MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September

2010

Name Roll. Number / Registration Number Program Subject Code Learning Center Center code

Naseer Khan Pathan 531010763 MBA Semester-3 / Spring 2010 Taxation Management MB0012 Global Institute , Kingdom of Bahrain 02519

Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Q.1 Tax evasion is a menace to the people, economy and the country. In the wake of recent Swiss Bank Account scandal give your views on the following: a. How does it affect Indian economy and the growth prospects? b. Does black money cause inflation? [10 Marks]
Solution:

35% of the Income Tax collections of the country and 43% of the corporate tax collections. The study cases. It came to light that none of the taxpayers concerned declared for taxation purposes anything

In view of the facts set out so far, it becomes necessary to look at the extent of compliance of tax laws in India. Though many estimates of black money have been coming forth, an attempt was made to determine the extent of tax evasion in the Mumbai Income Tax charge, which collected about

was made on the basis of results of the survey and search cases for all the years covered by such more than 25% of their true incomes after 1999. The figure arrived at was given to the press taxpayer, including companies. The said figure was thereafter cited for some more time, and even However, there appear to be higher tax evasion in the case of companies. Some of the companies

specifying the basis on which it was so calculated. Not a single protest was received from any of the have shown their entire capital as having come from the countries regarded as Tax Havens. Considering the extent of Indian monies stacked in Swiss Bank Accounts, and bank accounts of the developed countries, and comparing the same with the annual income tax collections of the Central Government, it appears that the real income admitted for taxation purposes is less than 25% . The been extent of evasion appears to be very much higher in the case of companies as the companies have resorted to evolution of tax evasion devices in the accounts and such methods have not yet income tax purposes. properly investigated by the Income Tax Department. There are companies which have thereafter no protest was received. There was, therefore, every reason to believe this estimate.

camouflaged their capital investments and shown it in the books as if it is explained capital for The Indian Scenario - Peculiar problems of tax evasion: It will be appropriate at this stage to highlight some of the key problems from the view point of computerisation in India: Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763 Page 2 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 (a) Investments in Real Estate: The one field where black monies have been invested on the largest 40%. It may be a difficult task to trace such black transactions through the computer system,

scale is that of real estate properties. Lands were sold for only 20% of their real values and the suggested for adoption on the U.S. pattern for India. But it is common knowledge that the black monies invested in land have been reinvested in bank accounts, shares and in other properties, apart from real estate property. It is now confirmed knowledge that in regard to buildings constructed, only 40% of the cost is shown to income tax. It is possible to detect such investment by analysis of the data obtained from the trade and industry governing commodities used for construction of buildings. balance 80% given in cash out of the tax evaded monies, ever since 1947. But later on when the tax rates were lowered to 30% for individuals and 35% for companies, the black portion got reduced to

Further, as all the transactions relating to sale of real estate properties are now recorded in owners of property who have not filed their tax returns at all so far. In India, there are only 3 corers of tax assesses at present, and thus a large number of people with taxable income have evidently computers maintained by the Registration Offices all over the country, and if the same data is brought on the computers of the Income Tax Department, it should be possible to know many

chosen not to file income tax returns.

jewellery among all the countries of the world. In the searches conducted by the Income Tax Department, huge unaccounted cash balances and gold and diamond jewellery have been found in the bank lockers maintained by tax payers in bogus names and in their own names. At current market rates, purchases of gold, silver and diamonds may now reach about Rs. 80,000 crores a year. Gold and diamond traders are mostly keeping their transactions outside bank accounts. They are also

(b) Gold and Jewellery Holdings: India is having the largest private holdings of gold and diamond

giving vouchers to the effect that raw gold has been given by the customers, though; in fact, it would to transact only through bank cheques and issue computerized bills, to facilitate proper flow of information to the computer system of the tax department. cheques, mutual funds and the primary bonds issued by the Reserve Bank of India. The data

have come from the traders themselves. Therefore, it is necessary to introduce a law requiring them (c) Shares, Mutual Funds, etc: There are vast investments in shares and debentures, travelers regarding company shares and other investments mentioned can be easily transferred to the Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

computer system of the Income Tax Department. The Mumbai Stock Exchange is having a separate

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 computer system with complete data on daily transactions and the Income Tax Department has so far not made use of such data. There is also the data generated in the computers of the organizations which are available with the Government itself.

in charge of demat of shares. Like-wise, the data on post office savings and other accounts is easy to be brought on the computers of the tax department for verification with the individual returns, d) Undisclosed Stock in-trade held by companies and traders : Many firms and individuals have

also a tendency to keep undisclosed business assets like cars and private assets, unaccounted cash holdings etc., They have ability to give extensive bribes to protect business and other interests. All data for taxation purposes. (e) Benami Investments: Benami investments are typical of the Indian economy. Even big This problem requires such practices would varnish once fear is caused among the tax payers about the use of computerized

accounts. It may be difficult to determine whether the investment found in the computers of the income tax department is benami or not, and benami shares will have to be traced sometimes by extensive studies to be conducted by teams of revenue officers. comprehensive study because it is peculiar to the Indian Taxation System.

companies have indulged in such practices to impart total secrecy to their undisclosed

shrouded in secrecy and hence no information will be available to the computer system of the Income Tax Department. The amounts in Swiss Bank Accounts, which are held in foreign currency, have been utilized by big companies and other taxpayers in India to import huge machineries at foreign currency and unaccounted funds in Indian currency to those contesting general elections. Several major companies have converted Swiss Account holdings into benami shares and vastly under invoiced prices. Such practices enable payment of secret trade commissions in are additions to the Swiss Bank Account holdings. b. Does black money cause Inflation?

(f) Swiss Bank and other undisclosed bank accounts held abroad: Swiss Bank Accounts are

debentures. The large amounts of Swiss Bank deposits have, thus, been utilized and every year, there

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 Illegally earned money is called black money. It is the result of hoarding, smuggling, tax evasion and The Indian economy stands badly shattered because of the huge amount of this tainted wealth lying is widening every day. control of the Government. The black money has already created a serious problem in our country. dealing in immovable property for which the consideration is paid in black. It has been beyond the

in the coffers of the rich. It has given rise to parallel economy operating in the country. As a result, the prices continue to rise in spite of all government efforts to control them. The poor go on becoming poorer while the rich go on becoming richer. The gap between the haves and the have nots Black money is used by the rich in various evil activities. They use this money for corrupting and

They bribe Government officers and lead them to corruption and dishonesty. They purchase political bosses and control the strings of the Government. Thus the entire social structure comes to be badly polluted. Searches and raids by Income Tax authorities are conducted from time to time. Such raids yield It is difficult to form an exact idea of the amount of black money in circulation in the country.

demoralizing social and political life. They display it in ostentatious living and wasteful luxuries.

best legal brains and get the law twisted in their favour. Most of the offenders use all their money of the huge iceberg lying hidden underneath. The 1997 Voluntary Disclosure Scheme announced by been reduced to thirty per cent.

and influence and go scot free whenever they are caught. The Government has, at various times, proved successful to a very limited extent. What has come to the surface is believed only to be the tip

announced some voluntary disclosure schemes for unearthing the black money. These schemes have the Government of India unearthed a big amount of black money as the tax rate in this scheme had The black money, according to some reliable estimates has gone up to Rs. 10,000 crores in our country. It is to a great extent responsible for a great rise in prices because the purchasing power of

crores of rupees. But the people are, at times, cleverer than the Government. They seek the aid of the

the people has increased. People having black money are leading a life of luxury whereas the poor

people are leading a miserable life. Some leading economists of the country have suggested stringent

measures to the government to unearth black money but successive governments have been Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763 Page 5 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 rejecting those measures. The vested interests always stand in the way of effective measures and get them diluted. The government of the day appears to be doing its best to unearth black money. A number of steps There has been some success. A lot soil remains to be done. have been taken. Taxation structure and system have been made easier. At different times, the government has brought forward several schemes and asked the people to declare their wealth. It must be clear to all that the nation cannot shut her eyes to this state of affairs. Smugglers and hoarders. Black money is a curse. It must be rooted out from public life. black-marketers can no longer be tolerated. They are striking at the very roots of our democratic

structure. All steps to weed the black money out of circulation must be taken as early as possible. The government must come down with a heavy hand on smugglers, tax evaders, black-marketers and

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Q.2 Detail death cum retirement gratuity under section 17 (1) iii of IT act. Is commutation of pension a viable option in terms of tax planning? [10 Marks]
Solution:

gratuity received under the revised Pension Rules of the Central Government or, as the case may be, Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the

inclusion in computing the total income under clause (10) of Section 10. Any death-cum-retirement

Death-cum-retirement gratuity or any other gratuity which is exempt to the extent specified from

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil

posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence service. Gratuity received in cases other than above on retirement, termination etc is exempt up to the limit as prescribed by the Board. Under the provisions of Section 10(10) of the IT Act, any death-cum-retirement gratuity of a government servant is completely exempt from income tax. death is exempt subject to

50,000; Of course, this is further subject to certain other limits like the one half-month's salary for each year of completed service, calculated on the basis of average salary for the 10 months the least of these items is exempt from income tax under Section 10(10).

However, in respect of private sector employees gratuity received on retirement or on becoming

incapacitated or on termination or any gratuity received by his widow, children or dependants on his

immediately preceding the year in which the gratuity is paid or 20 months' salary as calculated. Thus,

certain conditions. The maximum amount of exemption is Rs. 3,

Any payment in commutation of pension received under the Civil Pension(Commutation) Rules

of the Central Government or under any similar scheme applicable to the members of the civil

services of the Union, or holders of civil posts/posts connected with defence, under the Union, or civil posts under a State, or to the members of the All India Services/Defence Services, or, to the Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

employees of a local authority or a corporation established by a Central, State or Provincial Act, is

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 exempt under sub-clause (i) of clause (10A) of Section 10. As regards payments in commutation of pension received under any scheme of any other employer, exemption will be governed by the

The entire amount of any payment in commutation of pension by a government servant or any payment in commutation of pension from LIC [Get Quote] pension fund is exempt from income tax under Section 10(10A) of IT Act.

Union referred to in Section 10(23AAB) is exempt under sub-clause (iii) of clause (10A) of Section 10.

provisions of sub-clause (ii) of clause (10A) of section 10. Also, any payment in commutation of

pension received from a Regimental Fund or Non-Public Fund established by the Armed Forces of the

the commuted value of half of such pension. It may be noted here that the monthly pension standard deduction is now available in respect of pension received by a tax payer.

However, in respect of private sector employees, only the following amount of commuted pension is exempt, namely: (a) Where the employee received any gratuity, the commuted value of

receivable by a pensioner is liable to full income tax like any other item of salary or income and no

one-third of the pension which he is normally entitled to receive; and (b) In any other case,

Q.3 Explain the essential conditions to be satisfied by a firm to be assessed as firm under Section 184? [10 Marks]
Solution: Position of Firm under the Income Tax Act

Legally, a partnership firm does not have a separate entity from that of the partners constituting the firm as the partners are the owners of the firm. However, a firm is treated as a separate tax entity under the Income Tax Act. Salient features of the assessment of a firm are as under: 2. 1. A firm is treated as a separate tax entity.

3.

Share of profit which a partner receives from the firm (after deduction of remuneration and interest allowable) shall be fully exempt in the hands of the partner.

business or profession, besides the deductions which are allowed u/ss 30 to 37, special deduction is allowed to the firm on account of remuneration to working partners and interest paid to the partners. However, it is subject to certain limits laid down u/s 40 (b).

While computing the income of the firm under the head Profits and gains of

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 However, only that part of the interest and remuneration which was allowed as a deduction the head profits and gains of business or profession. year 2010-11. to the firm shall be taxable in the hands of the partners in their individual assessment under The firm will be assessed as a firm provided conditions mentioned under Section 184 are The firm will be taxed at a flat rate of 30% plus education cess @ 3% plus for the financial

5.

4.

satisfied. In case these conditions are not satisfied in a particular assessment year, the firm or profession and such interest, salary, bonus, commission or remuneration shall not be

will be assessed as affirm, but no deduction by way of payment of interest, salary, bonus,

Assessment of firm types: 1.

chargeable to income tax in the hands of the partner.

commission or remuneration, by whatever name called, made to the partner, shall be allowed in computing the income chargeable under the head profits and gains of business

From point (5) stated above, it can be concluded that for taxation purposes, a firm can be of two Firm assessed as firm (provided conditions mentioned u/s 184 are satisfied).and the firm limit specified under Section 40(b) shall be eligible for deduction on account of interest, salary etc while computing its income under the head business and profession). However, it will be subject to the maximum of the

2.

If the prescribed conditions are not satisfied, no deduction shall be allowed to the firm on account of such interest, salary, bonus etc.

Essential conditions to be satisfied by a firm to be assessed as firm (Section 184) 1. In the first assessment year: The firm will be assessed as a firm, also known as Firm Assessed as Such (FAAS) if the following conditions are satisfied: of partnership. (a) Partnership is evidenced by an instrument i.e. there is a written document giving the terms

(b) The individual share of the partners is specified in that instrument. Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 (c) Certified copy of partnership deed must be filed: A certified copy of the said instrument of which the assessment as a firm is first sought. partnership shall accompany the return of income in respect of the assessment year for

Where certified copy is not filed with the return there is no provision for condonation of delay. Further Delhi ITAT in the case of Ishar Dass Sahini & Sons v CIT held that where uncertified Photostat copy of the instrument of partnership is submitted along with the return of income and the certified copy is produced at the time of assessment, it will satisfy this condition. along with such return as the condition that it shall accompany the return of income is satisfied.

However where the return itself is filed late then there is no problem if the certified copy is filed

assessed as such (FAAS) in the first assessment year. Once the firm is assessed as firm for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the share of the partners. Where any such change had taken place in the previous year, the firm shall furnish a certified copy of

2. In the subsequent assessment years: If the above three conditions are satisfied the firm will be

regard.

the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year. Read the box for some important points to be considered in this

Circumstance where the firm will be assessed as a firm but shall not be eligible for deduction on account of interest, salary, bonus, etc. [Section 184(5)] Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763 Page 11 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 The firm will be assessed as a firm but shall not be eligible for any deduction on account of interest, salary and bonus etc if there is failure on the part of the firm as is mentioned in Section 144 (relating to Best Judgment Assessment) and where the firm does not comply with the three conditions mentioned under Section 184.

Q.4 List out the steps to compute total income? [10 Marks]
Solution: Step 1 Determination of residential status The residential status of a person has to be determined to ascertain which income is to be included in computing the total income. The residential statuses as per the Income- tax Act are shown below In the case of an individual, the duration for which he is present in India determines his residential status. Based on the time spent by him, he may be (a) resident and ordinarily resident, (b) resident

taxability of the income. For e.g., income earned outside India will not be taxable in the hands of a non-resident but will be taxable in case of a resident and ordinarily resident. Step 2 Classification of income under different heads INCOME FROM PROFITS AND GAINS CAPITAL INCOME

but not ordinarily resident, or (c) non-resident. The residential status of a person determines the

tax payer. Salary, pension earned is taxable under the head Salaries. Rental income is taxable

under the head Income from house property. Income derived from carrying on any business or profession is taxable under the head Profits and gains from business or profession. Profit from sale of a capital asset (like land) is taxable under the head Capital Gains. The fifth head of income is the Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

HOUSE PROPERTY OF BUSINESS OR GAINS FROM OTHER PROFESSION SOURCES

The Act prescribes five heads of income. These are shown below HEADS OF INCOME SALARIES

These heads of income exhaust all possible types of income that can accrue to or be received by the

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 residuary head under which income taxable under the Act, but not falling under the first four heads, will be taxed. The tax payer has to classify the income earned under the relevant head of income. Step 3 - Exclusion of income not chargeable to tax There are certain incomes which are wholly exempt from income-tax e.g. agricultural income. These income have to be excluded and will not form part of Gross Total Income. Also, some incomes are partially exempt from income-tax e.g. House Rent Allowance, Education Allowance. These

incomes are excluded only to the extent of the limits specified in the Act. The balance income over classified under the relevant head of income.

and above the prescribed exemption limits would enter computation of total income and have to be Step 4 - Computation of income under each head Income is to be computed in accordance with the provisions governing a particular head of income. under that head. There are deductions and allowances prescribed under each head of income. For chargeable under each head are allowed as deduction. Similarly, deductions and allowances are prescribed under other Under each head of income, there is a charging section which defines the scope of income chargeable example, while calculating income from house property, municipal taxes and interest on loan heads of income. These deductions etc. have to be considered before arriving at the net income

Step 5 Clubbing of income of spouse, minor child etc. progressive i.e. As the income increases, the applicable rate of tax increases. Some taxpayers in the child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability. higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions In case of individuals, income-tax is levied on a slab system on the total income. The tax system is

have been incorporated in the Act, under which income arising to certain persons (like spouse, minor

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Step 6 Set-off or carry forward and set-off of losses An assessee may have different sources of income under the same head of income. He might have profit from one source and loss from the other. For instance, an assessee may have profit from his textile business and loss from his printing business. This loss can be set-off against the profits of

textile business to arrive at the net income chargeable under the head Profits and gains of

certain cases. Further, losses which cannot be set-off in the current year due to inadequacy of eligible profits can be carried forward for set-off in the subsequent years as per the provisions contained in the Act. Step 7 Computation of Gross Total Income.

business or profession. Similarly, an assessee can have loss under one head of income, say, Income from house property and profits under another head of income, say, Profits and gains of business or profession. There are provisions in the Income-tax Act for allowing inter-head adjustment in

The final figures of income or loss under each head of income, after allowing the deductions, allowances and other adjustments, are then aggregated, after giving effect to the provisions for clubbing of income and set-off and carry forward of losses, to arrive at the gross total income. Step 8 Deductions from Gross Total Income There are deductions prescribed from Gross Total Income. These deductions are of three types. Step 9 Total income The income arrived at, after claiming the above deductions from the Gross Total Income is known as the Total Income. It is also called the Taxable Income. It should be rounded off to the nearest Rs. 10.

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Step 10 Application of the rates of tax on the total income The rates of tax for the different classes of assesses are prescribed by the Annual Finance Act.

Taxation For individuals, HUFs etc., there is a slab rate and basic exemption limit. At present, the

basic exemption limit is Rs. 1, 00,000 for individuals. This means that no tax is payable by individuals with total income of up to Rs. 1, 00,000. Those individuals whose total income is more than Rs. 1, 00,000 but less than Rs. 1, 50,000 have to pay tax on their total income in excess of Rs. 1,00,000 @ income-tax liability. 10% and so on. The highest rate is 30%, which is attracted in respect of income in excess of Rs. 2, 50,000. For firms and companies, a flat rate of tax is prescribed. At present, the rate is 30% on the whole of their total income. The tax rates have to be applied on the total income to arrive at the

Step 11 Surcharge percentage of income-tax. At present, the rate of surcharge for firms and domestic companies is 10% Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a

and for foreign companies is 2.5%. For individuals, surcharge would be levied @10% only if their total income exceeds Rs. 10 lakhs. Step 12 Education cess

The income-tax, as increased by the surcharge, is to be further increased by an additional income-tax irrespective of their level of total income. Step 13 - Advance tax and tax deducted at source

surcharge called education cess@2%. The Education cess on income-tax is for the purpose of

providing universalized quality basic education. This is payable by all assesses who are liable to pay

Although the tax liability of an assessee is determined only at the end of the year, tax is required to be required to be deducted at source from the income by the payer at the rates prescribed in the Act.

paid in advance in certain installments on the basis of estimated income. In certain cases, tax is Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763 Page 15 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 Such deduction should be made either at the time of accrual or at the time of payment, as prescribed to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any of filing of the return Taxation authorized bank. If any tax is still due on the basis of return of income, after adjusting advance tax by the Act. For example, in the case of salary income, the obligation of the employer to deduct tax at source arises only at the time of payment of salary to the employees. Such tax deducted at source has and tax deducted at source, the assessee has to pay such tax (called self-assessment tax) at the time

Q.5 Detail the important provisions under wealth tax act? [10 Marks]
Solution: One should try to understand the following provisions related to wealth tax act without which would Important Provisions under Wealth Tax Act not be able to get exact implications of wealth tax act. Asset must belong to the Assessee The above six assets will be included in the net wealth of the assessee only when they belong to him. therefore, not bring the property within the definition of net wealth for it would not be an asset belonging to the assessee. Assets must be held by the Assessee on the Valuation Date in the net wealth of the assessee. Individual

Mere possession or joint possession unaccompanied by the right to, or ownership of, property would

If the asset has been spent, lost, destroyed or transferred by the assessee before the valuation date, it

is not held by the assessee on the valuation date. Hence the value of such asset shall not be included

Assets required being included, though these may belong to others [Section 4] In computing the net wealth of an individual, there shall be included, as belonging to that individual, the value of assets which on the valuation date are held:

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 i) by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in by a minor child, not being a minor child suffering from any disability of the nature

ii)

connection with an agreement to live apart, or or

iii) iv) v)

specified in Section 80U of the Income-tax Act, or a married daughter, of such individual, by a person or association of persons to whom such assets have been transferred by the individual directly or indirectly, otherwise than for adequate consideration for the immediate or deferred benefit of the individual, his or her spouse, or individual otherwise than under an irrevocable transfer, or

by a person or association of persons to whom such assets have been transferred by the by the son's wife, of such individual, to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for

vi)

Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958) or is not chargeable under Section 5of that Act, for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972 wealth of the individual. A partner in a firm or a member of an association of persons the value of such assets or part thereof, as the case may be, shall not be included in computing the net

held in the form in which they were transferred or otherwise:

adequate consideration for the immediate or deferred benefit of the son's wife, of such individual or both, whether the assets referred to in any of the sub-clauses aforesaid are

adequate consideration, or

by a person or association of persons to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for

of his interest in the assets of the firm or association determined in the manner laid down in Schedule III: Provided that where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor in the firm, determined in the manner specified above, shall be Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

In the case of an assessee who is a partner in a firm or a member of an association of persons (not

being a co-operative housing society), there shall be included, as belonging to that assessee, the value

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 included in the net wealth of the parent of the minor, so far as may be, in accordance with the provisions of the third proviso to clause (a). Where, in the case of an individual being a member of a Hindu undivided family, any property having An Individual being a Member of a Hindu undivided family common stock of the family or been transferred by the individual, directly or indirectly, to the family been the separate property of the individual has, at any time after the31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the

other provision of this Act or in any other law for the time being in force, for the purpose of computing the net wealth of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1972: the members of the family for being held by them jointly; individual and not to the family; a) The individual shall be deemed to have transferred the converted property, through the family, to b) The converted property or any part thereof shall be deemed to be assets belonging to the amongst the members of the family, the converted property or any part thereof which is received by the spouse of the individual on such partition shall be deemed to be assets transferred indirectly by

hereinafter referred to as the converted property), then, notwithstanding anything contained in any

otherwise than for adequate consideration (the property so converted or transferred being

accordingly: Provided that the property referred to in clause (b) or clause (c) shall, on being included in the net wealth of the individual, be excluded from the net wealth of the family or, as the case may be the spouse of the individual. Membership under a house building scheme [Section 4(7)]

the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply

c) where the converted property has been the subject-matter of a partition (whether partial or total)

and a building or part thereof is allotted or leased to him under a house building scheme of the Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

society, company or association, as the case may be, the assessee shall, notwithstanding anything

Where the assessee is a member of a co-operative society, company or other association of persons

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 contained in this Act or any other law for the time being in force, be deemed to be the owner of such building or part and the value of such building or part, shall be included in computing the net wealth

the amount so payable is described as such or in any other manner in such scheme, be deducted as a A person: debt owed by him in relation to such building or part. Building/Right in building acquired in special cases [Section 4(8)]

of the assessee; and, in determining the value of such building or part, the value of any outstanding

installments of the amount payable under such scheme by the assessee to the society, company or

association towards the cost of such building or part and the land appurtenant thereto shall, whether

a) who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882); b) who acquires any rights (excluding any rights by way of a lease from month to month or for a part shall be included in computing the net wealth of such person. period not exceeding one year) in or with respect to any building or part thereof by virtue of any

such transaction as is referred to in clause (f) of Section 269UA of the Income-tax Act (43 of 1961), shall be deemed to be the owner of that building or part thereof and the value of such building or Assets held by a minor child [Provisos 2 and 3 to Section 4(1) (a)]

been acquired by the minor child out of his income referred to in the provision to sub-section (1A) of Section 64 of the Income-tax Act and which are held by him on the valuation date: wealth of an individual, such assets shall be included, Provided also that where the assets held by a minor child are to be included in computing the net (excluding the assets of the minor child so includible under this sub-section)is greater; or

Provided further that nothing contained in sub-clause (ii) shall apply in respect of such assets as have

(b) where the marriage of his parents does not subsist, in the net wealth of that parent who

(a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth maintains the minor child in the previous year as defined in Section 3 of the Income-tax Act,

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and where any such assets are once included in the net wealth of either parent, any such Page 19 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 assets shall not be included in the net wealth of the other parent in any succeeding year that it is necessary so to do. unless the Assessing Officer is satisfied, after giving that parent inopportunity of being heard,

Wealth tax is not a very important or high revenue tax in view of various exemptions. Wealth tax is a socialistic tax. It is not on income but payable only because a person is wealthy. Wealth tax is payable on net wealth on valuation date. As per Section 2(q), valuation date is 31st March every year. It is payable by every individual, HUF and company. Tax rate is 1% on amount by

In case of residents of India, assets outside India (less corresponding debts) are also liable to wealth assets less corresponding debts are liable to wealth tax [section 6].

Debt should have been incurred in relation to the assets which are included in net wealth of assessee. Only debt owed on date of valuation is deductible.

Net wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as defined in section 4) less exempted assets (as defined in section 5), less debt owed [as defined in section 2(m)].

the Companies Act, 1956; any co-operative society; any social club; any political party; and a Mutual fund specified under section 10(23D) of the Income-tax Act [section 45]

No surcharge or education cess is payable.

No wealth-tax is chargeable in respect of net wealth of any company registered under section 25 of

which net wealth exceeds Rs 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was Rs 15 lakhs).

tax. In case of non-residents and foreign national, only assets located in India including deemed education cess). Net wealth in excess of Rs. 30, 00,000 is chargeable to wealth-tax @ 1 per cent (on surcharge and

April every year falling immediately after the valuation date [Section 2(d)] All.).

Assessment year - Assessment year means a period of 12 months commencing from the first day of

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

1-1 Assets

Any building or land appurtenant thereto whether used for commercial or residential purposes or for the purpose of guest house (b) A farm house situated within 25 kilometers from the local limits of a cantonment board [Section 2(ea) (i)] A residential house is not asset, if it is meant exclusively for residential purposes of employee who is in whole-time employment and the gross annual salary of such employee, officer or director is less any municipality (whether known as a municipality, Municipal Corporation, or by any other name) or

Assets are defined in Section 2(ea) as follows.

Guest house, residential house or commercial building - The following are treated as assets - (a)

trade of the assessee is not treated as asset. carried on by him is not treated as asset. is not treated as an asset.

than Rs. 5, 00,000.

Any house which the assessee may occupy for the purposes of any business or profession

Any house (may be residential house or used for commercial purposes) which forms part of stock-in-

A residential property which is let out for a minimum period of 300 days in the previous year Any property in the nature of commercial establishments or complex is not treated as an asset. case of a leasing company, motor car is an asset.

Motor cars - Motor car is an asset, but not the following - (a) motor cars used by the assessee in the business of running them on hire (b) motor cars treated as stock-in- trade [Section 2(ea)(ii)]. In the

Jewellery, bullion, utensils of gold, silver, etc. [Section 2(ea)(iii)] - Jewellery, bullion, furniture,

utensils and any other article made wholly or partly of gold, silver, platinum or any other precious Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763 Page 21 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 metal or any alloy containing one or more of such precious metals are treated as assets [Section 2(ea)(ii)] metal or any alloy containing one or more of such precious metals, and also precious or semiinto any wearing apparel.

For this purpose, jewellery includes ornaments made of gold, silver, platinum or any other precious precious stones, whether or not set in any furniture, utensils or other article or worked or sewn stock-in-trade, then such asset is not treated as assets under section 2(ea) (iii).

Urban land - Urban land is an asset [Section 2(ea) (v)] census.

Urban land means land situated in the area which is comprised within the jurisdiction of a

commercial purposes) are treated as assets [Section 2(ea) (IV)]

Yachts, boats and aircrafts - Yachts, boats and aircrafts (other than those used by the assessee for

Where any of the above assets (i.e., jewellery, bullion, utensils of gold, etc.) is used by an assessee as

municipality and which has a population of not less than 10,000 according to the last preceding authority is not asset.

Land occupied by any building which has been constructed with the approval of the appropriate

excess of Rs. 50,000 is an asset. In case of companies, any amount not recorded in books of account is asset [Section 2(ea) (VI)]

10 years from the date of its acquisition by him is also not an asset.

Any unused land held by the assessee for industrial purposes for a period of 2 years from the date of

Cash in hand - In case of individual and HUF, cash in hand on the last moment of the valuation date in

its acquisition by him is not an asset. Any land held by the assessee as stock-in-trade for a period of

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

1-2 Deemed assets

Often, a person transfers his assets in name of others to reduce his liability of wealth tax. To stop such tax avoidance, provision of deemed asset has been made. In computing the net wealth of an assessee, the following assets will be included as deemed assets u/s 4. Assets transferred by one spouse to another - The asset is transferred by an individual after March

31, 1956 to his or her spouse, directly or indirectly, without adequate consideration or not in connection with an agreement to live apart will be deemed asset [Section 4(1)(a)(i)] If an asset is transferred by an individual to his/her spouse, under an agreement to live apart, the provisions of section 4(1) (a) (i) are not applicable. The expression to live apart is of wider sub-clause. connotation and even the voluntary agreements to live apart will fall within the exceptions of this

Assets held by minor child - In computing the net wealth of an individual, there shall be included the value of assets which on the valuation date are held by a minor child (including step child/adopted child but not being a married daughter) of such individual [Section 4(1)(a)(ii)] [excluding the assets of minor child so includible under section 4(1)] is greater. The net wealth of minor child will be included in the net wealth of that parent whose net wealth

Assets transferred to a person or an association of persons - An asset transferred by an individual of transferor [Section 4(1)(a)(iii)]

after March 31, 1956 to a person or an association of person, directly or indirectly, for the benefit Assets transferred under revocable transfers - The asset is transferred by an individual to a asset of transferor [Section 4(1)(a)(iv)]

of the transferor, his or her spouse, otherwise than for adequate consideration, is deemed asset person or an association of person after March 31, 1956, under a revocable transfer is deemed Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763 Page 23 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Assets transferred to sons wife [Section 4(1)(a)(v)] - The asset transferred by an individual after May 31, 1973, to sons wife, directly or indirectly, without adequate consideration will be deemed asset of transferor [Section 4(1)(a)(iv)] Assets transferred for the benefit of sons wife - If the asset is transferred by an individual after

May 31, 1973, to a person or an association of the immediate or deferred benefit of sons wife, the transferor [Section 4(1)(a)(vi)]. Interest of partner- Where the assessee (may or may not be an individual) is a partner in a firm or a member of an association of persons, the value of his interest in the assets of the firm or an Admission of minor to benefits of the partnership firm - If a minor is admitted to the benefits of III. partnership in a firm, the value of his interest in the firm shall be included in the net wealth of parent determined in the manner specified in Schedule association shall be included in the net wealth of the partner/member. For this purpose, interest down in Schedule III to the Wealth-tax Act [Section 4(1) (b)].

whether directly or indirectly, without adequate consideration, it will be treated as deemed asset of

of partner/member in the firm or association of persons should be determined in the manner laid

of minor in accordance with the provisions of section 4(1)(a)(ii) [see para 546.2]. It will be

Conversion by an individual of his self-acquired property into joint family property - If an individual belonging to his Hindu undivided family, or if he transfers his separate property to his Hindu property is includible in his net wealth [Section 4(1A)] undivided family, directly or indirectly, without adequate consideration, the converted or transferred property shall be deemed to be the property of the individual and the value of such

is a member of a Hindu undivided family and he converts his separate property into property

If there was such transfer and if the converted or transferred property becomes the subject-matter of transferor and is includible in his net wealth. Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

a total or a partial partition among the members of the family, the converted or transferred property

or any part thereof, which is received by the spouse of the transferor, is deemed to be the asset of the Page 24 of 31

MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Gifts by book entries - Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift, or by an individual, or a Hindu undivided family, or a firm or an association of persons, or a body of individuals with whom he has delivered to the other person at the time the entries were made [Section 4(5A)] business connection, the value of such gift will be included in the net wealth of the person making the gifts, unless he proves to the satisfaction of the Wealth-tax Officer that the money had actually been Impartible estate - For the purpose of the Wealth-tax Act, the holder of an impartible estate shall be

deemed to be the owner of all the properties comprised in the estate [Section 4(6)]

Property held by a member of a housing society - Where the assessee is a member of a co-operative housing society and a building or part thereof is allotted or leased to him, the assessee is deemed to be the owner of such building and the value of such building is includible in computing his net of persons [Section 4(7)]

wealth. In determining the value of such building, any outstanding installments, payable by the assessee to the society towards the costs of such house, are deductible as debt owed by the assessee.

The above rules are also applicable if the assessee is a member of a company or an association Property held by a person in part performance of a contract [Section 4(8)] - A person who is allowed

to take or retain possession of any building or part thereof in part performance of a contract of the acquire any rights, excluding any rights by way of a lease from month to month or for a period not referred to in section 269UA(f) of the Income-tax Act.

nature referred to in section 53A of the Transfer of Property Act, 1882. Similarly, a person can In above cases, the assets are taxable in the hands of beneficial owners, in the same manner in which they are taxed under the Income-tax Act: exceeding one year, in or with respect to any building or part thereof, by virtue of transaction as is

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

1-3 Assets which are exempt from tax

Property held under a trust - Any property held by an assessee under a trust or other legal obligation for any public purpose of charitable or religious nature in India is totally exempt from tax. [Section 5(i)]. Business assets held in trust, which are exempt - The following business assets held by as assessee carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central the beneficiaries of the institution (c) the business is carried on by an institution, fund or trust specified in sections 10(23B) or 20(23C) of the Income-tax Act. Any other business assets of a public charitable/religious trust are not exempt. wholly for charitable purposes and the work in connection with the business is mainly carried on by

The following assets are exempt from wealth-tax, as per section 5.

under a trust for any public charitable/religious trust are exempt from tax - (a) where the business is Government in this behalf in the Official Gazette (b) the business is carried on by an institution

family, his interest in the family property is totally exempt from tax [Section 5(ii)]. has been recognised as a heirloom is totally exempt from tax [Section 5(iv)]

Coparcenary interest in a Hindu undivided family - If the assessee is a member of a Hindu undivided Residential building of a former ruler - The value of any one building used for the residence by a former ruler of a princely State is totally exempt from tax [Section 5(iii)] Former rulers jewellery Jewellery in possession of a former ruler of a princely State, not being his personal property which

The jewellery shall be permanently kept in India and shall not be removed outside India except for a purpose and period approved by the Board. Reasonable steps shall be taken for keeping that jewellery substantially in its original shape. Reasonable facilities shall be allowed to any officer of the Government, or authorized by the Board, to examine the jewellery as and when necessary. Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 Assets belonging to the Indian repatriates - Assets (as given below) belonging to assessee who is a person of Indian origin or a citizen of India, who was ordinarily residing in a foreign country and who has returned to India with intention to permanently reside in India, is exempt. A person shall be undivided India.

deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in After his return to India, following shall not be chargeable to tax for seven successive assessment and (c) above within one year prior to the date of his return and at any time thereafter [Section 5(v)] years - (a) moneys brought by him into India (b) value of asset brought by him into India (c) moneys date of his return to India and (d) value of assets acquired by him out of money referred to in (a) part of house or a plot of land not exceeding 500 sq. meters in area is exempt. A house is qualified for

standing to the credit of such person in a Non-resident (External) Account in any bank in India on the One house or part of a house - In the case of an individual or a Hindu undivided family, a house or a exemption, regardless of the fact whether the house is self-occupied or let out. In case a house is

owned by more than one person, exemption is available to each co-owner of the house [Section 5(vi)]

Q.6 What is meant by full value of consideration? How short term capital gains and long term capital gains are computed using full value of consideration? [10 Marks]
Full value of consideration means & includes the whole/complete sale price or exchange value Solution: or compensation including enhanced compensation received in respect of capital asset in transfer. The following points are important to note in relation to full value of consideration. The consideration may be in cash or kind. It may be received or receivable. The consideration received in kind is valued at its fair market value. The consideration must be actual irrespective of its adequacy.

The expression full value means the whole price without any deduction whatsoever and it cannot Full value of consideration Sikkim Manipal University Directorate of Distance Learning Naseer Khan Pathan - 531010763

refer to adequacy or inadequacy of price. The consideration for the transfer of capital asset is what

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 the transferor receives in lieu of the asset he parts with, namely money or money s worth is m. It is not necessarily always the market value of the asset on the date of transfer. However, at many places, reference is made to Free Market Value (FMV).

It refer to expenses necessary for effecting transfer, e.g. brokerage, commission paid for securing a Expenses incurred wholly and exclusively in connection with such transfer purchaser, cost of stamp, traveling expenses, incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation, etc. 1. Short-term capital gain The profits and gains arising from the transfer of a short-term capital asset are treated as short-term

capital gains and included in the total income of the taxpayer for taxation at the rates applicable to

him. Where a taxpayer incurs a loss from the transfer of a short-term capital asset (such loss is termed as short-term capital loss.) the same is allowed to be set off only against gain from the remains unabsorbed, the same is allowed to be carried forward for set off only against gain from the head other sources. transfer of another short-term and long-term capital asset in the subsequent year. However, such

carry forward is restricted for a period of eight years. In other words, a short-term capital loss cannot be set off against income from salaries, house property, business or profession or income under the Similarly, the profits and gains arising from the transfer of a long-term capital asset are treated as 2. Long-term capital gain

transfer of another short-term or long-term capital asset. In a case where the short-term capital loss

capital gain is subjected to a concessional rate of tax to eliminate the bunching effect.

period of time, these could turn out to be illusory in real terms. Accordingly, the cost of the asset is adjusted for inflation during the period of holding. The increased cost is set-off against the sale consideration of the long-term capital asset to determine the long term capital gain. Such long-term

long-term capital gains. Since long-term capital gains represent accumulation of income over a

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Cost of Acquisition (COA) means any capital expense at the time of acquiring capital asset under COST OF ACQUISITION transfer, i.e., to include the purchase price, expenses incurred up to acquiring date in the form of registration, storage etc. expenses incurred on completing transfer. acquisition. In other words, cost of acquisition of an asset is the value for which it was acquired by the assessee. Expenses of capital nature for completing or acquiring the title are included in the cost of Indexed Cost of Acquisition = COA X CII of Year of transfer CII of Year of acquisition

The indices for the various previous years are given below: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 100 109 116 125 133 140 150 161 172 182 199 223 244 259 15 16 17 18 19 20 21 22 23 24 25 26 27

S.No. Fin. Year Cost Inflation Index S.No. Fin. Year

1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Cost Inflation Index 281 305 331 351 389 406 426 447 463 480 497 519 551

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010 If capital assets were acquired before 1.4.81, the assessee has the option to have either actual cost of on 1.4.81 then the indexation will also be done as per the CII of 1981 and not as per the year of acquisition. COST OF IMPROVMENT

acquisition or fair market value as on 1.4.81 as the cost of acquisition. If assesses chooses the value as

Cost of improvement is the capital expenditure incurred by an assessee for making any addition or improvement in the capital asset. It also includes any expenditure incurred in protecting or curing the title. In other words, cost of improvement includes all those expenditures, which are incurred to increase the value of the capital asset. Indexed Cost of improvement = COA X CII of Year of transfer CII of Year of improvement

Any cost of improvement incurred before 1st April 1981 is not considered or it is ignored. The reason behind it is that for carrying any improvement in asset before 1st April 1981, asset should improvement made in the asset. have been purchased before 1st April 1981. If asset is purchased before 1st April we consider the fair market value. The fair market value of asset on 1st April 1981 will certainly include the Provisions for computation of Capital Gain Provisions under section 48 The income under the head Capital Gains shall be computed by deducting the following from the full value of the consideration received or accrued as a result of the transfer of the capital asset : The cost of acquisition of the asset and the cost of any improvement thereto. Expenditure incurred wholly and exclusively in connection with such transfer.

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MBA Third Semester: MB0012 Assignment Set 1 - (60 Marks) Taxation Management 4 Credits Book ID-B1210 30th September 2010

Computation of Short Term Capital Gains From full value of consideration, deduct Cost of acquisition

Expenditure incurred wholly and in exclusively Cost of any improvement of asset

Computation of Long Term Capital Gains From full value of consideration, deduct

Indexed cost of acquisition of asset

Indexed cost of any improvement of asset

Expenditure incurred wholly and in exclusively connection with the transfer

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