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Q1) Define and explain the following as per provisions of Income

Tax Act, 1961.


A. Assessee: - [Section 2(7)]
 Assessee means a person by whom any tax or any other sum of money is
payable under this Act and includes the following: -

i. Every person in respect of whom any proceeding under the Income Tax Act has
been taken for the Assessment of his income or assessment of fringe benefits
or the income of any person in respect of which he is assessable or to
determine the loss sustained by him or by such other person, or the amount of
refund due to him or to such other person.

ii. A deemed Assessee i.e. a person who is treated as an assessee – this would
include the legal representative of a deceased person or the agent of a person
who is a non-resident or the trustee of a trust.

iii. Every person who is deemed to be an assessee in default – A person is said to


be an assessee in default if he fails to comply with the duties imposed upon
him under the Income Tax Act.

For eg: A person, paying interest to another person, is responsible for


deducting tax at source on this amount and to deposit the tax with the
government. If he does not deduct the tax, or deducts the tax but does not
deposit it with the government, he shall be deemed to be an assessee in
default.

B. Income: - [Section 2(24)]


 Income Includes –

a) Profits and gains

b) Dividend

c) Voluntary contributions received by a charitable or religious trust or institution

d) Value of any perquisite or profit in lieu of salary taxable u/s 17 and special
allowance or benefit specially granted either to meet personal expenses or for
the performance of duties of an office or an employment of profit.

e) The value of any benefit or perquisite obtained from a company by director or a


person who has substantial interest in the company or by relative of a director or
such person.
f) The value of any benefit or perquisite (whether convertible into money or not)
obtained by any representative assessee for the benefit of the beneficiary (which
the beneficiary would have ordinary been required to pay).

g) Export incentives

h) Any interest, salary, bonus, commission or remuneration earned by a partner of


a firm from such firm.

i) Any capital gains chargeable u/s 45.

j) Winnings from lotteries, crossword puzzles, races including card games and
other games of any sort or from gambling or betting of any form or nature
whatsoever.

(i) Lottery includes winnings from prizes awarded to any person by


draw of lot or by chance or in any other manner whatsoever under
any scheme or arrangement by whatever name called.

(ii) “Card game and other game of any sort” includes any game show
and entertainment programme on television or electronic mode, in
which people compete to win prizes or any other similar game.

k) Any sum received by the assessee from his employees towards welfare fund
contributions such as provident fund, superannuation fund, etc.

l) Any sum received under a keyman insurance policy including the sum allocated
by way of bonus on such policy.

m) The profits & gains of any business of insurance carried on by Mutual Insurance
Company or by a co – operative society.

n) Profits & gains of any business of banking (including providing credit facility)
carried on by cooperative society with its member.

o) Any sum whether received or receivable, in cash or kind, under an agreement for
not carrying out any activity in relation to any business or not to share any know
– how, patent, copyright, trade – mark, license franchise or any other business or
commercial right of similar nature.
p) Aggregate amount exceeding Rs. 50,000/- received from any person/persons
without consideration upto 30/09/2009, by an individual or HUF, subject to
certain exceptions.

q) Gifts or deemed gifts exceeding Rs. 50,000/-, received by an individual or HUF


on or after 01/10/2009, subject to certain exceptions.

C. Previous Year [Section 2(34) & 3] and Assessment Year


[Section 2(9)]: -
a. Previous Year: - As per section 2(34), previous year means the
previous year as defined in section 3. According to section 3, previous year
means the financial year immediately preceding the assessment year.

Income Tax is payable on the income earned during the previous year and it is
assessed in the immediately succeeding financial year which is called an
assessment year.

Therefore, the income earned during the previous year – 1st of April, 2010 to
31st March, 2011, will be assessed or charged to tax in the assessment year
2011-2012.

W.e.f. assessment year 1989-90, all assessee are required to follow a uniform
previous i.e. the financial year (1st April to 31st March) as their previous year.
Previous year, for Income Tax purpose, will be financial year, which ends on
31st March although the assessee can close his books of account on any other
day. E.g.: - An assessee may maintain books of accounts on calendar year
basis but his previous year, for Income Tax purpose, will be financial year and
not calendar year.

In case a business or profession is newly set up or new source of income comes


into existence during the financial year, the period beginning from the date of
setting up of the business or from the date the new source came into
existence, and ending on the last day of that financial year i.e. 31 st March shall
be first previous year for that business or source of income. E.g.: - If a new
business is set up on 21st of October, 2010, then the first previous year for that
business will be the period starting from 21 st October, 2010 to 31st March,
2011.

b. Assessment Year: - Assessment year means the period of twelve


months commencing on the first day of April every year. It is therefore, the
period from 1st April to 31st March. E.g.: - The assessment year 2011-2012 will
commence on 1st of April, 2011 and end on 31st of March, 2012. It is the year in
which the total income earned during the relevant previous year is assessed.
Q2) Explain the provisions of Income Tax Act, 1961 regarding
Non Resident. [Section 6(1)]
 Residential Status of An Individual:

Non Resident:

If an individual does not satisfy at least one of the basic conditions, he shall be
considered as Non Resident.

Basic Conditions:

An individual is said to be Non Resident in India in any previous year if he does not
fulfils any one of the following two basic conditions:

(a) He is in India in that year for a period or periods amounting in all to 182 days
or more.

(b) He is in India for a period or periods amounting in all to 60 days or more


during the previous year and 365 days or more during the 4 years proceeding that
previous year.

Exception:

In the case of following special individuals, the basic condition (b) above is not
applicable:

(a) An Indian citizen who leaves India during the previous year for the purpose of
employment outside India or an Indian citizen who leaves India during the
previous year as a member of the crew of an Indian ship.

(b) An Indian citizen or a person of Indian origin, who comes on visit to India during
the previous year.

These special individuals shall not be treated as resident unless their stay in India is
at least 182 days during the previous year.

Important Points:

 A person is said to be of Indian origin if he, or either of his parents or any of


his grandparents (both paternal and maternal) was born in undivided India.
[Section 115C]

 Employment also includes self employment.

Q3) Explain the provisions of Income Tax Act, 1961 regarding


Perquisites taxable only in case specified employees. [Section
17(2) (iii)]
 All monetary obligations of the employee discharged by the employer are
perquisites, which are taxable in the hands of all employees. But sometimes, the
employer, instead of making the payment in respect of such monetary obligations
or reimbursing such amount to the employee, provides the perquisite in the form
of a facility to the employee. Such facility will be a perquisite only for specified
employees mentioned in section 17(2) (iii). E.g.: - If a watchman/Sweeper is
engaged by the employee and his wages are reimbursed/paid by the employer, it
is a perquisite for all employees because it is the duty of the employee to pay the
salary of his watchman/Sweeper. On the other hand, if a watchman/Sweeper is
engaged by the employer and facility of his services is provided to the employee,
it will be a perquisite only for specified employees.

Q4) Explain the provisions regarding exemption for gratuity u/s


10 of the Income Tax Act, 1961. [Section 10(10)]
 Gratuity is a lump sum amount paid to an employee, on the basis of the duration
of his employment, on termination of service due to retirement, death etc. It is
exempt from tax, either fully or partly, depending on the type of employee
receiving it. Gratuity received while still in service is not exempt, it is taxable as
salary.

 Death cum Retirement Gratuity Exemption

Death cum Retirement Gratuity is Exempt in case of Government


Employees.
[Important point: For this purpose, government employee means employees of
Central or State Government or employees of local authority. It does not include
employees of statutory corporation.]

For others: -

Exemption in case of
Exemption in case of any other
Particulars employee covered by
employee
payment of Gratuity Act, 1972
What is the 1. 15 days salary X period of 1. ½ month salary X period of
amount of service service
exemption? 2. Actual gratuity received 2. Actual gratuity received
3. Maximum Rs.3,50,000 3. Maximum Rs.3,50,000
Whichever is less Whichever is less
How to Basic + D.A. (R) + D.A. (Ord.) Average Salary in 10 months
calculate salary last drawn preceding the month of
for the purpose retirement, taking only Basic +
of exemption? D.A. (R) and turnover
commission
How to Above Salary X 15 Above Salary X ½
calculate 15 26
days salary / ½
months salary?
How to Any part of a year more than Any part of a year more than,
calculate period 6 months shall be taken as less than or equal to 6 months
of service one year shall be totally ignored.

 If a employee receives gratuity from more than one employer, in the same
previous year, the total exemption cannot exceed the limit notified by
government (i.e. Rs. 3,50,000)
 Similarly, the notified ceiling applies to any gratuity received and exempted
in any earlier previous years by the employee. Any such gratuity exempted
earlier shall be reduced from the ceiling amount of Rs. 3, 50,000, and only the
balance amount can be claimed, subsequently.

In case of employees covered by Gratuity Act, the following points should be noted:

1) In case of employees of seasonal establishment, exemption shall be for 7


days salary instead of 15 days as above.

2) In case of piece - rated employees, 15days salary shall be calculated on the


basis of average of total wages (excluding overtime) received for a period of 3
months immediately preceding the termination of his employment.

Eg: -

Q5) Distinguish between short term and long term capital asset.

 Capital Assets are divided into two types –


a) Short term capital assets

b) Long term capital assets

a) Short term capital assets: -


A capital asset held by an assessee for 36 months or less immediately preceding
the date of its transfer is known as a short term capital asset. However, the
following assets shall be treated as short term capital assets if they are held for 12
(twelve) months or less (instead of 36 months mentioned above) immediately
preceding the date of its transfer:

i. Equity or preference shares held in a company (whether listed or unlisted).

ii. Securities listed in a recognized stock exchange in India.

iii. Units of the unit trust of India or units of a mutual fund specified u/s 10(23D)
(whether listed or unlisted).

iv. Zero coupon bonds.

b) Long term capital assets: -


It means a capital asset, which is not a short term capital asset. In other words, if
the asset is held by the assessee for more than 36 months or 12 months, as the
case may be, such an asset will be treated as long term capital asset.

Q6) State the various expenses & allowances that are deductable
under Income Tax Act, 1961 to compute Income from House
Property.
 Municipal Taxes: - Provided that where the property is in the occupation
of a tenant, the taxes levied by any local authority in respect of the property
shall, to the extent such taxes are borne by the owner, be deducted (irrespective
of the previous year in which the liability to pay such taxes was incurred by the
owner according to the method of accounting regularly employed by him) in
determining the annual value of the property of that previous year in which such
taxes are actually paid by him.

Section 24 Deduction: -

a. Standard Deduction: From the net annual value computed, the


assessee shall be allowed a statutory deduction of a sum equal to 30% of the net
annual value.

b. Interest on loans:
i. Interest payable on moneys borrowed for the purpose of acquisition,
construction, renovation, repairing or reconstruction can be claimed as
deduction.

ii. Interest relating to the year of completion of construction can be fully


claimed in that year irrespective of the date of completion.

iii. Interest accrued during the construction period proceeding the year of
completion of construction can be accumulated and claimed as deduction
over a period of 5 years in equal installments commencing from the year of
completion of construction.

iv. If a fresh loan is raised to repay the original loan taken for purchase,
construction, etc., the interest payable in respect of second loan would also
be admissible if such fact is proved to the satisfaction of the assessing officer.

v. Where a person acquires a property and pays only part of the sale
consideration, interest payable on the unpaid purchase price qualifies for
deduction in the computation of income from such property.

Self occupied property


The annual value of a self occupied property can be adopted as Nil. Similarly, if a
property cannot be actually occupied by reason of the fact that owing to his
employment, business or profession carried on at any other place, the assessee
has to reside at that other place in a building not belonging to him, the annual
value of such house shall also be taken to be Nil. So municipal taxes paid should
not be deductable. The fixed percentage of 30% deductible u/s 24 is also not
available. However interest on loans borrowed, up to a maximum of Rs. 30,000
shall be allowed as a deduction.

Q7) Explain the condition to be satisfied while claiming


deductable u/s 37(1) of Income Tax Act, 1961.
 Section 31(1) is a residuary provision. It applies to expenditure not covered by
any of the deductions discussed above. The expenditure must satisfy the
following conditions in order to claim deduction under this provision:

Any Expenditure,

1. not being expenditure of the nature described in section 30 to 36;

2. not being in the nature of capital expenditure;

3. not being in the nature of personal expenditure of the assessee;

4. laid out or expended wholly or exclusively for the purpose of the business or
profession; and

5. not be for a purpose which is an offence or which is prohibited by law (e.g. bribes
paid).

These conditions are explained below:

1. Not Covered u/s 30 – 36: - If any expenditure is covered by section 30 to


36, it is allowable under that section and cannot be claimed under this
residuary section. Thus, current repairs covered by section 30 cannot
claimed u/s 37, if other conditions are satisfied. Similarly, while family
planning expenditure by a company can be claimed only u/s 36(1) (ix), such
expenditure by a firm etc. may be claimed u/s 37, if other conditions are
satisfied.

2. Not Capital Expenditure: - Capital expenditure such as purchase of fixed


assets is not deductible under this section. Only revenue expenses are
allowed under this section. Only revenue expenses are allowed under this
section. Following points should be noted in this regard:

a. Capital expenditure generally means expenditure incurred on acquisition of a


fixed assets or its substantial improvement, extension or replacement, whether
tangible (machinery, building, furniture etc.) or intangible (goodwill, trademarks,
patents, licence, copyrights etc.).

b. The benefit of capital expenditure normally extends to a number of years.

c. Capital expenditure in increases the earning capacity of business.

d. Capital expenditure is usually non – recurring expenditure.

3. Not Personal Expenditure: - The expenses incurred for personal needs of


the assessee or his family members such as food, house, cloths, education
are not allowed to be deducted under this section.

4. Incurred During Previous Year: - In order to be allowed under this


section, the expenditure must be incurred during the previous year. If the
assessee follows the cash system of accounting, the expenses must have
been actually paid in cash/by cheque during the previous year. If the
assessee follows the mercantile (accrual) system, the expenses must have
accrued (become due) during the previous year (subject to section 43B)

5. Wholly For Business Purpose: - The expenditure must be wholly and


exclusively incurred for the purpose of the business or profession of the
assessee.

6. Permitted By Law: - Explanation to section 37(1) states that no deduction


shall be allowed in respect of any expenditure incurred for any purpose
which is an offence or which is prohibited by law.

7. For Business Carried On: - The expenditure must be for the purpose of a
business or a profession carried on by the assessee during the previous year.
Thus, the business should have commenced and be a running business.
Expenses before the commencement of business cannot be deducted.

Q8) Explain the provision for deduction available for federal milk
co – operative society.

Q9) Explain the provision of expenses expressly allowed while


computing Income from Other Sources.

 Deductible Expenses [Section 57]


i. In respect of dividend income and interest income any reasonable expenditure
incurred by way of commission or remuneration for realisation of such income is
deductible.

ii. In respect of any sum collected from employees towards the welfare fund
contribution, deduction shall be allowed to the extent the amount is remitted within
the relevant due date.

iii. In respect of family pension, a sum equal to 33.33% of the pension or Rs.15, 000,
whichever is less, shall be allowed as deduction.

iv. In respect of income earned by way of lease rental on letting of machinery, plant
and furniture, with or without building, the following shall be deducted:

a. Repairs

b. Insurance

c. Depreciation

v. Any other expenditure incurred by the assessee not being capital expenditure but
laid out or expected wholly or exclusively for the purpose of making or earning any
income chargeable under this head of income can be claimed.