Master of Business Administration- MBA Semester 3

MF0003 – Taxation Management - 2 Credits

(Book ID: B1037)

Assignment Set- 1 (30 Marks

ANS.1 AGRICULTURAL INCOME SEC. 2(1A)

Agricultural income is totally exempt from liability to income tax.

However, agricultural income is factor in determining the tax on the non-
agricultural income of an individual, Hindu undivided family, Association of
persons and Body of individuals whose total income exceeds Rs 5,000.

ITEMS THAT ARE INCLUDED IN AGRICULTURE INCOME

UNDER SEC 2(1A) ARE AS FOLLOWS:
1) (a) Any rent or revenue derived from land situated in India. When one
person grants to another a right to use his land situated in India for
agricultural purposes; the former receives from the latter rent or
revenue in consideration of such user. Such rent or revenue is treated
as agricultural income.
(b) used for agricultural purposes. It means cultivation of a field, tilling
of the land, watering it, sowing of the seeds, planting and similar
operations on the land.

2) (a) Income derived from such land by agricultural operations.

(b) Income derived from such land by the performance of any process
ordinarily employed by a cultivator to render the produce raised by him
fit to be taken to market. The process employed in curing of coffee, flue
curing of tobacco, ginning of cotton, etc, is such a process.
(c) Income derived from such land by a sale by a cultivator or receiver of
rent-in-kind the produce raised or received by him.

3) Income from farm house. The income from a farm house is treated as
agricultural income if the following conditions are satisfied.
(a) It is situated on or in the immediate vicinity of the agricultural land
(b) The building is, by reason of his connection with the land, used as
dwelling house or a store-house or an out-house by the cultivator
or receiver of rent-in-kind
(c) The land is either assessed to land revenue in India or is subject to
local rate assessed and collected by the officers of the government,
or alternatively
(d) If the land is situated in ‘non-urban’ area, i.e, an area which
though, is with in municipality or cantonment board jurisdiction,
has a population of less than 10,000 or is beyond a notified
distance (maximum 8 kilometer) from the local limits of any such
municipality or cantonment board.

EXAMPLES OF AGRICULTURAL INCOMES:

1) Income from growing flowers and creepers.
2) Rent from agricultural land.
3) Profit on sale of standing crops or produce after harvest by the
cultivating owner or tenant of agricultural land.
4) Income from leasing out agricultural land for grazing cattle
required for agricultural purposes.
5) Interest on capital received by a partner from his firm engaged
in agricultural operations.
6) Conversion of latex into smoked sheets.
7) Rent from agricultural land received from sub-tenants by the
mortgagee in possession.
8) Income from sale of mulberry leaves grown on agricultural
land.
9) Compensation received from an insurance company for
damages caused by hailstorm or floods to the tea plantations.

TAX AVOIDANCE: Tax avoidance can be defined as the art of

dodging tax without breaking the law. Objective of tax avoidance
is minimizing the incidence of tax by adjusting the affairs in such a
manner that although it is with in the four corners of the taxation
laws but the advantage is taken by finding out loopholes in the
laws. But where the main purpose is to defer, reduce or completely
avoid the tax payable under the law.

TAX EVASION: In the tax evasion, facts are deliberately

misrepresented and tax liability is understated by employing the
following means:
 a) concealment of income
b) inflation of expenses
c) falsification of accounts
d) violation of rules
these devices are unethical. Evasion, once proved, not only attracts
heavy penalties but may also lead to prosecution.

ANS.2 A. Gratuity actual received = 3,25,000 RS

Maximum limit = 3,50,000 RS

He is covered under the gratuity act. For this calculation is as

follows:
15/26*13000*29 = 2,17,500 RS

TAXABLE GRATUITY= 3,25,000 – 2,17,500

= 1,07,500

B. a) If he is in receipt of gratuity

TAXABLE COMMUTED PENSION= Commuted pension – 1/3

Of commuted pension
= 1,60,000 – 53,333.33
= 1,06,666.67 RS

b) If he not in receipt of gratuity

TAXABLE COMMUTED PENSION= Commuted pension – 1/2

Of commuted pension
= 1,60,000 – 80,000
= 80,000 RS

ANS.3 PERQUISITES: The term perquisites means any benefit, attached

to an office or position in addition to salary or wages. It may be given in
cash or in kind. If it is given in kind it is measured in terms of money and
added to find out employee’s salary for tax purpose. The perquisites are
taxable under the head salary only if they are (a) allowed by an employer to
an employee
(b) allowed during the continuance of employment
(c) directly dependent on service
(d) resulting in the nature of personal advantage to the employee.

Perquisites as defined in the act [Sec.17(2)]

1) Rent free accommodation [Sec.17(2) (i)]
2) Accommodation at concessional rent [Sec17(2) (ii)]
3) Perquisites taxable only under specified cases [Sec(2) (iii)]
4) Employee’s obligation met by the employer[Sec17(2) (iv)]
5) Any sum payable by the employer, weather directly or through a fund
other than a recognized provident fund or an approved superannuation
fund or Deposit Linked Insurance Fund, to effect an insurance on the
life of employee or in respect of a contract for an annuity on the life of
the employee [Sec 17(2) (v)]
6) Notified fringe benefits [Sec 17(2) (vi)

TAX FREE PERQUISITES: The value of the following perquisites

shall not be included in the salary income of any employee:
1) Medical benefits
2) Tea or snacks or free food or beverages provided in office or factory
or through paid vouchers which are not transferable and usable only at
eating joints.
3) Facility of motor car’s
4) Residential accommodation provided at remote area
5) Facility of club or health club and similar facilities
6) Expenses on telephones including mobile phone
7) Employer’s contribution of staff group insurance scheme
8) Scholarships to employees or their children paid by the employer
9) The facility of conveyance provided by the employer from residence
to place of employment and vice-versa
10) Refresher courses
11) Free relations to armed personnel. The value of free rations
Given to the armed forces personnel
12) Facility of guest house or holiday home
13) Welfare expenses
14) Entertainment expenses
15) Free or confessional ticket provided by the employer
16) Perquisites to government employees posted abroad
17) Rent free house
18) Gift in kind
19) Laptops and computers provided by the employer
20) Interest free or confessional loan
ANS.4
PARTICULARS 1 2 3 4
MUNICIPAL VALUE 15,000 18,000 20,000 -

FAIR RENT 16,000 15,000 25,000 25,000

WHICHEVER IS 16,000 18,000 25,000 25,000
HIGHER

STANDARD RENT 10,000 16,000 - 30,000

WHICHEVER IS
LOWER 10,000 16,000 25,000 25,000

ACTUAL RENT 9,000 20,000 18,000 20,000

GROSS ANNUAL 10,000 20,000 25,000 25,000
VALUE(WHICHEVER
IS HIGHER)

ANS.5 a) Tax Planning on buildings self-occupied: Those who are staying

in rented premises can think of availing loan from banks or approved
institutions. They have the pleasure of staying in their own house. Not
bothering to pay monthly rent, they can reduce their taxable income
substantially. Even their disposable income may not decrease, since they
need not paid monthly rent. Even the effective rate of interest may be
reduced, because of tax saving caused by the interest payment(or due). (of
course this requires detailed calculations)

House self-occupied for part of previous year, let out for part of previous
year[Sec. 23(2)(b)]

House self-occupied for part of the previous year and let out for part of the
previous year. Sec. 23(3): The annual value of the house shall NOT be nil.
Such a house will be treated as let-out house annual value will be determined
u/s 23(1).

b) Tax planning on leave salary: If a Govt. employee is due for retirement

shortly, it is better for him not to encash his salary while he is in service.
This is because he can avoid paying tax on leave encashment which he
receives at the time of retirement. Even an employee in private service gets
exemption for a major part of the amount received as leave encashment. In
this connection employee should also consider the loss of interest on the
amount which is not taking to save tax.

SET-2

ANS.1 AGRICULTURAL INCOME SEC. 2(1A)

Agricultural income is totally exempt from liability to income tax.

However, agricultural income is factor in determining the tax on the non-
agricultural income of an individual, Hindu undivided family, Association of
persons and Body of individuals whose total income exceeds Rs 5,000.

ITEMS THAT ARE INCLUDED IN AGRICULTURE INCOME

UNDER SEC 2(1A) ARE AS FOLLOWS:
4) (a) Any rent or revenue derived from land situated in India. When one
person grants to another a right to use his land situated in India for
agricultural purposes; the former receives from the latter rent or
revenue in consideration of such user. Such rent or revenue is treated
as agricultural income.
(b) used for agricultural purposes. It means cultivation of a field, tilling
of the land, watering it, sowing of the seeds, planting and similar
operations on the land.

5) (a) Income derived from such land by agricultural operations.

(b) Income derived from such land by the performance of any process
ordinarily employed by a cultivator to render the produce raised by him
fit to be taken to market. The process employed in curing of coffee, flue
curing of tobacco, ginning of cotton, etc, is such a process.
(c) Income derived from such land by a sale by a cultivator or receiver of
rent-in-kind the produce raised or received by him.
6) Income from farm house. The income from a farm house is treated as
agricultural income if the following conditions are satisfied.
(e) It is situated on or in the immediate vicinity of the agricultural land
(f) The building is, by reason of his connection with the land, used as
dwelling house or a store-house or an out-house by the cultivator
or receiver of rent-in-kind
(g) The land is either assessed to land revenue in India or is subject to
local rate assessed and collected by the officers of the government,
or alternatively
(h) If the land is situated in ‘non-urban’ area, i.e, an area which
though, is with in municipality or cantonment board jurisdiction,
has a population of less than 10,000 or is beyond a notified
distance (maximum 8 kilometer) from the local limits of any such
municipality or cantonment board.

EXAMPLES OF AGRICULTURAL INCOMES:

1) Income from growing flowers and creepers.
2) Rent from agricultural land.
3) Profit on sale of standing crops or produce after harvest by the
cultivating owner or tenant of agricultural land.
4) Income from leasing out agricultural land for grazing cattle
required for agricultural purposes.
5) Interest on capital received by a partner from his firm engaged
in agricultural operations.
6) Conversion of latex into smoked sheets.
7) Rent from agricultural land received from sub-tenants by the
mortgagee in possession.
8) Income from sale of mulberry leaves grown on agricultural
land.
9) Compensation received from an insurance company for
damages caused by hailstorm or floods to the tea plantations.

TAX AVOIDANCE: Tax avoidance can be defined as the art of

dodging tax without breaking the law. Objective of tax avoidance
is minimizing the incidence of tax by adjusting the affairs in such a
manner that although it is with in the four corners of the taxation
laws but the advantage is taken by finding out loopholes in the
laws. But where the main purpose is to defer, reduce or completely
avoid the tax payable under the law.
 TAX EVASION: In the tax evasion, facts are deliberately
misrepresented and tax liability is understated by employing the
following means:
a) concealment of income
b) inflation of expenses
c) falsification of accounts
d) violation of rules
these devices are unethical. Evasion, once proved, not only attracts
heavy penalties but may also lead to prosecution.

ANS.2 A. Gratuity actual received = 3,25,000 RS

Maximum limit = 3,50,000 RS

He is covered under the gratuity act. For this calculation is as

follows:
15/26*13000*29 = 2,17,500 RS

TAXABLE GRATUITY= 3,25,000 – 2,17,500

= 1,07,500

B. a) If he is in receipt of gratuity

TAXABLE COMMUTED PENSION= Commuted pension – 1/3

Of commuted pension
= 1,60,000 – 53,333.33
= 1,06,666.67 RS

b) If he not in receipt of gratuity

TAXABLE COMMUTED PENSION= Commuted pension – 1/2

Of commuted pension
= 1,60,000 – 80,000
= 80,000 RS

ANS.3 PERQUISITES: The term perquisites means any benefit, attached

to an office or position in addition to salary or wages. It may be given in
cash or in kind. If it is given in kind it is measured in terms of money and
added to find out employee’s salary for tax purpose. The perquisites are
taxable under the head salary only if they are (a) allowed by an employer to
an employee
(b) allowed during the continuance of employment
(c) directly dependent on service
(d) resulting in the nature of personal advantage to the employee.

Perquisites as defined in the act [Sec.17(2)]

7) Rent free accommodation [Sec.17(2) (i)]
8) Accommodation at concessional rent [Sec17(2) (ii)]
9) Perquisites taxable only under specified cases [Sec(2) (iii)]
10) Employee’s obligation met by the employer[Sec17(2) (iv)]
11) Any sum payable by the employer, weather directly or through
a fund other than a recognized provident fund or an approved
superannuation fund or Deposit Linked Insurance Fund, to effect an
insurance on the life of employee or in respect of a contract for an
annuity on the life of the employee [Sec 17(2) (v)]
12) Notified fringe benefits [Sec 17(2) (vi)

TAX FREE PERQUISITES: The value of the following perquisites

shall not be included in the salary income of any employee:
10) Medical benefits
11) Tea or snacks or free food or beverages provided in office or
factory or through paid vouchers which are not transferable and usable
only at eating joints.
12) Facility of motor car’s
13) Residential accommodation provided at remote area
14) Facility of club or health club and similar facilities
15) Expenses on telephones including mobile phone
16) Employer’s contribution of staff group insurance scheme
17) Scholarships to employees or their children paid by the
employer
18) The facility of conveyance provided by the employer from
residence to place of employment and vice-versa
10) Refresher courses
11) Free relations to armed personnel. The value of free rations
Given to the armed forces personnel
12) Facility of guest house or holiday home
13) Welfare expenses
14) Entertainment expenses
15) Free or confessional ticket provided by the employer
 16) Perquisites to government employees posted abroad
17) Rent free house
18) Gift in kind
19) Laptops and computers provided by the employer
20) Interest free or confessional loan

ANS.4
PARTICULARS 1 2 3 4
MUNICIPAL VALUE 15,000 18,000 20,000 -

FAIR RENT 16,000 15,000 25,000 25,000

WHICHEVER IS 16,000 18,000 25,000 25,000
HIGHER

STANDARD RENT 10,000 16,000 - 30,000

WHICHEVER IS
LOWER 10,000 16,000 25,000 25,000

ACTUAL RENT 9,000 20,000 18,000 20,000

GROSS ANNUAL 10,000 20,000 25,000 25,000
VALUE(WHICHEVER
IS HIGHER)

ANS.5 a) Tax Planning on buildings self-occupied: Those who are staying

in rented premises can think of availing loan from banks or approved
institutions. They have the pleasure of staying in their own house. Not
bothering to pay monthly rent, they can reduce their taxable income
substantially. Even their disposable income may not decrease, since they
need not paid monthly rent. Even the effective rate of interest may be
reduced, because of tax saving caused by the interest payment(or due). (of
course this requires detailed calculations)

House self-occupied for part of previous year, let out for part of previous
year[Sec. 23(2)(b)]

House self-occupied for part of the previous year and let out for part of the
previous year. Sec. 23(3): The annual value of the house shall NOT be nil.
Such a house will be treated as let-out house annual value will be determined
u/s 23(1).
b) Tax planning on leave salary: If a Govt. employee is due for retirement
shortly, it is better for him not to encash his salary while he is in service.
This is because he can avoid paying tax on leave encashment which he
receives at the time of retirement. Even an employee in private service gets
exemption for a major part of the amount received as leave encashment. In
this connection employee should also consider the loss of interest on the
amount which is not taking to save tax.

ANS.1 THE FOLLOWING ARE THE FEW EXAMPLES OF

ADMISSIBLE GENERAL DEDUCTION UNDER SEC 37 OF
INCOME TAX ACT:

1) Expenses incurred in the purchase, manufacture and sale of goods.

2) General expenses incurred in the day to day running to the business.
3) Expenses incurred in defending a case for damages for breach of
contract.
4) Amount of sales-tax paid and expenses incurred in connection with
sales-tax proceedings including appeals.
5) Compensation paid to an undesirable employee for the retrenchment
of his services or to a director to get rid of his services.
6) Contribution made to provident fund maintained for the benefit of
employees under an act and with the previous approval of a state
 government may not be allowable u/s 36(1)(iv) but allowable u/s
37(1).
7) Commission, etc paid for securing orders for the business.
8) Compensation paid to employees in connection with injury sustained
by them or accident met by them while on duty.
9) Royalties paid in connection with mines.
10) Insurance premium paid under a policy ensuring its employees
against injury or against liability for compensation in respect of
accident to its workmen.
11) Reasonable expenses incurred on the occasion of Dussehra, Diwali,
commencement of the business, etc.
12) Compulsory subscription or a subscription given to an association in
the interest of the business.
13) Legal expenses incurred in connection with the business or profession
.
14) Interest on unpaid purchase price of any business assets purchased by
an assessee and put to use will be allowed.
15) Expenditure incurred to oppose nationalization or to prevent
extinction of business.
16) Under executive instructions, cost of installing new telephone.
17) Normal advertisement expenditure incurred to maintain the sales.
18) Penalty paid by the assessee for saving from confiscation the good
which he purchased from a third party without knowing that they had
been illegally imported.
19) Welfare expenditure incurred by the assessee.
20) Payment of excise duty.

ANS.2 UNABSORBED DEPRECIATION: Depreciation allowance for

a particular previous year is first deductible from the profits and gains of
the business or profession. If the profits and gains of the same business or
profession are insufficient for this purpose, the balance of the amount of
current depreciation allowance is deductible from the profits of any other
business or profession of the assessee. If the profits of any other business
or profession are also unable to absorb the whole amount of depreciation
allowance, the balance of such allowance which remains unabsorbed can
be set off against any other taxable income of the same year. If still, the
whole amount of current depreciation allowance is not deductible on
account of the insufficiency of the other taxable income, the remaining
unabsorbed amount is called “Unabsorbed Depreciation”.
TAX PLANNING ON DEPRECIATION: Capital assets may be
purchased even on the last day to claim 50% of normal depreciation.
Business assets if are to be purchased during Sept. or Oct., one may see
that it is used for a minimum period of 180 days to claim full
depreciation allowance. Since no depreciation on the assets sold during
the previous year is allowed, the sale of the asset may be postponed to the
beginning of the next year.

ANS.3 Indexed cost of acquisition= cost of acquisition*C.I.I of sale

year/C.I.I of purchase year
= 2,50,000*551/406
= 3,39,286

Indexed cost of improvement= C.O.I*C.I.I of sale year/ C.I.I of

improvement
= 50,000*551/447
= 61,633

ANS.4 SECURITIES ARE OF FOUR TYPES:

1) Tax –free Government Securities. These securities are those, the
interest on which is fully exempt from tax under section 10(15).
Interest on such securities is neither included in total income nor it is
taxed.
2) Government Securities: Such securities are issued either by the
Central Government or a State Government. These are taxable
securities but no tax is deducted at source on such securities. Hence,
the interest on such securities will not be grossed up. The amount
received or due as the case may be shall be included in the total
income.
3) Tax-free Commercial Securities. These are issued by a local authority
or statutory corporation or a company, in the form of debentures or
bonds. Really speaking their interest not tax-free, because tax due on
this interest is payable by the company, or local authority or
corporation concerned. These are called tax-free, because the
assessee has not to pay tax on it from his own pocket. The tax paid by
the company(10.2% in case of listed securities, 20.4% in case of
unlisted securities) on this interest is deemed to have been paid on
any interest due to an asseessee, hence the amount of tax paid on any
 interest due to an asseessee added to his interest income. i.e, the
interest due to an asseessee is grossed up and then this grossed up
amount is included in his total income. The amount of tax paid by the
company on this interest is deducted from the total tax payable by the
asseessee.
4) Less-Tax Commercial Securities. These may be called “Taxable
Securities”. In the case of these securities, income tax is deducted at
source on the amount of interest calculated at the percentage stated
on the securities and balance of the amount of interest calculated at
the percentage stated on the securities and balance of the amount of
interest left after deduction of the aforesaid income tax is paid to the
security-holder. (The rate of tax deducted at source is 10.2% in case
of listed securities, 20.4% in case of unlisted securities) if the rate
percent of interest is given it is not grossed up as it is already the
gross amount of interest, and income tax is to be deducted there from.
If in the case of these securities, the net amount of interest received is
given, it has got to be grossed up. In any case, it is the gross amount
of interest that is included in the total income of an asseessee.