IPCC Taxation (Income-tax) November Solution

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2 IPCC Taxation (Income-tax) November Solution 1 IPCC Taxation (Income-tax) November Solution Answer 1(a) 10 marks Computation of Total Income of Mr. Devansh for AY Rs. Rs. Rs. Income u/h Income from House Property 50% portion let out Gross Annual Value (Actual rent assumed to be GAV in absence of 1,65,000 information) Less: Municipal Taxes (36,000 x 50%) 18,000 Net Annual Value 1,47,000 Less: Deductions u/s 24 Standard 30% of NAV 44,100 Interest on borrowed capital Nil 44,100 1,02,900 25% portion self-occupied Nil 1,02,900 Income u/h Profits & Gains of Business or Profession Net Profit as per P&L A/c 1,32,200 Add: Fire Insurance (for let out & self-occupied portion) (10,000 x 7,500 75%) Add: Income-tax & Wealth-tax (not allowed as business expense as 27,000 per section 40(a)) Add: Household expenses (being personal expenses) 42,500 Less: Weighted deduction for contribution to university (75% of (75,000) 1,00,000) Add: Municipal Taxes (for let out & self-occupied portion) (36,000 27,000 x 75%) Less: Cash gift (part of Income u/h Income from Other Sources) (1,20,000) Less: Interest on debentures (part of Income u/h Income from Other Sources) (3,600) 37,600 Income u/h Capital Gains - Sale of 5,000 bonus shares Full Value of Consideration 2,20,000 Less: Indexed Cost of Acquisition Nil Long-term Capital Gains (Period of Holding more than 12 months) 2,20,000

3 IPCC Taxation (Income-tax) November Solution 2 Rs. Rs. Rs. Income u/h Income from Other Sources Cash Gift (not taxable because received on the occasion of marriage) Nil Interest on debentures (3,600 / 90%) 4,000 Acquisition of vacant site (2,80,000 1,05,000) 1,75,000 Interest on Post Office SB A/c Exempt 1,79,000 Gross Total Income 5,39,500 Less: Deductions u/c VI-A 80C Life Insurance Premium (restricted to 15% of Rs. 45,000 3,00,000) Total Income 4,94,500 Computation of tax payable by Mr. Devansh for AY Rs. Rs. Long-term Capital Gains 20%) 44, Balalnce Rs. 2,74,500 at slab rates of Rs. 2,00,000 On first Rs. 2,00,000 Nil On balance Rs. 10% 7, , , Less: Rebate u/s 87A 2, , Add: Education 2% , Total tax payable 50, Less: TDS on Interest on Debentures 400 Net Tax Payable 50, Net Tax Payable (R/o) 50, Answer 2(a) 8 marks Computation of Total Income for the A.Y Mrs. Geetha (Non-resident) Mrs. Leena (Resident) 1. Income from profession in Malaysia (set up in India) received there - - (Note 2) 2. Profit from business in Delhi, but managed directly from Malaysia 40,000 - (Note 2) 3. Rent from property in Malaysia deposited in a Bank at Malaysia, and - - later on remitted to India through approved banking channels (Note 2) 4. Dividend from PQR Ltd, an Indian company [Exempt u/s 10(34)] Dividend from a Malaysian company received in Malaysia (Note 2) - 8, Cash gift received from her friend on her birthday (Note 3) - 51,000

4 CA. PANKAJ SARAOGI FCA 10 th Rank, B.Com.(H)-SRCC, CS Final, M.Com., DISA (ICAI), B.Ed., PWC Ex-employee, Corporate Trainer ; Facebook: UPCOMING BATCHES SCHEDULE CA FINAL DIRECT TAX LAWS Batch Conducted by Days & Timings Starting Date Completion Date Fees Venue I ICAI-NIRC MWF 6 pm to 9 pm Sun. 10 am to 3 pm 01/12/ /04/2015 6,000 Shakarpur, Delhi II ICAI-NIRC Tue. Thu. Sat. Sun. 6.00pm to 9.00pm 02/12/ /04/2015 6,000 Prashant Vihar, Delhi III ICAI-NIRC Mon. to Fri. 6.30am to 9.30am 01/12/ /03/2015 5,500 Vishwas Nagar, Delhi IV Pro Education Mon. to Fri. 6.30am to 9.30am 01/12/ /03/2015 Vary from city to city 28 centres across India CA IPCC TAXATION Batch Conducted by Days & Timings Starting Date Completion Date Fees Venue I Pro Education TTS 10 am to 1 pm Sun. 7am to 9.30am 25/11/ /04/2015 Vary from city to city 28 centres across India II Pro Education TTS 10 am to 1 pm Sun. 7am to 9.30am 31/01/ /05/2015 Vary from city to city 28 centres across India VENUE DETAILS 1. ICAI NIRC, Shakarpur, Delhi U-37, 38, Shakarpur, Delhi Near Laxmi Nagar Metro Station. Ph.: , , Web: 2. ICAI NIRC, Prashant Vihar, Delhi E-52, Prashant Vihar, Sector-14, Rohini. Near Pitampura Metro Station. Ph.: , , Web: 3. ICAI NIRC, Vishwas Nagar, Delhi ICAI Bhawan, Near KarkardoomaCourt, Vishwas Nagar, Delhi. Ph.: Rakesh , Web: 4. Pro Education: Delhi Nirman Vihar, Pitampura, Paschim Vihar, South Extn., North Campus, Uttam Nagar, Dwarka, C.R. Park; Rajasthan Jaipur Lalkothi, Jaipur Subhash Nagar, Jaipur Mansarover, Jaipur Sodala, Alwar; Haryana Faridabad, Rohtak, Panchkula, Yamuna Nagar; Uttar Pradesh Lucknow, Kanpur, Mathura; West Bengal Kolkata Hazra, Kolkata Sealdah; Punjab Patiala, Chandigarh; Uttarakhand Dehradun; Odisha Bhubaneswar; Chhattisgarh Raipur; Madhya Pradesh Jabalpur. Ph.: Web:

5 IPCC Taxation (Income-tax) November Solution 3 Mrs. Geetha (Non-resident) Mrs. Leena (Resident) 7. Agricultural income from land in Maharashtra (Note 4) Past foreign untaxed income brought to India during the previous - - year (Note 5) 9. Fees for technical services rendered in India, but received in Malaysia (Note 2) 25, Income from a business in Pune (Note 2) 12,000 15, Interest on debentures in an Indian company (Note 2) 18,500 14, Short term capital gain on sale of shares of an Indian company (Note 15,000 25,500 2) 13. Interest on savings account with SBI 12,000 8,000 Gross Total Income 1,22,500 1,21,500 Less: Deductions u/c VI-A - Deduction u/s 80C - Life insurance premium paid (assuming that - 30,000 the same is less than 10% of actual capital sum assured). - Deduction u/s 80TTA Interest on savings bank account (Note 10,000 8,000 6) Total Income 1,12,500 83,500 Notes: 1. Mrs. Geetha is a non-resident since she has been living in Malaysia since Her sister, Mrs. Leena, who is settled in Indore, is a resident. 2. In case of residents, their global income is taxable as per section 5(1). However, as per section 5(2), in case of a non-resident, only the following incomes are chargeable to tax: (i) Income received or deemed to be received in India in such year; and (ii) Income accruing or arising or deemed to accrue or arise in India during such year. Therefore, income from profession in Malaysia, rent from property in Malaysia and dividend from Malaysian company would not be taxable in the hands of Mrs. Geetha in India, since she is a non-resident and such income was earned and received outside India. However, profit from business in Delhi, fees for technical services rendered in India, income from business in Pune, interest on debentures in an Indian company, short-term capital gain on sale of shares of an Indian company would be fully taxable in the hands of Mrs. Geetha, even though she is a non-resident, since such income accrues in India. 3. Receipt of cash exceeding Rs. 50,000 from a non-relative is taxable u/s 56(2)(vii). Therefore, the sum of Rs. 51,000 received by Mrs. Leena from her friend on her birthday is taxable u/s 56(2)(vii). 4. Agricultural income from a land situated in India is exempt u/s 10(1) in the case of both residents and non-residents. 5. Rs. 5,000 brought to India is not taxable in the previous year because it does not amount to receipt of income in the previous year Deduction u/s 80TTA is available to both residents and non-residents in respect of interest on savings bank account, subject to a maximum of Rs. 10,000.

6 IPCC Taxation (Income-tax) November Solution 4 Answer 3(a)(i) 4 marks Rs. in lacs Bad debts written off (for the first time) in the books of account 210 Less: Credit balance in the Provision for bad and doubtful debts u/s 36(1)(viia) as on (i) Provision for bad and doubtful debts u/s 36(1)(viia) upto AY (ii) Current year provision for bad and doubtful debts u/s 36(1)(viia) [7.5% of Rs. 800 lakhs + 10% of Rs. 300 lakhs] Deduction u/s 36(1)(vii) in respect of bad debts written off for A.Y Answer 3(a)(ii) 4 marks Computation of Taxable Income of Charitable Trust for AY Rs. Rs. Rs. Voluntary Contributions with specific direction that they shall form Exempt part of corpus of the trust Voluntary contribution without any specific direction 19,20,000 Income from Property held in trust 8,16,000 27,36,000 Less: Exemptions Income applied in India 8,50,000 Donation to other trusts 84,560 Accumulation for Charitable Hospital 14,00,000 Accumulation upto 15% without any condition or balance 4,01,440 amount (whichever is less) Taxable Income Nil Answer 4(a) 8 marks Computation of Income u/h Salaries of Mr. Anand for the Assessment Year Basic salary 7,20,000 Bonus 36,000 House rent allowance 1,35,000 Less: Exempt (See Note 1) 18,000 1,17,000 Employer's contribution towards recognised provident fund in excess of 12% of salary (i.e., Rs.1,10,000-12% of Rs.7,20,000) Gratuity 20,51,640 23,600 Less: Exempt (See Note 2) 10,00,000 10,51,640 Uncommuted pension [Rs.8,000 + (25% of Rs.8,000 x 2)] 12,000 Commuted pension 4,50,000 Less: Exempt (See Note 3) 2,00,000 2,50,000 Gross salary 22,10,240

7 IPCC Taxation (Income-tax) November Solution 5 Less: Deduction u/s 16(iii) - Professional tax 2,000 Income from salary 22,08,240 Notes: 1. HRA is exempt to the extent of least of the following: (i) Actual HRA received 1,35,000 (ii) Rent paid 10% of salary (Rs.10,000 10% Rs.80,000) 2,000 (iii) 40% of salary (40% of Rs.80,000) 32,000 Therefore, Rs.18,000 (Rs.2,000 x 9), being the least amount, is exempt u/s10(13a). 2. Anand is a private sector employee, covered by the Payment of Gratuity Act. Number of completed years of service is 34 years. Gratuity is exempt to the extent of minimum of the following: (i) Statutory limit 10,00,000 (ii) 15 days salary for every completed year of service (Rs.80, /26) 15,69,231 (iii) Actual gratuity received 20,51,640 Therefore, Rs.10,00,000 is exempt u/s 10(10). 3. Commuted pension is exempt from tax as under: Commuted value of 75% of usual pension: Rs.4,50,000 Commuted value of full pension: Rs.6,00,000 (i.e., Rs.4,50,000 / 0.75) exempt from tax is one-third of commuted value of full pension, i.e., 1/3 of Rs.6,00,000 = Rs.2,00,000, as Anand is in receipt of gratuity at the time of retirement. 4. Accumulated balance of recognised provident fund is exempt from tax as Anand has rendered continuous service of more than 5 years with his employer. Answer 5(a)(i) 4 marks Asset Depreciation for whole Mr. Gopi Gopi Pipes (P) Ltd. year No. of days Plant & Machinery (Op. WDV) 12,00,000 x 15% = 1,80,000 1,80,000 x 91/365 = 44,877 1,80,000 x 274/365 = 1,35,123 Plant & machinery (New 10,00,000 x 15%/2 = Nil 75,000 Additions) 75,000 Building (Op. WDV) 25,00,000 x 10% = 2,50,000 2,50,000 x 91/365 = 62,329 2,50,000 x 274/365 = 1,87,671 Depreciation allowable for AY ,05,000 1,07,206 3,97,794 Answer 5(a)(ii) 4 marks Specified Business 1. setting up and operating a cold chain facility; 2. setting up and operating a warehousing facility for storage of agricultural produce; 3. production of fertilizer in India;

8 IPCC Taxation (Income-tax) November Solution 6 4. setting up and operating a warehousing facility for storage of sugar; Fiscal Incentives avaibale u/s 35AD 1. Capital expenditure incurred for these business can be claimed as expenditure of the year in which such expenditure is incurred. In that case depreciation u/s 32 shall not be allowed on these capital expenditures. 2. Further, any capital expenditure incurred prior to commencement of business can be claimed as business expense of the year in which such business is commenced provided same has been capitalised in the books of accounts on the first day of the business. 3. Deduction shall be 100% or 150% of the capital expenditure incurred depending upon date of commencement of business. 4. Capital expenditure, for this purpose, shall not include any expenditure incurred on the acquisition of any land or goodwill or financial instrument Answer 6(a)(i) 4 marks 1. Deduction for Subscription to notified Long-term Infrastructures Bonds was available u/s 80CCF but has been discontinued. Therefore, no deduction avaible under chapter VI-A for AY Deduction for Life Insurance Premium shall be available u/s 80C to the tune of Rs. 70,000 (being maximum 20% of Rs. 3,50,000). For old policies, limit of 20% shall continue. 2. Emplyee can claim deduction u/s 80CCD of Rs. 30,000 (10% of Rs. 3,00,000 or actual contribution by employer Rs. 40,000 whichever is lower). Rs. 40,000 shall be first included as income under head salaries of employee. Note: Limit of Rs. 1,00,000 u/s 80CCE shall not apply because deduction on account of employer s contribution to pension scheme u/s 80CCD is not counted towards limit provided u/s 80CCE. Answer 6(a)(ii) 4 marks First Daughter 10,000 Less: Exempt u/s 10(16) scholarship (assumed received for education) 5,000 Less: Exempt u/s 10(32) 1,500 3,500 Second Daughter 8,500 Less: Exempt u/s 10(32) 1,500 7,000 Third Daughter (since suffering from disability, therefore no clubbing) Nil Minor son 40,000 Less: Exempt u/s 10(32) 1,500 38,500 Income to be clubbed in the hands of Mr. Mittal 49,000 Note: Gift by Mr. Mittal to his minor son and income therefrom of Rs. 20,000 shall not have any impact. Even that income shall be clubbed in the hands of Mr. Mittal.

9 IPCC Taxation (Income-tax) November Solution 7 Answer 7(a)(i) 4 marks 1. TDS shall be deducted u/s 20%. TDS shall be 20% of Rs. 27,000 = Rs. 5, % = Rs. 5, There shall be no TDS u/s 194-I because rent for the whole year does not exceed Rs. 1,80, TDS shall be deducted u/s 30%. TDS shall be 30% of Rs. 1,50,000 = Rs. 45, No TDS deductible u/s 194LA be State of Uttar Pradesh because amount paid does not exceed Rs. 2,00,000. Answer 7(a)(ii) 4 marks Filing of Return of Income on or before due date is necessary for carry forward of losses. This statement is partially correct in terms of section 139(3) which states that to carry forward the losses under section 72, 73, 74 & 74A, assessee shall file Return of Income on or before due date specified u/s 139(1). Section 139(3) covers up only for specified sections related to carry forward of losses. There are some other sections viz,; which talsk about carry forward of losses but are not covered up by section 139(3), viz,; section 71B, 73A & 32(2), which menas that losses under thses sections can be carried forward even if Return of Income is not filed on or before due date. Restriction is in respect of losses under following sections only: Section Nature 72 Carry forward and set off of business losses 73 Losses in speculation business 74 Losses under the head "Capital gains" 74A Losses from certain specified sources falling under the head "income from other sources" (i.e. loss in the activity of owning & maintaining race horses) It means that following losses can be carried forward even if ROI is not filed on time: Section Nature 71B Carry forward and set off of loss from house property 73A Carry forward and set off of losses by specified business referred u/s 35AD 32(2) Unabsorbed depreciation Answer 7(a)(iii) 4 marks Yes, a political party is required to file Return of Income. Section 139(4B) provides the provisions for filing of Return of Income by a political party. If total income of political party (without claiming any exemption u/s 13A) is greater than maximum amount which is not chargeable to tax i.e. Rs. 2,00,000, then filing of Return of Income by Chief Executive Officer of such Political Party is mandatory and that too on or before due date of furnishing of Return of Income, which shall always be 30th September (being audit compulsory).

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