You are on page 1of 12

TAXATION MANAGEMENT

Q1. List out items that are included in agriculture income under Sec 2(1A).
Explain the meaning of tax evasion and tax avoidance.

Ans: Agricultural Income (Sec. 2(1A)


Agricultural income is totally exempt from liability to income tax.
However, agricultural income is factor in determining the tax on the
non-agricultural income of an Individual, Hindu undivided family,
Association of persons and Body of individuals whose total income
(excluding agricultural income) exceeds the minimum taxable limit and
the agricultural income exceeds Rs. 5,000.

Items that are included in agriculture income under Sec 2(1a) are
as follows:

1) (a) Any rent or revenue derived from land situated in India. When
one person grants to another a right to use his land situated in
India for agricultural purposes; the former receives from the
latter rent or revenue in consideration of such user. Such rent or
revenue is treated as agricultural income.

(b) used for agricultural purposes. It means cultivation of a field,


tilling of the land, watering it, sowing of the seeds, planting and
similar operations on the land.

2) (a) Income derived from such land by agricultural operations.

(b) Income derived from such land by the performance of any


process ordinarily employed by a cultivator to render the
produce raised by him fit to be taken to market. The process
employed in curing of coffee, flue curing of tobacco, ginning of
cotton, etc, is such a process.

SUBJECT CODE-MFOO03, SET-1 Page 99


TAXATION MANAGEMENT
(c) Income derived from such land by a sale by a cultivator or
receiver of rent-in-kind the produce raised or received by him.

3) Income from farm house. The income from a farm house is treated
as agricultural income if the following conditions are satisfied.
(a) It is situated on or in the immediate vicinity of the agricultural
land

(b) The building is, by reason of his connection with the land,
used as dwelling house or a store-house or an out-house by
the cultivator or receiver of rent-in-kind.

(c) The land is either assessed to land revenue in India or is


subject to local rate assessed and collected by the officers of
the government, or alternatively

(d) If the land is situated in ‘non-urban’ area, i.e, an area which


though, is with in municipality or cantonment board
jurisdiction, has a population of less than 10,000 or is beyond
a notified distance (maximum 8 kilometer) from the local
limits of any such municipality or cantonment board.

Examples of Agricultural Incomes:


i) Income from growing flowers and creepers.
ii) Rent from agricultural land.
iii) Profit on sale of standing crops or produce after harvest by the
cultivating owner or tenant of agricultural land.
iv) Income from leasing out agricultural land for grazing cattle required
for agricultural purposes.
v) Interest on capital received by a partner from his firm engaged in
agricultural operations.
vi) Conversion of latex into smoked sheets.

SUBJECT CODE-MFOO03, SET-1 Page 100


TAXATION MANAGEMENT
vii) Rent from agricultural land received from sub-tenants by the
mortgagee in possession.
viii) Income from sale of mulberry leaves grown on agricultural land.
ix) Compensation received from an insurance company for damages
caused by hailstorm or floods to the tea plantations.
x) Income from conversion of timber into planking.

Tax Evasion
In the tax evasion, facts are deliberately misrepresented and tax
liability is understated by employing the following means:
a) concealment of income
b) inflation of expenses
c) falsification of accounts
d) violation of rules
These devices are unethical. Evasion, once proved, not only
attracts heavy penalties but may also lead to prosecution.

Tax avoidance
Tax avoidance can be defined as the art of dodging tax without
breaking the law. Objective of tax avoidance is minimizing the
incidence of tax by adjusting the affairs in such a manner that
although it is with in the four corners of the taxation laws but the
advantage is taken by finding out loopholes in the laws. But where
the main purpose is to defer, reduce or completely avoid the tax
payable under the law.

Q2. (A.) After serving for 28 years 6 months and 4 days AKRAM retired
from Y Ltd. on 31st August. He received Rs. 3,25,000 as gratuity. His
last month basic was Rs. 10,000 and DA Rs 3,000.He is covered
under the Payment of Gratuity Act. Compute the taxable gratuity.
Ans:
(A.) Akram who retired from Y Ltd is covered under Payment of
Gratuity Act 1972

SUBJECT CODE-MFOO03, SET-1 Page 101


TAXATION MANAGEMENT
Hence Least of the following will be exempted from income tax
i) One half months salary for each completed year of service
Salary = Rs10000/- +Rs3000/- =Rs13000/-
Years of service = 29 years
Exempted gratuity = 15/26 *13000*29 = Rs217500/-
ii) Rs350000/-
iii) Gratuity Actually Received =Rs325000/-
So Gratuity exempted from tax =Rs217500/-
Hence Taxable Gratuity =Rs325000 – Rs217500/
= Rs107500/-
(B.) GOVINDA retired from service on 31st March and received a
commuted pension of Rs. 1,60,000. Find out taxable commuted
pension:
a) if he is in receipt of gratuity
b) if he not in receipt of gratuity.

Ans: Commuted pension Received by Govinda= Rs.1,60,000.

a) if he is in receipt of gratuity then as per section 10(10A)


Exemption from income tax =1/3* Rs.1,60,000.0
=Rs53333.33/-
Taxable commuted pension =Rs160000/ -Rs53333.33
=Rs106666.67/-

b) if he is not in receipt of gratuity then as per section 10(10A)


Exemption from income tax =1/2* Rs.1,60,000.0
=Rs80000/-
Taxable commuted pension =Rs160000/ -Rs80000/
=Rs80000/-

Q3. What are perquisites? List out tax free perquisites.

SUBJECT CODE-MFOO03, SET-1 Page 102


TAXATION MANAGEMENT
Ans: Perquisites:
The term ‘perquisite’ means any benefit, attached to an office or
position in addition to salary or wages. It may be given in cash or in
kind. if it is given in kind it is measured in terms of money and added
to find out employee’s salary for tax purpose. The perquisites are
taxable under the head salary only if they are
(a) allowed by an employer to an employee;
(b) allowed during the continuance of employment;
(c) directly dependent on service;
(d) resulting in the nature of personal advantage to the employee.

Perquisites received from a person other than employer, are taxable


under the head ‘profits and gains of business or profession’ or ‘income
from other sources’.

Perquisites as defined in the Act [Sec. 17(2)]


1) Rent free accommodation [Sec. 17(2) (i)]
2) Accommodation at concessional rent [Sec. 17(2) (ii)]
3) Perquisites taxable only under specified cases [Sec. 17(2) (iii)]
4) Employee’s obligation met by the employer [Sec. 17(2) (iv)]
5) Any sum payable by the employer, weather directly or through a
fund other than a recognised provident fund or an approved
superannuation fund of Deposit Linked Insurance Fund, to effect
as insurance on the life of employee or in respect of a contract for
an annuity on the life of the employee. [Sec. 17(2) (v)]
6) Notified Fringe Benefits [Sec. 17(2) (vi)]
In terms of privision of [Sec. 17(2) (vi)], the value of the following
benefits or amenities shall be included in the income of an
employee:
a) Interest free or concessional loan
b) Use of any movable asset
c) Transfer of any movable asset

SUBJECT CODE-MFOO03, SET-1 Page 103


TAXATION MANAGEMENT
Tax-free Perquisites:
The value of the following perquisites shall not be included in the
salary income of any employee:
 Medical benefits
Fixed medical allowance is always taxable.
If bills are in the name of an employee and the employer makes
payment, then it is taxable in the hands of all employees, whether
specified or not.
Medical facilities in the hospitals etc. maintained by the employer
are tax free.
Medical bills incurred or reimbursed by the employer for the
treatment in hospitals etc. maintained by Govt. or local authority or
any approved hospitals is not chargeable in the hands of any
employee.
Medical bills incurred or reimbursed by the employer fir the
treatment in private hospitals etc. are tax free up to Rs. 15,000 in
aggregate per year.

Medical facilities outside India for the treatment of employee or any


member of the family of such employee are also tax free provided
the expenditure shall be permitted by R.B.I.
Cost on travel of employee/any member of his family and one
attendant who accompanies the patient in connection with the
treatment outside India shall also be tax free provided, the
employee’s gross total income before including the expenditure on
traveling does not exceed Rs. 2,00,000.
Medical bills incurred or reimbursed by the employer for the
treatment of prescribed diseases, approved by the chief
commissioner are also tax free.

SUBJECT CODE-MFOO03, SET-1 Page 104


TAXATION MANAGEMENT
Medical insurance premium paid or reimbursed by the employer is
tax free.
 Tea or snacks or free food or beverages provided in office or
factory (work place) or through paid vouchers which are not
transferable and usable only at eating joints.
 Facility of motor car(s)
 Residential accommodation provided at remote area.
 Facility of club or health club and similar facilities.
 Expenses on telephones including mobile phone.
 Employer’s contribution of Staff Group Insurance Scheme
 Scholarships to employees or their children paid by the
employer.
 The facility of conveyance provided by the employer from
residence to place of employment and vice-versa.
 Refresher courses, etc. If the employer pays fees for an
employee taking refresher courses or management course in order
to enable, the employee to perform his services more efficiently.
Such expenses are treated as scholarship.
 Free Rations to Armed Personnel. The value of free rations
given to the armed forces personnel.
 Facility of guest house or holiday home
 Welfare expenses
 Entertainment expenses
 Free or confessional ticket provided by the employer (engaged
in the business of transport) for private journeys of the employee or
his family members.
 Perquisites to Government Employees posted abroad. Any
perquisites allowed outside India by the Government of India to a
citizen of India for rendering service outside India. This exemption
is not available to non-government employees and also to those
who are not citizens of India.

SUBJECT CODE-MFOO03, SET-1 Page 105


TAXATION MANAGEMENT

 Rent-free house and conveyance facility provided to High Court


and Supreme Court Judges
 The value of rent-free furnished residence provided to a
Minister, specified officers of Parliament or a Leader of the
Opposition in Parliament.
 Gifts in Kind.
 Laptops and computers provided by the employer for personal
use of employee or any member of his household.
 Interest-free or confessional loan, if the amount of loan in
aggregate does not exceed Rs. 20,000 during the previous year.
 Transfer without consideration to an employee of a movable
asset (other than computers electronic items and car) by the
employer after using it for a period of ten years or more.
 Periodicals and journals required for discharge of work.
 Leave travel concession u/s. 10(5).
 Issue of share etc., free of cost or at a confessional price under
employee’s Stock Option Plan- The value of any benefit provided
by a company free of cost at a confessional rate to its employees
by way of allotment of shares, debentures or warrants directly or
indirectly, under the Employees’ Stock Option Plan or Scheme
offered to employees in accordance with the guidelines issued by
the Central Government.
 Where loans are made available for medical treatment in
respect of diseases specified in Rule 3A (e.g., cancer, tuberculosis,
AIDS, etc) The value shall be taken as nil. However, the exemption
shall not apply to so much of the loan as has been reimbursed to
the employee under any medical insurance scheme.

SUBJECT CODE-MFOO03, SET-1 Page 106


TAXATION MANAGEMENT

Q.4 Mr. BALU owns four houses. The particulars regarding the
houses are as follows::

House House House House


1 2 3 4
Municipal valuation 15000 18000 20000 -
Fair rent 16000 15000 25000 25000
Standard rent 10000 16000 - 30000
Actual rent received 9000 20000 18000 20000

Determine the gross annual value of each of the four houses for the
AY 2009-2010.
Ans:
Determination of Gross Annual Value.

Sr House House House House


No. 1 2 3 4
1 Fair rent Value 16000 15000 25000 25000
2 Municipal valuation 15000 18000 20000 -
3 Higher of above 16000 18000 25000 25000
( 1 & 2)
4 Standard rent 10000 16000 - 30000
5 Lower of above(Notional 10000 16000 25000 25000
Rent)(lower of 3 & 4 )
6 Actual rent received 9000 20000 18000 20000
7 GAV(higher of 5 & 6) 10000 20000 25000 25000

SUBJECT CODE-MFOO03, SET-1 Page 107


TAXATION MANAGEMENT
Q5. Write short notes on:
a. Tax planning on buildings self-occupied.
b. Tax planning on leave salary.
Ans:
a. Tax planning on buildings self-occupied:
The building self-occupied by the owner (an individual or HUF) for
residential purposes can be arrived as under:

House or part of a house occupied by the owner for full previous year
for the purposes of his own residence Sec. 23(2)(a): Where the
property consists of one house in the occupation of the owner for his
own residence, the annual value of such house shall be taken to be
NIL
Deduction from Annual Value: Interest on borrowed capital.
Sec.24(b)
Interest on borrowed capital (of the current year and pre- construction
period) is deductible. However, it is subject to a maximum ceiling given
below:
a) Where such property has been acquired, constructed, repaired,
renewed or reconstructed with borrowed capital, the maximum limit for
deduction of interest shall be Rs. 30,000.
b) Where such house property is constructed/acquired with capital
borrowed after 31.3.1999, the deduction on account of interest shall be
allowed up to Rs. 1,50,000. The acquisition or construction should be
completed within three years from the end of the financial year in
which capital was borrowed.

Tax Planning
Those who are staying in rented premises can think of availing loan
from banks or approved institutions. They have the pleasure of staying
in their own house. Not bothering to pay monthly rent, they can reduce
their taxable income substantially. Even their disposable income may
not decrease, since they need not pay monthly rent. Even the effective

SUBJECT CODE-MFOO03, SET-1 Page 108


TAXATION MANAGEMENT
rate of interest may be reduced, because of tax saving caused by the
interest payment (or due). (of course this requires detailed
calculations.)
House self-occupied for part of previous year, let out for part of
previous year [Sec. 23(2)(b)]

House self-occupied for part of the previous year and let-out for part of
the previous year: Sec. 23(3): The annual value of the house shall
NOT be nil. Such a house will be treated as let-out house annual value
will be determined u/s 23(1)

More than one house in the occupation of the owner [Sec. 23(4)
Where the owner of the houses occupies more than one house for his
residence for full previous year, except one (at his option), all other
houses are deemed as let out. The income(s) of deemed let out
house(s) shall be computed in the usual manner.
The following points will be considered:
 The question of house remaining vacant or unrealized rent will
not arise.
 The municipal tax paid can be claimed.
 The expected rent will be the gross annual value.
 Full amount of interest on loan for acquisition, construction etc.
will be allowed.

b. Tax planning on leave salary:


Leave Salary or Encashment of earned leave: Cash equivalent of
leave salary payable to an employee of the central and the sate
government in respect of the earned leave at his credit at the time of
his retirement whether on superannuation or otherwise (e.g. by
resigning), is exempt from tax.

The least of the following is exempted from tax:


Particulars Amount

SUBJECT CODE-MFOO03, SET-1 Page 109


TAXATION MANAGEMENT

1. Maximum of 10 month’s salary on the basis of the


average salary drawn by the employee during 10 xxx
months preceding his retirement on superannuation
or otherwise
2. Average salary x Approved Period Maximum or xxx
Statutory limit Rs. 3,00,000
3. Amount actually received xxx

The Approved period: is defined as Earned leave entitlement cannot


exceed 30 days for every year of actual service
Salary : is defined as Basic pay + Dearness Allowance (given in terms
of employment) + Commission achieved on fixed percentage of
turnover

Tax Planning
If a Govt. employee is due for retirement shortly, it is better for him not
to encash his salary while he is in service. This is because he can
avoid paying tax on leave encashment which he receives at the time of
retirement. Even an employee in private service gets exemption for a
major part of the amount received as leave encashment. In this
connection employee should also consider the loss of interest on the
amount which is not taking to save tax.

SUBJECT CODE-MFOO03, SET-1 Page 110