government. The main objectives of tax are as follows: 1. Raise More Revenue The fundamental objective of taxation is to finance government expenditure. The government requires carrying out various development and welfare activities in the country. For this, it needs a huge amount of funds. The government collects funds by imposing taxes. So, raising more and more revenues has been an important objective of tax. 2. Prevent Concentration Of Wealth In A Few Hands Tax is imposed on persons according to their income level. High earners are imposed on high tax through progressive tax system. This prevents wealth being concentrated in a few hands of the rich. So, narrowing the gap between rich and poor is another objective of tax. 3. Redistribute Wealth For Common Good Tax collected by the government is expended for carrying out various welfare activities. In this way, the wealth of the rich is redistributed to the whole community. 4. Boost Up The Economy Tax serves as an instrument for promoting economic growth, stability and efficiency. The government controls or expands the economic activities of the country by providing various concessions, rebates and other facilities. The effective tax system can boost up the economy. Similarly, taxes can correct for externalities and other forms of market failure (such as monopoly). RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 17 of 29

18 Import taxes may control imports and therefore help the country's international balance of payments and protect industries from overseas competition. 5. Reduce Unemployment The government can reduce the unemployment problem in the country by promoting various employment generating activities. Industries established in remote parts or industries providing more employment are given more facilities. As a result, the unemployment problem can be reduced to a great extent through liberal tax policy. 6. Remove Regional Disparities Regional disparity has been a chronic problem to the developing countries. Tax is one of the ways through which regional disparities can be minimized. The government provides tax exemptions or concessions for industries established or activities carried out in backward areas. This will help increase economic activities in those areas and ultimately regional disparity reduces to minimum. 2. Explain the term person U/S 2(31) of the income tax. (Nov 2012) Income-tax is charged in respect of the total income of the previous year of every person. Hence, it is important to know the definition of the word person. As per section 2(31), Person includes: an individual: a Hindu undivided family: a company a firm an association of persons or a body of individuals whether incorporated or not: a local authority: - every artificial, juridical person, not falling within any of the above categories An individual a natural human being, i.e. male, female, minor or a person of sound or unsound mind. A Hindu undivided family it consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. Note: For details refer the chapter on Assessment of Hindu Undivided Families. A company Section 2(17) defines the term company to mean: (i) any Indian company, or RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 18 of 29

19 (ii) any body corporate incorporated by or under the laws of a country outside India i.e. a foreign company, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-indian, which is declared by general or special order of the Board to be a company only for such assessment year or assessment years (whether commencing before the first day of April, 1971 or, on or after that date), as may be specified in the declaration. Section 2(17) defines the term company to mean: (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India i.e. a foreign company, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act, 1922 or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-indian, which is declared by general or special order of the Board to be a company only for such assessment year or assessment years (whether commencing before the first day of April, 1971 or, on or after that date), as may be specified in the declaration. A firm a partnership firm whether registered or not. An association of persons or a body of individuals whether incorporated or not The difference between Association of persons and body of individuals is that whereas an association implies a voluntary getting together for a definite purpose, a body of individuals would be just a body without an intention to get-together. Moreover, the members of body of individuals can be individuals only whereas the members of an association of persons can be individual or non-individuals (i.e. artificial persons). A local authority means a municipal committee, district board, body of port commissioners, RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 19 of 29

20 or other authority legally entitled to or entrusted by the Government with the control and management of a Municipal or local fund. Every artificial, juridical person, not falling within any of categories: the above This is a residuary clause. If the assessee does not fall in any of the first six categories, he is assessed under this clause. Generally, a statutory corporation, deity or charitable institution or an endowment for charitable or religious purposes falls under artificial juridical person. 3. List out the incomes which are exempted U/S 10 of Income tax act 1961.(Nov./Dec 2015, 2014) Section 10 o the Income Tax Act, deals with incomes, which do not form part of an assessee s total income. In other words Section 10 exempts certain incomes from chargeability to tax. The following are the incomes which are exempted under section 10:- [1.] Section 10(1): Agricultural Income: Under this section Agricultural Income from an Agricultural land in India is exempt from tax. However, Agricultural Income from Agricultural Land outside India is not exempt, even Agricultural Income from a Non- Agricultural Land in India or an urban land in India is fully taxable. [2.] Section 10(2): Share of a member in the income of a Hindu Undivided Family (H.U.F.): Share in income of HUF received by an individual being a member of that HUF is exempt in the hands of that individual under this section. Under Income Tax Act, HUF is an Assessee, separate from its members and being an assessee, it pays income tax on its own income separately. If a member of HUF also has to pay tax on his share in the profits of the HUF, which are already taxed in the hands of HUF, then it would amount to double taxation. The same income would be taxed twice. Therefore, section 10 (2), exempts such income in the hands of member of HUF. [3.] Section 10(2A): Share of a Partner in the profits of the Partnership Firm: Just like HUF in the above case, Partnership Firm is also an Assessee separate from its partners and has to pay tax on its profits. If partners also have to pay tax on their share in the profits of the firm, then it would amount to double taxation. RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 20 of 29

21 Section 10 (2A), therefore, exempts the share of partners in the profits of the firm received by the partner. (Only share of profit is exempt and not any other remuneration like salary, bonus, commission, interest on capital, received by partner from the firm). [4.] Section 10(3): Casual Income: Exemption under this section is now no more available with effect from Assessment Year [5.] Section 10(5): Amount received as Leave Travel Concession : Will be separately dealt with in the Chapter on Income from Salaries. [6.] Section 10(7): Allowances or Perquisites received by a Citizen of India being an employee of Government of India: Received outside India from Government of India for services rendered outside India, are fully exempt from tax in India under section 10 (7). But Salary received by such an Indian Citizen from Government of India for services rendered outside India, though accrued as well as received outside India, is however, deemed to have accrued in India and is accordingly taxable in India. [7.] Section 10(10): Amount received as Gratuity : Will be separately dealt with in the Chapter on Income from Salaries. [8.] Section 10(10A): Amount received as Commuted Pension : Will be separately dealt with in the Chapter on Income from Salaries. [9.] Section 10(10AA): Amount received as Leave Salary : Will be separately dealt with in the Chapter on Income from Salaries. [10.] Section 10(10B): Amount received as Retrenchment Compensation : Will be separately dealt with in the Chapter on Income from Salaries. [11.] Section 10(10C):Compensation received under Voluntary Retirement Scheme : Will be separately dealt with in the Chapter on Income from Salaries. [12.] Section 10(10CC): Tax on Non-Monetary Perquisites paid by Employer: If tax on non-monetary or non-cash perquisites received by an employee is paid by his employer, then such tax shall not be added in the income of that employee, as it is exempt from tax in his hands under section 10 (10CC) with effect from Assessment Year Such tax as is paid by the employer shall not be allowed to the employer as a deduction on account of business expenditure under section 40. (Here, exemption is available only on tax paid by employer on non-monetary perquisites and not on tax paid by him on monetary or cash perquisites). RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 21 of 29

22 [13.] Section 10(10D): Maturity Proceeds of a Life Insurance Policy : Any sum received by a Policyholder or his Legal Heirs as a maturity proceeds of a Life Insurance policy or any Bonus on such policy from an Insurance Company is fully exempt from tax in the hands of either a Policyholder or his Legal Heirs under section 10 (10D). However, maturity proceeds of a Keyman Insurance policy or any Bonus on such policy is not exempt from tax. (For meaning of Keyman Insurance policy and its taxability, refer to Chapter I ) With effect from Assessment Year , this exemption is not applicable on maturity proceeds of that Life Insurance policy or any Bonus thereon, whose Annual Premium exceeds 20 % of the Sum Assured, provided policy was issued on or after 01 st April, 2003 (i.e. issued from the day one of the Previous Year , which pertains to Assessment Year ). [14.] Section 10(11) / (12):Receipts from Provident Fund : Will be separately dealt with in the Chapter on Income from Salaries. [15.] Section 10(13):Receipts from An Approved Superannuation Fund : When an employee retires from his service, due to his retirement age or his ill health or due to his incapacitation to work more or due to his death, he or his family members would receive an amount from Superannuation Fund. Any amount received from an approved Superannuation Fund is exempt from tax under section 10 (13), whether received by an employee at the time of his retirement or by his family members or his legal heirs at the time of his death. [16.] Section 10(13A):Amount received as House Rent Allowance (H.R.A.): An amount of fixed monthly allowance received by an employee from his employer, towards paying rent of a house is exempt from tax in the hands of that employee subject to the least of the followings:- (Balance H.R.A. received will thus be taxable in his hands) a) Actual H.R.A. received by the employee from his employer for that many number of months for which the house was rented by him. (If House was rented only for three months during the year, then H.R.A. of only three months only shall be considered here and not for the whole year) OR b) 50 % of the salary, if rented house is situated at Chennai, Delhi, Mumbai or Kolkata or 40 % of salary if rented house is situated at any other place other than Chennai, Delhi, Mumbai or Kolkata [Here, Salary would mean Basic Salary plus Dearness Allowance (D.A.) only if D.A. forms part of Retirement Benefits otherwise only Basic Salary ] OR c) Excess of rent paid over 10 % of Salary [Here also, the term Salary would mean Basic Salary plus Dearness Allowance (D.A.) only if D.A. forms part of Retirement Benefits otherwise only Basic Salary ] RAAK/B.COM/M.GOWTHAMAN/III YEAR/V Sem/UCM 54/INCOME TAX-I /UNIT-1 Answers/VER 2.0 Unit 1 Answers Page 22 of 29