INCOME TAX

Q 1 A What are the situations in which the income from building is considered as
agricultural income under the provisions of the income tax act, 1961?
ANS:
As per the Income Tax act 1961, the income derived from any building, provide the
following conditions are considered as agriculture income :
1)
2)
3)
4)

The building is on or in the immediate vicinity of the agriculture land.

It is occupied by the cultivator or receiver of rent or revenue.
It is used as dwelling house or store house or out-house.
The land is assessed to land revenue or it is not situated within the jurisdiction of
a municipality or a cantonment board and which has a population of not less than
10,000 according to the last preceding census of which the relevant population
figures have been published before the first day of the previous year or any are
within the distance of 8 kms from the limits of such municipality or cantonment
board and notified by the central government in the official gazette.

B What are the exceptions to the rule that the income of the previous year is
chargeable to tax in the immediately following assessment year?
ANS:
In the case of local authorities, the rate of income tax specified is 30% on the whole of
the total income. No surcharge is leviable on the amount of income tax calculated.
However, education cess @2% shall be levied on the amount of income tax. Above
clarification can be understood by the following illustration:
2.1 Mrs Johns aged below 65 years has derived a total income of Rs 12,00,000/- for the
F.Y. 2006-2007.
Computation of tax payable by Mrs. John 2007-08
-------------------------------------------------------------------------------------------------------Income Tax payable on
Rs.
- on first Rs. 1,35,000 (basic exemption women
NIL
- from Rs 1,35,0001 to Rs 1,50,000 @10%
1500
- from Rs 1,50,001 to Rs 2,50,000 @20%
20,000
- on balance Rs 9,50,000 @30%
2,85,000
----------3,06,500
+ surcharge @10%
30,650
----------+ education cess @2%
6,743
----------Total Tax Payable
3,43,893
=======
-----------------------------------------------------------------------------------------------------------

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Q 2 A Which are the prohibited category of persons resulting in denial of

exemption to charitable trusts?
ANS:
Any income of a trust used directly or indirectly for the benefit of the author, founder,
manager or any person who has made a substantial contribution to the trust (total
contribution exceeding Rs 50,000/- up to the end of relevant previous year) and relative
of any such person. If a charitable or religious trust is running an educational institution
or a hospital, exemption shall not be denied by reason only that such trust has provided
educational or medical facilities to any of these specified persons. However, the value of
such education or medical facility shall be deemed to be income of such trust or
institution and shall be chargeable to income tax.
B What is profit in lieu of salary & under what head this s chargeable to tax?
ANS:
Profit in lieu of salary to include:
1) The amount of compensation due to or received by an assessee from his employer or
former employer at or in connection with:a) Termination of employment or modification of the terms and conditions of
employment.
2) any payment due to or received by the assessee from his employer or from provident
fund or any other fund or any sum received under a keyman insurance policy
including the sum allocated by way of bonus on such policy. (it does not include
exempt payments from super annuation fund, gratuity, commuted pension,
retrenchment compensation , house rent allowance, employees contribution to PF and
interest thereon).
3) Any amount due to or received whether in lumps sum or otherwise, by any assessee
from any person before his joining any employment with that person or after
cessation of his employment with that person.
Q3A

How is income from self occupied property or property meant for owner
Occupation but remaining wholly or partly unoccupied computed? Discuss.

ANS:
The annual value of self occupied property can be adopted as NIL. Similarly if a
property cannot be actually occupied by reason of the fact that owing to his employment,
business or profession carried on at any other place, the assessee has to reside that other
place in a building not belonging to him, the annual value of such house shall also be
taken to be nil. Accordingly, the municipal and other taxes levied by the local authority

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ad the adhoc deduction of 30% are not deductible. However, interest on loans borrowed
upto a maximum of Rs. 30,000 shall be allowed as deduction. Incase such a property is
acquired or constructed out of loan borrowed on or after 01-04-99 and where such
acquisition or construction is completed within 3 years from the end of the financial year
in which such loan is borrowed, then interest shall be allowed upto Rs. 1,50,000 instead
of Rs 30,000. In respect of a self occupied property not falling in this category, the limit
of such deduction shall continue to be Rs 30,000.
If the assessee owns more than one house property falling under the above mentioned
category, then the income from any one such property, at the opinion of the assessee,
shall be computed as indicated above. The other self occupied property shall be treated
as deemed let out property.
B

What are the income that are chargeable to tax under the head profits &
gains of business or profession?
ANS:
The following items of income shall be chargeable to tax under the head properties and
gain of business or profession:1) Profits and gains of any business or profession carried on by the assessee at any time
during the previous year.
2) Any compensation or other payment due to or received by a person in connection
with:a) Termination or modification of contract relating to management of affairs of an
Indian company or any other company.
b) Termination or modification of a contract relating to agency for business activity
in India.
c) Vesting of the management of any business and property in favor of government
or any corporation owned by government under any law in force.
3) Income of any trade professional or similar association from specific services
performed for its members.
In the case of an assessee carrying on export business, the following export incentives.
Profit on sale of import entitlements or Exim scrip
Cash assistance (cash compensatory support CCS)
Excise or customs duty repaid (only drawback)
Any profit on the transfer of the duty entitlement pass book scheme, being the
duty remission scheme, under the export & import policy formulated under
foreign trade.
Any profit on the transfer of the duty replenishment certificate, being the duty
remission scheme, under export and import policy formulated under foreign trade.

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4) The value of any benefit or perquisite, whether convertible into money or not, arising
from business or exercise of a profession (the nexus between the business or
profession and the benefit should be proximate to attract this provision)
5) Any interest, salary, bonus, commission or remuneration due to or received by a
partner of a firm from such firm. Where any such interest, salary etc. has been
disallowed U/s 40 (b) in the case of the firm, the same shall not be taxed in the case of
the partner to the extent disallowed. (This provision intends to avoid double
taxation)/
a) any sum received or receivable in cash or kind under an agreement for not:i) Carrying out any activity in relation to any business.
ii) Sharing any know how, patent, copyright, trade mark, license, franchise or any
other business or commercial right of similar nature or information or
technique likely to assist in the manufacture or processing of goods or
provision for services.
6) Any sum received under keyman insurance policy including the sum allocated by way
of bonus on such policy.
Q4 A

Discuss the provisions of income tax act that relate to amortization of

expenses for obtaining a license to operate telecommunication services?

ANS:
Any amount actually paid for obtaining license to operate telecommunication services
shall be allowed as deduction equal installments during the number of years fro which the
license is in force. Whether the payment was made before the commencement of the
business or thereafter at any time, the deduction shall be allowed. If the payment is made
before the commencement of the business, the deduction shall be allowed beginning with
the year of commencement of the business; the deduction shall be allowed beginning
with the year of commencement of business. In any other case, it will be allowed
commencing from the year of payment. Deduction shall be allowed up to the year in
which the license shall cease to be in force.
Any expenditure for which deduction is allowed U/s 35ABB shall not qualify for
depreciation u/s 32.
If part of the license is sold for a consideration which is less than the amount remaining
to be allowed, then the balance shall be allowed as deduction during the remaining
number of years in equal installments.
If the entire license is sold for a consideration which is less than the amount remaining to
be allowed as deduction, then the balance shall be allowed as deduction in the year of
transfer.
If part of the license or the entire license is transferred for a consideration which is more
than the amount remaining to be allowed, then

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a. No further deduction shall be allowed.

b. The surplus to be extent of deduction already claimed will be taxed as business
income.
c. The remaining surplus, if any, is taxed as capital gain.
In a scheme of amalgamation or demerger if the license is transferred then the
amalgamated company/resulting company would be certified to get the same deduction
as that could have been availed by the amalgamating company/demerged company had it
continued to exist.
B When a reference to the valuation officer can be made U/S 55 A of income-tax
act, 1961?
ANS:
With a view to ascertaining the fair market value of a capital asset for the purpose of
capital gains and other relevant purposes, the assessing officer may refer the valuation of
a capital asset to a valuation officer under the following circumstances.
1) In case where the value of the asset as claimed by the assessee is in accordance with
the estimate by a registered valuer, if the assessing officer is of the opinion that the
value so claimed is less than its fair market value.
2) In any other case, if the assessing officer is of the opinion.
a) that the fair market value of the asset exceeds the value of the asset as claimed by
the assessee by more than 15% of the value claimed or by more than Rs 25,000
(Rule 111AA)
b) that having regard to the nature of the asset and other relevant circumstances it is
necessary to make the reference.
Where any such reference is made the provision of section 16A of the wealth tax act shall
be applicable and the valuation report of the valuation officer shall not be binding on the
assessing officer. Assessing officer may or may not take the report of the valuation
officer while framing the assessment.
Q5 A

What is a capital Asset for the purpose of income -tax act, 1961? Discuss.

ANS:
Capital asset means property of any kind held by an assessee, whether or not connected
with his business or profession. But doest not include the following:I. Stock-in-trade, raw materials and consumable stores held for the purposes of
business or profession.

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II. Personal effects of movable nature, such as furniture, utensils, vehicles, held
for personal use by the assessee or any dependent member of his family.
However jewellery is a capital asset.
III. Agriculture land in India which is not situated in any specified area.
IV. Gold bond issued by Govt. of India including gold deposit bonds issued under
the gold deposit scheme, 2000 notified by the Central Govt.
V. Special bear bonds, 1992 issued by the Govt. of India (special bear bonds no
more exists now)
B

How is the term dividend in the income- tax act? Discuss.

ANS:

Sec 2(22) defines Dividend to include

a) Any distribution by a company to its share holders to the extent of
accumulated profits whether capitalized or not resulting in the release of all
or any part of the asset of the company.
b) Any distribution to its share holders by a company
i) of debentures, debenture stock or deposit certificates with or without
interest.
ii) Distribution of bonus shares to the preference share holders by the
company, to the extent of accumulated profits, whether capitalized or
not.
c) any distribution made to the share holders by a company on its liquidation
to the extent to which the distribution is attributable to the accumulated
profits of the company, whether capitalized or not.
d) Any distribution by a company to its share holders on account of reduction
of share capital to the extent to which the company possesses accumulated
profits, whether capitalized or not.
e) Any payment to the extent of an accumulated profits by a company, not
being a company in which public are substantially interested, of any sum by
way of :
i) loan or advance to a share holders who holds the beneficial owner ship
of equity shares carrying not less than 10% voting power.
ii) Loan or advance to any concern (HUF, firm, hop, boy of individuals or a
company) is which such share holders is a member or partner holding
substantial interest.
iii) Any payment on behalf of or for the individual benefit of any such share
holder made to any person.
Q6 A

Write short notes on clubbing of income of minor children in the hands of

parent.

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Income of minor child

1) in computing the total income of any individual, theme shall be included all such
income as arises or accrues to his minor child.
2) However, income shall not be clubbed it it arises or accrues to a minor child on
account of any:a) manual work done him or
b) activity involving application of his skill, talent or specialized knowledge and
experience.
3) if the minor child is suffering form any disability of the nature specified in sec 8011,
the income of such child shall not be included in the hands of the parent but shall be
assessed in the hands of the child.
4) The income of the minor will b e included with the income of that parent whose total
income, excluding the income to be clubbed, is greater, once clubbing minors income
is done with that of one parent it will not be clubbed with the other parent unless the
assessing officer is satisfied after giving the other parent an opportunity to be heard,
that it is necessary to do so where the marriage of the parents does not subsist the
income of the minor will be included in the income of the parent who maintains the
minor child in the previous year.
5) In the case of an assessee in whose total income the minor childs income is to be
included us 64(IA) exemption is given up to Rs 1500 (not exceeding the income
clubbed) in respect of each such minor child. Sec -10(32)
6) CHILD in relation to an individual, includes a step child and an adopted child of
that individual SEC2 (15B) in view of this definition, even if the adopted child
derives income, such income will have to be clubbed with that of he parent concerned
in accordance with the provisions of sec (64)IA.
7) Since sec 64(1A) does not include minor married daughter would be claused.
However where sec 27 applies, clubbing of income from property gifted by the parent
does not arise in the case of minor married daughter. Similarly clubbing wealth U/SA
of the wealth tax act does not arise in the case of a minor married daughter.
8) Even though income derived by the minor from manual work or from any activity
involving skill and talent cannot be clubbed, there is no provision to avoid clubbing
of income earned on investment made out of such income.
9) In case where the parents are non residents and minor child is a resident deriving the
income which accrues or arises outside India, the clubbing of such income doest not
arise as the provision of sec 64(1A) cannot override the provisions of sec5 of the
income tax act. In such a case, the minor child shall be chargeable to tax.
10) If a minor child derives agriculture income, there is no provision under the finance act
requiring the clubbing of such income with the parents total income for rate purposes.
Only if the minor child is assessable in respect of income derived from skill and talent
or by way of salary earned, agriculture income shall be aggregated to determine the
rate of tax applicable to the minor.

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Briefly discuss the provisions relating to loss from speculation business.

Speculation business loss

1) Where there is unabsorbed speculation business loss, in the case of an assessee for
any assessment year such loss shall be carried forward to be set off in the subsequent
years against income from any speculation business. No such loss shall be carried
forward for more than 4 assessment years immediately succeeding the assessment
year for which the loss was first computed.
2) According to the explanation to sec-73, where any part of the business of a company
consists in the purchase and sale of shares of other companies such company shall be
deemed to be carrying on a speculation business to the extent to which the business
consists of the purchase and sale of such shares.
3) Explanations : This explanation does not apply to
i) a company whose gross total income consists mainly of income which is
chargeable under the heads Income from house property, capital gains and
Income from other sources.
ii) A company the principal business of which is the business of banking or
money leading.
C

Write short note on deduction in respect of royalty income on patents?

Deduction shall be allowed in respect of any income by way of royalty in respect of a

registered patent to the extent of the whole of such income or Rs 3 lakhs, whichever is
less.
If a compulsory license is granted in respect of any patent under the patents act, 1970, the
income by way of royalty eligible for deduction under this section shall not exceed the
amount of royalty under the terms and conditions of a license, settled by the controller
under the said act.
If any such income is earned from any source outside India, the amount of income to be
considered for deduction under this provision shall be restricted to the amount of such
income brought in to India by convertible foreign exchange by the assessee within in a
period of six months from the end of the previous year in which such income is earned or
within such further period allowed by the RBI.
A certificate in the prescribed form duty signed by the prescribed authority should be
furnished along with the return of income for availing the deduction.
Royalty in respect of a patent, means consideration including any lump sum but
excluding any consideration in the nature of capital gains or consideration for sale of
product manufactures with the use of the patented process or of the patented article.

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Where deduction has been claimed and allowed under this section in respect of any
income for any previous year, no deduction in respect of such income shall be allowed
under any other provisions in any assessment year.
X --------------- X -----------------X

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