BCOC 136
Income Tax Law and Practice
BCOC 136 Solved Free Assignment 2023
BCOC 136 Solved Free Assignment January 2023
Section-A
Q 1 What do you understand by casual income? How are they treated under the Income Tax Act?
Ans. Casual income is a type of income that is earned irregularly and sporadically through temporary or short-term work, such as freelancing, temporary employment, or part-time work.
It is often characterized by its unpredictability, which makes it difficult to rely on as a stable source of income. Casual income can also come from sources like rental properties, hobbies or side businesses.
The Income Tax Act of 1961 is the principal tax legislation in India that governs the taxation of income earned by individuals and other entities.
Casual income is treated differently under the Income Tax Act compared to regular income, as it is taxed at a different rate and is subject to different tax rules.
In general, casual income is subject to income tax, and the tax rate depends on the total amount of income earned during the financial year.
Income tax is calculated on the total income earned during the financial year, which is the period from April 1 to March 31 of the following year.
For the purpose of taxation, casual income is treated as additional income, and it is added to the total income of the taxpayer.
The tax rate on casual income depends on the tax slab that the taxpayer falls into. The tax slab is determined based on the total income earned during the financial year.
The tax rates are progressive, which means that the tax rate increases with the increase in income.
For example, for the financial year 2022-23, if the taxpayer’s total income is less than Rs. 2.5 lakhs, then they are exempted from paying income tax. If their income is between Rs. 2.5 lakhs and Rs. 5 lakhs, then they are taxed at a rate of 5%.
If their income is between Rs. 5 lakhs and Rs. 10 lakhs, then they are taxed at a rate of 20%, and if their income is more than Rs. 10 lakhs, then they are taxed at a rate of 30%.
It is important to note that casual income is also subject to other taxes, such as the Goods and Services Tax (GST) and the Professional Tax (PT).
GST is a tax on the supply of goods and services, while PT is a tax on the income earned by professionals, such as doctors, lawyers, and engineers.
The rate of GST and PT varies depending on the type of goods or services provided and the state in which the taxpayer is located.
One of the key challenges with casual income is that it can be difficult to track and report, particularly if the income is earned from multiple sources.
Taxpayers are required to maintain accurate records of their income and expenses to ensure that they pay the correct amount of tax.
This includes keeping track of invoices, receipts, and other financial documents that can help to substantiate their income and expenses.
Taxpayers who earn casual income are also required to file their income tax returns on time. The due date for filing income tax returns for the financial year 2022-23 is July 31, 2023.
Taxpayers who fail to file their returns on time may be subject to penalties and interest charges.
One of the ways in which taxpayers can manage their casual income is by using a tax professional or accounting software.
Tax professionals can help to ensure that taxpayers are paying the correct amount of tax and filing their returns on time.
Accounting software can also help to track income and expenses, generate invoices, and prepare financial reports that can be used for tax purposes.
Taxpayers who earn casual income may also be eligible for certain tax credits, which can further reduce their tax liability. Tax credits are a form of tax incentive that allows taxpayers to reduce their tax liability by a certain amount.
For example, the government of India offers a tax credit for contributions made to the National Pension System (NPS), which can help taxpayers save on their taxes.
Overall, casual income can be a valuable source of income for individuals who are looking for flexible work arrangements or supplemental income.
However, it is important for taxpayers to understand the tax implications of casual income and to ensure that they are paying the correct amount of tax.
By keeping accurate records of their income and expenses and working with tax professionals or using accounting software, taxpayers can effectively manage their casual income and avoid any potential tax issues.
It is also important to note that the taxation of casual income can vary depending on the type of work performed. For example, if the casual income is earned through a freelance job or self-employment, then it may be subject to additional taxes, such as the Self-Employment Tax.
This tax is a social security and Medicare tax that is typically paid by self-employed individuals.
In addition, the tax rules for casual income can also differ depending on the industry in which the income is earned.
For example, the tax rules for casual income earned by artists, writers, and musicians may be different from the tax rules for casual income earned by professionals in other fields.
Finally, taxpayers who earn casual income should be aware of any tax incentives or exemptions that may be available to them.
For example, some states offer tax exemptions for small businesses or tax incentives for renewable energy projects. By taking advantage of these incentives, taxpayers can reduce their tax liability and make the most of their casual income.
Q 2 From the following particulars, calculate gross taxable salary of Mr. Ashish for the A.Y. 2022-23.
Basic Pay 10,000
D.A. (Under the terms of employment) Bonus 5,000
Taxable part of Gratuity received 3,00,000
Completed year of service 35 years
Leave consumed during service 28 months
Actual amount of leave encashment 1,50,000
Ans. To calculate the gross taxable salary of Mr. Ashish, we need to first calculate his total income for the year. This will include his salary, any bonus or allowances he receives, and any other income he may have earned.
Basic Pay: Rs. 10,000 per month x 12 months = Rs. 1,20,000
D.A.: Rs. 5,000 per month x 12 months = Rs. 60,000
Bonus: Rs. 5,000 (assumed to be annual)
Total Salary: Rs. 1,85,000
Taxable part of Gratuity: Rs. 3,00,000
Gratuity is tax-free up to a limit of Rs. 20 lakhs, so only Rs. 3,00,000 – Rs. 20,00,000 = Rs. 1,00,000 is taxable.
Leave encashment: Rs. 1,50,000
Leave encashment is also taxable, but the tax treatment depends on the number of years of service, the number of months of leave encashed, and the amount of leave encashment received.
In this case, the completed years of service are 35, and the number of months of leave encashed is 28.
The tax-free limit for leave encashment is Rs. 3 lakhs, but in this case, the actual amount of leave encashment is Rs. 1,50,000, so the entire amount will be taxable.
Total Income = Rs. 1,85,000 + Rs. 1,00,000 + Rs. 1,50,000 = Rs. 4,35,000
Next, we need to calculate the deductions that Mr. Ashish is eligible for under the Income Tax Act. The most common deductions include:
Standard deduction: Rs. 50,000
Deduction under Section 80C: Rs. 1,50,000
Deduction for medical insurance: Rs. 25,000
Total Deductions = Rs. 2,25,000
Therefore, Gross Taxable Salary = Total Income – Total Deductions
= Rs. 4,35,000 – Rs. 2,25,000
= Rs. 2,10,000
Thus, the gross taxable salary of Mr. Ashish for the A.Y. 2022-23 is Rs. 2,10,000.
Q 3 Define annual value and state the deductions that are allowed from the annual value in computing the income from house property.
Ans. Annual value is a term used in the Income Tax Act to determine the income from house property. It refers to the potential rental income that a property can generate in a year, irrespective of whether the property is actually rented out or not.
The annual value is calculated by taking into account various factors such as the actual rent received or receivable, the municipal valuation of the property, and the fair market rent of similar properties in the same area.
The annual value is an important factor in computing the taxable income from house property. In order to arrive at the net taxable income from house property, certain deductions are allowed from the annual value.
These deductions are specified under Section 24 of the Income Tax Act and can help to reduce the taxable income.
The first deduction that is allowed from the annual value is the standard deduction. This deduction is allowed to cover the expenses that are incurred in the maintenance of the property, such as repairs, painting, and property taxes. The standard deduction is currently set at 30% of the annual value.
In addition to the standard deduction, another deduction that is allowed is the interest on home loan. If the property is acquired with the help of a home loan, then the interest paid on the loan is allowed as a deduction from the annual value.
This deduction is allowed on an accrual basis, which means that the interest can be claimed as a deduction even if it has not been paid during the financial year.
The maximum amount of interest that can be claimed as a deduction is Rs. 2 lakhs per financial year for self-occupied properties.
Apart from the above-mentioned deductions, there are certain other expenses that can be claimed as deductions while computing income from house property.
These expenses include the cost of repairs and maintenance, property tax, insurance premiums, and rent paid for vacant properties.
However, it is important to note that only the actual expenses incurred can be claimed as deductions and not the entire amount of annual value.
Furthermore, it is also important to note that the deductions allowed from the annual value may vary depending on the usage of the property.
For example, if the property is used for business purposes, then different deductions may be allowed.
Similarly, if the property is let out for residential purposes, then certain other deductions such as the local taxes paid on the property may be allowed.
It is important to note that the annual value and deductions allowed may differ for different types of properties, such as commercial or industrial properties.
The deductions allowed for such properties may be different from those allowed for residential properties.
In addition, the calculation of annual value and deductions allowed may also differ for properties that are located in different states, as each state may have its own rules and regulations.
It is also important to maintain proper records and documentation of all expenses incurred for the maintenance and repair of the property, as well as the interest paid on home loans.
This will help in claiming the deductions accurately and avoid any discrepancies or penalties from the income tax department.
Furthermore, it is important to note that if the annual value of the property is nil or negative, then no tax will be payable on the income from house property.
In such cases, it is advisable to file an income tax return with a declaration of nil or negative income.
In conclusion, the annual value is a crucial component in determining the taxable income from house property.
The deductions allowed from the annual value, such as the standard deduction, interest on home loan, and certain other expenses, can help in reducing the taxable income.
It is important to maintain proper records and documentation of all expenses incurred and to file the income tax return accurately to avoid any discrepancies or penalties.
Q 4. Prof. R.K. Mittal has a GTI of Rs. 30, 00,000 including LTCG of Rs. 5 lakh during P.Y.2021-22. He made the following donations:
i) Rs. 1,00,000 to National Defence Fund
ii) Rs. 70,000 to PMNRF
iii) Rs. 1,60,000 for repair of Temple (Notified)
iv) Rs. 90,000 to a Political Party
v) Books worth Rs. 70,000 to poor children
vi) Rs. 1,00,000 to a Public Charitable Institution
vii) Rs. 1,00,000 for promotion of family planning programme of UP Government.
Calculate the amount of deduction u/s 80 G
Ans. The amount of deduction under Section 80G of the Income Tax Act, 1961 is allowed for donations made to various charitable and social causes. The deduction can be claimed from the Gross Total Income (GTI) of the taxpayer.
In the case of Prof. R.K. Mittal, the GTI for the P.Y. 2021-22 is Rs. 30,00,000, which includes LTCG of Rs. 5,00,000. Let’s calculate the amount of deduction he can claim under Section 80G for the donations made by him during the year:
i) Donation of Rs. 1,00,000 to National Defence Fund – 100% of the donation is eligible for deduction under Section 80G, therefore the deduction amount is Rs. 1,00,000.
ii) Donation of Rs. 70,000 to PMNRF – 100% of the donation is eligible for deduction under Section 80G, therefore the deduction amount is Rs. 70,000.
iii) Donation of Rs. 1,60,000 for the repair of Temple (Notified) – 50% of the donation is eligible for deduction under Section 80G, therefore the deduction amount is Rs. 80,000.
iv) Donation of Rs. 90,000 to a Political Party – No deduction is allowed for donations made to political parties under Section 80G.
v) Books worth Rs. 70,000 to poor children – No deduction is allowed for donations made in the form of books.
vi) Donation of Rs. 1,00,000 to a Public Charitable Institution – 50% of the donation is eligible for deduction under Section 80G, therefore the deduction amount is Rs. 50,000.
vii) Donation of Rs. 1,00,000 for the promotion of the family planning programme of UP Government – No deduction is allowed for donations made for the promotion of family planning programs.
Therefore, the total amount of deduction that Prof. R.K. Mittal can claim under Section 80G is Rs. 2,20,000 (Rs. 1,00,000 + Rs. 70,000 + Rs. 80,000 + Rs. 50,000). This amount can be deducted from his GTI of Rs. 30,00,000 to arrive at his taxable income for the year.
Q 5. From the information given below, compute the total income of the firm and tax payable by it for the Assessment Year 2022-23.
Particulars Rs.
Profit from small scale industrial undertaking 6,50,000
Profit from the animal breeding business 2,20,000
Short term capital loss 2,50,000
Long term capital gain 4,50,000
Interest from bank (Gross) 80,000
Donation to charitable institution (approved) by cheque 1,30,000
Ans. To calculate the total income and tax payable by the firm for the Assessment Year 2022-23, we need to consider the following incomes and deductions:
Profit from small scale industrial undertaking – Rs. 6,50,000
Profit from animal breeding business – Rs. 2,20,000
Short term capital loss – Rs. 2,50,000
Long term capital gain – Rs. 4,50,000
Interest from bank – Rs. 80,000
We can first offset the short term capital loss against the long term capital gain, which results in a net capital gain of Rs. 2,00,000 (Rs. 4,50,000 – Rs. 2,50,000).
The gross total income of the firm can be calculated as follows:
Profit from small scale industrial undertaking + Profit from animal breeding business + Net capital gain + Interest from bank = Rs. 6,50,000 + Rs. 2,20,000 + Rs. 2,00,000 + Rs. 80,000 = Rs. 11,50,000
Next, we can deduct the donation made to a charitable institution, which is approved under Section 80G, by cheque for Rs. 1,30,000 from the gross total income. This results in a total income of Rs. 10,20,000 (Rs. 11,50,000 – Rs. 1,30,000).
The tax payable by the firm can be calculated based on the income tax slab rates applicable for the Assessment Year 2022-23. As per the current slab rates, the tax liability for a firm with a total income of Rs. 10,20,000 is Rs. 1,12,500.
Additionally, the firm is also liable to pay a health and education cess of 4%, which amounts to Rs. 4,500.
Therefore, the total tax payable by the firm for the Assessment Year 2022-23 is Rs. 1,17,000 (Rs. 1,12,500 + Rs. 4,500).
Section-B
Q 6 What are the provisions for calculating House rent allowance?
Ans. House Rent Allowance (HRA) is an allowance paid by an employer to their employees to meet their rented accommodation expenses.
It is one of the most common components of an employee’s salary and is a tax-free allowance up to a certain limit. The provisions for calculating HRA are as follows:
Calculation of HRA
HRA is calculated as a percentage of the employee’s basic salary. The actual percentage of HRA may vary depending on the city where the employee resides.
In metropolitan cities like Mumbai, Delhi, Kolkata, and Chennai, the HRA percentage is 50% of the basic salary. In other cities, it is 40% of the basic salary.
Actual Rent Paid
The actual rent paid by the employee is considered while calculating the HRA. This includes the rent paid for the rented accommodation where the employee is currently residing.
The rent amount must be paid to the landlord, and it should be supported by rent receipts.
Salary Structure
The salary structure of the employee plays a crucial role in calculating the HRA. The HRA amount is calculated on the basic salary of the employee. So, if an employee has a high basic salary, their HRA component will also be higher.
To minimize the tax liability of an employee, employers often structure their salary in such a way that the HRA component is maximized.
Location of the Rented Accommodation
The HRA amount varies based on the city where the employee is residing. As mentioned earlier, in metropolitan cities, the HRA percentage is 50% of the basic salary, while in other cities, it is 40% of the basic salary.
This is due to the higher cost of living and rent in metropolitan cities.
Exemptions under the Income Tax Act
The HRA component of an employee’s salary is exempt from tax up to a certain limit. The amount exempted is calculated based on three factors, which are the actual HRA received, actual rent paid, and the location of the rented accommodation.
If the actual HRA received is higher than the actual rent paid, then the balance amount is taxable. If the actual rent paid is higher than the actual HRA received, then the excess amount is deductible from the employee’s taxable income.
Limitations of HRA Calculation
There are certain limitations to HRA calculation. If an employee is residing in their own house or is not paying any rent, then the HRA component is fully taxable.
If an employee is residing with their parents, they can claim the HRA exemption only if they are paying rent to their parents and have a proper rent agreement in place.
Additionally, if an employee is living in a house owned by their spouse, they cannot claim the HRA exemption.
In conclusion, the provisions for calculating HRA take into account various factors such as the actual rent paid, salary structure, location of the rented accommodation, and exemptions under the Income Tax Act.
It is essential for both employees and employers to understand these provisions to minimize the tax liability of the employee and ensure compliance with the tax laws.
Q 7 What are the provisions regarding unrecognized provident fund in Income Tax Act, 1961.
Ans. The Income Tax Act, 1961 provides for certain tax provisions regarding recognized and unrecognized provident funds. Provident funds are retirement saving schemes that are set up by an employer for the benefit of its employees.
Recognized provident funds are those that have been approved by the Commissioner of Income Tax, while unrecognized provident funds are those that have not been approved.
In the case of recognized provident funds, contributions made by the employee and the employer are deductible from the employee’s taxable income up to a certain limit.
The interest earned on the accumulated amount is also exempt from tax. However, when the accumulated amount is withdrawn at the time of retirement, it is subject to tax.
This taxability of the withdrawal depends on whether the employee has completed five years of continuous service or not.
In the case of unrecognized provident funds, the contributions made by the employee and the employer are not eligible for deduction from the taxable income of the employee.
However, the interest earned on the accumulated amount is exempt from tax. The accumulated amount is also not subject to tax at the time of withdrawal, provided that the contribution made by the employer is not more than 12% of the employee’s salary.
If the contribution made by the employer is more than 12% of the employee’s salary, then the excess amount is subject to tax in the hands of the employee.
Additionally, if the employee has received any contribution from the employer in respect of which the employee has not offered any tax, then such contribution is taxable in the hands of the employee.
It is important to note that the provisions regarding recognized and unrecognized provident funds apply only to the extent that the provident fund is a genuine scheme for the benefit of the employees.
If the scheme is found to be a sham or a mere device for tax evasion, then the tax authorities may disregard the scheme and treat the contributions as the taxable income of the employee.
To summarize, the provisions regarding unrecognized provident funds in the Income Tax Act, 1961 provide that the contributions made by the employee and the employer are not eligible for deduction from the taxable income of the employee.
However, the interest earned on the accumulated amount is exempt from tax. The accumulated amount is also not subject to tax at the time of withdrawal, provided that the contribution made by the employer is not more than 12% of the employee’s salary.
If the contribution made by the employer is more than 12% of the employee’s salary, then the excess amount is subject to tax in the hands of the employee.
Q 8 Discuss the various kinds of Securities? Explain the rule regarding grossing up of interest on Tax-Free Commercial Securities.
Ans. Securities refer to tradable financial instruments such as stocks, bonds, and debentures that represent ownership in a company or entity or promise of payment.
These instruments have different characteristics and serve different purposes in the financial markets. In this article, we will discuss the various kinds of securities and the rules regarding grossing up of interest on Tax-Free Commercial Securities.
Equity securities: Equity securities represent ownership in a company or entity. The most common type of equity security is common stock, which gives the owner voting rights and the potential to receive dividends.
Preferred stock is another type of equity security that typically pays a fixed dividend and has a higher priority in receiving payments compared to common stock.
Debt securities: Debt securities represent a promise to pay a fixed income to the holder of the security.
The most common type of debt security is a bond, which is issued by corporations or governments to raise funds.
Bonds have a fixed interest rate and a maturity date, at which point the principal amount is repaid to the investor.
Derivative securities: Derivative securities are financial instruments that derive their value from an underlying asset. The most common types of derivatives are futures, options, and swaps.
Futures contracts provide an agreement to buy or sell an asset at a predetermined price at a future date.
Options provide the right, but not the obligation, to buy or sell an asset at a predetermined price at a future date. Swaps involve exchanging cash flows based on a predetermined formula.
Hybrid securities: Hybrid securities have characteristics of both equity and debt securities. The most common type of hybrid security is a convertible bond, which can be converted into equity securities at a predetermined price.
Now let’s discuss the rule regarding grossing up of interest on Tax-Free Commercial Securities.
Tax-Free Commercial Securities are bonds issued by the Government of India or any other approved entity that offer tax-free interest income. These securities are popular among investors as they provide a tax-free income stream.
However, the Income Tax Act, 1961 contains a provision that requires the interest income from Tax-Free Commercial Securities to be grossed up for the purpose of calculating the total income of the taxpayer.
Grossing up means adding the amount of tax that would have been payable on the interest income to the income itself, so that the total income is calculated before applying any deductions or exemptions.
The reason for this rule is to ensure that taxpayers do not avoid paying tax by investing in Tax-Free Commercial Securities.
Since the interest income from these securities is tax-free, taxpayers may be tempted to invest a significant portion of their savings in these securities, thereby avoiding tax liability.
The grossing up rule applies to all taxpayers, including individuals, Hindu Undivided Families (HUFs), and corporate entities. The rate of grossing up is determined based on the tax rate applicable to the taxpayer.
For example, if the tax rate for an individual is 30%, then the interest income from Tax-Free Commercial Securities will be grossed up by a factor of 1.4286 (100/70), which is the tax rate plus one.
In conclusion, understanding the various types of securities is essential for investors who want to build a diversified investment portfolio.
Tax-Free Commercial Securities are a popular investment option among investors looking for a tax-free income stream. However, the grossing up rule ensures that taxpayers do not avoid tax liability by investing in these securities.
Investors should consult with a financial advisor to determine the appropriate investment strategy for their individual circumstances.
Q 9 Explain with example the term Book Profit in relation to the assessment of firms.
Ans. Book profit is a term used in income tax law to determine the income of a partnership firm for the purpose of tax assessment. The term refers to the net profit of a firm that is calculated as per the provisions of the Income Tax Act, 1961, which are different from the accounting principles used to calculate the firm’s net profit.
The main objective of calculating book profit is to arrive at the taxable income of a firm, which is used to determine the amount of tax that the firm is required to pay.
The calculation of book profit is based on several factors, such as the firm’s net profit, depreciation, interest, remuneration paid to partners, and other adjustments that are made as per the Income Tax Act.
The book profit is calculated by adding the net profit of the firm to the amount of depreciation allowed under the Act. This amount is then reduced by the interest paid to partners and remuneration paid to partners.
The book profit is also adjusted for certain other items as per the provisions of the Act.
For example, suppose a partnership firm has a net profit of Rs. 10,00,000 for the financial year 2021-22. The depreciation allowed as per the Income Tax Act for the year is Rs. 3,00,000, and the interest paid to partners is Rs. 1,50,000.
The remuneration paid to partners is Rs. 2,00,000. The book profit of the firm for the year will be calculated as follows:
Net profit: Rs. 10,00,000
Add: Depreciation allowed: Rs. 3,00,000
Total: Rs. 13,00,000
Less: Interest paid to partners: Rs. 1,50,000
Less: Remuneration paid to partners: Rs. 2,00,000
Book profit: Rs. 9,50,000
Thus, the book profit of the partnership firm for the year 2021-22 is Rs. 9,50,000, which will be used to determine the tax liability of the firm.
The calculation of book profit is important because the tax liability of a partnership firm is based on this amount. The Income Tax Act provides for certain adjustments that can be made to the book profit of the firm, which can reduce its tax liability.
For example, if a firm invests a certain amount in certain specified instruments, such as government bonds or infrastructure bonds, it can claim a deduction from its book profit, which will reduce its tax liability.
In addition, the Income Tax Act provides for a minimum alternate tax (MAT) on book profits of certain firms, such as those engaged in infrastructure and power projects. MAT is a tax that is levied on the book profit of a firm, even if the firm’s taxable income is lower than the book profit.
The purpose of MAT is to ensure that firms that have a book profit but are not paying any tax due to various exemptions and deductions are still required to pay some tax.
In conclusion, book profit is a crucial term in income tax law, particularly in the context of partnership firms.
The calculation of book profit is complex and involves several adjustments as per the provisions of the Income Tax Act.
The book profit of a firm is used to determine its tax liability and is subject to certain deductions and adjustments that can reduce its tax liability.
It is important for firms to understand the concept of book profit and the various provisions of the Income Tax Act that apply to it in order to minimize their tax liability and comply with the tax laws of the country.
Q 10 What is ITR? List the various documents required for filing ITR.
Ans. ITR stands for Income Tax Return, which is a form that taxpayers in India are required to fill and submit to the Income Tax Department every year to report their income, deductions, and taxes paid or owed.
Filing ITR is mandatory for all individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities whose income exceeds a certain threshold.
To file ITR, taxpayers need to gather and submit various documents to support their income, deductions, and taxes paid.
The list of documents required varies depending on the sources and types of income. Some of the common documents required for filing ITR are:
PAN (Permanent Account Number): PAN is a unique 10-digit alphanumeric identifier issued by the Income Tax Department to all taxpayers. It is mandatory to quote PAN while filing ITR.
Form 16: Form 16 is a certificate issued by the employer that contains details of the employee’s salary, taxes deducted, and other deductions, such as provident fund contributions. It is applicable only for salaried individuals.
Form 16A/16B/16C: These are certificates issued by the deductor for TDS deducted on income other than salary, such as interest income, rent, or professional fees.
Form 26AS: Form 26AS is a statement of tax credit that reflects the taxes paid by the taxpayer and the TDS deducted by the deductor. It can be downloaded from the income tax e-filing website.
Bank statements: Bank statements provide a record of all the transactions made by the taxpayer, such as interest income, dividends, and other income.
Investment documents: Documents related to investments made by the taxpayer, such as mutual fund statements, stock trading statements, and fixed deposit receipts.
Property documents: Documents related to the ownership and sale of property, such as sale deeds, purchase deeds, and rental agreements.
Business documents: Documents related to the business, such as balance sheets, profit and loss statements, and audit reports.
Other documents: Any other document that supports the taxpayer’s income, deductions, or taxes paid, such as medical bills, charitable donation receipts, and home loan statements.
Filing ITR accurately and on time is crucial to avoid penalties and legal consequences. It is essential to keep all the necessary documents ready and to consult a tax expert or use online tax filing services to ensure that the ITR is filed correctly and efficiently.
Section-C
Q 11 The income of the previous year is taxed in the current year”. Explain.
Q 12 State the conditions which a Hindu Undivided Family has to fulfill in order to be called as resident in India.
Q 13 List any five incomes that shall be chargeable under head ‘Profit and gains of Business or profession’.
Q 14 What does the term ‘Capital Gains’ signify under the Income Tax Act?
Ans. The concept of “income of the previous year is taxed in the current year” is a fundamental principle of the Indian Income Tax Act, 1961.
It means that the income earned by a taxpayer in a particular financial year, known as the previous year, is liable to be taxed in the subsequent financial year, known as the assessment year.
In other words, the tax liability for a particular year is determined based on the income earned in the previous year.
For example, let’s say Mr. X earned a salary of Rs. 10 lakhs during the financial year 2021-22 (previous year). The tax liability for this income will be determined and paid in the assessment year 2022-23.
The assessment year is the year in which the taxpayer files their income tax return for the previous year, and the tax liability for that year is assessed by the Income Tax Department.
The principle of taxation of the previous year’s income in the current year is based on the accrual basis of accounting. Under this method, income is recognized when it is earned or accrued, rather than when it is received.
Therefore, even if the taxpayer has not received the income during the previous year, it is still liable to be taxed in the current year if it has been earned or accrued during the previous year.
The Income Tax Act provides various provisions for the determination of income for tax purposes. Income is categorized into five heads – salary, house property, business or profession, capital gains, and other sources.
The rules for determining the income under each head are different, and the final tax liability is calculated based on the total income earned in the previous year under all the heads.
Once the income for the previous year has been calculated, various deductions and exemptions are allowed under the Income Tax Act to arrive at the taxable income.
These deductions can be in the form of investments made in certain tax-saving schemes or expenses incurred for specific purposes, such as medical expenses or education expenses.
The tax liability for the previous year’s income is calculated based on the applicable tax rates for that financial year. The tax rates are revised every year by the government in the Union Budget.
The tax liability is calculated as per the applicable tax rates and the income tax slabs for the particular financial year.
The principle of taxation of the previous year’s income in the current year is essential for the efficient functioning of the tax system.
It ensures that taxpayers pay taxes on the income earned during the previous year and encourages them to report their income accurately and honestly.
It also helps the government to collect taxes efficiently and use the revenue for various developmental activities.
In conclusion, the principle of “income of the previous year is taxed in the current year” is a fundamental principle of the Indian Income Tax Act, 1961.
It means that the tax liability for a particular year is determined based on the income earned in the previous year.
The principle is based on the accrual basis of accounting, and various deductions and exemptions are allowed to arrive at the taxable income.
The tax liability is calculated based on the applicable tax rates and the income tax slabs for the particular financial year.
Ans. A Hindu Undivided Family (HUF) is a separate tax entity under the Indian Income Tax Act, 1961, which is distinct from its members. Like an individual, an HUF is also subject to taxation in India.
However, the residential status of an HUF plays a crucial role in determining the tax liability.
The residential status of an HUF is determined on the basis of the control and management of its affairs and not on the basis of the residential status of its members.
A resident HUF is taxed on its worldwide income, i.e., income earned in India and outside India.
Whereas a non-resident HUF is taxed only on its income earned in India. The residential status of an HUF is determined based on the following two conditions:
Place of control and management
Existence in India for a specified period
Place of control and management
The place where the control and management of the affairs of the HUF is situated is the deciding factor in determining the residential status of the HUF.
Control and management refer to the decision-making powers exercised by the Karta (the head of the family) in the HUF. The Karta has the power to take decisions relating to the day-to-day affairs of the HUF.
Therefore, the place of control and management of an HUF determines its residential status.
If the control and management of the affairs of the HUF are situated wholly or partly in India during the previous year, then the HUF is a resident in India for tax purposes.
Existence in India for a specified period
Apart from the place of control and management, the HUF must also fulfill the following conditions to be considered as a resident HUF:
If the HUF has been in existence in India for at least two years during the previous year, or If the HUF has been in existence in India for at least one year during the previous year and the Karta or any of the HUF members has been present in India for a period of 182 days or more during the previous year.
If the HUF satisfies any of the above conditions, it is considered a resident HUF, and its worldwide income is taxable in India.
It is important to note that even if the HUF fulfills any of the above conditions, it may still be considered a non-resident HUF if the control and management of its affairs are situated wholly outside India during the previous year.
Tax implications for resident and non-resident HUFs
Resident HUFs are taxed on their worldwide income, whereas non-resident HUFs are taxed only on the income earned in India.
Resident HUFs are also eligible for various deductions and exemptions available under the Income Tax Act. However, non-resident HUFs are not eligible for certain deductions and exemptions.
For example, resident HUFs can claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
This deduction is not available to non-resident HUFs. Similarly, resident HUFs can claim a deduction for medical insurance premiums paid under Section 80D of the Income Tax Act, whereas non-resident HUFs are not eligible for this deduction.
Ans. Under the Income Tax Act of 1961, the head “Profit and gains of Business or profession” includes any profits and gains that arise from business or profession.
Section 28 of the Act provides a comprehensive list of incomes that shall be chargeable under this head. The following are five incomes that are chargeable under this head:
Business Income: Any income that arises from carrying out a business or profession is taxable under this head.
For example, income earned from a manufacturing business, trading business, or consulting services is taxable under this head.
Capital Gains: Any profit or gain arising from the transfer of a capital asset used in a business or profession is taxable under this head.
For example, if a business owner sells a property used for business purposes, the profit or gain arising from the sale is taxable under this head.
Interest Income: Any interest earned on business or profession-related loans, deposits, or investments is taxable under this head. For example, interest earned on a loan given to a customer is taxable under this head.
Rent Income: Any rental income earned from business or profession-related properties is taxable under this head.
For example, if a business owner rents out a commercial property to another business, the rental income earned is taxable under this head.
Commission and Fees: Any commission, brokerage, or fees earned by a business or profession is taxable under this head.
For example, if a business owner earns a commission by selling a product to a customer, the commission earned is taxable under this head.
It is important to note that the above list is not exhaustive, and there may be other incomes that can be chargeable under this head.
Additionally, it is important to understand the various deductions and allowances that are available under this head to arrive at the taxable income.
Some of these deductions include depreciation, expenses incurred for running the business, and allowances for bad debts.
Ans. Capital gains refer to the profits or gains that arise from the sale or transfer of a capital asset.
The capital asset could be any property or asset, whether tangible or intangible, such as a building, land, stocks, bonds, mutual funds, vehicles, jewellery, patents, trademarks, and copyrights.
When a capital asset is sold or transferred, the difference between the sale price and the cost of acquisition is considered as the capital gain.
If the sale price is higher than the cost of acquisition, it results in a capital gain, whereas if the sale price is lower than the cost of acquisition, it results in a capital loss.
Under the Income Tax Act, capital gains are taxed under the head ‘Capital gains.’ The capital gain is classified into two categories, i.e., long-term capital gain and short-term capital gain, depending on the period of holding of the asset.
If the asset is held for more than 36 months before its transfer, it is considered a long-term capital asset, and the gain arising from its sale is called long-term capital gain.
If the asset is held for 36 months or less before its transfer, it is considered a short-term capital asset, and the gain arising from its sale is called a short-term capital gain.
The taxation of capital gains depends on the type of asset sold, the holding period, and the nature of the gain. In the case of long-term capital gains, the tax rate is lower than the tax rate for short-term capital gains.
Long-term capital gains on the sale of listed equity shares and equity-oriented mutual funds are currently exempt from tax under Section 10(38) of the Income Tax Act, subject to certain conditions.
In the case of other capital assets, long-term capital gains are taxed at a flat rate of 20%, whereas short-term capital gains are taxed at the normal rate of tax applicable to the taxpayer.
The capital gains tax liability can be reduced by claiming exemptions and deductions provided under the Income Tax Act.
One such exemption is the benefit of indexation. It allows the taxpayer to adjust the cost of acquisition of the asset for inflation by applying a cost inflation index published by the government.
By adjusting the cost of acquisition, the capital gains tax liability can be reduced.
Another exemption is the exemption under Section 54 and 54F of the Income Tax Act. These sections provide that if the sale proceeds of a long-term capital asset are reinvested in a residential house property, then the capital gains arising from the sale of the asset shall be exempt from tax, subject to certain conditions.
The Income Tax Act also provides for deductions from the taxable capital gains, such as expenses incurred on the transfer of the asset, brokerage and commission paid, cost of improvement of the asset, etc.
In conclusion, capital gains refer to the profits or gains that arise from the sale or transfer of a capital asset. The Income Tax Act has laid down specific rules and regulations for the taxation of capital gains.
The taxability of capital gains depends on the type of asset sold, the holding period, and the nature of the gain.
Taxpayers can claim various exemptions and deductions provided under the Income Tax Act to reduce their capital gains tax liability.