CA - IPCC COURSE MATERIAL

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1 CA - IPCC COURSE MATERIAL Quality Education beyond your imagination... TAXATION GUESS QUESTIONS APPLICABLE FOR MAY 2016 EXAMS Cell: / 26 Visit Mail: mastermindsinfo@ymail.com Facebook Page: Masterminds For CA Youtube Channel: Masterminds For CA 1

2 DIRECT TAX 1. BASIC CONCEPTS 1. Tax Rates applicable for the Assessment year (MM Amendments Material) 2. State any four instances where the income of the previous year is assessable in the previous year itself instead of the assessment year. (PM,SM) 3. Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is Rs. 1,01,00,000 and the total income does not include any income in the nature of capital gains. (MM Amendments Material) 4. Compute the tax liability of X Ltd., a domestic company, assuming that the total income of X Ltd. is Rs. 10,01,00,000 and the total income does not include any income in the nature of capital gains. (MM Amendments Material) 2. RESIDENTIAL STATUS 5. Discuss the correctness or otherwise of the statement - Income deemed to accrue or arise in India to a nonresident by way of interest, royalty and fees for technical services is to be taxed irrespective of territorial nexus. (PM,SM) 6. State the activities and operations, income from which is not deemed to accrue or arise in India. (PM, SM) PROBLEMS: 7. Determination of Residential Status of Crew Member of a Ship. In the Previous Year , Mr.Krishnan, Indian Citizen, is vessel Manager in Blue Ocean Transits Ltd which operates Freight voyage from Cochin Port (India) to Colombo Port (Srilanka) on regular basis. It does not involve in transit of passengers. Mr. Krishnan, being a Crew Member of Ship, provides you the following information about his voyage during the FY : a) Date entered into the Continuous Discharge Certificate (For Joining the ship) b) Date entered into the Continuous Discharge Certificate (signing off) c) On , he reached his native place of Cochin and resigned his job. Is he a Resident or not for the AY ? Comment. (MM Amendments Material) 8. The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr. E, the karta of the HUF, who was born in Kolkata, visits India during the P.Y after 15 years. He comes to India on and leaves for Australia on Determine the residential status of Mr. E and the HUF for A.Y Determine the taxability of income of US based company Heli Ltd., in India on entering into the following transactions during the financial year : (PM,SM) Rs. 5 lacs received from an Indian domestic company for providing technical knowhow in India. Rs. 6 lacs from an Indian firm for conducting the feasibility study for the new project in Finland. The payment for the same was made in Finland. Rs. 4 lacs from a non-resident for use of patent for a business in India. Rs. 8 lacs from a non-resident Indian for use of know-how for a business in Singapore. Such amount was received in U.S. Rs. 10 lacs for supply of manuals and designs for the business to be established in Singapore. No payment for the same was made in India. IPCC Guess Questions May 2016 Direct Tax 2

3 10. Mr. Ramesh & Mr. Suresh are brothers and they earned the following incomes during the financial year Mr. Ramesh settled in Canada in the year 1995 and Mr. Suresh settled in Delhi. Compute the total income for the assessment year (PM,SM) 11. Profits In Lieu of Salary - Sec.17(3) PROBLEMS: 3. INCOME FROM SALARIES 12. Mr. Khanna, an employee of IOL, New Delhi, a private sector company, received the following for the financial year : Sl. No. Particulars Amount 1 Basic pay 1,20,000 2 House rent allowance 1,00,000 3 Special allowance 30,000 Mr. Khanna was residing at New Delhi and was paying a rent of Rs.10,000 a month. Compute the eligible exemption under section 10(13A) of the Income-tax Act, 1961, in respect of house rent allowance received. If Mr. Khanna opts for Concessional rent accommodation whereby IOL would be paying a rent of Rs.10,000 per month to the landlord and recovers a sum of Rs.2,500 per month from Mr. Khanna which was in excess of his entitlement, what will be the perquisite value in respect of such concessional rent accommodation? Which of the above would be beneficial to Mr. Khanna i.e., HRA or CRA? 13. Mr. Gupta retired on after 20 years 10 months of service, receiving leave salary of Rs.5,00,000. Other details of his salary income are: Basic Salary : Rs.5,000 p.m. (Rs.1,000 was increased w.e.f ) Dearness Allowance Commission Bonus Leave availed during service He was entitled to 30 days leave every year. : Rs.3,000 p.m. (60% of which is for retirement benefits) : Rs.500 p.m. : Rs.1,000 p.m. : 480 days You are required to compute his taxable leave salary assuming: He is a government employee. He is a non - government employee. IPCC Guess Questions May 2016 Direct Tax 3

4 14. Mr. Mohit is employed with XY Ltd. on a basic salary of Rs.10,000 p.m. He is also entitled to dearness 100% of basic salary, 50% of which is included in salary as per terms of employment. The company gives him house rent allowance of Rs.6,000 p.m. which was increased to Rs.7,000 p.m. with effect from He also got an increment of Rs.1,000 p.m. in his basic salary with effect from Rent paid by him during the previous year is as under: April and May, Nil, as he stayed with his parents June to October, Rs.6,000 p.m. for an accommodation in Ghaziabad November, 2014 to March, Rs.8,000 p.m. for an accommodation in Delhi. Compute his gross salary for assessment year Mr. X retired from the services of M/s Y Ltd. on after completing service of 30 years and one month. He received the following on his retirement: (PM,MM) Gratuity Rs.6,00,000. He was covered under the Payment of Gratuity Act, Leave encashment of Rs.3,30,000 for 330 days leave balance in his account. He was credited 30 days leave for each completed year of service. As per the scheme of the company, he was offered a car which was purchased on by the company for Rs.5,00,000. Company has recovered Rs.2,00,000 from him for the car. Company depreciates the vehicles at the rate of 15% on Straight Line Method. An amount of Rs.3,00,000 as commutation of pension for 2/3 of his pension commutation. Company presented him a gift voucher worth Rs.6,000 on his retirement. His colleagues also gifted him a Television (LCD) worth Rs.50,000 from their own contribution. Following are the other particulars: He has drawn a basic salary of Rs.20,000 and 50% dearness allowance per month for the period from to Received pension of Rs.5,000 per month for the period to after commutation of pension. Compute his gross total income from the above for Assessment Year Mr. Harish, aged 52 years, is the Production Manager of XYZ Ltd. From the following details, compute the taxable income for the assessment year (PM,MM) Basic salary Dearness allowance Transport allowance (for commuting between place of residence and office) Motor car running and maintenance charges fully paid by employer (The motor car is owned by the company and driven by the employee. The engine cubic capacity is above 1.60 litres. The motor car is used for both official and personal purpose by the employee.) Expenditure on accommodation in hotels while touring on official duties met by the employer Loan from recognized provident fund (maintained by the employer) Lunch provided by the employer during office hours. Cost to the employer Computer (cost Rs.35,000) kept by the employer in the residence of Mr. Harish from Mr. Harish made the following payments: Medical insurance premium: Paid in Cash Paid by account payee crossed cheque Rs.50,000 per month 40% of basic salary Rs.3,000 per month Rs.60,000 Rs.80,000 Rs.60,000 Rs.24,000 Rs.4,800 Rs.15,200 IPCC Guess Questions May 2016 Direct Tax 4

5 17. Ms. Rakhi is an employee in a private company. She receives the following medical benefits from the company during the previous year : S.No. Particulars Amount(Rs.) 1. Reimbursement of following medical expenses incurred by Ms. Rakhi (A) On treatment of her self employed daughter in a private clinic 4,000 (B) On treatment of herself by family doctor 8,000 (C) On treatment of her mother-in-law dependent on her, in a nursing 5,000 Home 2. Payment of premium on Mediclaim Policy taken on her health 7, Medical Allowance 2,000 per month 4. Medical expenses reimbursed on her son's treatment in a government 5,000 Hospital 5. Expenses incurred by company on the treatment of her minor son 1,05,000 Abroad 6. Expenses in relation to foreign travel and stay of Rakhi and her son 1,20,000 abroad for medical treatment (Limit prescribed by RBI for this is Rs.2,00,000) Discuss about the taxability of above benefits and allowances in the hands of Rakhi. 18. Mr. Rishi, employed in CD Ltd at Chennai, furnishes you the following information for the year ended : Basic salary Rs.50,000 per month. Dearness 40% of basic salary (eligible for retirement benefits). Motor car (engine cubic capacity above 1.6 litres) owned by CD Ltd. was given to Mr. Rishi for both official and personal use, for the whole year. Running expenses for personal use was fully met by Mr. Rishi. Actual expenses Rs.32,400. The car was self-driven by Mr. Rishi. Cost of laptop Rs.40,000 acquired by CD Ltd. in August, 2014 given to Mr. Rishi for Rs.5,000 immediately. Accommodation taken on lease by CD Ltd. given to Mr. Rishi from at a concessional monthly rent of Rs.5,000. The annual lease rent paid to the landlord by the company is Rs.3,00,000. Leave travel concession given to employee, his wife and three children (one daughter aged 7 and twin sons aged 3). Cost of air tickets (economy class) reimbursed by the employer Rs.30,000 for adults and Rs.45,000 for three children. Rishi is eligible for availing exemption this year to the extent it is permissible in law. Contribution of employer to PF was 15% of the basic salary. Equal amount was contributed by Mr. Rishi. Professional tax paid is Rs.3,000, of which Rs.2,000 was paid by the employer. Compute the total income of Mr. Rishi for the assessment year From the following details, find out the salary chargeable to tax of Mr. Anand for the assessment year : Mr. Anand is a regular employee of Malpani Ltd. in Mumbai. He was appointed on in the scale of 25,000-2,500-35,000. He is paid dearness allowance (which forms part of salary for retirement 15% of basic pay and bonus equivalent to one and a half month s basic pay as at the end of the year. He contributes 18% of his salary (basic pay plus dearness allowance) towards recognized provident fund and the Company contributes the same amount. He is provided free housing facility which has been taken on rent by the Company at Rs.15,000 per month. He is also provided with following facilities: The Company reimbursed the medical treatment bill of Rs.40,000 of his daughter, who is dependent on him. The monthly salary of Rs.2,000 of a house keeper is reimbursed by the Company. He is getting telephone Rs.1,000 per month. A gift voucher of Rs.4,700 was given on the occasion of his marriage anniversary. The Company pays medical insurance premium to effect an insurance on the health of Mr. Anand Rs.12,000. IPCC Guess Questions May 2016 Direct Tax 5

6 Motor car running and maintenance charges fully paid by employer of Rs.36,600. (The motor car is owned and driven by Mr. Anand. The engine cubic capacity is below 1.60 litres. The motor car is used for both official and personal purpose by the employee.) Value of free lunch provided during office hours is Rs.2,200 p.a. (PM) 20. Mr. Madhav is the Finance Head of Gamma Ltd. at Ahmedabad. From the following details, compute his total income for the Assessment Year : Basic salary Rs.22,500 per month Dearness allowance 1/4th of basic salary Transport allowance (for commuting between place of residence and office) Rs.2,000 per month Cost of laptop facility provided for both official and personal use Rs.40,000 Conveyance allowance (out of the said amount Rs.10,000 was Rs.12,000 incurred on conveyance for his official duties) Expenditure on accommodation in hotels while touring on official duties met Rs.45,000 by the employer Lunch provided by the employer during office hours.cost to the Employer Rs.13,500 Gamma Ltd. had taken a house on lease for which it paid a rent of Rs.3,500 p.m. The said accommodation was provided to Mr. Madhav, who pays Rs.1,000 p.m to the company. Gamma Ltd. also hired Rs.500 p.m and provided the same to Mr. Madhav free of cost. In addition, the company provided a television owned by it (Cost Rs.20,000) to Mr. Madhav, free of cost. Mr. Madhav made the following payments: Medical insurance premium : Paid in cash Rs.1,500 Paid by cheque Rs.4,500 Contribution to Public Provident Fund (PPF) Rs.1,00, INCOME FROM HOUSE PROPERTY 21. Explain the concept of Deemed Ownership. (Sec.27) 22. Taxability of Recovery of Unrealised Rent & Arrears of Rent Received.(Sec. 25AA & Sec. 25B) 23. Explain briefly the applicability of section 22 for chargeability of income-tax for: (PM,SM) i) House property situated in foreign country and ii) House property with disputed ownership. 24. Mr. Kalpesh borrowed a sum of Rs.30 lakhs from the National Housing Bank towards purchase of a residential flat. The loan amount was disbursed directly to the flat promoter by the bank. Though the construction was completed in May, 2016, repayments towards principal and interest had been made during the year ended (PM) In the light of the above facts, state: i) Whether Mr. Kalpesh can claim deduction under section 24 in respect of interest for the assessment year ? ii) Whether deduction under Section 80C can be claimed for the above assessment year, even though the construction was completed only after the closure of the year? 25. Ganesh has two houses, both of which are self-occupied. The particulars of the houses for the P.Y are as under. Municipal valuation p.a. Fair rent p.a. Standard rent p.a. Date of completion Particulars House I House II 1,00,000 75,000 90, ,50,000 1,75,000 1,60, IPCC Guess Questions May 2016 Direct Tax 6

7 Municipal taxes paid during the year Interest on money borrowed for repair of property during the current year 12% - 8% 55,000 Compute Ganesh s income from house property for A.Y and suggest which house should be opted by Ganesh to be assessed as self-occupied so that his tax liability is minimum. 26. Mr. Krishna owns a residential house in Delhi. The house is having two identical units. First unit of the house is self-occupied by Mr. Krishna and another unit is rented for Rs. 12,000 p.m. The rented unit was vacant for three months during the year. The particulars of the house for the previous year are as under: Standard Rent Municipal Valuation Fair Rent Municipal tax paid by Mr. Krishna Light and water charges Interest on borrowed capital Insurance charges Painting expenses Rs. 2,20,000 p.a. Rs. 2,44,000 p.a. Rs. 2,35,000 p.a. 12% of the Municipal Valuation Rs. 800 p.m. Rs. 2,000 p.m. Rs. 3,500 p.a. Rs. 16,000 p.a. Compute income from house property of Mr. Krishna for the A.Y Two brothers Arun and Bimal are co-owners of a house property with equal share. The property was constructed during the financial year The property consists of eight identical units and is situated at Cochin. During the financial year , each co-owner occupied one unit for residence and the balance of six units were let out at a rent of Rs. 12,000 per month per unit. The municipal value of the house property is Rs. 9,00,000 and the municipal taxes are 20% of municipal value, which were paid during the year. The other expenses were as follows: Rs. i) Repairs 40,000 ii) Insurance premium (paid) 15,000 iii) Interest payable on loan taken for construction of house 3,00,000 One of the let out units remained vacant for four months during the year. Arun could not occupy his unit for six months as he was transferred to Chennai. He does not own any other house. The other income of Mr. Arun and Mr. Bimal are Rs. 2,90,000 and Rs. 1,80,000 respectively, for the financial year Compute the income under the head Income from House Property and the total income of two brothers for the assessment year Mrs. Indu, a resident individual, owns a house in U.S.A. She receives $ 2,000 per month. She paid municipal taxes of $ 1,500 during the financial year She also owns a two storied house in Mumbai, ground floor is used for her residence and first floor is let out at a monthly rent of Rs. 10,000. Standard rent for each floor is Rs. 11,000 per month and fair rent is Rs. 10,000 per month. Municipal taxes paid for the house amounts to Rs. 7,500. Mrs. Indu had constructed the house by taking a loan from a nationalized bank on She repaid the loan of Rs. 54,000 including interest of Rs. 24,000. The value of one dollar is to be taken as Rs. 45. Compute total income from house property of Mrs. Indu. IPCC Guess Questions May 2016 Direct Tax 7

8 29. Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the financial year She owns a house property at Los Angeles, U.S.A., which is used as her residence. The annual value of the house is $20,000. The value of one USD ($) may be taken as Rs. 60. She took ownership and possession of a flat in Chennai on , which is used for self occupation, while she is in India. The flat was used by her for 7 months only during the year ended The municipal valuation is Rs. 32,000 p.m. and the fair rent is Rs. 4,20,000 p.a. She paid the following to Corporation of Chennai : Property Tax Rs. 16,200 Sewerage Tax Rs. 1,800 She had taken a loan from Standard Chartered Bank for purchasing this flat. Interest on loan was as under: Period prior to , to , to ,31,300 She had a house property in Bangalore, which was sold in March, In respect of this house, she received arrears of rent of Rs. 60,000 in March, This amount has not been charged to tax earlier. Compute the income chargeable from house property of Mrs. Rohini Ravi for the assessment year , exercising the most beneficial option available. 30. Rajesh, a British national, is a resident and ordinarily resident in India during the P.Y He owns a house in London, which he has let out at 10,000 p.m. The municipal taxes paid to the Municipal Corporation of London is 8,000 during the P.Y The value of one in Indian rupee to be taken at Rs Compute Rajesh s taxable income for the A.Y IPCC Guess Questions May 2016 Direct Tax 8 Rs. 5. INCOME FROM BUSINESS OR PROFESSION 31. Deduction Based on Actual Payment - Sec.43B 32. Cash Payments > 20,000 - Sec.40A(3) 33. Maintenance of books of accounts - Sec.44AA 34. Tax audit - Sec.44AB 35. Expenditure on Scientific Research - Sec Deduction of capital Exp. of Specified Business Sec.35AD 37. Determination of consideration in the case of transfer of immovable Property -Sec 43CA 38. Investment in new Plant and Machinery in notified backward areas of Specified States- Section 32AD PROBLEMS: 39. Mr. A commenced operations of the business of setting up a warehouse facility for storage of food grains, sugar and edible oil on He incurred capital expenditure of Rs.80 lakh, Rs.60 lakh and Rs.50 lakh, respectively, on purchase of land and building during the period January, 2014 to March, 2014 exclusively of the above businesses, and capitalized the same in its books of account as on 1st April, The cost of land included in the above figures are Rs.50 lakhs, Rs.40 lakh and Rs.30 lakh, respectively. Further, during the P.Y , it incurred capital expenditure of Rs.20 lakh, Rs.15 lakh and Rs.10 lakh, respectively, for extension / reconstruction of the building purchased and used exclusively for the above businesses. Compute the income under the head Profits and gains of business or profession for the A.Y and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the heading C deductions in respect of certain incomes. The profits from the business of setting up a warehousing facility (before claiming deduction under section 35AD and section 32) for the A.Y is Rs.16 lakhs, Rs.14 lakhs and Rs.31 lakhs, respectively.

9 40. Isac limited is a company engaged in the business of biotechnology. The net profit of the company for the financial year ended is Rs.15,25,890 after debiting the following items: S.No. Particulars Rs. 1. Purchase price of raw material used for the purpose of in-house research and development 2. Purchase price of asset used for in-house research and development wrongly debited to profit and loss account: a) Land b) Building 1,80,000 5,00,000 3,00, Expenditure incurred on notified agricultural extension project 1,50, Expenditure on notified skill development project: a) Purchase of land b) Expenditure on training for skill development 5. Expenditure incurred on advertisement in the souvenir published by a political party 2,00,000 2,50,000 75,000 Compute the income under the head Profits and gains of business or profession for the A.Y of Isac Ltd. 41. X & Co. a partnership firm, furnishes the following P&L A/c for the previous year ending 31 st March, To Cost of Goods Sold 2,80,000 By Sales 2,92,000 To Other Expenses 91,000 By Net Loss 1,72,000 To Interest to Partners 25,000 To Remuneration to Partners 68,000 4,64,000 4,64,000 The other expenses debited include Rs.13,600 not allowable. Interest to partners is in excess by Rs.7,100 (not statutorily allowable). You are required to compute: a) Book profits of the firm. b) Permissible remuneration to partners under Sec.40(b). c) The income of the firm. 42. X Ltd. is a manufacturing company. The profit and loss account of X Ltd. for the year ending March 31, 2015 is given below: Sales tax Other expenses Net profit Rs. 50,000 14,15,000 5,45,000 20,10,000 Sales Rs. 20,10,000 20,10,000 Other information: 1. Out of sales tax of Rs. 50,000, only Rs.47,000 is paid. The payment is made as follows: a) Rs. 40,000 on Sep 2, 2014; b) Rs. 4,000 on Sep 5, 2015; c) Rs. 3,000 on Oct 1, Return of income is submitted on Oct 10, 2015 and evidence of sales tax payment as stated in (b) and (c) above is submitted along with the return of income. IPCC Guess Questions May 2016 Direct Tax 9

10 3. During the previous year , the following payments are made in respect of expenses pertaining to earlier years: a) Bonus to employees pertaining to the P.Y paid on Rs.15,000. b) Customs duty pertaining to the previous year paid on Dec 1st, 2014: 25,000. c) Electricity bill pertaining to previous year paid on May 3, 14; Rs.35,000. d) Excise duty pertaining to the previous year paid on May 20, 2014: 40,000. e) Leave salary payable to employees pertaining to the previous year paid on December 2, 2014: Rs. 45,000. These payments do not pertain to the previous year Consequently, these are not recorded in the profit and loss account given above. Find out the net income of X Ltd. 43. Mr. P submits before you the following details of his business. Compute his taxable business Income for the A.Y Profit & Loss Account for the year ended 31st March 2015 Particulars Rs. Particulars Rs. To Office Salaries 1,98,000 By Gross Profit 4,25,000 To Proprietors Salary 60,000 By Profit on Sale of residential 90,000 house (long-term) To General Expenses 45,000 By Bad debts recovered 24,000 (disallowed in earlier years assessment) To Bad Debts 11,500 By Interest from Govt. Securities 14,000 To Advertisement 8,400 By Dividends received 6,000 from agricultural companies To Fire Insurance Premium 1,500 By Interest from Bank A/c 2,000 To Depreciation 11,700 By Income from Horse Racing 10,000 (Gross) To Motor Car Expenses 8,500 To Legal charges for defending suit 4,000 for alleged breach of a trading contract. To Donation to Delhi University for 10,000 Social Research To Interest on Proprietors Capital 15,000 To Reserve for future losses 4,000 To Income tax paid on last 7,100 Assessment To Life Insurance Premium 6,000 To Advance Income tax 4,000 To Net Profit 1,76,300 a) General expenses include 30,000 paid as compensation to an old employee whose services were terminated as his continuance in service was considered detrimental to the conduct of the business and Rs.1,000 as help to a poor university student. b) A sum of 5,000, cost of a small machine has also been included in General Expenses. c) The advertisement cost includes expenditure of Rs.6,000 on one wooden show case & Rs.1,800 on calendars. d) One-fourth of Motor Car Expenses are for personal use of the car. e) The depreciation is found to be excess by Rs.2,000 compared to the amount allowable under I.T. Rules. f) Reserve for future losses represents a demand for Sales-tax under dispute. IPCC Guess Questions May 2016 Direct Tax 10

11 44. Mr.S furnishes the following income for the assessment year Profit and Loss Account for the year ending Particulars Amount Particulars Amount To Office expenses 12,400 By Gross Profit 1,98,000 To Audit Fees 12,000 By Sundry Receipts 19,000 To Legal Expenses 8,000 By Customs duty recovered back form 15,300 Govt. (earlier not allowed as deduction) To Depreciation on Machinery 11,000 By bad debts recovered 3,000 (earlier allowed as deduction) To Staff Salary 21,000 By Gift from son 40,000 To Bonus to staff 15,000 To Contribution to approved 16,000 Gratuity Fund To O/S liability for Excise Duties 18,000 To General Expenses 21,000 To Net Profit 1,40,900 Other relevant particulars: a) Bonus to employee according to the Payment of Bonus Act, comes to Rs.4,200. b) Depreciation on machinery shown in the profit and loss account is calculated according to the income-tax provisions. c) General expenses include payment of Rs. 9,000 to an approved educational institute for the purpose of carrying on scientific research in natural science. The research is, however, unrelated to the business of assessee. d) During the previous year Mr. S also made a capital expenditure of Rs. 5,000 for the purpose of carrying on a scientific research related to his business. This expenditure is, however, not recorded in the profit and loss account. e) Outstanding liability in respect of excise duty amounting to Rs. 10,500 was paid on ; Rs.1,000 on ; Rs.2,000 on ; Rs.1,000 on and Rs. 3,500 is still outstanding. The return is furnished on (last date). Determine the taxable income of Mr.S for the assessment year X, a leading tax consultant, who maintains books of account on cash basis furnishes the following: Receipts and Payments Account for the year ending March 31, 2014 Balance brought down Fees from clients: of of of Presents from clients Interest-free loan from a client for purchase of a car Winnings from lottery (Gross) Dividend from UTI (received on September 11, 2014) Rent of let out property Share of income from a firm 12,400 1,30,500 11,500 13,000 24,000 2,38,000 46,000 12,000 60,000 15,000 Purchase of a typewriter Car expenses Office expenses Salary to staff: of of Expenses in respect of let out property [municipal tax: Rs.2,000, Repairs -1,000, insurance -3,000] Car purchased on Repairs of office Interest on loan Income-tax payment Life insurance premium Balance carried down 6,000 18,000 40,000 32,000 11,000 6,000 2,40,000 12,000 10,000 2,000 8,000 1,77,400 IPCC Guess Questions May 2016 Direct Tax 11

12 Car is partly for official purposes (40%) and partly for private purposes (60%). Determine the taxable income and tax liability of X for the assessment year Mr. Tiwari, a non-resident, operates an aircraft between Bangkok and Mumbai. He received the following amounts in the course of the business of operation of aircraft during the year ending : Rs.3 crore in India on account of carriage of passengers from Mumbai. Rs.2 crore in India on account of carriage of goods from Mumbai. Rs.1 crore in India on account of carriage of passengers from Bangkok. Rs.2 crore in Bangkok on account of carriage of passengers from Mumbai. The total expenditure incurred by Mr. Tiwari for the purposes of the business during the year ending was Rs. 1.8 crore. Compute the income of Mr. Tiwari chargeable to tax in India under the head Profits and gains of business or profession for the assessment year Following is the profit and loss account of Mr. Q for the year ended : Particulars Rs. Particulars Rs. To Repairs on Building 1,81,000 By Gross Profit 6,01,000 To Amount paid to IIT, Mumbai for an 8,100 1,00,000 By I.T. Refund approved scientific research programme To Interest 1,10,000 By Interest on Company Deposits 6,400 To Travelling 1,30,550 To Net Profit 93,950 6,15,500 6,15,500 Following additional information is furnished: Repairs on building includes Rs.1,00,000 being cost of building a new toilet. Interest payments include Rs.50,000 on which tax has not been deducted and penalty for contravention of Central Sales Tax Act of Rs.24,000. Compute the income chargeable under the head "Profits and gains of Business or Profession" of Mr. Q for the year ended ignoring depreciation. 48. Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit & Loss Account for the year ended : Manufacturing, Trading and Profit & Loss Account for the year ended Particulars Rs. Particulars Rs. To Opening Stock 71,000 By Sales 32,00,000 To Purchase of Raw Materials 16,99,000 By Closing stock 2,00,000 To Manufacturing Wages & Expenses 5,70,000 To Gross Profit 10,60,000 34,00,000 34,00,000 To Administrative charges 3,26,000 By Gross Profit 10,60,000 To State VAT penalty 5,000 By Dividend from domestic companies 15,000 To State VAT paid 1,10,000 By Income from agriculture (net) 1,80,000 To General Expenses 54,000 To Interest to Bank (On machinery term loan) 60,000 To Depreciation 2,00,000 To Net Profit 5,00,000 12,55,000 12,55,000 IPCC Guess Questions May 2016 Direct Tax 12

13 Following are the further information relating to the financial year : i) Administrative charges include Rs.46,000 paid as commission to brother of the assessee. The commission amount at the market rate is Rs.36,000. ii) The assessee paid Rs.33,000 in cash to a transport carrier on This amount is included in manufacturing expenses (Assume that the provisions relating to TDS are not applicable to this payment.) iii) A sum of Rs. 4,000 per month was paid as salary to a staff throughout the year and this has not been recorded in the books of account. iv) Bank term loan interest actually paid up to was Rs.20,000 and the balance was paid in October v) Housing loan principal repaid during the year was Rs.50,000 and it relates to residential property occupied by him. Interest on housing loan was Rs.23,000. Housing loan was taken from Canara Bank. These amounts were not dealt with in the profit and loss account given above. vi) Depreciation allowable under the Act is to be computed on the basis of following information: Plant & Machinery (Depreciation 15%) Opening WDV (as on ) 12,00,000 Additions during the year (used for more than 180 days) 2,00,000 Total additions during the year Note: Ignore additional depreciation under section 32(1)(iia) Rs. 4,00,000 Compute the total income of Mr. Raju for the assessment year Mr. Praveen engaged in retail trade, reports a turnover of Rs. 58,50,000 for the financial year His income from the said business as per books of account is computed at Rs. 3,90,000. Retail trade is the only source of income for Mr. Praveen. i) Is Mr. Praveen eligible to opt for presumptive determination of his income chargeable to tax for the assessment year ? ii) If so, determine his income from retail trade as per the applicable presumptive provision. iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail trade, what are his obligations under the Income-tax Act, 1961? What is the due date for filing his return of income under both the options? 50. XYZ ltd., a manufacturing concern, furnishes the following particulars: S.No Particulars Rs Opening WDV of plant and machinery as on New plant and machinery purchased and put to use on New plant and machinery acquired and put to use on Computer acquired and installed in the office premises on ,00,000 20,00,000 8,00,000 3,00,000 Compute the amount of depreciation and additional depreciation as per the income tax Act, 1961 for the A.Y (MM AMENDMENTS MATERIAL) 51. X ltd set up a manufacturing unit in notified backward area in the state of Telangana on It invested Rs.30 core in new plant and machinery on Further, it invested Rs.25 core in the plant and machinery on , out of which Rs.5 core was second hand plant and machinery. Compute the depreciation under sec:32, is X ltd entitled for any other benefit in respect of such investment? If so, what i9s the benefit available? (MM AMENDMENTS MATERIAL) Would your answer change where such manufacturing unit set up by a firm? 6. CAPITAL GAINS 52. Sec.51 - Forfeiture of Advance (Not Applicable From ) 53. Sec.10 (37)-Exemption of C.G. on compulsory Acquisition of urban Agriculture land IPCC Guess Questions May 2016 Direct Tax 13

14 54. Sec.45(2) - Conversion of A Capital Asset into Stock in Trade 55. Sec.45(5) - Compulsory Acquisition 56. Sec.50 - Computation of C.G s In Case of Depreciable Asset s 57. Sec.50C - Special Provisions for Computation of Consideration 58. Sec.54, Sec.54EC, 54F PROBLEMS: 59. Mr. X & sons, HUF, purchased a land for Rs. 40,000 in In , a partition takes place when Mr. A, a coparcener, is allotted this plot valued at Rs. 80,000. In , he had incurred expenses of Rs. 1,85,000 towards fencing of the plot. Mr. A sells this plot of land for Rs. 15,00,000 in after incurring expenses to the extent of Rs. 20,000. You are required to compute the capital gain for the A.Y Mr. k purchases a house property on April 10, 1978 for Rs. 35,000. The fair market value of the house property on April 1, 1981 was Rs. 70,000. On August 31, 1984, Mr. Kay enters into an agreement with Mr. Jay for sale of such property for Rs. 1,20,000 and received an amount of Rs. 10,000 as advance. However, as Mr. Jay did not pay the balance amount, Mr. Kay forfeited the advance. In May 1987, Mr. Kay constructed the first floor by incurring a cost of Rs. 50,000. Subsequently, in September 1987, Mr. Kay gifted the house to his friend Mr. Dee. On February 10, 2015, Mr. Dee sold the house for Rs. 10,00,000. CII for F.Y : 125; : 150; :1024. Compute the capital gains in the hands of Mr. Dee for A.Y Ms.Usha purchases 1,000 equity shares in X Ltd. at a cost of Rs. 15 per share (brokerage 1%) in January She gets 100 bonus shares in August She again gets 1100 bonus shares by virtue of her holding on February Fair market value of the shares of X Ltd. on April 1, 1981 is Rs. 25. In January 2015, she transfers all her Rs. 150 per share (brokerage 2%). Compute the capital gains taxable in the hands of Ms. Usha for the A.Y assuming: a) X Ltd is an unlisted company and securities transaction tax was not applicable at the time of sale. b) X ltd is a listed company and the shares are sold in a recognised stock exchange and securities transaction tax was paid at the time of sale. Cost Inflation Index for F.Y : 100, F.Y : 125 & F.Y : Mr.A, is an individual carrying on business. His stock and machinery were damaged and destroyed in a fire accident. The value of stock lost (totally damaged) was Rs.6,50,000. The opening WDV of the block as on was Rs.10,80,000. During the process of safeguarding machinery and in the firefighting operations, Mr.A lost his gold chain and a diamond ring, which he had purchased in April, 2003 for Rs.1,20,000. The market value of these two items as on the date of fire accident was Rs.1,80,000. Mr. A received the following amount from the insurance company: Towards loss of stock Rs.4,80,000 Towards damage of Machinery Rs.6,00,000 Towards gold chain and diamond ring Rs.1,80,000 You are requested to briefly comment on the tax treatment of the above three items under the provisions of the income-tax Act, X acquired a house for Rs. 20,000 in On his death in October 1995 the house was acquired by his son Y. The market value of the house as on was Rs. 80,000. This house was acquired by the Government on for Rs.3,00,000 and a compensation of Rs. 2,20,000 is paid to him on and the balance Rs. 80,000 on Y filed a suit against the Government challenging the quantum of compensation and the court ordered for giving of additional compensation of Rs.1,00,000. He incurred an expenditure of Rs. 2,000 in connection with the suit. The additional compensation is received on Compute the capital gains chargeable to tax. 64. Singhania & Co. own six machines, put in use for business in March, The depreciation on these machines is 15%. The written down value of these machines as on 1st April, 2014 was Rs. 8,50,000. Three of the old machines were sold on 10th June, 2014 for Rs. 11,00,000. A new plant was bought for Rs. 8,50,000 on 30th November, IPCC Guess Questions May 2016 Direct Tax 14

15 You are required to: Determine the claim of depreciation for Assessment Year Compute the capital gains liable to tax for Assessment Year If Singhania & Co. had sold the three machines in June, 2014 for Rs. 21,00,000, will there be any difference in your above workings? Explain. 65. Mr. A is a proprietor of Akash Enterprises having 2 units. He transferred on his Unit 1 by way of slump sale for a total consideration of Rs.25 lacs. Unit 1 was started in the year The expenses incurred for this transfer were Rs.28,000. His Balance Sheet as on is as under: Unit 1 Unit 2 Liabilities Total (Rs.) Assets Total (Rs.) (Rs.) (Rs.) Own Capital 15,00,000 Building 12,00,000 2,00,000 14,00,000 Revaluation Reserve (for 3,00,000 Machinery 3,00,000 1,00,000 4,00,000 building of unit 1) Bank loan (70% for unit 1) 2,00,000 Debtors 1,00,000 40,000 1,40,000 Trade creditors (25% for unit 1,50,000 Other assets 1,50,000 60,000 2,10,000 1) Total 21,50,000 Total 17,50,000 4,00,000 21,50,000 Other information: Revaluation reserve is created by revising upward the value of the building of Unit 1. No individual value of any asset is considered in the transfer deed. Other assets of Unit 1 include patents acquired on for Rs.50,000 on which no depreciation has been charged. Compute the capital gain for the assessment year G sold a residential house on for Rs.10,00,000. He had purchased this house on for Rs.1,20,000 and he spend Rs. 70,000 on improvement of the house during the year He purchased a new house on for Rs. 3,00,000. This house was also sold by him on for Rs. 6,00,000. He purchased another house on for Rs.8,00,000. Compute the C.G. s for the A.Y and Mr. Chandru transferred a vacant site on for Rs.100 lakhs. The site was acquired for Rs.9,99,300 on He invested Rs.50 lakhs in eligible bonds issued by Rural Electrification Corporation Ltd. (RECL) on Again, he invested Rs.20 lakhs in eligible bonds issued by National Highways Authority of India (NHAI) on Compute the chargeable capital gain in the hands of Chandru for the year A.Y Mr. X furnishes the following data for the previous year ending : 1. Unlisted Equity Shares of AB Ltd., 10,000 in number were sold on , at Rs. 500 for each share. 2. The above shares of 10,000 were acquired by X in the following manner: Received as gift from his father on (5, 000 shares) the market price on Rs.50 per share. Bonus shares received from AB Ltd. on (2,000 shares) Purchased on at the price of Rs.125 per share (3,000 shares) 3. Purchased one residential house at Rs.25 lakhs, on from the sale proceeds of shares. 4. X is already owning a residential house, even before the purchase of above house. You are required to compute the taxable capital gain. He has no other source of income chargeable to tax. 69. Mr. Raj kumar sold a house to his friend Mr. Dhuruv on 1 st November, 2014 for a consideration of Rs.25,00,000. The sub-registrar refused to register the document for the said value, as according to him, stamp duty had to be paid on Rs.45,00,000, which was the Government guideline value. Mr. Raj kumar preferred an appeal to the revenue divisional officer, who fixed the value of the house as Rs.32,00,000 (Rs.22,00,000 for land and the balance for building portion). The differential stamp duty was paid, accepting IPCC Guess Questions May 2016 Direct Tax 15

16 the said value determined. what are the tax implications in the hands of Mr. Raj kumar and Mr. Dhuruv for the assessment year ? Mr. Raj kumar had purchased the land on 1 st June, 2010 for Rs.5,19,000 and completed the construction of house on 1 st October, 2012 for Rs.14,00,000. Cost inflation indices may be taken as 711 for the financial year , 785 for the financial year , and 1024 for the financial year Mr. Akash sold his residential property on 2nd February, 2015 for Rs. 90 lakh and paid brokerage@1% of sale price. He had purchased the said property in May 2000 for Rs. 24,36,000. In June, 2015, he invested Rs. 75 lakh in equity of A (P) Ltd., a newly incorporated SME manufacturing company, which constituted 63% of share capital of the said company. A (P) Ltd. utilized the said sum for the following purposesa) Purchase of new plant and machinery during July 2014 Rs. 65 lakh b) Included in (a) above are Rs. 6 lakh for purchase of computers and Rs. 8 lakh for purchase of cars. c) Air-conditioners purchased for Rs. 1 lakh, included in the (a) above, were installed at the residence of Mr. Akash. d) Amount deposited in specified bank on Rs. 10 lakh Compute the chargeable capital gain for the A.Y Assume that Mr. Akash is liable to file his return of income on or before 30th September, 2015 and he files his return on Ms. Vasumathi purchased 10,000 equity shares of ABC Co. Pvt. Ltd. on for Rs.1,20,000. The company was wound up on : Liabilities Rs. Assets Rs. 60,000 equity shares General reserve Provision for taxation 6,00,000 40,00,000 2,50,000 Agricultural lands Cash at bank 42,00,000 6,50,000 48,50,000 48,50,000 The tax liability (towards dividend distribution tax) was ascertained at Rs.3,00,000 after considering refund due to the company. The remaining assets were distributed to the shareholders in the proportion of their shareholding. The market value of 6 acres of agricultural land (in an urban area) as on is 10,00,000 per acre. The agricultural land received above was sold by Ms. Vasumathi on for Rs.15,00,000 Discuss the tax consequences in the hands of the company and Ms. Vasumathi 72. Ms. Gunjan purchased a land at a cost of Rs. 50 lakh in the financial year and held the same as her capital asset till 31st August, She started her real estate business on 1st September, 2012 and converted the said land into stock-in-trade of her business on the said date, when the fair market value of the land was Rs. 320 lakh. She constructed 8 flats of equal size, quality and dimension. Cost of construction of each flat is Rs. 36 lakh. Construction was completed in January, She sold 5 flats at Rs. 90 lakh per flat in February, She invested Rs. 70 lakh in bonds issued by National Highways Authority of India on 31st March, Compute the capital gains and business income arising from the above transactions in the hands of Ms. Gunjan for Assessment Year indicating clearly the reasons for treatment for each item. 7. INCOME FROM OTHER SOURCES 73. Mr. A, a dealer in shares, received the following without consideration during the P.Y from his friend Mr. B, - a) Cash gift of Rs. 75,000 on his anniversary, 15th April, b) Bullion, the fair market value of which was Rs. 60,000, on his birthday, 19th June, IPCC Guess Questions May 2016 Direct Tax 16

17 c) A plot of land at Faridabad on 1st July, 2014, the stamp value of which is Rs. 5 lakh on that date. Mr. B had purchased the land in April, Mr. A purchased from his friend Mr. C, who is also a dealer in shares, 1000 shares of X Rs. 400 each on 19th June, 2014, the fair market value of which was Rs. 600 each on that date. Mr. A sold these shares in the course of his business on 23rd June, Further, on 1st November, 2014, Mr. A took possession of property (building) booked by him two years back at Rs. 20 lakh. The stamp duty value of the property as on 1st November, 2014 was Rs. 32 lakh and on the date of booking was Rs. 23 lakh. He had paid Rs. 1 lakh by cheque as down payment on the date of booking. On 1st March, 2015, he sold the plot of land at Faridabad for Rs. 7 lakh. Compute the income of Mr. A chargeable under the head Income from other sources and Capital Gains for A.Y Discuss the taxability or otherwise of the following in the hands of the recipient under section 56(2)(vii) the Income-tax Act, Akhil HUF received Rs. 75,000 in cash from niece of Akhil (i.e., daughter of Akhil s sister).akhil is the Karta of the HUF. Nitisha, a member of her father s HUF, transferred a house property to the HUF without consideration. The stamp duty value of the house property is Rs. 9,00,000 Mr. Akshat received 100 shares of A Ltd. from his friend as a gift on occasion of his 25 th marriage anniversary. The fair market value on that date was Rs. 100 per share. He also received jewellery worth Rs. 45,000 (FMV) from his nephew on the same day. Kishan HUF gifted a car to son of Karta for achieving good marks in XII board examination. The fair market value of the car is Rs. 5,25, X holds the following securities on April 1, 2014: 6.5% central government loan (date of payment of interest : July 10 every year) - Rs.10,000 8% debentures (non-listed of PQR Ltd. (dates of payment of interest : May 15 and November 15 every year) - Rs.40,000 9% relief bonds (tax-free) - Rs.10,000 A part from the afore said securities, X invests in (non-listed) UP Government loan, Bihar Government loan and debentures of ABC Ltd. (non-listed) on June 30, 2014 and receives Rs.4,000, Rs.8,000 and Rs.18,000, respectively, as interest on December 31, His rental (taxable) income is Rs.11,52,000. He pays 2 percent commission to bank for collecting interest (net) on securities. Determine the taxable income of X for the assessment year Discuss the tax implications under section 56(2) in respect of each of the following transactions - Mr. Tejpal received a painting by M. F. Hussain worth Rs.2 lakh from his nephew on his 10th wedding anniversary. Verma s son transferred shares of D Ltd. to Verma HUF without any consideration. The fair market value of the shares is Rs. 2.5 lakh. Sunshine (P) Ltd. purchased 9,500 equity shares of Saturn (P) Ltd. at Rs. 86 per share. The fair market value of the share on the date of transaction is Rs Bijali (P) Ltd. issued 28,000 equity shares of Rs. 10 each at a premium of Rs. 8. The fair market value of each share on the date of issue is Rs.15. Mr. Sharan s land was acquired by the Government in August He received interest of Rs.5,40,000 on enhanced compensation in January, 2015, out of which Rs.1,20,000 related to the year , Rs.1,60,000 related to the year , Rs. 2,00,000 related to the year and 60,000 related to the year Mr. Suraj, a Sales Manager with Moon Ltd., sold a building to his friend Mr. Rohan, who is engaged in the business of artificial jewellery, for Rs.80 lakh on , when the stamp duty value was Rs.220 lakh. The agreement was, however, entered into on when the stamp duty value was Rs.150 lakh. Mr. Suraj had received a down payment of Rs. 30 lakh by cheque from Mr. Rohan on the date of agreement. Discuss the tax implications in the hands of Mr. Suraj and Mr. Rohan, assuming that Mr. Suraj had purchased the building for Rs. 61 lakh on 20th October, IPCC Guess Questions May 2016 Direct Tax 17

18 Would your answer be different if Mr. Suraj was a property dealer and he sold the building to Mr. Rohan in the course of his business? 78. Mr. Sunil sold his house property in Hyderabad as well as his rural agricultural land for a consideration of Rs. 70 lakh and Rs. 20 lakh, respectively, to his friend Mr. Ravi on He has purchased the house property and the land in the year 2012 for Rs. 45 lakh and Rs. 12 lakh, respectively. The stamp duty value on the date of transfer, i.e., , is Rs. 78 lakh and Rs. 22 lakh for the house property and rural agricultural land, respectively. Determine the tax implications in the hands of Mr. Sunil. 8. SET OFF AND CARRY FORWARD OF LOSSES 79. Reconstitution Of The Firm And Succession Of Any Person - Sec Losses incurred by a co., in which public are not substantially interested - sec.79 PROBLEMS: 81. The total income of Mr. Krishna for the assessment year from the following particulars: Particulars Amount(Rs.) Income from business before adjusting the following items: 1,75,000 a) Business loss brought forward from assessment year ,000 b) Current depreciation 40,000 c) Unabsorbed depreciation of earlier year 1,55,000 Income from house property (Gross Annual Value) 4,32,000 Municipal taxes paid 32,000 Mr. Krishna sold a plot at Noida on 12th September, 2014 for a consideration of Rs. 6,40,000, which had been purchased by him on 20th December, 2011 at a cost of Rs.4,10,000 Long-term capital loss on sale of shares sold through recognized stock exchange (STT paid) 75,000 Long-term capital gain on sale of debentures 60,000 Dividend on shares held as stock in trade 22,000 Dividend from a company carrying on agri business 10,000 During the previous year , Mr. Krishna has repaid Rs.1,67,000 towards housing loan from a scheduled bank. Out of Rs.1,67,000, Rs.97,000 was towards payment of interest and rest towards principal payments. Cost inflation indices: F.Y : 785 & F.Y : M/s. Vivitha & Co., a partnership firm, with four partners A, B, C and D having equal shares, furnishes the following details, summarized from the valid returns of income filed by it: Assessment year Item eligible for carry forward and set off Unabsorbed business loss Rs. 1,20, Unabsorbed business loss Rs. 1,90, Unabsorbed depreciation Rs. 1,20, Unabsorbed long-term capital losses: - from shares Rs. 1,10,000 - from building Rs. 1,90,000 C who was a partner during the last three years, retired from the firm with effect from IPCC Guess Questions May 2016 Direct Tax 18