2018 (May)

cOMMERCE (Speciality)
Course: 601 (Direct Tax - )

Time: 3 hours

The figures in the margin indicate full marks for the questions

(NEW COURSE)
FullMarks:80
PassMarks:24
1.(a) Write True or False: 1x4-4

1) Preliminary expenditure incurred after 31.03.2008 are allowed deduction in 10

equal installments. False, Under Sec. 35D preliminary expenses are allowed deduction in 5
equal installments.

2) Conversion of debentures into shares shall not be regarded as transfer for capital
gain purpose. True

3) If no system of accounting is followed, interest on securities is taxable on receipts

basis. (Note: Interest on securities may be taxed on due or receipts basis depending upon
the system of accounting. If the assessee follows cash system of accounting. interest is
taxable on receipts basis, otherwise it shall be taxable on due basis. If no system of accounting
is followed, it will always be taxable on "due" basis.)

4) Loss on account of owning and maintaining the racehorse can be carried forward
indefinitely. False (Note: According to provisions of section 74A(3), the losses incurred by
an assessee from the activity of owning and maintaining race horses can be set-off against the
income from the activity of owning and maintaining race horses only. Such loss can be carried
forward for a maximum period of 4 assessment years for being set-off against the income
from the activity of owning and maintaining race horses in the subsequent years)

(b) Fill in the blanks: 1x4-4

1) Short-term capital loss on particular assessment year can be set off in the same

assessment year from STCGandITCG.onlx.

2) For claiming exemption under Section 54, the assessee should construct the
residential property within 3yearsafter the date of transfer.
3) Interest on units of a Mutual Fund on or after April 1, 2003 shall be exempt.
According to Sec. 10(35), any income from units of mutual funds are exempted from]

4) Where a part of the block of assets is sold for a price less than the opening WDV plus
cost of assets, if any. acquired during the year, the balance amount shall be treated as WDVat
theend for charging depreciation.

2.Write short notes on any four of the following: 4x4-16

a) Block of assets.

Ans: Block of assets: Block of assets means a group of assets falling within a class of assets and
on which same rate of depreciation is charged. Class of assets comprised of:

() Tangible assets being building, machinery, plant and furniture.

(i) Intangible assets being know-how, patents, copyrights, trade marks, licenses,
franchises or any other business or commercial rights of similar nature.

b) Chargeability under the head 'Profits and gains of business or profession.

Ans: The following income shall be chargeable to income-tax under the head "Profits and
gains of business or profession" (Chargeability - Sec. 28):

a) The profts and gains of any business or profession which was carried on by the
assessee at any time during the previous year;

b) Any compensation or other payment due to or received by.-any person, by

whatever name called, managing the whole or substantially the whole of the affairs of an Indian
company, at or in connection with the termination of his management or the modifcation of the

terms and conditions relating thereto

c)Incomederived bya trade, professional or similar association from specific services
performed for its members:
d) The value of any perquisite or benefit arising from business or profession, whether
convertible into money or not,

e) Any interest, commission, salary, remuneration , or bonus due to, or received by, a
partner of a firm from such f1rm:

A n y sum received under a Keyman insurance policy including the sum allocated by
way of bonus on such policy.

8Income from speculative transactions.

h) Any sum, whether received or receivable, in cash or kind, under an agreement for:
a. not carrying out any activity in relation to any business; or

b. not sharing any know-how, patent, copyright, trade-mark, licence, franchise

or any other business or commercial right of similar nature

i)Any profht on the transfer of the Duty Free Replenishment Certificate

i)Any proft on the transfer of the Duty Entitlement Pass Book Scheme
k) Profts on sale ofa license granted under the Imports (Control) Order, 1955, made
 k) Prohts on sale of a license granted under the imports ( c o n O

under the Imports and Exports (Control) Act, 1947 (18 of 1947)

c)Long-term and short-term capital gains.

Ans: TYPE OF CAPITAL GAINS
an assessee after
When a capital asset is
transferred by
a) Long term capital gains:
as the case may be, the capital gains arising
months/24months/12 months,
having held it for 36
Gains.
from this transfer is known as Long Term Capital
before transfer is less
b) Short term capital gain: If the period of holding of capital asset
from such
months/24months/12 months, as the case may be, the capital gains arising
than 36
Short Term Capital Gains.
transfer are known as

Differences between short-term and long-term capital gain:

|Long term capital gains

Short term capital gains taxed on
is in Gross total income and is
the Gross total income of LTCG
STCG is included intaxed as per rate applicable
the flat rate of 20% (10% in
certain case or
the assessee and
NIl in certain cases).
to that assessee.
under sections 80C to BOU are
under sections 80C to 8OU are Deductions
|Deductions
available.
|not available.
of minimum exemption limit is
exemption limit is
Set-off
of minimum
|Set-off
available from all STCGs for resident as well available only for resident.

as Non-resident.

set-off against only LTCG.

set-off against STCG and LTCG.
LTCL can be
STCL can be Cost of acquisition & Cost
of improvement
of improvement
Cost of acquisition & Cost are indexed in case of long-term capital gans.
in case of STCG.
are not indexed

d) Not allowable deductions from 'Income from other sources.

es (
Ans: Deductions Not a
as deduction in computing income form other sources
The following are not allowed
the assessee are not deductible.
1. Personal expenses: Any personal expenses of
is payable outside India on
under the Act which
2. Interest Any interest chargeable
:

which tax has not been deducted at source is not deductible.

"Salaries" and payable

TDS Any payment chargeable under the head
3. Salary without :

paid or deducted there from.

outside India is not deductible if tax has not been
4. Wealth Tax: Any sum paid on account of wealth tax is not deductible.

by section 40A under the

5. Amount specified by Section 40A: Any amount specifhed under
or profession is not deductible while calculating income
head profit or gain from business
the head "Income from other sources
6. Expenditure in respect of Royalty and Technical fees received by a foreign company

of royalties and technical service fees

In the case of foreign companies, expenditure in respect
section 44D is not deductible.
as specified by

e) Carry forward of business losses.

still
intra-head and inter-head adjustments,
Ans: times it may happen that after making
Many
against the income of the
the loss remains unadjusted.
Where the losses are not fully adjusted
are transferred to the next
tax year, this process of transferring
same tax year and such losses
known carry-forward of losses. Such unadjusted loss
un- adjustable losses to the
next year is as
income Separate
for adjustment against subsequent year(s)
can be carried forward to next year
different
under the Income-tax Law for carry forward of loss under
provisions have been framed unabsorbed
loss from house property and
of losses (other than
heads of income. Carry forward
loss is incurred, is fhled
of income for the year, in which
depreciation) is permissible if the return
the status of carry forward of loss of previous
in time. The
late of return should not impact
filing
years.
What are the rules regarding grant
3. (a) What do you understand by the term 'depreciation'?
of deduction for depreciation? 4+10-14
means diminution in value of an
DEPRECIATION ON ASSETS (Section 32): Depreciation
Ans:
and
It is debited to proft and loss account
asset on account of wear and tear and obsolescence.
assets except
is provided on all tangible and intangible
is an allowed expenditure. Depreciation
land, animals and goodwill on block of asset basis.
falling within a class of assets
Block of assets: Block of assets means a group of assets

of comprised of:
and on which same rate of depreciation is charged. Class assets

() Tangible assets being building, machinery, plant and furniture.

trade marks, licenses,

being know-how, patents, copyrights,
(i) Intangible assets
franchises or any other business or commercial rights of similar nature.

METHODS OF DEPRECIATION AND WHICH METHOD IS TO BE ADOPTED:

following methods:
is calculated by using the
Depreciation under income
tax

1. Written down value method:

2. Straight line method.

method the
down value method: Under this
Diminishing Balance Method/Written Book
the block of assets.
fixed rate on the book value of
depreciation is charged every year at a
yearly depreciation from the cost of assets.
value of asset is calculated by deducting
is calculated at a fixed rate
line method: Under this method the depreciation
Straight in
Block of assets concept is not applicable
amount of actual cost of the
asset.
every year on the
assets of power generating
units referred to in
is applicable on certain
this case. This method
section 32(10).
.ndor lncome tay Act is ralulated under written value method except in
 Depreciation under Income tax Act is calculated under written value method except in
case of an undertaking engaged in generation and distribution of power which have the option
to choose the straight line method of charging depreciation.

cONDITIONS FOR CLAIMING DEPRECIATION

a) Depreciation is allowed on all tangible or intangible assets except land, animals or

goodwill.

b Asset must be owned (wholly or partly) by the assessee and must be used for the
purpose of business or profession.

c)If an asset is partly used for the purpose of business or profession and partly for
personal purpose then, proportionate depreciation is to be provided.

d) No depreciation is charged on the hired asset but if any capital expenditure is

incurred on hired building then depreciation can be claimed on such capital expenditure.
Asset must be used during the relevant previous year. It is not necessary that asset

must be used throughout the year, even use during any part of the year would be sufficient to
claim depreciation.

f Depreciation is calculated on the last day of accounting year and only on those

assets which are in use on that day.

g)Depreciation shall be allowed on WDV of Block of asset at a prescribed rate. Under

section 2(11), "Block of assets" means a group of assets falling within a class of assets

comprising
() Tangible assets, being buildings, machinery. plant or furniture.

(i) Intangible assets, being know-how. patents, copyrights, Trademarks, licences,

franchises or any other business or commercial rights of similar nature, in respect of which the

same percentage of depreciation is prescribed.

h) Total depreciation in the life of an asset cannot exceed its actual cost.
i) Depreciation on stand-by assets or assets which are not used during previous year is
not allowed except in case generator.

) N o depreciation is allowed in the year in which the assets is sold or demolished or

discarded or destroyed.

k) When a new asset acquired during previous year, full depreciation is allowed if
assets used for 180 or more than 180 days and half year's depreciation is allowed if installed and
used for less than 180 days.

ACTUAL COST SECTION 4311);

Actual cost means the actual cost of the assets to the assessee as reduced by that

portion of the cost thereof, if any, as has been met directly or indirectly by any other person or
authority.
Items to be included in cost of fixed assets.

(1) Cost of fixed asset.

(2) Interest on money borrowed for purchase of the assets till the asset is put to
use.

(3) Carriage inward, loading or unloading charges.

(4) Installation charges.

(5) Cost of repair and modification prior to the use of asset.

(6) Commission paid to banker for giving guarantee to supplier of the asset.

Items not to be included in cost of fixed assets:

(6) Excise duty and additional duty leviable thereon in respect of which credit is
claimed and allowed.

(i) Amount of subsidy, grant or reimbursement by the Central Govt. of State

Govt. or any authority established under any lawor any other person towards a portion of cost
of asset.

(iin) Expenditure for acquisition of any asset or part thereof in respect of which a

payment or aggregate of payments made to a person in a day, otherwise than by an account

payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing
system through a bank account, exceeds Rs.10,000, such expenditure shall be ignored for the
purposes of determination of actual cost.

RATE OF DEPRECIATION FORTHE ASSESSMENT YEAR 2019-2020 (WDV BASIS)

Building

Block-1 Residential building other than hotels and boarding houses

Block-2 Office, factory. godowns or building-not mainly residential purpose

Block-3 Temporary erection such as wooden structures 100

Furniture

Block-4 Furniture-Any furniture/fting including electrical fittings

Plant and machinery

Block-5 Any plant or machinery (not covered by block 6. 7,8.9,10,11 or 12) and 15
motors cars (other than those used in a business of running them on hire)
acquired or put to use on or after April 1, 1990

Block-6 Ocean going ships, vessels ordinary operating on inland waters Including 20
sneed hoats
 Plant and machinery

Block-5 Any plant or machinery (not covered by block 6. 7,8.9,10,11 or 12) and 15
motors cars (other than those used in a business of running them on hire)
acquired or put to use on or after April 1, 1990

Block-6 Ocean-going ships, vessels ordinary operating on inland waters Including

speed boats

Block-7 Buses, lorries and taxies used in business of running them on hire, 30

machinery used in semi-conductor industry, moulds used in rubber and

plastic goods factories

Block-8 Aero planes. life saving medical equipment 40

Block-9 Containers made of glass or plastic used as refill, new commercial vehicle 50
which is acquired during Jan 1, 2009 and Sept 30, 2009 and is put to use
before Oct 1, 2009 for the purpose of business / profession

Block-10Computersincluding computer software. Books (other than annual 60

Publication) owned by a professional

Block-11 Energy saving devices; renewal energy devices; rollers in flour mills, B0

Sugar works and steel industry

Block-12 Air pollution control equipments; water pollution control equipments: 100
Solid waste control equipments, recycling and resource recovery
System: (being annual publication) owned by assesses Carrying on a
profession or books (may or may not be annual Publication) carrying on a
business in running lending libraries

Intangible Assets
Block-13 Intangible assets (acquired after March 31, 1998) - know-how, Patents,. 25

copyrights, trademarks, licenses. franchises another business or

commercial rights of similar nature

cONDITION WHEN ONLY 50%DEPRECIATIONIS ALLOWED

If any particular asset is purchased during the year and it has been put to use for less
than 180 days during the year, in that case, depreciation is allowed at half the normal rate. If it is
purchased during the year and is not at all put to use, depreciation shall not be allowed. But in
the subsequent year whenever the asset is put to use, full depreciation shall be allowed
irrespective of period of use.

"Put to use" does not mean putting the asset to actual use rather it means making an
asset ready for use. So the all following conditions should be fulfilled:

a) An asset is acquired in the previous year and

b) It is put to use in this previous year and

c) Such put to use is for a period less than 180 days

ADDITIONALDEPRECIATION. Section32(1ia)
In the case of any new machinery or plant which has been acquired and installed after
the 31.03.2018, by an assessee engaged in the business of manufacture or production, or in the
business of generation or generation and distribution of power, additional depreciation at the
rate of 20% of the actual cost of such machinery or plant shall be allowed if all of the following
conditions must be fulfilled:

0 Asset must be new and it has not been used earlier.

0 It must be for manufacturing or production

o Power Generation and Distribution companies are also ligible for Additional

Depreciation.

I t is allowed in addition to normal depreciation and shall be taken into consideration

for calculating normal written down value.

Or
4. (a) Explain, in detail,
capital gain exempted from tax.
Ans: Capital Gains Exempted from tax 4
Capital Gains from Transfer of a
1.

gains arising on the transfer of Residential House: [Sec.54}

a residential Any long-term capital
individual or HUF, will be house
exempt from
(including self-occupied house), to
tax if the assessee has an
or two
years after the date within a period of one
of such transfer year before
constructed, one residential house in purchased, or within a period of three
India. years
Amount of exemption: The
amount of
utilised or the amount of exemption available is equal to the
capital gain, whichever is less. If amount so
gain cannot be so utilised for the whole or any
part of the capital
should be deposited in acquisition of a residential
house before filing the
Capital Gains Account Scheme, 1988 in return, the same
the due date for order to claim
furnishing the return. exemption, before
For
availing this exemption, the assessee
period of three years must not transfer the
new house, within a
from the date of its
Otherwise the exemption purchase or construction, as the case
allowed under this section shall be may be.
house, in computing the capital reduced from the cost of the new
gains
arising therefrom.
2.
Capital Gains from Transfer of
short-term and long-term) arising to an Agricultural Land: (Sec.54B: Any capital gain (both
used by the assessee or his individual or H.U.F. from
transfer of any land, which was
parent (in case of individual
immediately preceding two years, shall assessee) for agricultural purpose in the
be exempt from
years from the date of such transfer, tax, if the assessee
any other land (to be used
purchases within 2
Other-wise, the amount can be for agricultural
deposited under purposes).
the due date for Capital Gains Account Scheme, 1988
furnishing the return. before
Amount of exemption: The amount
of exemption
capital gain or the cost of new allowable is equal to the amount of
agricultural
Capital Gains, Account Scheme), whichever
land purchased
(including the amount deposited in
is less. The new land
is not to be
period of three years from the date of its transferred for a
earlier shall be withdrawn, by purchase, otherwise the amount of
reducing amount from the case of the new
this
exemption allowed
the capital gains land, in computing
arising from its transfer.
3. Capital Gains from
Compulsory Acquisition of Industrial Undertaking: (Sec.
capital gain arising from the transfer
by way of compulsory 54D): Any
industrial undertaking, shall be acquisition of land or building of an
exempt, if the assessee purchases/ constructs
from the date of within three years
compulsory acquisition, any land or building
undertaking. Otherwise, the forming part of industrial
amount can be deposited under the
Scheme, 1988' before the due date for 'Capital Gains Accounts
furnishing the return.
Amount of
exemption: The
amount of capital gain
gain or the cost of new
exempt shall be equal to the capital
land
building purchased or constructed (including the
or

deposited under the CGA scheme), whichever is less. amount

The new land or building
constructed, as the case may be, is not to be purchased or
transferred for a period of three years from its
purchase or construction, otherwise the exemption
allowed shall be withdrawn, by
from the cost of the new land
or building. in
reducing it
computing the capital gains arising from their
transfer.
4. Capital Gains invested in
Certain Bonds: (Sec.54EC}: Any
from transfer [of land or long-term capital gain arising
building or both] that takes place on or after
if the whole of the
amount of such capital
1.4.2000, shall be exempt
gain is invested in long-term specifed assets i.e. bonds
issued by National
Highway Authority of India (NHAI) or Rural Electrification
or any other notified
bonds within a period of six months from the
Corporation
date of transfer. The amount
Ltd.
of investment in long-tem specified assets by an assessee during a financial year shall not exceed
Rs.50 lakhs.

5. Capital Gains invested in Units of a

Notified Fund for Financing Start-Ups:
Any long-term capital gain shall be [Sec.54EE]:
exempt if the whole of the amount of such capital
invested, within a period of six months from the gain is
date of transfer, in long-term
ie. units issued up to 31.3.2019 by a notified fund specified assets
set up for financing start
ups. The amount of
investment in long-term specified assets
by an assessee during a fnancial year shall not exceed
Rs.50 lakhs.

6. Capital Gains from an Asset other

than Residential House: [Sec. 54Fl: Any
long-term
capital gain arising to an individual or HUF, from the transfer of any asset, other than a
residential house, shall be exempt if the whole of the
net consideration is utilised within a
of one year before or two
period
years after the date of transferor for
purchase, or within 3 years in
construction, of one residential house in India.

Amount of exemption: If, however, only a part of net consideration is so utilised, the
amount of exemption shall be equal to: (Capital Gains x New Residential House)/ Amount of Net

Consideration
Further, if the amount cannot be so utilised before filing the return, then in order to avail
of the exemption, it may be deposited under the Capital Gains Accounts Scheme, 1988 before

the due date for filing the return u/s 139.

7. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to Rural
Area [Sec.54G]: Any capital gains arising from transfer of machinery. plant, land or building or
any rights therein, in the course of shifting of an industrial undertaking in urban area, shall be
exempt, if the assessee has, within a period of 1 year before or 3 years after the date of transfer,

purchased new plant or machinery, acquired or constructed land or building., shifted the original
asset and transferred the establishment, to a rural area.

Amount of exemption: The amount of exemption shall be equal to the amount so utilised
or the amount of capital gain, whichever is less.

8. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to SEZ:
[Sec 54GA1 Anv canital osin aricina from tranefor chince
 8. Capital Gains from Shifting of an Industrial Undertaking from Urban Area to SEZ:
[Sec.54GA]: Any capital gains arising from transfer of machinery, plant, land or building or any
rights therein, in the course of shifting of an industrial undertaking in an urban area, to any
Special Economic Zone, shall be exempt, if the assessee has, within a period of 1 year before or 3
years after the date of transfer, purchased new plant or machinery, acquired or constructed land
or building. shifted the original asset and transferred the establishment, to the SEZ, or incurred
expenses on purposes specifed in a scheme framed by the Government in this regard.

Amount exemption: The amount exempt shall be equal to the amount so utilised or the
amount of capital gain, whichever is less. If the capital gain cannot be so utilised, then it should
be deposited under Capital Gains Accounts Scheme, to avail the benefit, before the due date of
fhling the return.
9.Capital Gain from Transfer of a Residential Property invested in a manufacturing small
or medium enterprise: [Sec. 54GB): Any long-term capital gain arising to an individual or HUF
from the transfer of a residential property (house or plot of land) effected upto 31.3.2017 (up to
31.3.2019 in case investment is made in an eligible start-up), shall be exempt if the net
consideration is invested in the equity of a new start-up SME company or in an eligible start-up
in the manufacturing sector or in an eligible business, which is in turn utilised by such company
for the purchase of new plant and machinery.
10. Capital Gain on Compulsory Acquisition of Agricultural Land: [Sec. 10(37)1 Any
capital gain arising to an individual/HUF on compulsory acquisition of an agricultural land
situate in urban areas, where the compensation/consideration is received by the assessee on or
after 1.4.2004. provided, the land was being used for agricultural purposes by the
HUF/individual or his parent(s), during the period of two years immediately before acquisition.
The exemption would be allowed even if agricultural land was not cultivated by the assessee
himself but by hired labourer or through his family member.
r

(b) Mr. S submits the following particulars about the sale of assets during the year, 2014-15:
14

Jewellery(Rs.) Land (Rs.) Gold (Rs.)

Sales Price
Expenses on sales
5,00.000 18.50,000 3,50,000
50,000
Cost of acquisition 60,000 2,10,000 1,00,000
Year of acquisition 1987-838 1984-85 1999-2000
150 125 389
Calculate the amount of capital gain chargeable to tax for the assessment year 2015-16 if Cii
for 2014-15 is 1024.
Solution: Calcu lation of Long Term Capital Gein

Particulars Jewellery Land Gold

Sale Consideration 5,00,000 1450,000 3,50,000
Less: Expenses on sale S0,000|
Net Sale Consideration 5,0,000 1800,000 3,50,000
Less: Index Cost of Acquisition 4,09,600 17,20,320 2,63,239
0 D00 x102 210,00S L00.00x024
150
Tong Tem Ca pital Gain 90,400 79,680 86,761

5. (a) Explain the provisions of the Income-tax Act regarding carry forward of losses. 14
Ans: Carry forward of losses: Many times it may happen that after making intra-head and inter
head adjustments, still the loss remains unadjusted. Where the losses are not fully adjusted
against the income of the same tax year and such losses are transferred to the next tax year, this
process of transferring un- adjustable losses to the next year is known as carry-forward of
losses. Such unadjusted loss can be carried forward to next year for adjustment against
subsequent year(s)' income Separate provisions have been framed under the Income-tax Law
for carry forward of loss under different heads of income. Carry forward of losses (other than
loss from house property and unabsorbed depreciation) is permissible if the return of income
for the year, in which loss is incurred, is filed in time. The late filing of return should not impact
the status of carry forward of loss of previous years
Rules regarding carry forward of losses of various heads are given below
1. Loss under head House Property: The loss under the head house property, let out or
self occupied, can be carried forward to the subsequent years subject to a limit of 8 assessment
years. The loss is to be set off against the income from house property only. Loss under the head
house property' may be et off against income under any other head upto a maximum of
Rs.2,00.000 [Sec.71(3A)].
2. Business Loss: It can be carried forward for subsequent years subject to a limit of 8
assessment years and it is to be set off against profit from under head business only. In set off
and carry forward of business losses the following important points are to be considered:
(a) The person who has incurred the loss, alone has the right to carry it forward. The
successor except succession by inheritance (business passing from father to son) cannot claim
to carry forward the loss incurred by his predecessor in business. However, where a company
merges with another under the scheme of amalgamation, the past loss of the amalgamating
company can be carried forward by the new company.

(b) The unabsorbed business loss of an industrial undertaking which was discontinued
due to natural calamities shall be carried forward and set off against the proft of the
reconstructed, re-established business upto a period of 8 assessment years as reckoned from
the previous year in which the business is re-started.
(c) The business loss could be carried forward for 8 assessment years to be set off from
income under the head"profts and gains of business or profession"
(d) Loss from any asset held as stock-in-trade can be set off from any income from such
asset even if it is taxable under the head other sources
(e) To carry forward business losses. continuity of same business is not necessary.

3. Speculation Loss: The loss of a speculation business of any assessment year is allowed
 It may be observed that it is not necessary that the same speculation business must
continue n the assessment year in which the loss is set off. It can be carried forward for
succeeding 4 assessment years. But the loss is to be set off against the speculation profit only. A
company whose principal business is that of trading in shares has been excluded from the
purview of the explanation to Sec.73. Consequently, such activity shall not be regarded as
speculation activity and any los arising there from shall be treated as normal business loss and
not as speculation loss.

4. Unabsorbed Depreciation [Sec. 32(2)]: If there is a loss under business and profession
and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall
be allowed to be carried forward. Unabsorbed depreciation allowance shall be added to the
depreciation allowance for the following previous year or years and so on infhnitely and deemed
to be part of that llowance. The depreciation shall be carried forward even the
business/profession to which is relate even of the business/profession not in existence. Return
of loss is not required to be submitted for carry forward of unabsorbed depreciation.

The assessee should set off brought forward losses in the following manner:

a) First of all current year depreciation will be adjusted.

b) Then brought forward business losses will be set off (speculative or non-speculative)

c)Then unabsorbed depreciation will be set-off against business income.

d) Unabsorbed depreciation can be carried forward for indefinite number of years.

eUnabsorbed depreciation can be set off from any head of income other than Salary
and Capital Gain in any year.

5. Loss under the head "Capital Gain': Where in respect of any assessment year, the net
result of the computation under the head Capital gains' is a loss to the assessee, whether short
term or long-term such short-term and long-term capital losses shall be separately carried
forward. Further, such carried forward short-term capital loss can be set off in the subsequent
assessment year from income under the head capital gains whether short-term or long-term.
But brought forward long-term capital loss shall be allowed to be set off only from long-term
capital gain. Such capital losses can also be carried forward to a maximum of 8 assessment
years, immediately succeeding the assessment year for which the loss was first computed.

6. Expenses incurred on maintenance of race horses: Loss from Owning and maintaining
race horses: (Section 74A) An Assessee can carry forward these losses up to 4 years
immediately succeeding the Assessment year in which the loss has incurred. It can be set off
only against that income and an Assessee must hle the Income Tax Return within due date
prescribed under section 139(1).

or
6. (a) Explain the important areas where tax planning may be attempted. 14

Ans:
Tax planning can be done under different heads of income which are stated below:
A)
Existence of 'master-servant' or 'employer-employee' relationship is absolutely essential
for taxing income under the head "Salaries". Where such relationship does not exist income is
taxable under some other head as in the case of partner of a frm, advocates, chartered
accountants, LIC agents, small saving agents, commission agents, etc. Besides, only those
payments which have a nexus with the employment are taxable under the head 'Salaries. Salary
is chargeable to income-tax on due or paid basis, whichever is earlier. Any arrears of salary paid
in the previous year, if not taxed in any earlier previous year, shall be taxable in the year of
payment.
Tax planning regarding salary is relevant for both the employer as well as the employee.
A. From Employer's Point of View: Whatever payments the employer is giving to his
employee, the same he would like to debit to his Profht and Loss account so that his taxable
business income comes to minimum and he has to pay a lesser amount of tax. In case he is
unable to debit such payments to his Proht and Loss Account, then he will be required to pay tax
from his own pocket on such payments or remunerations given to employees. Hence every
businessman would like to make only type of payments which are deductible while calculating
business income.

B. From Employee's Point of View: Salary received or receivable by the employee

whether in cash or in kind is taxable in employee's hands. Employee would be interested to get
all type of benefits, allowances, perks etc. from his employer but at the time, he will be keen to
pay the minimum of tax. The scope of tax planning from the angle of employees is limited. The
defhnition of salary is very wide and includes not only monetary salary but also benefits and
perquisites in kind. The only deductions available in respect of salary income are the deduction
for entertainment allowance and deduction for professional tax. Following are the some of the
tips of tax planning under the head salaries:
1. Salary Structure: The employer should not pay a consolidated amount as salary to the
employee. If so paid entire amount is taxable. So split the salary as basic pay, allowances and
perquisites in order to get exemptions and deductions available to allowance and perquisites
The employer has to make a careful study and fix the salary structure in such a manner that it
will include llowances which are exempt.
2. Employees Welfare Schemes: There are several employees' welfare schemes such as
PF, approved superannuation fund, gratuity, etc. Payments received from such funds by the
employees are totally exempt or exempt up to signifcant amounts. The employer is well advised
to institute such welfare schemes for the benefit of the employees.
3. Insurance Policies: Any payment made by an employer on behalf of an employee to
maintain a life policy will be treated as perquisite in the hands of employee. Further, payments
received from the employer in respect of Key man Insurance Policies constitute income in the
hands of the employees. But the premium paid by employer on accident insurance of employee
will not be treated as
perquisites
4. Rent Free Accommodation/ House Rent Allowance: An employee should analyze the
tax incidence of a perquisite and an allowance, whenever he is given an option. The employee
should work out the taxability of HRA and taxability of RFA separately and select least taxable
item.

5. Dearness Allowance, Dearness Pay: It should be ensured that, under the terms of
employment, dearness allowance and dearness pay form part of basic salary. This will minimize
the tax incidence on house rent allowance, gratuity and commuted pension. Likewise, incidence
of tax on employer's contribution to recognized providernt fund will be lesser if dearness
allowance forms a part of basic salary.
6. Commission: Commission payable as per the terms of contract of employment at a
fixed percentage of turnover achieved by an employee, falls within the expression "salary" as
defined in rule 2(h). Consequently, tax incidence on house rent allowance, entertainment
allowance, gratuity and commuted pension will be lesser if commission is paid at a fixed
percentage of turnovers achieved by the employee.
7. Uncommuted/ Commuted Pension: An uncommuted pension is always taxable;
employees should get their pension commuted. Commuted pension is fully exempt from tax in
the case of Government employees and partly exempt from tax in the case of non government
employees who can claim relief under section 89.
8. Provident Fund: An employee being the member of recognized provident fund, who
resigns before 5 years of continuous service, should ensure that he joins the firm which
maintains a recognized fund for the simple reason that the accumulated balance of the
provident fund with the former employer will be exempt from tax, provided the same is
transferred to the new employer who also maintains a recognized provident fund.
Since employers' contribution towards recognized provident fund is exempt from tax up
to 12 percent of salary, employer may give extra benefit to their employees by raising their
contribution to 12 percent of salary without increasing any tax liability
9. Medical Allowances: While medical allowance payable in cash is taxable, provision of
ordinary medical facilities is not taxable if some conditions are satisfied. Therefore, employees
should go in for free medical facilities instead of fxed medical allowance.

10. Retirement Benefhts: Since the incidence of tax on retirement benefts like gratuity,
commuted pension, accumulated unrecognized provident fund is lower if they are paid in the
beginning of the financial year, employer and employees should mutually plan their affairs in
such a way that retirement, termination or resignation, as the case may be, takes place in the
begining of the fnancial year. An employee should take the beneht of relief available section 89
wherever possible. Relief can be claimed even in the case of a sum received from URPF so far as
it is attributable to employer's contribution and interest thereon. Although gratuity received
during the employment is not exempt u/s 10(10), relief u/s 89 can be claimed. It should, however
be ensured that the relief is claimed only when it is benefhcial.
 10. Retirement Benefits: Since the incidence of tax on retirement benefhts like gratuity,
commuted pension, accumulated unrecognized provident fund is lower if they are paid in the
beginning of the financial year, employer and employees should mutually plan their affairs in
such a way that retirement, termination or resignation, as the case may be, takes place in the
beginning of the financial year. An employee should take the benefit of relief available section 89
wherever possible. Relief can be claimed even in the case of a sum received from URPF so far as
it is attributable to employer's contribution and interest thereon. Although gratuity received
during the employment is not exempt u/s 10(10), relief u/s 89 can be claimed. It should, however,
be ensured that the relief is claimed only when it is benefhcial.
11. Pension Received by Non Residents: Pension received in India by a non resident
assessee from abroad is taxable in India. If however, such pension is received by or on behalfof
the employee in a foreign country and later on remitted to India, it will be exempt from tax.
12. Leave Travel Concession: As the perquisite in respect of leave travel concession is
not taxable in the hands of the employees if certain conditions are satished, it should be ensured
that the travel concession should be claimed to the maximum possible extent without attracting
any incidence of tax.
13. Free Gift of Assets: As the perquisites in respect of free gift of movable assets(other
than computer, electronic items, car) by employer after using for 10 years or more are not
taxable, employees can claim these beneDts without adding to their tax bill.
14. Perquisites: Since the term "salary" includes basic salary, bonus, commission, fees
and all other taxable allowances for the purpose of valuation of perquisite in respect of rent free
house, it would be advantageous if an employee goes in for perquisites rather than for taxable
allowances. This will reduce valuation of rent free house, on one hand, and, on the other hand
the employee may not fall in the category of specified employee. The effect of this ingenuity will
be that all the perquisites specified u/s 17(2)(ii) will not be taxable.

B) mHo se Propert
The Annual value of a house property is taxable as income in the hands of the owner of
the property. For tax purpose, properties may be classifed as "Self Occupied Property" and "Let
out Property
a) Self-occupied property.: For two self-occupied house property, which has not been let
out, the Annual Value is taken as nil. Where the house is self-occupied, the interest on capital
borrowed after 01.04.1999 for acquisition / construction is allowed as deduction subject to a
maximum of Rs. 2 lakhs, provided the construction/ acquisition is completed within 5 years from
the end of the financial year in which the loan was borrowed. On all loans taken prior to the
above date and also on loans taken for repairing, renewing or reconstructing the property. the
ceiling is Rs. 30,000. However, in the case of self-occupied property, taxes levied by the local
authority (i.e. municipal tax) cannot be claimed as deduction
b) Let out property: Taxable value of the let out property shall be the higher of the
following:
A. Amount for which property might reasonably expected to let; or
B.Actual annual rent received/ Receivable.
However, where the property was let out but vacant during the whole or part of the year,
then taxable value will be the amount actually received. The municipal taxes actually paid during
the financial year will be deducted from the taxable value to arrive at the Annual value of house
property. From this, standard deduct ion@30% of Annual value of the property and Interest on
borrowed capital for the purpose of acquisition, construction, reconstruction, repairs,
renovation etc. are allowed as deduct ions, to arrive at the taxable income.
If there is a "Loss from House Property', the same can be set off against income from any
other head in the same assessment year. I f the loss cannot be set off against income from any
other head in the same assessment year, the loss is allowed to be carried forward and set off in 8
subsequent years against income from house property only.

Following are some of the tax planning tips under the head Income from House Property.
1. If a person has occupied more than one house for his own residence, only one house of
his own choice is treated as self-occupied and all the other houses are deemed to be let out. The
tax exemption applies only in the case of two self occupied house and not in the case of deemed
to be let out properties. Care should, therefore, be taken while selecting the house( One which
is having higher GAV normally after looking into further details ) to be treated as self-occupied
in order to minimize the tax liability.
2. As interest payable out of India is not deductible if tax is not deducted at source, care
should be taken to deduct tax at source in order to avail exemption u/s 24(b).
3. As amount of municipal tax is deductible on "payment" basis and not on "due" or
"accrual" basis, it should be ensured that municipal tax is actually paid during the previous year
if the assessee wants to claim the deduction.

Business is any trade, commerce or manufacture or any adventure or concern in the

nature of trade, commerce or manufacture. Profession is defined to include any profession or
vocation, which calls for intellectual or manual skil. It covers doctors, lawyers, singers,
musicians etc.
Prohts and Gains from Business or profession, income received from providing services
etc will be treated as Business or Professional income under this head. The following are some
of the important expenses, those can be claimed as deductible expenses.
a) Rent, rates, Taxes, Repairs and Insurance of Premises/ Buildings (Taxes only on actual
payment basis)
b Repairs and Insurance of Plant &Furniture, machinery
c) Depreciation on Building, Plant &Furniture, machinery
d) Insurance premium paid for Stocks/ Stores/ Health Insurance of Employees
e)Interest paid on borrowed capital-from Public financial institution on actual payment
f) PF/Gratuity/ Superannuation Fund contribution etc.on actual payment
g) Bad Debts writ ten off
 i)Expenditure incurred on Entertainment, Traveling, Presentation articles,
B.O
Advertisement, Maintenance of Guest House etc
Every business has to follow either cash or mercantile system of accounting

D)Tax-Planning-CapitalGains
1) Since long-term capital gains bear lower tax, taxpayers should so plan as to transfer
their capital assets normally only 36 months after acquisition. It is pertinent to note that if
capital asset is one which became the property of the taxpayer in any manner specifhed in
section 49(1), the period for which it was held by the previous owner is also to be counted in JI

computing 36 months.

2) The assessee should take advantage of exemption u/s 54 by investing the capital gain SE
arising from the sale of residential property in the purchase of another house (even out of India)
Eng
within specifhed period.
3) In order to claim advantage of exemption under sections 54B and 54D it should be
ensured that the investment in new asset is made only after effecting transfer of capital assets.

4) In order to claim advantage of exemption under sections 54, 548, 54D, 54EC, 54ED,
54EF, 54G and 54GA the tax payer should ensure that the newly acquired asset is not
transferred within 3 years from the date of acquisition.

5) If securities transaction tax is applicable, long term capital gain tax is exempt from tax
by virtue of section 10(38). Conversely. if the taxpayer has generated long-term capital loss, it is
taken as equal to zero. In other words, if the shares are transferred, in national stock exchange.
securities transaction tax is applicable and as a consequence, the long-term capital loss is
ignored. In such a case, tax liability can be reduced.
Or

(6) What propositions may an employee consider for the purpose of tax planning under the
head 'Salaries?
Ans: Existence of 'master-servant' or 'employer-employee' relationship is absolutely essential
for taxing income under the head "Salaries". Where such relationship does not exist income is
taxable under some other head as in the case of partner of a firm, advocates, chartered
accountants, LIC agents, small saving agents, commission agents, etc. Besides, only those
payments which have a nexus with the employment are taxable under the head 'Salaries. Salary
is chargeable to income-tax on due or paid basis, whichever is earlier. Any arrears of salary paid
in the previous year, if not taxed in any earlier previous year, shall be taxable in the year of

payment.
Tax planning regarding salary is relevant for both the employer as well as the employee.

C. From Employer's Point of View: Whatever payments the employer is giving to his
employee, the same he would like to debit to his Profit and Loss account so that his taxable
business income comes to minimum and he has to pay a lesser amount of tax. In case he is
FC
unable to debit such payments to his Profit and Loss Account, then he will be required to pay tax
from his own pocket on such payments or remunerations given to employees. Hence every IG
businessman would like to make only type of payments which are deductible while calculating IG

business income.

D. From Employee's Point of View: Salary received or receivable by the employee

whether in cash or in kind is taxable in employee's hands. Employee would be interested to get
all type of benehts, allowances, perks etc. from his employer but at the time, he will be keennto
pay the minimum of tax. The scope of tax planning from the angle of employees is limited. The
definition of salary is very wide and includes not only monetary salary but also benefts and 8n

perquisites in kind. The only deductions available in respect of salary income are the deduction
for entertainment allowance and deduction for professional tax. Following are the some of the
tips of tax planning under the head salaries:

1. Salary Structure: The employer should not pay a consolidated amount as salary to the
employee. If so paid entire amount is taxable. So split the salary as basic pay, allowances and
perquisites in order to get exemptions and deductions available to allowance and perquisites.
The employer has to make a careful study and fix the salary structure in such a manner that it
will include allowances which are exempt.
2. Employees Welfare Schemes: There are several employees' welfare schemes such as
PF, approved superannuation fund, gratuity, etc. Payments received from such funds by the
employees are totally exempt or exempt up to significant amounts. The employer is well advised
to institute such welfare schemes for the benefit of the employees
3. Insurance Policies: Any payment made by an employer on behalf of an employee to
maintain a life policy will be treated as perquisite in the hands of employee. Further, payments
received from the employer in respect of Key man Insurance Policies constitute income in the
M
hands of the employees. But the premium paid by employer on accident insurance of employee
NI
will not be treated as perquisites.

4. Rent Free Accommodation/ House Rent Allowance: An employee should analyze the
tax incidence of a perquisite and an allowance, whenever he is given an option. The employee Ug
should work out the taxability of HRA and taxability of RFA separately and select least taxable UG

item.
UG

5. Dearness Allowance, Dearness Pay: It should be ensured that, under the terms of
employment, dearness allowance and dearness pay form part of basic salary. This will minimize
the tax incidence on house rent allowance. gratuity and commuted pension. Likewise, incidence
of tax on employer's contribution to recognized provident fund will be lesser if dearness
allowance forms a part of basic salary.
6. Commission: Commission payable as per the terms of contract of employment at a
fixed percentage of turnover achieved by an employee, falls within the expression "salary" as
defined in rule 2(h). Consequently, tax incidence on house rent allowance, entertainment
allowance, gratuity and commuted pension will be lesser if commission is paid at a fixed
percentage of turnovers achieved by the employee.
 Dearness Allowance, Dearness Pay: It should be ensured that. under the terms of
employment, dearness allowance and dearness pay form part of basic salary. This will minimize
the tax incidence on house rent allowance, gratuity and commuted pension. Likewise, incidence
of tax on employer's contribution to recognized provident fund will be lesser if dearness
allowance forms a part of basic salary.

Commission: Commission payable as per the terms of contract of employment at a

fixed percentage of turnover achieved by an employee, falls within the expression "salary" as
defined in rule 2(h). Consequently, tax incidence on house rent allowance, entertainment
allowance, gratuity and commuted pension will be lesser if commission is paid at a ixed
percentage of turnovers achieved by the employee.

7. Uncommuted / Commuted Pension: An uncommuted pension is always taxable;

employees should get their pension commuted. Commuted pension is fully exempt from tax in
the case of Government employees and partly exempt from tax in the case of non government
employees who can claim relief under section 89.

8. Provident Fund: An employee being the member of recognized provident fund, who
resigns before 5 years of continuous service, should ensure that he joins the firm which
maintains a recognized fund for the simple reason that the accumulated balance of the
provident fund with the former employer will be exempt from tax, provided the same is
transferred to the new employer who also maintains a recognized provident fund.

Since employers' contribution towards recognized provident fund is exempt from tax upP
to 12 percent of salary, employer may give extra benefit to their employees by raising their
contribution to 12 percent of salary without increasing any tax liability.

9. Medical Allowances: While medical allowance payable in cash is taxable,. provision of

ordinary medical facilities is not taxable if some conditions are satisfed. Therefore, employees
should go in for free medical facilities instead of fixed medical allowance.

10. Retirement Benehts: Since the incidence of tax on retirement benefits like gratuity
commuted pension, accumulated unrecognized provident fund is lower if they are paid in the
beginning of the financial year, employer and employees should mutually plan their affairs in
Such a way that retirement, termination or resignation, as the case may be, takes place in the
beginning of the financial year. An employee should take the benefit of relief available section 89
wherever possible. Relief can be claimed even in the case of a sum received from URPF so far as
it is attributable to employer's contribution and interest thereon. Although gratuity received
during the employment is not exempt u/s 10(10), relief u/s 89 can be claimed. It should, however,
be ensured that the relief is claimed only when it is beneficial.

11. Pension Received by Non Residents: Pension received in India by a non resident
assessee from abroad is taxable in India. If however, such pension is received by or on behalf of
the employee in a foreign country and later on remitted to India, it will be exempt from tax.

12. Leave Travel Concession: As the perquisite in respect of leave travel concession is
not taxable in the hands of the employees if certain conditions are satisfied, it should be ensured
that the travel concession should be claimed to the maximum possible extent without attracting
any incidence of tax.

13. Free Gift of Assets: As the perquisites in respect of free gift of movable assets(other
than computer, electronic items, car) by employer after using for 10 years or more are not
taxable, employees can claim these benefits without adding to their tax bl.

14. Perquisites: Since the term "salary" includes basic salary. bonus, commission, fees
and all other taxable allowances for the purpose of valuation of perquisite in respect of rent free
house, it would be advantageous if an employee goes in for perquisites rather than for taxable
allowances. This will reduce valuation of rent free house, on one hand, and, on the other hand,
the employee may not fall in the category of specihed employee. The effect of this ingenuity will
be that all the perquisites specifed u/s 17(2)tii) will not be taxable.