TAXATION

END SEMESTER SUPPLEMENTRY ASSIGNMENT

Submitted to:
Prof. Khyati Shah

Submitted by:
Ankita Majumdar 177104

Date of submission:
5th August 2020

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Q1. Give an example showing computation of taxable income and tax liability for P.Y. 2019-
20, A.Y. 2020-21 for Mr. Sahil, a resident and ordinarily resident aged 33 years, residing
in Pune since 2016.

For your example kindly assume the following for ‘Income under the head
Salaries’:- i). He is a salaried employee and is employed with a Pvt. Ltd. company
since January 2016.
ii). His salary must consist of Basic Salary, Dearness Allowance (100% forming
part of all retirement benefits), House Rent Allowance, Transportation
Allowance and Medical Allowance. Do not take any other items to be a part
of his salary structure except the allowances mentioned here.
iii). All the allowances (mentioned in point (ii) above) that he receives must be
based on a percentage of Basic Salary.
iv). Professional tax levied on him for the P.Y. is borne and paid by him.
v). Salary and all the allowances become due on the last day of the same month and
are paid on fifth day of the next month. vi). He is employed with this company
throughout the P.Y. vii). He does not own any residential house property.

For your example kindly assume the following for ‘Income under the head Capital
Gains’: -
i). He has earned long-term capital gain of Rs. 1,65,000 on sale of listed equity
shares.
ii). He has earned short-term capital gain of Rs. 60,000 on sale of commercial house
property.

For your example kindly assume the following for ‘Income under the head Other
Sources’: -
i). He has received dividend income from few companies listed in India. Aggregate
of such income must be below Rs. 10,00,000.
ii). He has purchased a rural non-agricultural land from Mr. Chetak, his cousin, for
Rs. 20,60,000. Stamp Duty Value of the same is Rs. 21,63,000.

For your example kindly assume that he has made payments in account payee
cheque for the following investments: -
i). Subscription to Equity Linked Savings Scheme – Rs.
90,000 ii). Contribution to Public Provident Fund – Rs. 40,000

Other relevant information to be considered for your example: -

i). All the information is provided for P.Y. 2019-20, A.Y. 2020-21 and hence, all
the computations must be for the said time period only.
ii). His taxable income must be above Rs. 10 lakhs and upto Rs. 50 lakhs only. iii).
He does not have any other income other than ones mentioned above.

You are also required to mention other necessary notes and / or assumptions to support
your example.

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 Kindly use the following format to show the computation of Taxable Income & Tax
Liability of Mr. Sahil for P.Y. 2019-20, A.Y. 2020-21: -

Particulars Amount (in Rs.)

Inner Column Outer Column

A1. Mr. Sahil is 33 years old is a resident and ordinarily resident Indian. He has been living
in Pune since 2016. Given below are the relevant information for PY 2019-20, AY 2020-21.

He has been working in a Pvt. Ltd Company since January 2016. Mr Sahil is earning a monthly
basic salary of Rs. 90,000. He is entitled to receive Dearness allowance, which being 80% of
the basic salary (100% forming part of all retirement benefits). He is also entitled to receive
the following allowances-
Transportation allowance 5% of the basic salary
Medical allowance 2% of the basic salary
House rent allowance (HRA) 30% of the basic salary

He lives in rented apartment, whose rent is Rs. 17,000 p.m since 2017. Professional tax of Rs.
200 pm was borne and paid by him.
Mr Sahil is employed with this company throughout the P.Y. Salary and all the allowances
become due on the last day of the same month and are paid on fifth day of the next month.
He has earned long-term capital gain of Rs. 1,65,000 on sale of listed equity shares. He has
earned short-term capital gain of Rs. 60,000 on sale of commercial house property.
Mr Sahil has received dividend income from few companies listed in India. Aggregate of such
income is Rs. 7,00,000. He has purchased a rural non-agricultural land from Mr. Chetak, his
cousin, for Rs. 20,60,000. Stamp Duty Value of the same is Rs. 21,63,000.
Mr. Sahil has also incurred the following expenses: -
Contribution to Public Provident Fund – Rs. 40,000
Investment in Equity Linked Savings Scheme – Rs. 90,000

Mr Sahil’s taxable income and tax liability for P.Y. 2019-20, A.Y. 2020-21 is worked out
below assuming he does not have any other income other than ones mentioned above

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Computation of taxable income for Mr. Sahil for P.Y. 2019-20, A.Y. 2020-21
Particulars Amount (in Rs.)
Inner Outer
Column Column
Income under the head Salaries
Basic Salary (90,000*12) 10,80,000
Add: Dearness Allowance (HRA) (80% of Basic) 8,64,000
Add: House Rent Allowance (30% of Basic) 3,24,000
Less: Exemption (Working Note 1) (9,600)
Taxable House Rent Allowance 3,14,400
Add: Medical Allowance (2% of Basic) 21,600
Add: Transportation Allowance (5% of Basic) 5,400
GROSS SALARY 22,85,400
Less: Deductions
Standard Deductions (50,000)
Professional Tax (200*12) (2,400)
INCOME UNDER THE HEAD SALARIES 22,33,000

Income under the head Capital Gains

Long Term Capital Gains on sale of Listed Equity Shares 1,65,000
Short Term Capital Gains on sale of Commercial House 60,000
Property
INCOME UNDER THE HEAD CAPITAL GAINS 2,25,000

Income From Other Sources

Immovable property for inadequate consideration Nil
(Working Note 2)
Dividend Income (Exempt upto Rs. 10,00,000) Nil
INCOME FROM OTHER SOURCES Nil

GROSS INCOME 24,58,000

less: Deductions
Contribution to Public Provident Fund (40,000)
Investment in Equity Linked Savings Scheme (90,000)
TAXABLE INCOME 23,28,000

Working Notes
1. Salary= Basic salary+ D.A ( forming part of all retirement benefits)
= 90,000+ (90,000*80%*100%)
= 1,62,000 p.m

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 HRA exemption
a. 40% of the salary ( since the place is Pune)= 64,800 p.m
b. HRA received (30% of the basic salary) = 27,000 p.m
c. Rent paid less 10% of the salary =17,000-(1,62,000*10%)= 800 p.m
=800*12=9,600 (per year)
Whichever is lowest amongst the three will be taken. Therefore, HRA exemption is
(800*12)= Rs.9,600.

2. a. Purchase Consideration= Rs. 20,60,000

Stamp Duty Value= Rs. 21,63,000
105% of Purchase Consideration= 105% of 20,60,000= 21,63,000

b. Stamp Duty Value-Purchase Consideration= 21,63,000-20,60,000=1,03,000

In the above, both the conditions are not satisfied. Therefore, no amount would be
transferred to income from other sources.

Computation of tax liability for Mr. Sahil for P.Y. 2019-20, A.Y. 2020-21
Taxable Income= 23,28,000
Income Chargeable to Tax Other Income Chargeable to Tax as
at Special Rates of Income per Income Tax Slabs
Tax
Long Term Capital Gains
on Listed Equity Shares
Taxable at the rate of 10%
1,65,000 21,63,000
Tax Rate Amount
in Rs.
upto Rs. 1,00,000 exempt upto 2.5 lakhs exempt Nil
2.5 lakhs to 5 lakhs 5% 12,500
5 lakhs to 10 lakhs 20% 1,00,000
10 lakhs to 41,87,400 30% 3,48,900
Basic 6,500 4,61,400
Income
Tax

Total Basic Income Tax 4,67,900

Add: 4% Health and 18716
Education Cess
Tax Liability 4,86,616
TAX LIABILITY 4,86620

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Q2. M/s. Dayal & Co., a partnership firm engaged in manufacturing of valves and located in
Mumbai, provided the following information for A.Y. 2020-21, P.Y. 2019-20: -

Particulars Amount (in

Rs.)
Block 1: Plant & Machinery (P&M) having rate of depreciation of 15%:
D.V. of the block having 4 assets in the block as on April 1, 2019 24,81,800
Purchase of three New eligible P&M in this block made during P.Y. 2019-20 is as under: -

Purchased on April 20, 2019 2,67,100

Purchased on September 28, 2019 4,71,900
Purchased on October 3 , 2020 6,50,000
Particulars Amount (in
Rs.)
Block 2: Building having rate of depreciation of 10%:
D.V. of the block having 2 assets in the block as on April 1, 2019 25,87,600
Sale of one Building during P.Y. 2019-20 is as under: -
Sale on March 20, 2020 31,93,200

Note that all the P&M purchased were put to use on the same day of purchase. Further,
all the P&M purchased were to be used for the purpose of manufacturing only.

You are required to compute Depreciation for M/s. Dayal & Co. for A.Y. 2020-21, P.Y.
2019-20.

A2. Computation of normal and additional depreciation for M/s. Dayal & Co. for A.Y. 2020-
21, P.Y. 2019-20.

Particulars Amount (in Rs.)

Inner Column Outer Column
Block 1 ( Plant and Machinery at the rate of 15%)
Opening Balance/D.V of the block as on 1st April
2019 24,81,800

Add: Purchases 7,39,000

Written Down Value as on 31st March 2020 32,20,800
Normal Depreciation (Working Note 1) 4,83,120
Additional Depreciation (Working Note 2) 1,47,800

Block 2 ( Building at the rate of 10%)

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Opening Balance/D.V of the block as on 1st April
2019 25,87,600
Less: Sales (31,93,200)
Written Down Value as on 31st March 2020 (Working
Note 3) Nil
Normal Depreciation (Working Note 4) Nil

Working Notes
1. Calculation of normal depreciation for plant and machinery-
(24,81,800*15%)+(2,67,100*15%)+(4,71,900*15%) = 4,83,120
I have not taken depreciation for plant and machinery costing Rs. 6,50,000 because it
was purchased after A.Y. 2020-21, P.Y. 2019-20.

2. Calculation of additional depreciation for plant and machinery-

(2,67,100*20%)+(4,71,900*20%)= 1,47,800
I have not taken depreciation for plant and machinery costing Rs. 6,50,000 because it
was purchased after A.Y. 2020-21, P.Y. 2019-20.

3. As the written down value of the block is reduced to zero, the block ceases to exist and
hence there is no normal depreciation.

4. As the written down value of the block is reduced to zero, the block ceases to exist and
hence there is no normal depreciation.

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Q3. Answer the following by giving an example of the “classification of the following
capital assets into short term and long term capital assets” under the head income
from Capital Gains: -
(A) Diamond studded Wrist Watch
(B) Immovable Property

A3. Capital Assets are land, building, patents, trademark, house property, gold, jewellery,
machinery, leasehold rights, etc. Also, capital assets can include rights in relation to a company
or the rights of management or control or any other legal right.
Some exceptions in Capital Assets are agricultural land in rural India, personal goods such as
clothes and furniture, Special bearer bonds, any stock or raw materials for business, etc.
Capital Assets are classified into two broad categories.
• Short term capital assets- it means capital assets which are held for not more than 36
months, immediately prior to the date of transfer.
• Long term capital assets- it means capital assets which are held for more than 36
months, immediately prior to the date of transfer. However, in case of equity and
preference shares and immovable property, the asset becomes long term after 12
months and 24 months respectively.

In case of diamond studded wrist watch (which is categorised as jewellery), if held for more
than 36 months, then it is considered as a long term capital asset. But if the watch is held for
less than 36 months, then it is considered as short term capital asset.
In case of immovable property, if held for more than 24 months, then it is considered as a long
term capital asset. But if the watch is held for less than 24 months, then it is considered as short
term capital asset.
Tax Calculations for Diamond Studded Wrist Watch:
Short Term Capital Gain
Mr. A bought a diamond studded watch for Rs. 2.5 lakh in 2018 and sold it for Rs. 2.75 lakh
in 2019, his capital gain will be (brokerage charges 5,000):
Computation of capital gain will be as follows :

Particulars Amount In
Rupees

Sales Consideration 2,75,000

Less Expenses on transfer 5,000

Less: Cost of Acquisition 2,50,000

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Particulars Amount In
Rupees

Less: Cost of Improvement Nil

Short Term Capital Gain 20,000

Short Term Capital Gain Tax Liability for Mr. A (at his marginal tax rate slab of 30%) 6,000

Long Term Capital Gain

Mr. A bought a diamond studded watch for Rs. 2 lakh in June, 2004 and sold it for Rs. 7 lakh
in April,2020, his capital gain will be (brokerage charges 5,000):
Computation of capital gain will be as follows :
Particulars Amount In Rupees

Sales Consideration 7,00,000

Less Expenses on transfer 5,000

Less: Indexed cost of Acquisition (Working Note 1) 5,32,743

Less: Indexed cost of Improvement Nil

Net Long Term Capital Gains 1,62,257

Long Term Capital Gain Tax (20%) 32,451

Cess on LTCG (4% on LTCG Tax) 1,298

Total Long Term Capital Gain Tax 33,749

Working Notes
1. The cost inflation index notified for the year 2004-05 is 113 and for the year 2020-21
is 301.
Hence, the indexed cost of acquisition, i.e., the inflated cost of acquisition will be
computed as follows:
(Cost of acquisition * Cost inflation index of the year of transfer of capital asset)/( Cost
inflation index of the year of acquisition)
Rs. 2,00,000 * 301/113 = Rs. 5,32,743

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Tax Calculations for Immovable Property:
Long Term Capital Gain
Mr. Ram purchased a residential house property in May, 2004 for Rs. 84,000 and sold the same
in April, 2020 for Rs. 10,10,000 (brokerage Rs. 10,000). The capital gains and long term capital
gain tax is as follows:
Computation of capital gain will be as follows :

Particulars Amount In Rupees

Sales Consideration 10,10,000

Less: Expenses on transfer 10,000

Net Sale Consideration 10,00,000

Less: Indexed cost of acquisition (Working Note 1) 2,23,752

Less: Indexed cost of improvement, Nil

Long Term Capital Gain (LTCG) 7,76,248

Long Terms Capital Gain Tax (20% OF LTCG) 1,55,250

Cess on LTCG Tax 6,210

Total Long Terms Capital Gain Tax 1,61,460

Working Notes
1. The cost inflation index notified for the year 2004-05 is 113 and for the year 2020-21
is 301.
Hence, the indexed cost of acquisition, i.e., the inflated cost of acquisition will be
computed as follows:
(Cost of acquisition * Cost inflation index of the year of transfer of capital asset)/( Cost
inflation index of the year of acquisition)
Rs. 84,000 * 301 / 113 = Rs. 2,23,752

Short Term Capital Gain

Mr A sold his property January 2016 at ₹ 50 Lakh, which he had purchased in December 2014
for ₹ 30 Lakh. As per his income, Mr. A falls in the tax slab of 30%. Mr. A spent around ₹ 2
Lakh on house improvement during the period and also paid a brokerage of 0.5 per cent of the
sale price of the house at the time of selling the house. The short term capital gain and short
term capital gain tax in this case is as follows:
In this case, the gain achieved on this property within the 2 year holding period and hence will
be considered as short term capital gain and will be taxed as short term capital gains tax, as per
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his applicable income tax slab. In this case, as shown below, Mr. A's short term capital gains
will be ₹ 17.75 Lakh and he is liable to pay a tax of ₹ 5,32,500 on this.
This has been explained in the table below:
Computation of capital gain will be as follows :
Particulars Amount In
Rupees

Sales Consideration 50,00,000

Less: Expenses on transfer 25,000

Net Sale Consideration 49,75,000

Less: Cost of Acquisition 30,00,000

Less: Cost of Improvement 2,00,000

Short Term Capital Gain 17,75,000

Short Term Capital Gain Tax Liability for Mr. A (at his marginal tax rate slab of 5,32,500
30%)

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