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Year 2004
Q. No. 1 Mr. Ramlal the general manager of Y ltd. Retired on December 31,2003 after 30 years of service. The particulars of his income are as follows: (a) Salary Rs. 8,000 per month from January 1, 2003. House rent allowance Rs. 3,000 per month from January 1, 2003. (b) Medical expenses reimbursed by the employer Rs. 21,000 for the period from April 1, 2003 which includes Rs. 5,000 paid to a Government hospital. (c) The employer provides him a car of less than 1.6 litres capacity and driver for official and personal use. (d) Ramlal contributes 22% ( 12% regular and 10% additional voluntary contribution) to a recognized provident fund and the company matches his regular contribution of 12% (e) He lives in a rented house in Delhi and pays Rs. 4,000 per month as rent. (f) Ramlal received Rs. 1,50,000 as gratuity. He is not covered by the payment of Gratuity Act.1972. (g) He received Rs. 1,60,000 for encashment of leave, being 10 months leave not availed of. (h) In addition to the above he is provided with the other benefits and facilities such as (i) (ii) (iii) (iv) Free gas and water for his domestic use Rs. 4,000 A domestic servant ( Salary paid by the employer ) 3,500 Free lunch outside office Rs.5,000. Education allowance of Rs. 6,000.

Compute Mr. Ramlals Income for the assessment year 2004-2005. Solution: (Kindly beware of the dates in such questions. Given data pertains to Calendar Year, where as IT Act mandates accounting on only Financial Year basis ie 01 Apr to 31 Mar. Therefore all income/expenditure from 01 Jan to 31 Mar 2003 have to be disregarded in calculation). Assessment Year 2004-05 Name Mr Ramlal Computation of Income Salary (Apr 03-Dec 03) = Rs 8000 x 9 months 72000 House Rent Allowance = Rs 3000 x 9 months 27000 Less: Exempted Amount (Refer Note 1 for calculations) 27000 NIL Medical Expenses Reimbursement 21000 Less: Exempt amount as per IT Act 15000 6000
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Car Perquisites = 1200 PM x 9 months Add: Drivers salary valuation 600 x 9 months Gratuity (Refer Note 3 for calculation) Leave Salary (Refer Note 4 for calculation) Other Perquisites (a) Free Gas and Water (b) Domestic Servant (c) Lunch Outside office premises (d) Education Allowance Less: Exempt = 2 (100 x 9) for 2 children Income From Salary NOTES:

10800 5400

16200 30000 80000 4000 3500 5000

6000 1800

4200 220900

Note 1: House Rent Allowance Calculation (a) 50% of Salary = x 8000 = 4000 (b) Actual HRA received 3000 (c) Rent Paid minus 10% of Salary = 4000 800= 3200 Least of the above three amounts eligible for tax exemption. So, Rs 3000 PM is exempted. Note 2: Recognised Provident Fund Employer Contribution = 12% of Salary. This is the maximum Tax Free employers contribution permitted by the Act. So, it is fully exempted. Note 3: Gratuity (a) Admissible gratuity by law = month salary x years of service = 4000 x 30= 120000 (b) Specified Amount by Central Govt 350000 (c) Actual Gratuity received 150000 Least of the above 3 amounts is the tax exempted gratuity amount = 120000 Balance amount = 150000 -120000 = 30000 is taxable Note 4: Leave Encashment (a) Entitlement as per law = Max 30 days accumulation per year of service = 8000 x 30 years 240000 (b) 10 months salary at average rate = 8000 x 10 = 80000 (c) Max Amount specified by Central Govt = 300000 (d) Actual amount received by Ram Lal 160000 Least of the above four amounts is tax exempted amount = 80000 Balance amount = 160000 80000 = 80000 is taxable.

Q. No.2. 31-03-2004.

Following is the Profit and Loss account of SS. Ltd. For the year ended

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Particulars To Opening Stock Finished goods 5,00,000 Work-in-progress 1,00,000 To Raw material consumed To Salaries, Wages and bonus To Power and fuel To Stores To Administrative expenses To sales expenses To Depreciation To Interest to: Supplier for late payment Unsecured lenders Bank Debentures Financial Institutions To Provision for income tax To Transfer to: General reserve Debenture redemption To Interim dividend To Proposed dividend To Balance C/fd You are informed that (a) (b) (c) (d) (e)

Rs.

6,00,000 44,00,000 16,00,000 4,00,000 10,00,000 5,00,000 10,00,000 15,00,000 1,00,000 4,00,000 2,00,000 3,00,000 5,00,000 25,00,000 30,00,000 15,00,000 10,00,000 15,00,000 5,00,000 2,25,00,000

Particulars By Sales By Commission By Excess provision no Longer needed: For income tax For expenses By Closing Stock: Finished goods Work-in-progress

Rs. 1,80,00,000 30,00,000 5,00,000 2,00,000 7,00,000 1,00,000

_________ 2,25,00,000

Sales expenses included Rs. 50,000 being entertainment expenses. Money borrowed through debentures was used for new plant and machinery costing Rs. 30,00,000. Depreciation allowable as per Income Tax rule is Rs. 25,00,000 Administrative expenses include Rs. 20,000 paid for carrying on scientific research Out of interest debited to Profit and Loss account the following is unpaid: (i) (ii) To suppliers for late payment Rs. 10,000 To financial institutes Rs. 50,000

The above amounts were unpaid till 31 October 2004, the due date for filing the return of income for SS ltd. Shri Jash, The Managing Director asks you to compute profits and gains of business for the assessment year 2004-2005. (20) Solution: Assessment Year 2004-05
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Income from Business/Profession Net Profit as per Profit and Loss Statement (Balance C/F) Add: Inadmissible Items Depreciation charged off Interest unpaid to FI (U/s 43 B)(Note 3) Provision for Income Tax Transfer to Reserves (3000000 + 1500000) Interim Dividend Proposed Dividend Less: Admissible Expenses Depreciation as allowed by IT Rules Weighted Deduction for Scientific Research Excess Provision (500000 + 200000) Total Taxable Income NOTES Note 1: Weighted deduction towards scientific research = 125% = 20000 x 125% = 25000 Balance amount admissible = 25000 20000 = 5000 Note 2: Entertainment expenditure are considered as Business Expenses and therefore fully exempt from tax. Note 3: Owings to Financial Institutions/Duty payment to Govt, etc are not allowed on accrual basis. These are admissible only on payment basis. Note 4: Interest on debentures is considered as revenue expense since date of expense vis a vis date of production is not given in the question paper. Thus capitalization of expense for pre-production period is not possible. Note 5: Dividend is not allowed as business expenses. Transfer to reserves is also not allowed as an expenses. Any provisions are also not allowed. Income Tax payment is specifically disallowed as business expense. 500000 1500000 50000 2500000 4500000 1000000 1500000 2500000 5000 700000

11050000 11550000

3205000 8345000

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Q. No.3.

Write Short notes on (any three) (a) Exempt Income (b) Expenditure on Scientific Research (c) Deduction of Export profits (d) Speculation losses (e) Entertainment allowance

(5 X 3 = 15)

Ans: (a) Exempt Income: Income Tax Act exempts certain incomes from levy of income tax. Most of these incomes are listed under Chapter VI A. Following are some of them: (i) Agricultural Income: Entire agricultural Income is exempt from tax. However, if the assessee has other incomes also, agricultural income is to be accounted while calculating the tax liability. It means that in case of agricultural income together with other incomes, other incomes will move into the higher tax brackets. (ii) Payment from HUF at the time of Partition of HUF: Since HUF property is a shared property of all members, its division is only redistribution of assets among the existing owners and not an income in the hands of the assessees. Thus, it is exempt from levy of income tax. (iii) Share Profit of a Partnership Firm: Share of profit from a Partnership Firm in the hands of a partner is nothing but income from business and profession on which tax has already been paid. Further tax would amount to double taxation. Thus it is exempt from tax. (iv) House Rent Allowance: IT Act allows HRA as a tax free allowance with certain restriction imposed on maximum amount payable tax free based on city criteria, basic salary, etc. (v) Leave Salary: Leave salary when paid as the terminal benefit is allowed as tax free payment with some limitations imposed on the maximum Tax free amount. (vi) Provident Fund Contribution by Employer/Interest Accrued on PF Deposits: These payments are allowed as tax free. (b) Expenditure on Scientific Research: Act provides for weighted deduction for investments made in scientific research. Expenditure on In-House Research 150% Sponsorship to IIT or other Govt Laboratories 125%. Deduction for Export Profits: From current assessment year, old section on export profits has been deleted. However, following sections are still available for claiming exemption of export income: Sec 10 A If a company is in Free Trade Zone Income is exempt from tax for 10 years.
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(c)

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Sec 10 AA Special provisions in respect of newly established Units in Special Economic Zones. 100 % profit exempted for 5 years and 50 % profits exempted for next 5 years Sec 10 B Income from 100% Export Oriented Units is exempted from tax for 10 years irrespective of location of factory. Sec 10 BA Special provisions in respect of export of certain articles or things. 100% deduction allowed. (d) Speculation Losses: (i) (ii) Speculation Losses can be set off against profits from speculation businesses only and no other businesses. Speculation losses can be carried forward up to next 4 years for setting off against gains from speculation business in future.

(e) Entertainment Allowance: Entertainment allowance is allowed only to Govt Servants to meet the hospitality expenses on official visitors. It is a flat allowance with no strings of actual expenditure incurred. It is allowed as least of the following: (i) 20% of the basic salary (ii) Rs 5000/(iii) Actual amount received as Entertainment allowance. Note: This benefit is not allowed to private sector salaried persons.

Q. No. 4 (a) How will you determine the income from house property under the Income Tax Act? (7) Ans: Method to Compute Income from House Property. Step 1: Compute Gross Annual Value of the House. Find out Expected Rent by comparing Municipal Valuation, Fair Rent and Standard Rent. Higher of Municipal Valuation and Fair Rent is to be taken provided it does not exceed the Standard Rent. Else take Standard Rent. Step 2: Compare the expected rent with actual rent received/receivable. Whichever is higher, will be selected as Gross Annual Value. Note: Rent received/ receivable does not include rent of the period for which the property remains vacant and unrealized rent. Chart to Compute Gross Annual Value Municipal Value V/s Fair Rent Step 3. Property. Higher of the two V/s Standard Rent

Lesser of the two V/s Higher of the two Actual Rent Put various values in table below and find the Income from the House

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1. 2. 3. 4.

Gross Annual Value Less : Municipal Taxes Net Annual Value Less: Deductions U/S 24 (a) (b) Standard Deduction @ 30% Net Annual Value Interest on Borrowed Capital

5.

Income from House Property

Note: In case of Self Occupied Property(a) (b) (c) (d) Gross annual value is NIL. No Standard Deduction is allowed. Deduction on account of Interest on Borrowed Capital is limited to Rs 150000 per year only. No other deductions like insurance cost, water and electricity charge, collection charges are allowed.

Q. No. 4 (b) Discuss briefly the specific deductions allowed while computing income from House property. (8) Ans. In case of House Property only two deductions are allowed: (a) (b) Standard Deduction Interest on borrowed Capital

No other deductions on any account, whatsoever, like insurance cost, water and electricity charge, collection charges, maintenance charges, etc, are allowed. Standard Deduction: Standard Deduction @ 30% of Net Annual Value is allowed in case of Let Out Property only. It is not allowed in case of Self Occupied property. Interest on Borrowed Capital: Interest on capital borrowed only from Banks and Financial Institutions (not from friends and relatives and private financiers) is allowed as deduction on accrued basis (payment may or not have been made). While there is no limit on amount of interest in case of Let Out Property, there is a limit of Rs 150000 in case of Self Occupied House Property financed post 01 Apr 1999.
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Q. No.5. What are the different categories of persons according to their legal status? Give an illustration of each. (15) Ans: There are 7 categories of Persons defined in the IT Act. This definition is inclusive and therefore further additions at the discretion of IT officer are possible. (a) (b) An Individual (defined as a natural person living human being) Say a Govt Servant, a Businessman. A self employed person A Hindu Undivided Family (HUF) If inherited property is not divided among claimants and put in a separate pool with joint ownership of pool, such an arrangement is called HUF. Senior most among the owners of joint property is called Karta. A company Tata, Reliance, Sahara A Firm a partnership firm like Ram Lal Chhagan Lal Enterprises having two or more partners in business. An association of person or a body of individuals, whether incorporated or not. Like Housing Societies. A local authority Municipal Corporation of Mumbai Every artificial judicial person not falling within any of the preceding categories. Like Thirumala Devsthanam Trust.

(c) (d) (e) (f) (g)

Q. No.6 (a) Tax Act.

Briefly discuss any 5 incomes, which are exempt under section 10 of Income (8)

Ans: Exempted incomes are listed under Chapter VI A. Some of these have been discussed in Question 3 (a) above.

Q. No.6 (b) What do you mean by depreciation under Income Tax Act. Briefly explain the calculation of depreciation for Income Tax Act. (7) Ans. Capital Expenses are not allowed to be charged off as business expense in the year of expenditure. Instead, capital investments are allowed to be charged off gradually as business expenses in the form of Depreciation at laid down WDV rates.

Conditions for Claiming Depreciation U/S 32

(a) (b) (c) (d) Asset must be owned by assessee It must be used for the purpose of business/profession It should be used during the relevant previous year Depreciation is available on tangible as well as intangible assets.

Other Salient Points

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(a) (b)

Registered ownership is not necessary. If an asset is used for less than 180 days (i.e. purchased after 02 Oct of the previous year), only 50% depreciation is allowed.

Calculation of Depreciation: Depreciation is calculated on the basis on Block of Assets. Different item have different rates of depreciation allowed by the IT Act. A group of assets allowed same rate of depreciation is called Block of Assets. In case of Income Tax, depreciation is calculated on WDV basis and not SLM basis.

Different Situations to Compute Depreciation

(a) When the Written Down Value of a Block is Reduced to Zero: Depreciation is allowed on cumulative WDV of assets in a block. In case the WDV of any block falls to Zero or negative due to say spectacular profits on sale of any old asset, no depreciation would be admissible for that block of asset even though other assets with individual WDV are still there. Stated in other words no depreciation is admissible if net WDV of a particular block of assets is reduced to Zero, though the block of assets does not cease to exist. (b) If the Block of Assets Ceases to Exist: If a block of assets ceases to exist i.e. If all the assets of the block have been transferred and the block of assets is empty on the last day of the previous year, no depreciation is admissible in such case.

Q. No.7(a) Enumerate the provisions of set-off and carry forward losses as contemplated under the Income Tax Act in respect of different types of business activities. (10) Ans. Many Person have more than one source under a head of income or even more than one head of income. While some sources and heads may have positive income, there could be some heads or sources where there could be loss as well. There are limitations placed on intra-head and even intra-source adjustments of profits and loss. The process of setting off of losses and their carry forward may be covered in the following steps: Step 1: Step 2: Step 3: Inter-source adjustment under the same head of income. Inter-head adjustment in the same Assessment Year. Step 2 is applied only if a loss cannot be set off under Step 1. Carry forward of loss. Step 3 is applied only if a loss can not be set off under steps 1 and 2.

Inter-Source Adjustment: If the net result for any Assessment Year in respect of any source, under any head of income, is a loss, the assessee is entitled to have the amount of such loss SET OFF against his income from any other source under the same head of income for the same Assessment Year. Exceptions:
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(a) (b) (c) (d) (d)

Loss from Speculation Business: speculation businesses only.

Set off allowed from gain from

Long Term Capital Loss: Set off allowed from Long Term Capital Gain only. Loss from Activity of Owning and Maintaining Race Horses: Set off allowed from profits of same business only. Loss from Business: Can not be set off against income under the head Salaries. Loss from Lotteries, Cross Word Puzzles, Etc.: No set off of loss is allowed.

Other than above 4 cases, any other loss can be set off against any other income within the same head of income. Inter- Head Adjustment: When the net result of computation made for any Assessment Year in respect of any head of income is a loss, such loss can be set off against the income from other heads with the exception of heads noted above. In case the loss can not be adjusted in the same year, CARRY FORWARD OF LOSSES is allowed to be set off against profits of subsequent years. (a) (b) (c) (d) (e) (f) Loss from Let Out House Property in 8 subsequent years against gains from House property only Loss from Self Occupied Property From any head Pre construction period interest 5 years in equal instalments Loss from Business/Professions 8 years against gains from business profits Loss from Speculation business 4 years against gains from same business Loss from Capital transfer 8 years against Capital gains only

Q. No.7(b) Discuss the scope of the head Income from other Sources and explain the deductions available under the head. (5) Ans: Income from Other Sources is the last and residual head of income and covered under Section 56. Any income which does not specifically fall under any of the other four heads of income (Viz Salary, Income from House Property, Profits and Gains from Business or Profession or Capital Gains) is to be computed and brought to charge under Section 56 under the head Income From Other Sources. Although the list of such incomes is very long, following 8 incomes are always charged under this head: (a) (b) Dividend Winnings from lotteries, races gambling or betting etc.
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(c) (d) (e) (f) (g) (h)

Interest on deposits/securities Any sum of money exceeding Rs 25000 is received without any considering (Gift) by Individual or HUF after 31 Aug 04. Income from machinery plant or furniture let on hire Income from letting of plant, machinery, furniture etc along with the building and letting of building is inseparable from plant/machinery etc. Sum received by employer from his employees as contribution towards any Staff Welfare Scheme Any sum received under a Keyman insurance policy including the bonus if not taxed as salary or business income.

Deductions from Income from Other Sources (Section 57): Only following deductions are available: (a) (b) Expenses for the purpose of realizing dividend/interest. Family pension: (i) (ii) (c) Rs.15000 or 33.33% of such income,

whichever is lower From Income from machinery, plant or furniture let on hire: Repairs, Insurance premium, and depreciation are deductible.

Q. No.8 (a) Explain Long Term Capital Gains. How do you calculate Long Term Capital Gains? (8) Ans: Long Term Capital Gains arise out of transfer of capital assets which have been owned for 36 months or more. In case of share market instruments like shares, debentures, Units of UTI, Mutual Funds, etc, qualifying holding duration is only 12 months. That is to say: if a stock market instrument was held for 12 months or more prior to transfer, it is to be computed under Long Term Capital Gains. Long Term Capital Assets are generally taxed at lower rate. They also get the benefit of indexation which reduces the tax incidence further.

Method to Compute Long Term Capital Gain Step

1. 2. Find out full value of sale/consideration Deduct the following: (a) Expenditure incurred wholly and exclusively in connection with such transfers
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Amount
xxxx

xxxx

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(b) Indexed Cost of acquisition (c) Indexed Cost of Improvement Gross Capital Gain 3. 4. From the resulting sum, deduct various exemptions provided by Sections 54, 54B, 54EC, 54AD, 54F, 54G The Balance amount is Long term Capital Gain

xxxx xxxx

xxxx XXX xxxx XXX

Computation of Indexed Cost of Acquisition: Fair market value as on 01 April 1981 or X Cost inflation index for the year in Cost of acquisition whichever is more which the asset is transferred. Cost inflation index for 1981-82

Q. No.8 (b) Ans:

Briefly explain the deductions with respect to Long Term Capital Gains. (7)

Income Tax Act grants total or partial deduction of capital gains under sections 54, Section 54: Capital Gains Arising From the Transfer of Residential House Property: If such capital gains are reinvested in another house property within a period starting 1 year before the gains to 3 years after the gains. Section 54 B: Capital Gains from transfer of Agricultural land purpose are reinvested in another agricultural land. Section 54 D: Capital gains due to compulsory acquisition of land and building of Industrial Undertaking. Section 54 EC: Capital Gains on investment in certain bonds if it is reinvested are another specified asset. Section 54 ED: Capital Gains from investment in certain listed securities/units. Section 54 F: Capital gains on transfer of a long term capital asset other than a House Property, and amount must be invested in house property. When the gains arising out of transfer of assets other than House Property are reinvested in House Property, such amount is exempted from Capital Gains tax. Section 54 G: Capital gains arising out of shifting of industrial undertaking from urban area. *********

54 B, 54D, 54 EC, 54 ED, 54 F, 54 G and 54H.

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Year 2003
Q.1. Write Short Notes on any of the FOUR: (a) (b) (c) (d) (e) (f) (g) Ans: (a) Dividend received by individuals Concept of income accrued or arising Depreciation allowable u/s 32 Payment/s made in cash Concept of indexed cost of acquisition Capital Asset and Transfer Annual value Dividend Received by Individuals: Dividend income after 01 Jun 1997, with the exception of FY 2002-03, is not taxable in the hands of the shareholder. The company will pay dividend distribution tax on such dividends. It means that dividend is exempt from taxation in the hands of the individual. Concept of Income Accrued or Arising: Concept of Accrual or Arising of Income means right to receive the payment. Once the right to receive the payment is established, like raising of invoice, or due date of payment in case of time bound payments, income is considered as Accrued. It has no relation to actual receipt of such income. This concept is important because it forms the basis of charge for majority of income. Depreciation Allowable under Section 32: Refer to Q. No.6 (b). Payment/s Made in Cash: Income Tax Act stipulates that all payments in excess of Rs 20000 should be paid by cheque to the extent feasible. There is no limit on number of such small payments. However, in case of payment in cash exceeding Rs 20000, 25% of such payment would be disallowed as business expenses. Which means that, against a business expense of Rs 1 lakh paid in cash, only Rs 75000 would be admissible as business expense. Concept of Indexed Cost of Acquisition: The purchasing power of rupee keeps falling due to inflation and consequently, the value of asset keeps appreciating in rupee terms. Such appreciation in rupee term is not a gain or profit for the assessee and therefore not taxable. To offset such inflation caused appreciation, and find net gain over and above the inflation, the govt provides an inflation index for each year. This index is used to find the inflation adjusted current cost of capital asset. This practice of indexation was started from FY 1981-82, Assessment Year 1982-83. Therefore, all capital assets purchased prior to 01 Apr 1981 are to be indexed on the market value basis on that date or original cost, at the discretion of the assessee. Capital Asset and Transfer: These are the terminologies used with reference to Income from Capital Gains. All assets which are purchased by a company to assist in business and not as stock in trade, are termed as
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(4X5=20)

(b)

(c) (d)

(e)

(f)

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capital assets. Therefore, a particular item say a Truck is capital asset for an assessee in Transport businesses, but stock in trade for a company like Telco or its dealer. However, such capital assets are also required to be disposed off at various points of time. Such disposal transactions are technically called Transfer. Since most capital assets enjoy benefit of liberal depreciation rates, often the market or disposal value of the asset exceeds the depreciated/residual/book value. Such gains when accrued are taxable subject to certain exemptions and conditions. (g) Annual Value: This terminology is used with reference to Income from House Property. House property is assessed for its annual income generation capacity by way of rent on the basis of Municipal valuation/Fair Rent/ Standard Rent. The rent so arrived at is called Expected Rent. Expected Rent is then compared with the actual rent received. Rent so finalized is called Gross Annual Value. Municipal taxes are deducted from Gross Annual Value to arrive at Net Annual Value.

Q.2 Win Win Ltd provides you with the following details to compute its income from business for the Assessment year 2003-04: (20) (a) Net Profit for the financial year 2002-03 amounted to Rs.10,00,000/(b) Income Tax paid for the financial year 2002-03 amounted to Rs.7,00,000/(c) Dividend Income received during the financial year 2002-03 amounted to Rs.2,00,000/(d) Depreciation allowable u/s 32, though provided in the profit and loss account amounted to Rs.4,50,000/- is Rs.3,00,000/- only. (e) Amounts received not taxable under the Act not credited to P & L A/c amounted to Rs.5,00,000/(f) Salary paid amounted to Rs.25,75,000/- was duly accounted before arriving at the net profit of Rs.10,00,000/- for the financial year 2002-03. (g) Discount paid amounted to Rs.2,00,000/- was duly accounted during the financial year 2002-03 before arriving at the Net Profit mentioned above. (h) The disallowances u/s 43B amounted to Rs.4,50,000/- during the financial year 2001-02 subsequently duly paid.

Ans: Assessment Year - 2003-04 Net Profit as per Profit and Loss Statement Add: Inadmissible Items
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1000000

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Income Tax Depreciation (taken separately) Less: Dividend Income Depreciation Allowed by IT Act Expenses U/s 43 B NOTES

700000 450000 200000 300000 450000

1150000 2150000 950000 1200000

Note 1: Dividend income is considered business income from other sources. Note 2: No treatment is required for serials e, f and g since these have already been taken care of and therefore information is superfluous and unnecessary.

Q.3. Discuss any three sections under the Act which provide for exemption or deduction in respect of export earnings. (15) Ans. Refer to answer at Question 3(c) of 2004 Question Paper.

Q.4.

Explain briefly the exemptions available u/s 10 with reference to any 5 items.

Ans. Incomes exempt under Section 10: (a) Agricultural Income. Agricultural income has been exempt from Income tax by an Act of Parliament. (b) Leave Salary on termination /Retirement of job. (c) Death cum retirement gratuity. (d) Commuted Value of Pension. (e) Leave travel concession/travel assistance on retirement (f) Any sum received under a life insurance policy (g) Workman Compensation on termination of job. (h) Amount received as part of share on dissolution of HUF. (i) Share of profits received by partners from a partnership firm. Since the profits have already been taxed in the hand of the partnership firm and therefore taxing it again would amount to double taxation. (j) Any allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for rendering service outside India;

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Q.5. Mr A receives Salary of Rs.6,00,000/- during the financial year 2002-03. He claims the Standard Deduction amounting to Rs.20,000/- and profession tax of Rs.3,000/Mr A also receives income from other sources consisting of dividend income and income from bank deposits amounting to Rs.50,000/- and Rs.5,000/- respectively. He also informs of claim u/s 88 amounting to Rs.10,000/You are advised to compute the taxable income of Mr A. (15) Ans. Accounting Year 2005-06 600000 (-) 3000 50000 50000 6000 NIL 5000 602000 5000 597000

Income From Salary Less: Professional Tax Income from Other Sources Dividend Less : Exemption Interest on bank deposits Gross Total Income Less: Deduction under chapter VI A U/s 80L Taxable Income

Note 1. No Standard Deduction is allowed since total income is over Rs 500000. Note 2. Dividend is tax free in the hands of share holder.

Q.6. (a)

Distinguish between Taxable profit and Commercial profit

(5)

Ans. Distinction between taxable profits and commercial profits arise because different set of rules followed by company law board as per which balance sheet is to be prepared and Income Tax Act. Many business expenses which are disallowed by IT Act are allowed to be charged off in balance sheet and vice versa. Take the case of expenditure on research which is allowed on weighted deduction basis by Income Tax Act but not in Balance Sheet. Thus, Taxable profit is one which is calculated by applying IT Act regulations and used for levying Income Tax. Commercial profit is one which is calculated by the rules of Company Law Board and reflected in the balance sheet for projection to the stake holders. Q.6. (b) Any three specific disallowances under the head Income from business or profession (10) Ans. Specific disallowances under the head Income from Business or Profession are given by Sections 40, 40A and 43B. These are: (a) Interest, Royalty, /fees for technical services payable to a non resident (Sec 40(a)(i) if the amount is payable outside India or to a non resident or foreign company within India if the tax is not deducted. Fringe Benefit tax [Sec 40(a)(ic)}
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(b)

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(c)

Income Tax [Sec 40(a)(ii)] Any sum paid as Income Tax is not deductible. Similarly any interest penalty or fine levied by IT department for any delay or other infringement is also not deductible. Wealth Tax Salary Payable outside India without tax deduction. Payments made to relatives if expenditure is considered to be xcessive or unreasonable having regard to fair market value.

(d) (e) (f)

Q.7. (a)

Explain the concept of capital and revenue expenditure.

(5)

Ans. Capital Expenditure - Broadly speaking, expenditure on the acquisition of a fixed asset or expenditure which extends the life or value of an existing fixed asset is called Capital Expenditure or CAPEX. In other words, it is an expenditure that is recorded as an asset because it is expected to benefit more than the current period or an expenditure intended to benefit the future activities of a business, usually by adding to the assets of a business, or by improving an existing asset. An expenditure made for purchase of goods with useful lives of more than one year is classified as CAPEX. Such expenditures are not deducted in the year they are paid, even if they are paid in connection with a trade or business. In other words, they are capitalized and generally may be depreciated or amortized. Revenue Expenditure - The cost of resources consumed or used up in the process of generating revenue are generally referred to as revenue expenses. In other words, it is an expenditure that is expected to provide a benefit for only a specific accounting period.

Q.7. (b) Give five examples of expenditure incurred wholly and exclusively for the purpose of business. (10) Ans. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) Cost of Raw Material Salary and perquisites paid to the employees Commission paid to selling agents Interest paid on finance raised from banks or other sources. Litigation expenses paid to protect trade or business Royalty paid for using trade mark of another company License fee for carrying on the trade. Annual Listing Fee paid to Stock Exchanges Stamp and registration charges for entering into any contract. Rent of the premises
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Q.8.

(d) (e) Ans.

Write Short Note on any three: (a) Agricultural Income (b) AOP and BOI (c) Mediclaim Speculation losses Stock options

(3X5=15)

(a)

Agricultural Income: Entire agricultural Income is exempt from tax. However same is to be accounted while calculating the tax liability. It means that in case of agricultural income together with other incomes, other incomes will move into the higher tax brackets. AOP and BOI: AOP and BOI are abbreviations for Association of Persons and Body of Individuals. The difference between the two lies in the definition of person in the Income Tax. In the Income Tax Act, a Person is defined as any entity, living or just legal, which earns income. Where as any living human being is defined as Individual. Thus, an Association of Persons (AOP) is a heterogeneous group of any number of entities from the list of 7 Persons as defined in the IT Act. A BOI will consist of only natural persons. Mediclaim: Medical premium payment (Mediclaim) is covered under section 80D and deducted from gross total income. The maximum amount of premium paid to be considered for deduction is Rs 10,000. However in the case of senior citizens, the maximum amount eligible for deduction is Rs 15,000. Speculation Losses: (i) (ii) Speculation Losses can be set off against profits from speculation businesses only and no other businesses. Speculation losses can be carried forward up to next 4 years for setting off against gains from speculation business in future.

(b)

(c)

(d)

(e)

Stock Options (ESOP): "Employees Stock Option Scheme" under which a company grants option to its employees to buy a specified number of shares at a specified price during a specified period. In some cases it is also termed as Employee Stock Ownership Plan" whereby an employee of the company is given option to acquire shares of the company at a pre-determined price after a certain period, directly or indirectly through a trust. Benefits under an ESOP are not taxable as a perquisite.

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