CA INTER COURSE

Taxation question bank

CHAPTER 1

BASIC CONCEPTS

Question 1

Who is an “Assessee”?

Answer

As per section 2(7), assessee means a person by whom any tax or any other sum of money is
payable under the Income-tax Act, 1961.

In addition, the term includes –

 Every person in respect of whom any proceeding under the Act has been taken for the
assessment of –
• his income; or
• the income of any other person in respect of which he is assessable; or
• the loss sustained by him or by such other person; or
• the amount of refund due to him or to such other person.
 Every person who is deemed to be an assessee under any provision of the Act;
 Every person who is deemed to be an assessee in default under any provision of the Act.

Question 2

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State any four instances where the income of the previous year is assessable in the previous
year itself instead of the assessment year.

Answer

The income of an assessee for a previous year is charged to income-tax in the assessment year
following the previous year. However, in a few cases, the income is taxed in the previous year in
which it is earned. These exceptions have been made to protect the interests of revenue. The
exceptions are as follows:

(i) Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock,

mail or goods shipped at a port in India, the ship is allowed to leave the port only when the
tax has been paid or satisfactory arrangement has been made for payment thereof. 7.5%
of the freight paid or payable to the owner or the charterer or to any person on his behalf,
whether in India or outside India on account of such carriage is deemed to be his income
which is charged to tax in the same year in which it is earned.
(ii) Where it appears to the Assessing Officer that any individual may leave India during the
current assessment year or shortly after its expiry and he has no present intention of
returning to India, the total income of such individual for the period from the expiry of the
respective previous year up to the probable date of his departure from India is chargeable
to tax in that assessment year.
(iii) If an AOP/BOI etc. is formed or established for a particular event or purpose and the
Assessing Officer apprehends that the AOP/BOI is likely to be dissolved in the same year or
in the next year, he can make assessment of the income up to the date of dissolution as
income of the relevant assessment year.
(iv) During the current assessment year, if it appears to the Assessing Officer that a person is
likely to charge, sell, transfer, dispose of or otherwise part with any of his assets to avoid
payment of any liability under this Act, the total income of such person for the period from
the expiry of the previous year to the date, when the Assessing Officer commences
proceedings under this section is chargeable to tax in that assessment year.

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(v) Where any business or profession is discontinued in any assessment year, the income of
the period from the expiry of the previous year up to the date of such discontinuance may,
at the discretion of the Assessing Officer, be charged to tax in that assessment year.

Question 3

Compute the tax liability of Mr. Kashyap (aged 35), having total income of Rs 51,75,000 for the
Assessment Year 2022-23. Assume that his total income comprises of salary income, income
from house property and interest on fixed deposit. Assume that Mr. Kashyap has not opted for
the provisions of section 115BAC.

Answer

Computation of tax liability of Mr. Kashyap for the A.Y.2022-23

(A) Tax payable including surcharge on total income of Rs 51,75,000

Rs 2,50,000 – Rs 5,00,000 @5% Rs 12,500
Rs 5,00,001 – Rs 10,00,000 @20% Rs 1,00,000
Rs 10,00,001 – Rs 51,75,000 @30% Rs 12,52,500
Total Rs 13,65,000
Add: Surcharge @ 10% Rs 1,36,500
Rs 15,01,500
(B) Tax Payable on total income of Rs 50 lakhs (Rs 12,500 plus Rs 1,00,000 Rs 13,12,500
plus Rs 12,00,000)
(C) Total Income Less Rs 50 lakhs Rs 1,75,000
(D) Tax payable on total income of Rs 50 lakhs plus the excess of total Rs 14,87,500
income over Rs 50 lakhs (B +C)
(E) Tax payable: lower of (A) and (D) Rs 14,87,500
Add: Health and education cess @4% Rs 59,500
Tax liability Rs 15,47,000
(F) Marginal Relief (A – D) Rs 14,000

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Alternative method –

(A) Tax payable including surcharge on total income of Rs 51,75,000

Rs 2,50,000 – Rs 5,00,000 @5% Rs 12,500
Rs 5,00,001 – Rs 10,00,000 @20% Rs 1,00,000
Rs 10,00,001 – Rs 51,75,000 @30% Rs 12,52,500
Total Rs 13,65,000
Add: Surcharge @ 10% Rs 1,36,500
Rs 15,01,500
(B) Tax Payable on total income of Rs 50 lakhs (Rs 12,500 plus Rs 1,00,000 Rs 13,12,500
plus Rs 12,00,000)
(C) Excess tax payable (A)-(B) Rs 1,89,000
(D) Marginal Relief (Rs 1,89,000 – Rs 1,75,000, being the amount of income Rs. 14,000
in excess of Rs 50,00,000)
(E) Tax payable (A)-(D) Rs 14,87,500
Add: Health and education cess @4% Rs 59,500
Tax liability Rs 15,47,000

Question 4

Compute the tax liability of Mr. Gupta (aged 61), having total income of Rs 1,02,00,000 for the
Assessment Year 2022-23. Assume that his total income comprises of salary income, income
from house property and interest on fixed deposit. Assume that Mr. Gupta has not opted for
the provisions of section 115BAC.

Answer

Computation of tax liability of Mr. Gupta for the A.Y.2022-23

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(A) Tax payable including surcharge on total income of Rs 1,02,00,000
Rs 3,00,000 – Rs 5,00,000 @5% Rs 10,000
Rs 5,00,001 – Rs 10,00,000 @20% Rs 1,00,000
Rs 10,00,001 – Rs 1,02,00,000 @30% Rs 27,60,000
Total Rs 28,70,000
Add: Surcharge @ 15% Rs 4,30,500 Rs 33,00,500
(B) Tax Payable on total income of Rs 1 crore (Rs 10,000 plus Rs 1,00,000 Rs 28,10,000
plus Rs 27,00,000)
Add: Surcharge@10% Rs 2,81,000
Rs 30,91,000
(C) Total Income Less Rs 1 crore Rs 2,00,000
(D) Tax payable on total income of Rs 1 crore plus the excess of total income Rs 32,91,000
over Rs 1 crore (B +C)
(E) Tax payable: lower of (A) and (D) Rs 32,91,000
Add: Health and education cess @4% Rs 1,31,640
Tax liability Rs 34,22,640
(F) Marginal Relief (A – D) Rs 9,500

Alternative method –

(A) Tax payable including surcharge on total income of Rs 1,02,00,000

Rs 3,00,000 – Rs 5,00,000 @5% Rs 10,000
Rs 5,00,001 – Rs 10,00,000 @20% Rs 1,00,000
Rs 10,00,001 – Rs 1,02,00,000 @30% Rs 27,60,000
Total Rs 28,70,000
Add: Surcharge @ 15% Rs 4,30,500 Rs 33,00,500
(B) Tax Payable on total income of Rs 1 crore (Rs 10,000 plus Rs 1,00,000 Rs 28,10,000
plus Rs 27,00,000)
Add: Surcharge@10% Rs 2,81,000

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 Rs 30,91,000
(C) Excess tax payable (A)-(B) Rs 2,09,500
(D) Marginal Relief (Rs 2,09,500 – Rs 2,00,000, being the amount of income Rs 9,500
in excess of Rs 1,00,00,000)
(E) Tax payable (A)-(D) Rs 32,91,000
Add: Health and education cess @4% Rs 1,31,640
Tax liability Rs 34,22,640

Question 5

Mr. Agarwal aged 40 years and a resident in India, has a total income of Rs 4,50,00,000,
comprising long term capital gain taxable under section 112 of Rs 55,00,000, short term capital
gain taxable under section 111A of Rs 65,00,000 and other income of Rs 3,30,00,000. Compute
his tax liability for A.Y.2022-23. Assume that Mr. Kashyap has not opted for the provisions of
section 115BAC.

Answer

Computation of tax liability of Mr. Agarwal for the A.Y.2022-23

Particulars Rs
Tax on total income of Rs 4,50,00,000
Tax@20% of Rs 55,00,000
Tax@15% of Rs 65,00,000
Tax on other income of Rs 3,30,00,000
Rs 2,50,000 – Rs 5,00,000 @5% 12,500
Rs 5,00,000 – Rs 10,00,000 @20% 1,00,000
Rs 10,00,000 – Rs 3,30,00,000 @30% 96,00,000 97,12,500
1,17,87,500

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Add: Surcharge @15% on Rs 20,75,000 3,11,250
@25% on Rs 97,12,500 24,28,125 27,39,375
1,45,26,875
Add: Health and education cess @4% 5,81,075
Tax Liability 1,51,07,950

Question 6

Mr. Sharma aged 62 years and a resident in India, has a total income of Rs 2,30,00,000,
comprising long term capital gain taxable under section 112 of Rs 52,00,000, short term capital
gain taxable under section 111A of Rs 64,00,000 and other income of Rs 1,14,00,000. Compute
his tax liability for A.Y.2022-23. Assume that Mr. Sharma has not opted for the provisions of
section 115BAC.

Answer
Computation of tax liability of Mr. Sharma for the A.Y.2022-23

Particulars Rs
Tax on total income of Rs 2,30,00,000
Tax@20% of Rs 52,00,000 10,40,000
Tax@15% of Rs 64,00,000 9,60,000
Tax on other income of Rs 1,14,00,000
Rs 3,00,000 – Rs 5,00,000 @5% 10,000
Rs 5,00,000 – Rs 10,00,000 @20% 1,00,000
Rs 10,00,000 – Rs 1,14,00,000 @30% 31,20,000 32,30,000
52,30,000
Add: Surcharge @15% 7,84,500
60,14,500

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Add: Health and education cess @4% 2,40,580
Tax Liability 62,55,080

CHAPTER 2

RESIDENCE AND SCOPE OF TOTAL INCOME

Question 1

Mr. Ram, an Indian citizen, left India on 22.09.2021 for the first time to work as an officer of a
company in Germany. Determine the residential status of Ram for the assessment year 2022-
23.

Answer

Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies
any one of the following conditions –

(i) He has been in India during the previous year for a total period of 182 days or more, or
(ii) He has been in India during the 4 years immediately preceding the previous year for a total
period of 365 days or more and has been in India for at least 60 days in the previous year.

In the case of Indian citizens leaving India for employment, the period of stay during the
previous year must be 182 days instead of 60 days given in (ii) above.

During the previous year 2021-22, Mr. Ram, an Indian citizen, was in India for 175 days only
(i.e., 30+31+30+31+31+22 days). Thereafter, he left India for employment purposes.

Since he does not satisfy the minimum criteria of 182 days stay in India during the relevant
previous year, he is a non-resident for the A.Y. 2022-23.

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Question 2

Mr. Dey, a non-resident, residing in US since 1990, came back to India on 1.4.2020 for
permanent settlement. What will be his residential status for assessment year 2022-23?

Answer

Mr. Dey is a resident in A.Y. 2022-23 since he has stayed in India for a period of 365 days (more
than 182 days) during the P.Y. 2021-22.

As per section 6(6), a person will be “Not ordinarily Resident” in India in any previous year, if
such person, inter alia,:

(a) has been a non-resident in 9 out of 10 previous years preceding the relevant previous year;
or
(b) has during the 7 previous years immediately preceding the relevant previous year been in
India for 729 days or less.

If he does not satisfy either of these conditions, he would be a resident and ordinarily resident.

For the previous year 2021-22 (A.Y. 2022-23), his status would be “Resident but not ordinarily
resident” since he was non-resident in 9 out of 10 previous years immediately preceding the
P.Y. 2021-22. He can be resident but not ordinarily resident also due to the fact that he has
stayed in India only for 365 days (i.e., less than 730 days) in 7 previous years immediately
preceding the P.Y. 2021-22.

Question 3

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Mr. Ramesh & Mr. Suresh are brothers and they earned the following incomes during the
financial year 2021-22. Mr. Ramesh settled in Canada in the year 1996 and Mr. Suresh settled in
Delhi. Compute the total income for the A.Y. 2022-23.

Sr. No. Particulars Mr. Ramesh Mr. Suresh

(Rs) (Rs)
1 Interest on Canada Development Bonds (only 50% of 35,000 40,000
interest received in India)
2 Dividend from British company received in London 28,000 20,000
3 Profits from a business in Nagpur, but managed 1,00,000 1,40,000
directly from London
4 Short term capital gain on sale of shares of an Indian 60,000 90,000
company received in India
5 Income from a business in Chennai 80,000 70,000
6 Fees for technical services rendered in India, but 1,00,000 ----
received in Canada
7 Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000
8 Agricultural income from a land situated in Andhra 55,000 45,000
Pradesh
9 Rent received in respect of house property at Bhopal 1,00,000 60,000
10 Life insurance premium paid --- 30,000

Answer

Computation of total income of Mr. Ramesh & Mr. Suresh for the A.Y. 2022-23

S. No. Particulars Mr. Ramesh Mr. Suresh

(Non Resident) (Resident)
(Rs) (Rs)
1 Interest on Canada Development Bond (See Note 2) 17,500 40,000

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 2 Dividend from British Company received in London 20,000
(See Note 3)
3 Profits from a business in Nagpur but managed 1,00,000 1,40,000
directly from London (See Note 2)
4 Short term capital gain on sale of shares of an 60,000 90,000
Indian company received in India (See Note 2)
5 Income from a business in Chennai (See Note 2) 80,000 70,000
6 Fees for technical services rendered in India, but 1,00,000 -
received in Canada (See Note 2)
7 Interest on savings bank deposit in UCO Bank, Delhi 7,000 12,000
(See Note 2)
8 Agricultural income from a land situated in Andhra - -
Pradesh (See Note 4)
9 Income from house property at Bhopal (See Note 5) 70,000 42,000
Gross Total income 4,34,500 4,14,000
Less: Deduction under Chapter VI-A
Section 80C - Life insurance premium - 30,000
Section 80TTA (See Note 6) 7,000 10,000
Total Income 4,27,500 3,74,000

Notes:

1. Mr. Ramesh is a non-resident since he has been living in Canada since 1996. Mr. Suresh, is
settled in Delhi, and thus, assumed as a resident and ordinarily resident.
2. In case of a resident and ordinarily resident, his global income is taxable as per section 5(1).
However, as per section 5(2), in case of a non-resident, only the following incomes are
chargeable to tax:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.

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 Therefore, fees for technical services rendered in India would be taxable in the hands of Mr.
Ramesh, even though he is a non-resident.

The income referred to in Sl. No. 3,4,5 and 7 are taxable in the hands of both Mr. Ramesh
and Mr. Suresh since they accrue or arise/ deemed to accrue or arise in India.

Interest on Canada Development Bond would be fully taxable in the hands of Mr. Suresh,
whereas only 50%, which is received in India, is taxable in the hands of Mr. Ramesh.

3. Dividend received from British company in London by Mr Ramesh, a non-resident, is not

taxable since it accrued and is received outside India. However, such dividend received by
Mr. Suresh is taxable, since he is a resident and ordinarily resident.
4. Agricultural income from a land situated in India is exempt under section 10(1) in the case
of both non-residents and residents.
5. Income from house property-

Mr. Ramesh (Rs) Mr. Suresh (Rs)

Rent received 1,00,000 60,000
Less: Deduction under section 24(a) @30% 30,000 18,000
Net income from house property 70,000 42,000

The net income from house property in India would be taxable in the hands of both Mr.
Ramesh and Mr. Suresh, since the accrual and receipt of the same are in India.

6. In case of an individual, interest upto Rs 10,000 from savings account with, inter alia, a bank
is allowable as deduction under section 80TTA.

Question 4

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Examine the correctness or otherwise of the statement - “Income deemed to accrue or arise in
India to a non-resident by way of interest, royalty and fees for technical services is to be taxed
irrespective of territorial nexus”.

Answer

This statement is correct.

As per Explanation to section 9, income by way of interest, royalty or fees for technical services
which is deemed to accrue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1),
shall be included in the total income of the non-resident, whether or not –

(i) non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.

In effect, the income by way of fees for technical services, interest or royalty from services
utilised in India would be deemed to accrue or arise in India in case of a non-resident and be
included in his total income, whether or not such services were rendered in India and
irrespective of whether the non-resident has a residence or place of business or business
connection in India.

Question 5

Examine with reasons whether the following transactions attract income-tax in India in the
hands of recipients:

(i) Salary paid by Central Government to Mr. John, a citizen of India Rs 7,00,000 for the
services rendered outside India.
(ii) Interest on moneys borrowed from outside India Rs 5,00,000 by a non-resident for the
purpose of business within India say, at Mumbai.

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(iii) Post office savings bank interest of Rs 19,000 received by a resident assessee, Mr. Ram,
aged 46 years.
(iv) Royalty paid by a resident to a non-resident in respect of a business carried on outside
India.
(v) Legal charges of Rs 5,00,000 paid in Delhi to a lawyer of United Kingdom who visited India
to represent a case at the Delhi High Court.

Answer

Taxable / Not Amount liable to Reason

Taxable tax (Rs)
(i) Taxable 6,50,000 As per section 9(1)(iii), salaries payable by the
Government to a citizen of India for service
rendered outside India shall be deemed to
accrue or arise in India. Therefore, salary paid
by Central Government to Mr. John for services
rendered outside India would be deemed to
accrue or arise in India since he is a citizen of
India. He would be entitled to standard
deduction of Rs 50,000 under section 16(ia).
(ii) Taxable 5,00,000 As per section 9(1)(v)(c), interest payable by a
non-resident on moneys borrowed and used
for the purposes of business carried on by such
person in India shall be deemed to accrue or
arise in India in the hands of the recipient.
(iii) Partly Taxable 5,500 The interest on Post Office Savings Bank a/c,
would be exempt u/s 10(15)(i), only to the
extent of Rs 3,500 in case of an individual a/c.
Further, interest upto Rs 10,000, would be
allowed as deduction u/s 80TTA from Gross

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 Total Income. Balance Rs 5,500 i.e., Rs 19,000
- Rs 3,500 – Rs 10,000 would be taxable in the
hands of Mr. Ram, a resident.
(iv) Not Taxable - Royalty paid by a resident to a non-resident in
respect of a business carried outside India
would not be taxable in the hands of the non-
resident provided the same is not received in
India. This has been provided as an exception
to deemed accrual mentioned in section
9(1)(vi)(b).
(v) Taxable 5,00,000 In case of a non-resident, any income which
accrues or arises in India or which is deemed to
accrue or arise in India or which is received in
India or is deemed to be received in India is
taxable in India.
Therefore, legal charges paid in India to a non-
resident lawyer of UK, who visited India to
represent a case at the Delhi High Court would
be taxable in India.

CHAPTER 3

INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Question 1

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Examine whether the following incomes are chargeable to tax, and if so, compute the amount
liable to tax:

(i) Arvind received Rs 20,000 as his share from the income of the HUF.
(ii) Mr. Xavier, a ‘Param Vir Chakra’ awardee, who was formerly in the service of the Central
Government, received a pension of Rs 2,20,000 during the financial year 2021-22.
(iii) Agricultural income of Rs 1,27,000 earned by a resident of India from a land situated in
Malaysia.
(iv) Rent of Rs 72,000 received for letting out agricultural land for a movie shooting.

Answer

S. No. Taxable/ Not Amount liable Reason

Taxable to tax (Rs)
(i) Not Taxable - Share received by member out of the income of
the HUF is exempt under section 10(2).
(ii) Not Taxable - Pension received by Mr. Xavier, a former Central
Government employee who is a ‘Param Vir
Chakra’ awardee, is exempt under section
10(18).
(iii) Taxable 1,27,000 Agricultural income from a land in any foreign
country is taxable in the case of a resident
taxpayer as income under the head “Income
from other sources”. Exemption under section
10(1) is not available in respect of such income.
(iv) Taxable 72,000 Agricultural income is exempt from tax as per
section 10(1). Agricultural income means, inter
alia, any rent or revenue derived from land
which is situated in India and is used for
agricultural purposes. In the present case, rent

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 is being derived from letting out of agricultural
land for a movie shoot, which is not an
agricultural purpose. In effect, the land is not
being put to use for agricultural purposes.
Therefore, Rs 72,000, being rent received from
letting out of agricultural land for movie
shooting, is not exempt under section 10(1).
The same is chargeable to tax under the head
“Income from other sources”.

Question 2

Examine the taxability of agricultural income under the Income-tax Act, 1961. How will income
be computed where an individual derives agricultural and non-agricultural income?

Answer

Agricultural income is exempt from tax as per section 10(1). However, aggregation of
agricultural and non-agricultural income is to be done to determine the rate at which the non-
agricultural income shall be chargeable to tax. In case the agricultural income is not more than
Rs 5,000 or the tax-payer has non-agricultural income not more than the basic exemption limit,
then no such aggregation needs to be done.

Further, such aggregation has to be done only if the tax-payer is an individual, HUF, AOP, BOI or
an artificial juridical person, since the Finance Act prescribes slab rates of income-tax for these
assessees.

In the case of other assessees such as partnership firms, companies etc., whose income is
chargeable to tax at a flat rate, aggregation of agricultural income would have no effect.

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Since the second part of the question requires the manner of computation of income where an
individual derives agricultural and non-agricultural income, the same can be answered on the
basis of Rules 7A, 7B and 8 of the Income-tax Rules, 1962 dealing with composite income.

Rule Particulars Business Income Agricultural Income

Rule 7A Income from sale of rubber products 35% 65%
derived from rubber plants grown by the
seller in India.
Rule 7B Income from sale of coffee
- grown and cured by the seller in India 25% 75%
- grown, cured, roasted and grounded by 40% 60%
the seller in India
Rule 8 Income from sale of tea grown and 40% 60%
manufactured by the seller in India

Thereafter, income-tax shall be computed by aggregating the agricultural income and the non-
agricultural income in the manner described below:

(1) Aggregate the agricultural income with non-agricultural income and determine tax payable
on such amount.
(2) Aggregate the agricultural income with the basic exemption limit of the assessee i.e., Rs
2,50,000/ Rs 3,00,000/ Rs 5,00,000, as the case may be, and determine tax on such amount.
(3) Compute the difference between the tax computed in Step (1) and Step (2), which shall be
the tax payable in respect of non-agricultural income.
(4) The tax payable so computed in step (3) shall be increased by surcharge, if applicable or
reduced by rebate under section 87A, if the total income does not exceed Rs 5 lakh.
Thereafter, health and education cess@4% has to be added to compute the total tax
liability.

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Question 3

Whether the income derived from saplings or seedlings grown in a nursery is taxable under the
Income-tax Act, 1961? Examine.

Answer

As per Explanation 3 to section 2(1A) of the Act, income derived from saplings or seedlings
grown in a nursery shall be deemed to be agricultural income and exempt from tax, whether or
not the basic operations were carried out on land.

Question 4

Examine with reasons in brief whether the following statements are true or false with reference
to the provisions of the Income-tax Act, 1961:

(i) Exemption is available to a Sikkimese individual, only in respect of income from any source
in the State of Sikkim.
(ii) Pension received by a recipient of gallantry award, who was a former employee of Central
Government, is exempt from income-tax.
(iii) Mr. A, a member of a HUF, received Rs 10,000 as his share from the income of the HUF. The
same is to be included in his chargeable income.

Answer

(i) False: Exemption under section 10(26AAA) is available to a Sikkimese individual not only in
respect of the said income, but also in respect of income by way of dividend or interest on
securities.

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(ii) True: Section 10(18) exempts any income by way of pension received by individual who has
been in service of Central Government and has been awarded “ParamVir Chakra” or
“MahaVir Chakra” or “Vir Chakra” or such other gallantry award as the Central Government,
may, by notification in the Official Gazette, specify in this behalf.
(iii) False: Section 10(2) exempts any sum received by an individual as a member of a HUF
where such sum has been paid out of the income of the family. Therefore, Rs 10,000 should
not be included in Mr. A’s chargeable income.

Question 5

Rudra Ltd. has one unit at Special Economic Zone (SEZ) and other unit at Domestic Tariff Area
(DTA). The company provides the following details for the previous year 2021-22.

Particulars Rudra Ltd. (Rs) Unit in DTA (Rs)

Total Sales 6,00,00,000 2,00,00,000
Export Sales 4,60,00,000 1,60,00,000
Net Profit 80,00,000 20,00,000

Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961, for the
Assessment Year 2022-23, in the following situations:

(i) If both the units were set up and start manufacturing from 22-05-2014.
(ii) If both the units were set up and start manufacturing from 14-05-2018.

Answer

Computation of deduction under section 10AA of the Income-tax Act, 1961

As per section 10AA, in computing the total income of Rudra Ltd. from its unit located in a
Special Economic Zone (SEZ), which begins to manufacture or produce articles or things or
provide any services during the previous year relevant to the assessment year commencing on
or after 01.04.2006 but before 01.04.2021, there shall be allowed a deduction of 100% of the
profit and gains derived from export of such articles or things or from services for a period of

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five consecutive assessment years beginning with the assessment year relevant to the
previous year in which the Unit begins to manufacture or produce such articles or
things or provide services, as the case may be, and 50% of such profits for further five
assessment years.

Computation of eligible deduction under section 10AA [See Working Note below]:

(i) If Unit in SEZ was set up and began manufacturing from 22-05-2014:
Since A.Y. 2022-23 is the 8th assessment year from A.Y. 2015-16, relevant to the previous
year 2014-15, in which the SEZ unit began manufacturing of articles or things, it shall be
eligible for deduction of 50% of the profits derived from export of such articles or things,
assuming all the other conditions specified in section 10AA are fulfilled.

Export turnover of Unit in SEZ

= Profits of Unit in SEZ x X 50%
Total turnover of Unit in SEZ

300 lakhs
= 60 lakhs X 400 lakhs x 50% = Rs 22.50 lakhs

(ii) If Unit in SEZ was set up and began manufacturing from 14-05-2018:
Since A.Y. 2022-23 is the 4th assessment year from A.Y. 2019-20, relevant to the previous
year 2018-19, in which the SEZ unit began manufacturing of articles or things, it shall be
eligible for deduction of 100% of the profits derived from export of such articles or things,
assuming all the other conditions specified in section 10AA are fulfilled.

Export turnover of Unit in SEZ

= Profits of Unit in SEZ x X 100%
Total turnover of Unit in SEZ

300 lakhs
= 60 lakhs x 400 lakhs x 100% = Rs 45 lakhs

The unit set up in Domestic Tariff Area is not eligible for the benefit of deduction under section
10AA in respect of its export profits, in both the situations.

Working Note:

Computation of total sales, export sales and net profit of unit in SEZ

GMTESTSERIES.COM®
 Particulars Rudra Ltd. (Rs) Unit in DTA (Rs) Unit in SEZ (Rs)
Total Sales 6,00,00,000 2,00,00,000 4,00,00,000
Export Sales 4,60,00,000 1,60,00,000 3,00,00,000
Net Profit 80,00,000 20,00,000 60,00,000

Chapter – 4

HEADS OF INCOME

UNIT 1: SALARIES

Question 1

Mr. Mohit is employed with XY Ltd. on a basic salary of Rs 10,000 p.m. He is also entitled to
dearness allowance @100% of basic salary, 50% of which is included in salary as per terms of
employment. The company gives him house rent allowance of Rs 6,000 p.m. which was
increased to Rs 7,000 p.m. with effect from 01.01.20 22. He also got an increment of Rs 1,000
p.m. in his basic salary with effect from 01.02.2022. Rent paid by him during the previous year
2021-22 is as under:

April and May, 2021 – Nil, as he stayed with his parents

June to October, 2021 – Rs 6,000 p.m. for an accommodation in Ghaziabad

November, 2021 to March, 2022 – Rs 8,000 p.m. for an accommodation in Delhi

Compute his gross salary for assessment year 2022-23 assuming he has not opted for the
provisions of section 115BAC.

Answer

GMTESTSERIES.COM®
Computation of gross salary of Mr. Mohit for A.Y. 2022-23

Particulars Rs
Basic salary [(Rs 10,000 × 10) + (Rs 11,000 × 2)] 1,22,000
Dearness Allowance (100% of basic salary) 1,22,000
House Rent Allowance (See Note below) 21,300
Gross Salary 2,65,300

Note: Computation of Taxable House Rent Allowance (HRA)

Particulars April-May June-Oct Nov-Dec Jan Feb-March

(Rs) (Rs) (Rs) (Rs) (Rs)
Basic salary per month 10,000 10,000 10,000 10,000 11,000
Dearness allowance 5,000 5,000 5,000 5,000 5,500
(included in salary as per
terms of employment)
(50% of basic salary)
Salary per month for the 15,000 15,000 15,000 15,000 16,500
purpose of computation
of house rent allowance
Relevant period (in 2 5 2 1 2
months
Salary for the relevant 30,000 75,000 30,000 15,000 33,000
period (Salary per month
× relevant period)
Rent paid for the Nil 30,000 16,000 8,000 16,000
relevant period (Rs6,000×5) (Rs8,000×2) (Rs8,000×1) (Rs8,000×2)
House rent allowance 12,000 30,000 12,000 7,000 14,000
(HRA) received during (Rs6,000×2) (Rs6,000×5) (Rs6,000×2) (Rs7,000×1) (Rs7,000×2)

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the relevant period (A)
Least of the following is N.A.
exempt [u/s 10(13A)]
1. Actual HRA received - 30,000 12,000 7,000 14,000
2. Rent paid (–) 10% of - 22,500 13,000 6,500 12,700
salary
3. 40% of salary - 30,000 15,000 7,500 16,500
(Residence at Ghaziabad (40% × Rs (50% × Rs (50% × Rs (50% × Rs
– June to Oct, 2021) 75,000) 30,000) 15,000) 33,000)
50% of salary (Residence
at Delhi–Nov, 21 -March,
22)
Exempt HRA (B) Nil 22,500 12,000 6,500 12,700
Taxable HRA [Actual 12,000 7,500 Nil 500 1,300
HRA (–) Exempt HRA]
(A-B)

Taxable HRA (total) = Rs 12,000 + Rs 7,500 + Rs 500 + Rs 1,300 = Rs 21,300

Question 2

Ms. Rakhi is an employee in a private company. She receives the following medical benefits
from the company during the previous year 202 1-22:

Particulars Rs
1 Reimbursement of following medical expenses incurred by Ms. Rakhi
(A) On treatment of her self employed daughter in a private clinic 4,000
(B) On treatment of herself by family doctor 8,000

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 (C) On treatment of her mother -in-law dependent on her, in a nursing 5,000
home
2 Payment of premium on Mediclaim Policy taken on her health 7,500
3 Medical Allowance 2,000 p.m.
4 Medical expenses reimbursed on her son's treatment in a government 5,000
hospital
5 Expenses incurred by company on the treatment of her minor son 1,95,000
abroad including stay expenses
6 Expenses in relation to foreign travel of Rakhi and her son for medical 1,20,000
treatment
Note - Limit prescribed by RBI for expenditure on medical treatment
and stay abroad is USD 2,50,000 per financial year under liberalized
remittance scheme.

Examine the taxability of the above benefits and allowances in the hands of Rakhi.

Answer

Tax treatment of medical benefits, allowances and mediclaim premium in the hands of Ms.
Rakhi for A.Y. 2022-23

Particulars
1. Reimbursement of medical expenses incurred by Ms. Rakhi
(A) The amount of Rs 4,000 reimbursed by her employer for treatment of her self-
employed daughter in a private clinic is taxable perquisite.
(B) The amount of Rs 8,000 reimbursed by the employer for treatment of Ms. Rakhi by
family doctor is taxable perquisite.
(C) The amount of Rs 5,000 reimbursed by her employer for treatment of her
dependant mother-in-law in a nursing home is taxable perquisite.
The aggregate sum of Rs 17,000, specified in (A), (B) and (C) above, reimbursed by the

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 employer is taxable perquisite
2. Medical insurance premium of Rs 7,500 paid by the employer for insuring health of Ms.
Rakhi is a tax free perquisite as per clause (iii) of the first proviso to section 17(2).
3. Medical allowance of Rs 2,000 per month i.e., Rs 24,000 p.a. is a fully taxable allowance.
4. As per clause (ii)(a) of the first proviso to section 17(2), reimbursement of medical
expenses of Rs 5,000 on her son’s treatment in a hospital maintained by the
Government is a tax free perquisite.
5. As per clause (vi) of the first proviso to section 17(2), the following expenditure incurred
& by the employer would be excluded from perquisite subject to certain conditions –
6. (i) Expenditure on medical treatment of the employee, or any member of the family of
such employee, outside India[Rs 1,05,000, in this case];
(ii) Expenditure on travel and stay abroad of the employee or any member of the family
of such employee for medical treatment and one attendant who accompanies the
patient in connection with such treatment [Rs 1,20,000, in this case].
The conditions subject to which the above expenditure would be exempt are as follows
–
(i) The expenditure on medical treatment and stay abroad would be excluded from
perquisite to the extent permitted by Reserve Bank of India;
(ii) The expenditure on travel would be excluded from perquisite only in the case of an
employee whose gross total income, as computed before including the said
expenditure, does not exceed Rs 2 lakh.
Since the expenditure on medical treatment and stay abroad does not exceed the limit
permitted by RBI, they would be fully exempt. However, the foreign travel expenditure
of Ms. Rakhi and her minor son borne by the employer would be excluded from
perquisite only if the gross total income of Ms. Rakhi, as computed before including the
said expenditure, does not exceed Rs 2 lakh.

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Question 3

Mr. X is employed with AB Ltd. on a monthly salary of Rs 25,000 per month and an
entertainment allowance and commission of Rs 1,000 p.m. each. The company provides him
with the following benefits:

1. A company owned accommodation is provided to him in Delhi. Furniture costing Rs 2,40,000

was provided on 1.8.2021.

2. A personal loan of Rs 5,00,000 on 1.7.2021 on which it charges interest @ 6.75% p.a. The
entire loan is still outstanding. (Assume SBI rate of interest on 1.4.202 1 was 12.75% p.a.)

3. His son is allowed to use a motor cycle belonging to the company. The company had
purchased this motor cycle for Rs 60,000 on 1.5.2018. The motor cycle was finally sold to him
on 1.8.2021 for Rs 30,000.

4. Professional tax paid by Mr. X is Rs 2,000.

Compute the income from salary of Mr. X for the A.Y. 2022-23 assuming Mr. X h as not opted
for the provisions of section 115BAC.

Answer

Computation of Income from Salary of Mr. X for the A.Y. 2022-23

Particulars Rs Rs
Basic salary [Rs 25,000 × 12] 3,00,000
Commission [Rs 1,000 × 12] 12,000
Entertainment allowance [Rs 1,000 × 12] 12,000
Rent free accommodation [Note 1] 48,600
Add : Value of furniture [Rs 2,40,000 × 10% p.a. for 8 months] 16,000 64,600
Interest on personal loan [Note 2] 22,500
Use of motor cycle [Rs 60,000 × 10% p.a. for 4 months] 2,000
Transfer of motor cycle [Note 3] 12,000

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Gross Salary 4,25,100
Less : Deduction under section 16
Under section 16(ia) – Standard deduction 50,000
Under section 16(iii) - Professional tax paid 2,000 52,000
Income from Salary 3,73,100

Note 1: Value of rent free unfurnished accommodation

= 15% of salary for the relevant period

= 15% of (Rs 3,00,000 + Rs 12,000 + Rs 12,000) = Rs 48,600

Note 2: Value of perquisite for interest on personal loan

= [Rs 5,00,000 × (12.75% - 6.75%) for 9 months] = Rs 22,500

Note 3: Depreciated value of the motor cycle

= Original cost – Depreciation @ 10% p.a. for 3 completed years.

= Rs 60,000 – (Rs 60,000 × 10% p.a. × 3 years) = Rs 42,000.

Perquisite = Rs 42,000 – Rs30,000 = Rs 12,000.

Question 4

Mr. Balaji, employed as Production Manager in Beta Ltd., furnishes you the following
information for the year ended 31.03.2022:

(i) Basic salary upto 31.10.2021 Rs 50,000 p.m.

Basic salary from 01.11.2021 Rs 60,000 p.m.
Note: Salary is due and paid on the last day of every month.
(ii) Dearness allowance @ 40% of basic salary.

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(iii) Bonus equal to one month salary. Paid in October 2021 on basic salary plus dearness
allowance applicable for that month.
(iv) Contribution of employer to recognized provident fund account of the employee@16% of
basic salary.
(v) Professional tax paid Rs 2,500 of which Rs 2,000 was paid by the employer.
(vi) Facility of laptop and computer was provided to Balaji for both official and personal use.
Cost of laptop Rs 45,000 and computer Rs 35,000 were acquired by the company on
01.12.2021.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres) provided
to the employee from 01.11.2021 meant for both official and personal use. Repair and
running expenses of Rs 45,000 from 01.11.2021 to 31.03.2022, were fully met by the
employer. The motor car was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children (one
daughter aged 7 and twin sons aged 3). Cost of air tickets (economy class) reimbursed by
the employer Rs 30,000 for adults and Rs 45,000 for three children. Balaji is eligible for
availing exemption this year to the extent it is permissible in law.

Compute the salary income chargeable to tax in the hands of Mr. Balaji for the assessment year
2022-23 assuming he has not opted for the provisions of section 115BAC.

Answer

Computation of Taxable Salary of Mr. Balaji for A.Y. 2022-23

Particulars Rs
Basic salary [(Rs 50,000 × 7) + (Rs 60,000 × 5)] 6,50,000
Dearness Allowance (40% of basic salary) 2,60,000
Bonus (Rs 50,000 + 40% of Rs 50,000) (See Note 1) 70,000
Employers contribution to recognised provident fund in excess of 12% of 26,000
salary = 4% of Rs 6,50,000 (See Note 2)
Professional tax paid by employer 2,000

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Perquisite of Motor Car (Rs 2,400 for 5 months) (See Note 4) 12,000
Gross Salary 10,20,000
Less: Deduction under section 16
Standard deduction u/s 16(ia) Rs 50,000
Professional tax u/s 16(iii) (See Note 6) Rs 2,500 52,500
Taxable Salary 9,67,500

Notes:

1. Since bonus was paid in the month of October, the basic salary of Rs 50,000 for the month of
October is considered for its calculation.

2. It is assumed that dearness allowance does not form part of salary for computing retirement
benefits.

3. As per Rule 3(7)(vii), facility of use of laptop and computer is a tax free perquisite, whether
used for official or personal purpose or both.

4. As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity exceeding 1.60
liters) owned by the employer is provided to the employee without chauffeur for personal as
well as office use, the value of perquisite shall be Rs 2,400 per month. The car was provided to
the employee from 01.11.2021, therefore the perquisite value has been calculated for 5
months.

5. Mr. Balaji can avail exemption under section 10(5) on the entire amount of Rs 75,000
reimbursed by the employer towards Leave Travel Concession since the same was availed for
himself, his wife and three children and the journey was undertaken by economy class airfare.
The restriction imposed for two children is not applicable in case of multiple births which take
place after the first child. It is assumed that the Leave Travel Concession was availed for journey
within India.

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6. As per section17(2)(iv), a “perquisite” includes any sum paid by the employer in respect of
any obligation which, but for such payment, would have been payable by the assessee.
Therefore, professional tax of Rs 2,000 paid by the employer is taxable as a perquisite in the
hands of Mr. Balaji. As per section 16(iii), a deduction from the salary is provided on account of
tax on employment i.e. professional tax paid during the year.

Therefore, in the present case, the professional tax paid by the employer on behalf of the
employee Rs 2,000 is first included in the salary and deduction of the entire professional tax of
Rs 2,500 is provided from salary.

Question 5

From the following details, find out the salary chargeable to tax for the A.Y.2022-23 assuming
he has not opted for the provisions of section 115BAC-

Mr. X is a regular employee of Rama & Co., in Gurgaon. He was appointed on 1.1.2021 in the
scale of Rs 20,000 – Rs 1,000 – Rs 30,000. He is paid 10% D.A. & Bonus equivalent to one month
pay based on salary of March every year. He contributes 15% of his pay and D.A. towards his
recognized provident fund and the company contributes the same amount. DA forms part of
pay for retirement benefits.

He is provided free housing facility which has been taken on rent by the company at Rs 10,000
per month. He is also provided with following facilities:

(i) Facility of laptop costing Rs 50,000.

(ii) Company reimbursed the medical treatment bill of his brother of Rs 25,000, who is
dependent on him.
(iii) The monthly salary of Rs 1,000 of a house keeper is reimbursed by the company.
(iv) A gift voucher of Rs 10,000 on the occasion of his marriage anniversary.
(v) Conveyance allowance of Rs 1,000 per month is given by the company towards actual
reimbursement of conveyance spent on official duty.

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(vi) He is provided personal accident policy for which premium of Rs 5,000 is paid by the
company.
(vii) He is getting telephone allowance @ Rs 500 per month.

Answer

Computation of taxable salary of Mr. X for A.Y. 2022-23

Particulars Rs
Basic pay [(Rs 20,000×9) + (Rs 21,000×3)] = Rs 1,80,000 + Rs 63,000 2,43,000
Dearness allowance [10% of basic pay] 24,300
Bonus 21,000
Employer’s contribution to Recognized Provident Fund in excess of 12% (15%- 8,019
12% =3% of Rs 2,67,300) [See Note 1 below]
Taxable allowances
Telephone allowance 6,000
Taxable perquisites
Rent-free accommodation [See Note 1 & 2 below] 44,145
Medical reimbursement 25,000
Reimbursement of salary of housekeeper 12,000
Gift voucher [See Note 5 below] 10,000
Gross Salary 3,93,464
Less: Deduction under section 16(ia) – Standard deduction 50,000
Salary income chargeable to tax 3,43,464

Notes:

1. Since dearness allowance forms part of salary for retirement benefits, the perquisite value
of rent-free accommodation and employer’s contribution to recognized provident fund
have been accordingly worked out.

GMTESTSERIES.COM®
2. Where the accommodation is taken on lease or rent by the employer, the value of rent-free
accommodation provided to employee would be actual amount of lease rental paid or
payable by the employer or 15% of salary, whichever is lower.

For the purposes of valuation of rent free house, salary includes:

(i) Basic salary i.e., Rs 2,43,000

(ii) Dearness allowance (assuming that it is included for calculating retirement benefits)
i.e. Rs 24,300
(iii) Bonus i.e., Rs 21,000
(iv) Telephone allowance i.e., Rs 6,000

Therefore, salary works out to

Rs 2,43,000 + Rs 24,300 + Rs 21,000 + Rs 6,000 = Rs 2,94,300.

15% of salary = Rs 2,94,300 × 15/100 = Rs 44,145

Value of rent-free house = Lower of rent paid by the employer (i.e. Rs 1,20,000) or 15% of
salary (i.e., Rs 44,145).

Therefore, the perquisite value is Rs 44,145.

3. Facility of use of laptop is not a taxable perquisite .

4. Conveyance allowance is exempt since it is based on actual reimbursement for official
purposes.
5. The value of any gift or voucher or token in lieu of gift received by the employee or by
member of his household below Rs 5,000 in aggregate during the previous year is exempt.
In this case, the gift voucher was received on the occasion of marriage anniversary and the
sum exceeds the limit of Rs 5,000.
Therefore, the entire amount of Rs 10,000 is liable to tax as perquisite.
Note - An alternate view possible is that only the sum in excess of Rs 5,000 is taxable. In
such a case, the value of perquisite would be Rs 5,000.
6. Premium of Rs 5,000 paid by the company for personal accident policy is not liable to tax.

GMTESTSERIES.COM®
 UNIT 2: INCOME FROM HOUSE PROPERTY

Question 1

Mr. Raman is a co-owner of a house property along with his brother holding equal share in the
property.

Particulars Rs
Municipal value of the property 1,60,000
Fair rent 1,50,000
Standard rent under the Rent Control Act 1,70,000
Rent received 15,000 p.m.

The loan for the construction of this property is jointly taken and the interest charged by the
bank is Rs 25,000, out of which Rs 21,000 has been paid. Interest on the unpaid interest is Rs
450. To repay this loan, Raman and his brother have taken a fresh loan and interest charged on
this loan is Rs 5,000.

The municipal taxes of Rs 5,100 have been paid by the tenant.

Compute the income from this property chargeable in the hands of Mr. Raman for the A.Y.
2022-23.

Answer

Computation of income from house property of Mr. Raman for A.Y. 2022-23

Particulars Rs Rs
Gross Annual Value (See Note 1 below) 1,80,000

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Less: Municipal taxes – paid by the tenant, hence not deductible Nil
Net Annual Value (NAV) 1,80,000
Less: Deductions under section 24
(i) 30% of NAV 54,000
(ii) Interest on housing loan (See Note 2 below)
- Interest on loan taken from bank 25,000
- Interest on fresh loan to repay old loan for this property 5,000 84,000
Income from house property 96,000
50% share taxable in the hands of Mr. Raman (See Note 3 below) 48,000

Notes:

1. Computation of Gross Annual Value (GAV)

GAV is the higher of Expected rent and actual rent received. Expected rent is the higher of
municipal value and fair rent, but restricted to standard rent.

Particulars Rs Rs Rs Rs
(a) Municipal value 1,60,000
(b) Fair rent 1,50,000
(c) Higher of (a) and (b) 1,60,000
(d) Standard rent 1,70,000
(e) Expected rent [lower of (c) and (d)] 1,60,000
(f) Actual rent [Rs 15,000 x 12] 1,80,000
(g) Gross Annual Value [higher of (e)and (f)] 1,80,000

2. Interest on housing loan is allowable as a deduction under section 24 on accrual basis.

Further, interest on fresh loan taken to repay old loan is also allowable as deduction.
However, interest on unpaid interest is not allowable as deduction under section 24.

GMTESTSERIES.COM®
3. Section 26 provides that where a house property is owned by two or more persons whose
shares are definite and ascertainable, the share of each such person in the income of house
property, as computed in accordance with sections 22 to 25, shall be included in his
respective total income. Therefore, 50% of the total income from the house property is
taxable in the hands of Mr. Raman since he is an equal owner of the property.

Question 2

Mr. X owns one residential house in Mumbai. The house is having two identical units. First unit
of the house is self-occupied by Mr. X and another unit is rented for Rs 8,000 p.m. The rented
unit was vacant for 2 months during the year. The particulars of the house for the previous year
2021-22 are as under:

Standard rent Rs 1,62,000 p.a.

Municipal valuation Rs 1,90,000 p.a.

Fair rent Rs 1,85,000 p. a

Municipal tax (Paid by Mr. X) 15% of municipal valuation

Light and water charges Rs 500 p.m.

Interest on borrowed capital Rs 1,500 p.m.

Lease money Rs 1,200 p.a.

Insurance charges Rs 3,000 p.a.

Repairs Rs 12,000 p.a.

Compute income from house property of Mr. X for the A.Y. 2022-23.

Answer

GMTESTSERIES.COM®
Computation of Income from house property for A.Y. 2022-23

Particulars Rs Rs
(A) Rented unit (50% of total area – See Note below)
Step I - Computation of Expected Rent
Municipal valuation (Rs 1,90,000 x ½) 95,000
Fair rent (Rs 1,85,000 x ½) 92,500
Standard rent (Rs 1,62,000 x ½) 81,000
Expected Rent is higher of municipal valuation and fair rent, but 81,000
restricted to standard rent
Step II - Actual Rent
Rent receivable for the whole year (Rs 8,000 x 12) 96,000
Step III – Computation of Gross Annual Value
Actual rent received owing to vacancy (Rs 96,000 – Rs 16,000) 80,000
Since, owing to vacancy, the actual rent received is lower than
the Expected Rent, the actual rent received is the Gross Annual
Value
Gross Annual Value 80,000
Less: Municipal taxes (15% of Rs 95,000) 14,250
Net Annual value 65,750
Less : Deductions under section 24 -
(i) 30% of net annual value 19,725
(ii) Interest on borrowed capital (Rs 750 x 12) 9,000 28,725
Taxable income from let out portion 37,025
(B) Self occupied unit (50% of total area – See Note below)
Annual value Nil
Less : Deduction under section 24 -
Interest on borrowed capital (Rs 750 x 12) 9,000 9,000
Loss from self occupied portion (9,000)

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Income from house property 28,025

Note: No deduction will be allowed separately for light and water charges, lease money paid,
insurance charges and repairs.

Question 3

Mr. Vikas owns a house property whose Municipal Value, Fair Rent and Standard Rent are Rs
96,000, Rs 1,26,000 and Rs 1,08,000 (per annum), respectively.

During the Financial Year 2021-22, one-third of the portion of the house was let out for
residential purpose at a monthly rent of Rs 5,000. The remaining two-third portion was self-
occupied by him. Municipal tax @ 11 % of municipal value was paid during the year.

The construction of the house began in June, 2014 and was completed on 31-5-2017. Vikas took
a loan of Rs 1,00,000 on 1-7-2014 for the construction of building. He paid interest on loan @
12% per annum and every month such interest was paid.

Compute income from house property of Mr. Vikas for the Assessment Year 2022-23.

Answer

Computation of income from house property of Mr. Vikas for the A.Y. 2022-23

Particulars Rs Rs
Income from house property
I. Self-occupied portion (Two third)
Net Annual value Nil
Less: Deduction under section 24(b)
Interest on loan(See Note below) (Rs 18,600 x 2/3) 12,400
Loss from self occupied property (12,400)

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II. Let-out portion (One third)
Gross Annual Value
(a) Actual rent received (Rs 5,000 x 12) Rs 60,000
(b) Expected rent Rs 36,000
[higher of municipal valuation (i.e., Rs 96,000) and fair rent (i.e., Rs 60,000
1,26,000) but restricted to standard rent(i.e., Rs 1,08,000)] = Rs
1,08,000 x 1/3 Higher of (a) or (b)
Less: Municipal taxes (Rs 96,000 x 11% x 1/3) 3,520
Net Annual Value 56,480
Less: Deductions under section 24
(a) 30% of NAV 16,944
(b) Interest on loan(See Note below) (Rs 18,600 x 1/3) 6,200 33,336
Income from house property 20,936

Note: Interest on loan taken for construction of building

Interest for the year (1.4.2021 to 31.3.2022) = 12% of Rs 1,00,000 = Rs 12,000

Pre-construction period interest = 12% of Rs 1,00,000 for 33 months (from 1.07.2014 to

31.3.2017) = Rs 33,000

Pre-construction period interest to be allowed in 5 equal annual installments of Rs 6,600 from

the year of completion of construction i.e. from F.Y. 2017-18 till F.Y. 2021-22.

Therefore, total interest deduction under section 24 = Rs 12,000 + Rs 6,600 = Rs 18,600.

Question 4

Mrs. Rohini Ravi, a citizen of the U.S.A., is a resident and ordinarily resident in India during the
financial year 2021-22. She owns a house property at Los Angeles, U.S.A., which is used as her

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residence. The annual value of the house is $ 20,000. The value of one USD ($) may be taken as
Rs 75.

She took ownership and possession of a flat in Chennai on 1.7.20 21, which is used for self-
occupation, while she is in India. The flat was used by her for 7 months only during the year
ended 31.3.2022. The municipal valuation is Rs 3,84,000 p.a. and the fair rent is Rs 4,20,000 p.a.
She paid the following to Corporation of Chennai:

Property Tax Rs 16,200

Sewerage Tax Rs 1,800

She had taken a loan from Standard Chartered Bank in June, 2019 for purchasing this flat.
Interest on loan was as under:

Particulars Rs
Period prior to 1.4.2021 49,200
1.4.2021 to 30.6.2021 50,800
1.7.2021 to 31.3.2022 1,31,300

She had a house property in Bangalore, which was sold in March, 2018. In respect of this house,
she received arrears of rent of Rs 60,000 in March, 2022. This amount has not been charged to
tax earlier.

Compute the income chargeable from house property of Mrs. Rohini Ravi for the assessment
year 2022-23.

Answer

Since the assessee is a resident and ordinarily resident in India, her global income would form
part of her total income i.e., income earned in India as well as outside India will form part of her
total income.

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She possesses a self-occupied house at Los Angeles as well as at Chennai. She can take the
benefit of “Nil” Annual Value in respect of both the house properties.

As regards the Bangalore house, arrears of rent will be chargeable to tax as income from house
property in the year of receipt under section 25A. It is not essential that the assessee should
continue to be the owner. 30% of the arrears of rent shall be allowed as deduction.

Accordingly, the income from house property of Mrs. Rohini Ravifor A.Y.2022-23 will be
calculated as under:

Particulars Rs Rs
1. Self-occupied house at Los Angeles
Annual value Nil
Less: Deduction under section 24 Nil
Chargeable income from this house property Nil
2. Self-occupied house property at Chennai
Annual value Nil
Less: Deduction under section 24
Interest on borrowed capital(See Note below) 1,91,940
(1,91,940)
3. Arrears in respect of Bangalore property (Section 25A)
Arrears of rent received 60,000
Less: Deduction @ 30% u/s 25A(2) 18,000 42,000
Loss under the head "Income from house property” (1,49,940)

Note: Interest on borrowed capital

Particulars Rs
Interest for the current year (Rs 50,800 + Rs 1,31,300) 1,82,100
Add: 1/5th of pre-construction interest (Rs 49,200 x 1/5) 9,840

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Interest deduction allowable under section 24 1,91,940

Question 5

Two brothers Arun and Bimal are co-owners of a house property with equal share. The property
was constructed during the financial year 1998 -1999. The property consists of eight identical
units and is situated at Cochin.

During the financial year 2021-22, each co-owner occupied one unit for residence and the
balance of six units were let out at a rent of Rs 12,000 per month per unit. The municipal value
of the house property is Rs 9,00,000 and the municipal taxes are 20% of municipal value, which
were paid during the year. The other expenses were as follows:

Rs

(i) Repairs 40,000

(ii) Insurance premium (paid) 15,000

(iii) Interest payable on loan taken for construction of house 3,00,000

One of the let out units remained vacant for four months during the year.

Arun could not occupy his unit for six months as he was transferred to Chennai. He does not
own any other house.

The other income of Mr. Arun and Mr. Bimal are Rs 2,90,000 and Rs 1,80,000, respectively, for
the financial year 2021-22.

Compute the income under the head ‘Income from House Property’ and the total income of
two brothers for the assessment year 2022-23.

Answer

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 Computation of total income for the A.Y. 2022-23

Particulars Arun (Rs) Bimal (Rs)

Income from house property
I. Self-occupied portion (25%)
Annual value Nil Nil
Less: Deduction under section 24(b)
Interest on loan taken for construction Rs 37,500 (being 25% 30,000 30,000
of Rs 1.5 lakh) restricted to maximum of Rs 30,000 for each
co-owner since the property was constructed before
1.04.1999. Hence, it is assumed that loan was taken before
1.4.1999
Loss from self occupied property (30,000) (30,000)
II. Let-out portion (75%) – See Working Note below 1,25,850 1,25,850
Income from house property 95,850 95,850
Other Income 2,90,000 1,80,000
Total Income 3,85,850 2,75,850

Working Note – Computation of Income from Let-Out Portion of House Property

Particulars Rs Rs
Let-out portion (75%)
Gross Annual Value
(a) Municipal value (75% of Rs 9 lakh) 6,75,000
(b) Actual rent [(Rs 12000 x 6 x 12) – (Rs 12,000 x 1 x 4)] 8,16,000
= Rs 8,64,000 – Rs 48,000
- whichever is higher 8,16,000
Less: Municipal taxes 75% of Rs 1,80,000 (20% of Rs 9 lakh) 1,35,000
Net Annual Value (NAV) 6,81,000

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Less: Deduction under section 24
(a) 30% of NAV 2,04,300
(b) Interest on loan taken for the house [75% of Rs 3 lakh] 2,25,000 4,29,300
Income from let-out portion of house property 2,51,700
Share of each co-owner (50%) 1,25,850

UNIT 3: PROFITS AND GAINS OF BUSINESS OR PROFESSION

Question 1

Mr. Venus., engaged in manufacture of pesticides, furnishes the following particulars relating to
its manufacturing unit at Chennai, for the year ending 31-3-2022:

(Rs in lacs)
WDV of Plant and Machinery on 31.3.2021 30
Depreciation including additional depreciation for P.Y. 2020-21 4.75
New machinery purchased on 1-9-2021 10
New machinery purchased on 1-12-2021 8
Computer purchased on 3-1-2022 4

Additional information:

• All assets were purchased by A/c payee cheque.

• All assets were put to use immediately.
• New machinery purchased on 1-12-2021 and computer have been installed in the office.

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• During the year ended 31 -3-2021, a new machinery had been purchased on 31-10-2020, for
Rs 10 lacs. Additional depreciation, besides normal depreciation, had been claimed thereon.
• Depreciation rate for machinery may be taken as 15%.

Compute the depreciation available to the assessee as p er the provisions of the Income-tax
Act, 1961 and the WDV of different blocks of assets as on 31-3- 2022. Assume that he does not
opt for section 115BAC.

Answer

Computation of written down value of block of assets of Venus Ltd. As on 31.3.2022

Particulars Plant & Machinery Computer

(Rs in lacs) (Rs in lacs)
Written down value (as on 31.3.2021) 30.00 Nil
Less: Depreciation including additional depreciation 4.75 -
for P.Y. 2020-21
Opening balance as on 1.4.2021 25.25
Add: Actual cost of new assets acquired during the
year
New machinery purchased on 1.9.2021 10.00 -
New machinery purchased on 1.12.2021 8.00 -
Computer purchased on 3.1.2022 - 4.00
43.25 4.00
Less: Assets sold/discarded/destroyed during the year Nil Nil
Written Down Value (as on 31.03.2022) 43.25 4.00

Computation of Depreciation for A.Y. 2022-23

Particulars Plant & Computer

Machinery (Rs in lacs)

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 (Rs in lacs)
I. Assets put to use for more than 180 days, eligible for
100% depreciation calculated applying the eligible rate
of normal depreciation and additional depreciation
Normal Depreciation
- WDV of plant and machinery (Rs 25.25 lacs x 15%) 3.79 -
- New Machinery purchased on 1.9.2021 (Rs 10 lacs x 1.50 -
15%)
(A) 5.29 -
Additional Depreciation
New Machinery purchased on 1.9.20 21 (Rs 10 lakhs x 2.00
20%)
Balance additional depreciation in respect of new 1.00
machinery purchased on 31.10.2020 and put to use for
less than 180 days in the P.Y. 2020-21 (Rs 10 lakhs
x 20% x 50%)
(B) 3.00
II. Assets put to use for less than 180 days, eligible for 50%
depreciation calculated applying the eligible rate of
normal depreciation and additional depreciation, if any
Normal Depreciation
New machinery purchased on 1.12.2021 [Rs 8 lacs x 0.60 -
7.5% (i.e., 50% of 15%)]
Computer purchased on 3.1.202 2 [Rs 4 lacs x 20% (50% - 0.80
of 40%)]
(C) 0.80
Total Depreciation (A+B+C) 8.89 0.80

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Notes:

(1) As per section 32(1)(iia), additional depreciation is allowable in the case of any new
machinery or plant acquired and installed after 31.3.2005, by an assessee engaged, inter
alia, in the business of manufacture or production of any article or thing, at the rate of 20%
of the actual cost of such machinery or plant.
However, additional depreciation shall not be allowed in respect of, inter alia,–
(i) any office appliances or road transport vehicles;
(ii) any machinery or plant installed in, inter alia, office premises.

In view of the above provisions, additional depreciation cannot be claimed in respect of –

(i) Machinery purchased on 1.12.2021, installed in office and

(ii) Computer purchased on 3.1.2022, installed in office.
(2) Balance additional depreciation@10% on new plant or machinery acquired and put to use
for less than 180 days in the year of acquisition which has not been allowed in that year,
shall be allowed in the immediately succeeding previous year.
Hence, in this case, the balance additional depreciation@10% (i.e., Rs 1 lakhs, being 10% of
Rs 10 lakhs) in respect of new machinery which had been purchased during the previous
year 2020-21 and put to use for less than 180 days in that year can be claimed in P.Y. 20 21-
22 being immediately succeeding previous year.

Question 2

Mr. Abhimanyu is engaged in the business of generation and distribution of electric power. He
opts to claim depreciation on written down value for income-tax purposes. From the following
details, compute the depreciation allowable as per the provisions of the Income-tax Act, 1961
for the assessment year 2022-23, assuming that he does not opt for section 115BAC:

(Rs in lacs)

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(i) WDV of block as on 31.3.2021 (15% rate) 50
(ii) Depreciation for P.Y. 2020-21 7.50
(iii) New machinery purchased on 12-10-2021 10
(iv) Machinery imported from Colombo on 12-4-2021. 9
This machine had been used only in Colombo earlier and
the assessee is the first user in India.
(v) New computer installed in generation wing unit on 15-7-2021 2
All assets were purchased by A/c payee cheque.

Answer

Computation of depreciation under section 32 for A.Y.2022-23

Particulars Rs Rs
Normal Depreciation
Depreciation@15% on Rs 51,50,000, being machinery put to use for 7,72,500
more than 180 days [WDV as on 31.3.2021 of Rs 50,00,000 –
Depreciation for P.Y. 2020-21 of Rs 7,50,000+ Purchase cost of
imported machinery of Rs 9,00,000]
[email protected]% on Rs 10,00,000, being new machinery put to use 75,000
for less than 180 days
8,47,500
Depreciation@40% on computers purchased Rs 2,00,000 80,000 9,27,500
Additional Depreciation (Refer Note below)
Additional Depreciation@10% of Rs 10,00,000 [being actual cost of 1,00,000
new machinery purchased on 12-10-2021]
Additional Depreciation@20% on new computer installed in 40,000 1,40,000
generation wing of the unit [20% of Rs 2,00,000]
Depreciation on Plant and Machinery 10,67,500

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Note:-

The benefit of additional depreciation is available to new plant and machinery acquired and
installed in power sector undertakings. Accordingly, additional depreciation is allowable in the
case of any new machinery or plant acquired and installed by an assessee engaged, inter alia, in
the business of generation, transmission or distribution of power, at the rate of 20% of the
actual cost of such machinery or plant.

Therefore, new computer installed in generation wing units eligible for additional depreciation
@20%.

Since the new machinery was purchased only on 12.10.2021, it was put to use for less than 180
days during the previous year, and hence, only 10% (i.e., 50% of 20%) is allowable as additional
depreciation in the A.Y.2022-23. The balance additional depreciation would be allowed in the
next year.

However, additional depreciation shall not be allowed in respect of, inter alia, any machinery or
plant which, before its installation by the assessee, was used either within or outside India by
any other person. Therefore, additional depreciation is not allowable in respect of imported
machinery, since it was used in Colombo, before its installation by the assessee.

Question 3

Examine with reasons, the allowability of the following expenses incurred by Mr. Manav, a
wholesale dealer of commodities, under the Income- tax Act, 1961 while computing profit and
gains from business or profession for the Assessment Year 2022-23.

(i) Construction of school building in compliance with CSR activities amounting to Rs 5,60,000.
(ii) Purchase of building for the purpose of specified business of setting up and operating a
warehousing facility for storage of food grains amounting to Rs 4,50,000.

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(iii) Interest on loan paid to Mr. X (a resident) Rs 50,000 on which tax has not been deducted.
The sales for the previous year 2020-21 was Rs 202 lakhs. Mr. X has not paid the tax, if any,
on such interest.
(iv) Commodities transaction tax paid Rs 20,000 on sale of bullion.

Answer

Allow ability of the expenses incurred by Mr. Manav, a wholesale dealer in commodities, while
computing profits and gains from business or profession

(i) Construction of school building in compliance with CSR activities

Under section 37(1), only expenditure not being in the nature of capital expenditure or
personal expense and not covered under sections 30 to 36, and incurred wholly and
exclusively for the purposes of the business is allowed as a deduction while computing
business income.
However, any expenditure incurred by an assessee on the activities relating to corporate
social responsibility referred to in section 135 of the Companies Act, 2013 shall not be
deemed to have been incurred for the purpose of business and hence, shall not be allowed
as deduction under section 37.
Accordingly, the amount of Rs 5,60,000 incurred by Mr. Manav, towards construction of
school building in compliance with CSR activities shall not be allowed as deduction under
section 37.
(ii) Purchase of building for setting up and operating a warehousing facility for storage of
food grains
Mr. Manav, would be eligible for investment-linked tax deduction under section 35AD
@100% in respect of amount of Rs 4,50,000 invested in purchase of building for setting up
and operating a warehousing facility for storage of food grains which commences
operation on or after 1 st April, 2009 (P.Y.2021-22, in this case), if Mr. Manav does not opt
for section 115BAC.
Therefore, the deduction u6nder section 35AD while computing business income of such
specified business would be Rs 4,50,000, if Mr. Manav opts for section 35AD.

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(iii) Interest on loan paid to Mr. X (a resident) Rs 50,000 on which tax has not been deducted
As per section 194A, Mr. Manav, being an individual is required to deduct tax at source on
the amount of interest on loan paid to Mr. X, since his turnover during the previous year
2020-21 exceeds Rs 100 lacs.
Therefore, Rs 15,000, being 30% of Rs 50,000, would be disallowed under section 40(a)(ia)
while computing the business income of Mr. Manav for non-deduction of tax at source
under section 194A on interest of Rs 50,000 paid by it to Mr. X. The balance Rs 35,000
would be allowed as deduction under section 36(1)(iii), assuming that the amount was
borrowed for the purposes of business.
(iv) Commodities transaction tax of Rs 20,000 paid on sale of bullion Commodities transaction
tax paid in respect of taxable commodities transactions entered into in the course of
business during the previous year is allowable as deduction, provided the income arising
from such taxable commodities transactions is included in the income computed under the
head “Profits and gains of business or profession”. Taking that income from this
commodities transaction is included while computing the business income of Mr. Manav,
the commodity transaction tax of Rs 20,000 paid is allowable as deduction under section
36(1)(xvi).

Question 4

Examine with reasons, for the following sub-divisions, whether the following statements are
true or false having regard to the provisions of the Income -tax Act, 1961:

(i) For a dealer in shares and securities, securities transaction tax paid in a recognized stock
exchange is permissible business expenditure.
(ii) Where a person follows mercantile system of accounting, an expenditure of Rs 25,000 has
been allowed on accrual basis and in a later year, in respect of the said expenditure,
assessee makes the payment of Rs 25,000 through a crossed cheque, Rs 25,000 can be the
profits and gains of business under section 40A(3A) in the year of payment.

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(iii) It is mandatory to provide for depreciation under section 32 of the Income-tax Act, 1961,
while computing income under the head “Profits and Gains from Business and Profession”.
(iv) The mediclaim premium paid to GIC by Mr. Lomesh for his employees, by a draft, on
27.12.2021 is a deductible expenditure under section 36.
(v) Under section 35DDA, amortization of expenditure incurred under eligible Voluntary
Retirement Scheme at the time of retirement alone, can be done.
(vi) An existing assessee engaged in trading activities, can claim additional depreciation under
section 32(1)(iia) in respect of new plant acquired and installed in the trading concern,
where the increase in value of such plant as compared to the approved base year is more
than 10%.

Answer

(i) True: Section 36(1)(xv) allows a deduction of the amount of securities transaction tax paid
by the assessee in respect of taxable securities transactions entered into in the course of
business during the previous year as deduction from the business income of a dealer in
shares and securities.
(ii) True: As per section 40A(3A), in the case of an assessee following mercantile system of
accounting, if an expenditure has been allowed as deduction in any previous year on due
basis, and payment exceeding Rs 10,000 has been made in the subsequent year otherwise
than by an account payee cheque or an account payee bank draft or use of ECS through a
bank account or through such other prescribed electronic modes such as credit card, debit
card, net banking, IMPS, UPI, RTGS, NEFT, and BHIM Aadhar Pay, then, the payment so
made shall be deemed to be the income of the subsequent year in which such payment has
been made.
(iii) True: According to the Explanation 5 to section 32(1), allowance of depreciation is
mandatory. Therefore, depreciation has to be provided mandatorily while calculating
income from business/ profession whether or not the assessee has claimed the same while
computing his total income.

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(iv) True: Section 36(1)(ib) provides deduction in respect of premium paid by an employer to
keep in force an insurance on the health of his employees under a scheme framed in this
behalf by GIC or any other insurer. The medical insurance premium can be paid by any
mode other than cash, to be eligible for deduction under section 36(1)(ib).
(v) False: Expenditure incurred in making payment to the employee in connection with his
voluntary retirement either in the year of retirement or in any subsequent year, will be
entitled to deduction in 5 equal annual installments beginning from the year in which each
payment is made to the employee.
(vi) False: Additional depreciation can be claimed only in respect of eligible plant and machinery
acquired and installed by an assessee engaged in the business of manufacture or production
of any article or thing or in the business of generation or transmission or distribution of
power.
In this case, the assessee is engaged in trading activities and the new plant has been
acquired and installed in a trading concern. Hence, the assessee will not be entitled to claim
additional depreciation under section 32(1)(iia).

Question 5

Examine, with reasons, the allowability of the following expenses under the Income-tax Act,
1961 while computing income from business or profession for the Assessment Year 2022-23:

(i) Provision made on the basis of actuarial valuation for payment of gratuity Rs 5,00,000.
However, no payment on account of gratuity was made before due date of filing return.
(ii) Purchase of oil seeds of Rs 50,000 in cash from a farmer on a banking day.
(iii) Tax on non-monetary perquisite provided to an employee Rs 20,000.
(iv) Payment of Rs 50,000 by using credit card for fire insurance.
(v) Salary payment of Rs 4,00,000 to Mr. X outside India by a company without deduction of tax
assuming Mr. X has not paid tax on such salary income.
(vi) Payment made in cash Rs 30,000 to a transporter in a day for carriage of goods

Answer

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(i) Not allowable as deduction: As per section 40A(7), no deduction is allowed in computing
business income in respect of any provision made by the assessee in his books of account
for the payment of gratuity to his employees except in the following two cases:
(1) where any provision is made for the purpose of payment of sum by way of contribution
towards an approved gratuity fund; or
(2) where any provision is made for the purpose of making any payment on account of
gratuity that has become payable during the previous year.

Therefore, in the present case, the provision made on the basis of a ctuarial valuation for
payment of gratuity has to be disallowed under section 40A(7), since, no payment has been
actually made on account of gratuity.

Note: It is assumed that such provision is not for the purpose of contribution towards an
approved gratuity fund.

(ii) Allowable as deduction: As per Rule 6DD, in case the payment is made for purchase of
agricultural produce directly to the cultivator, grower or producer of such agricultural
produce, no disallowance under section 40A(3) is attracted even though the cash payment
for the expense exceeds Rs 10,000. Therefore, in the given case, disallowance under section
40A(3) is not attracted since, cash payment for purchase of oil seeds is made directly to
the farmer.
(iii) Not allowable as deduction: Income-tax of Rs 20,000 paid by the employer in respect of
non-monetary perquisites provided to its employees is exempt in the hands of the
employee under section 10(10CC). As per section 40(a)(v), such income-tax paid by the
employer is not deductible while computing business income.
(iv) Allowable as deduction: Payment for fire insurance is allowable as deduction under section
36(1). Since payment is made by credit card, which is a prescribed electronic mode,
disallowance under section 40A(3) is not attracted in this case.
(v) Not allowable as deduction: Disallowance under section 40(a)(iii) is attracted in respect of
salary payment of Rs 4,00,000 outside India by a company without deduction of tax at
source.

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(vi) Allowable as deduction: The limit for attracting disallowance under section 40A(3) for
payment otherwise than by way of account payee cheque or account payee bank draft or
use of ECS through a bank account or through such other prescribed electronic mode is Rs
35,000 in case of payment made for plying, hiring or leasing goods carriage. Therefore, in
the present case, disallowance under section 40A(3) is not attracted for payment of Rs
30,000
made in cash to a transporter for carriage of goods.

Question 6

Examine with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:

(a) Payment made in respect of a business expenditure incurred on 16 th February, 2022 for Rs
25,000 through a crossed cheque is hit by the provisions of section 40A(3).
(b)
(i) It is a condition precedent to write off in the books of account, the amount due from
debtor to claim deduction for bad debt.
(ii) Failure to deduct tax at source in accordance with the provisions of Chapter XVII-B, inter
alia, from the amounts payable to a non-resident as rent or royalty, will result in
disallowance while computing the business income where the non-resident payee has
not paid the tax due on such income.

Answer

(a) True: In order to escape the disallowance specified in section 40A(3), payment in respect of
the business expenditure ought to have been made through an account payee cheque.
Payment through a crossed cheque will attract disallowance under section 40A(3).
(b)
(i) True: It is mandatory to write off the amount due from a debtor as not receivable in the
books of account, in order to claim the same as bad debt under section 36(1)(vii).

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 However, where the debt has been taken into account in computing the income of the
assessee on the basis of ICDSs notified under section 145(2), without recording the same
in the accounts, then, such debt shall be allowed in the previous year in which such debt
becomes irrecoverable and it shall be deemed that such debt or part thereof has been
written off as irrecoverable in the accounts for the said purpose.
(ii) True: Section 40(a)(i) provides that failure to deduct tax at source from, inter alia, rent or
royalty payable to a non-resident, in accordance with the provisions of Chapter XVII-B, will
result in disallowance of such expenditure, where the non-resident payee has not paid the
tax due on such income.

Question 7

Mr. Sivam, a retail trader of Cochin gives the following Trading and Profit and Loss Account for
the year ended 31st March, 2022:

Trading and Profit and Loss Account for the year ended 31.03.2022

Particulars Rs Particulars Rs
To Opening stock 90,000 By Sales 1,12,11,500
To Purchases 1,10,04,000 By Closing stock 1,86,100
To Gross Profit 3,03,600 -
1,13,97,600 1,13,97,600
To Salary 60,000 By Gross profit b/d 3,03,600
To Rent and rates 36,000 By Income from UTI 2,400
To Interest on loan 15,000
To Depreciation 1,05,000
To Printing & stationery 23,200
To Postage & telegram 1,640
To Loss on sale of shares 8,100

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(Short term)
To Other general expenses 7,060
To Net Profit 50,000
3,06,000 3,06,000

Additional Information:

(i) It was found that some stocks were omitted to be included in both the Opening and Closing
Stock, the values of which were: Opening stock Rs 9,000 Closing stock Rs 18,000
(ii) Salary includes Rs 10,000 paid to his brother, which is unreasonable to the extent of Rs
2,000.
(iii) The whole amount of printing and stationery was paid in cash by way of one time payment
to Mr. Ramesh.
(iv) The depreciation provided in the Profit and Loss Account Rs 1,05,000 was based on the
following information:
The opening balance of plant and machinery( i.e., the written down value as on 31.3.2021
minus depreciation for P.Y. 2020-21) is Rs 4,20,000. A new plant falling under the same
block of depreciation was bought on 01.7.20 21 for Rs 70,000. Two old plants were sold on
1.10.2021 for Rs 50,000.
(v) Rent and rates includes GST liability of Rs 3,400 paid on 7.4.2022.
(vi) Other general expenses include Rs 2,000 paid as donation to a Public Charitable Trust.

You are required to compute the profits and gains of Mr. Sivam under presumptive taxation
under section 44AD and profits and gains as per normal provisions of the Act assuming he has
not opted for the provisions of section 115BAC. Assume that the whole of the amount of
turnover received by account payee cheque or use of electronic clearing system through bank
account during the previous year.

Answer

Computation of business income of Mr. Sivam for the A.Y. 2022-23

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 Particulars Rs Rs
Net Profit as per profit and loss account 50,000
Add: Inadmissible expenses/ losses
Under valuation of closing stock
Salary paid to brother – unreasonable [Section 40A(2)]
Printing and stationery -whole amount of printing &
stationery paid in cash would be disallowed, since such
amount exceeds Rs 10,000 [Section 40A(3)]
Depreciation (considered separately)
Short term capital loss on shares
Donation to public charitable trust
2,08,300
Less: Items to be deducted:
Under valuation of opening stock 9,000
Income from UTI [Chargeable under the head “Income 2,400 11,400
from Other Sources]
Business income before depreciation 1,96,900
Less: Depreciation (See Note 1) 66,000
1,30,900

Computation of business income as per section 44AD:

As per section 44AD, where the amount of turnover is received, inter alia, by way of account
payee cheque or use of electronic clearing system through bank account or through such other
prescribed electronic modes , the presumptive business income would be 6% of turnover, i.e.,
Rs 1,12,11,500 x 6 /100 = Rs 6,72,690

Notes:

1. Calculation of depreciation

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Particulars Rs
Opening balance of plant & machinery as on 1.4.2021 (i.e. WDV as on 31.3.2021 4,20,000
(-) depreciation for P.Y. 2020-21)
Add : Cost of new plant & machinery 70,000
4,90,000
Less : Sale proceeds of assets sold 50,000
WDV of the block of plant & machinery as on 31.3.2022 4,40,000
Depreciation @ 15% 66,000
No additional depreciation is allowable as the assessee is not engaged in
manufacture or production of any article.

2. Since GST liability has been paid before the due date of filing return of income under section
139(1), the same is deductible.

Question 8

Mr. Sukhvinder is engaged in the business of plying goods carriages. On 1 st April, 2021, he
owns 10 trucks (out of which 6 are heavy goods vehicles, the gross vehicle weight of such goods
vehicle is 15,000 kg each). On 2nd May, 2021, he sold one of the heavy goods vehicles and
purchased a light goods vehicle on 6th May, 2021. This new vehicle could however be put to
use only on 15th June, 2021.

Compute the total income of Mr. Sukhvinder for the assessment year 2022-23, taking note of
the following data:

Particulars Rs Rs
Freight charges collected 12,70,000
Less : Operational expenses 6,25,000
Depreciation as per section 32 1,85,000

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Other office expenses 15,000 8,25,000
Net Profit 4,45,000
Other business and non-business income 70,000

Answer

Section 44AE would apply in the case of Mr. Sukhvinder since he is engaged in the business of
plying goods carriages and owns not more than ten goods carriages at any time during the
previous year.

Section 44AE provides for computation of business income of such assessees on a presumptive
basis. The income shall be deemed to be Rs 1,000 per ton of gross vehicle weight or unladen
weight, as the case may be, per month or part of the month for each heavy goods vehicle and
Rs 7,500 per month or part of month for each goods carriage other than heavy goods vehicle,
owned by the assessee in the previous year or such higher sum as declared by the assessee in
his return of income.

Mr. Sukhvinder’s business income calculated applying the provisions of section 44AE is Rs
13,72,500 (See Notes 1 & 2 below) and his total income would be Rs 14,42,500.

However, as per section 44AE(7), Mr. Sukhvinder may claim lower profits and gains if he keeps
and maintains proper books of account as per section 44AA and gets the same audited and
furnishes a report of such audit as required under section 44AB. If he does so, then his income
for tax purposes from goods carriages would be Rs 4,45,000 instead of Rs 13,72,500 and his
total income would be Rs 5,15,000.

Notes:

1. Computation of total income of Mr. Sukhvinder for A.Y. 2022-23

Particulars Presumptive Where books are

income Rs maintained Rs

GMTESTSERIES.COM®
Income from business of plying goods carriages [See 13,72,500 4,45,000
Note 2 Below]
Other business and non-business income 70,000 70,000
Total Income 14,42,500 5,15,000

2. Calculation of presumptive income as per section 44AE

Type of carriage No. of Rate per ton Ton Amount Rs

months per month/ per
month
(1) (2) (3) (4)
Heavy goods vehicle
1 goods carriage upto 1st May 2 1,000 15 (15,000/ 30,000
1,000)
5 goods carriage held throughout 12 1,000 15 (15,000/ 9,00,000
the year 1,000)
Goods vehicle other than heavy
goods vehicle
1 goods carriage from 6th May 11 7,500 - 82,500
4 goods carriage held throughout 12 7,500 - 3,60,000
the year
Total 13,72,500

Question 9

Mr. Raju, a manufacturer at Chennai, gives the following Manufacturing, Trading and Profit &
Loss Account for the year ended 31.03.2022: Manufacturing, Trading and Profit & Loss Account
for the year ended 31.03.2022

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Particulars Rs Particulars Rs
To Opening Stock 71,000 By Sales 2,32,00,000
To Purchase of Raw Materials 2,16,99,000 By Closing stock 2,00,000
To Manufacturing Wages & 5,70,000
Expenses
To Gross Profit 10,60,000
2,34,00,000 2,34,00,000
To Administrative charges 3,26,000 By Gross Profit 10,60,000
To SGST penalty 5,000 By Dividend from domestic 15,000
companies
To GST paid 1,10,000 By Income from agriculture (net) 1,80,000
To General Expenses 54,000
To Interest to Bank (On 60,000
machinery term loan)
To Depreciation 2,00,000
To Net Profit 5,00,000
12,55,000 12,55,000

Following are the further information relating to the financial year 2021-22:

(i) Administrative charges include Rs 46,000 paid as commission to brother of the assessee.
The commission amount at the market rate is Rs 36,000.
(ii) The assessee paid Rs 33,000 in cash to a transport carrier on 29.12.2021. This amount is
included in manufactur ing expenses. (Assume that the provisions relating to TDS are not
applicable to this payment)
(iii) A sum of Rs 4,000 per month was paid as salary to a staff throughout the year and this has
not been recorded in the books of account.
(iv) Bank term loan interest actually paid upto 31.03.2022 was Rs 20,000 and the balance was
paid in November 2022.

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(v) Housing loan principal repaid during the year was Rs 50,000 and it relates to residential
property acquired by him in P.Y. 2020-21 for self-occupation. Interest on housing loan was
Rs 23,000. Housing loan was taken from Canara Bank. These amounts were not dealt with
in the profit and loss account given above.
(vi) Depreciation allowable under the Act is to be computed on the basis of following
information:

Plant & Machinery (Depreciation rate @ 15%) Rs

WDV (as on 31.03.2021) 14,00,000
Less: Depreciation for P.Y. 2020-21 2,10,000
Additions during the year (used for more than 180 days) 2,00,000
Total additions during the year 4,00,000
Note: Ignore additional depreciation under section 32(1)(iia)

Compute the total income of Mr. Raju for the assessment year 20 22-23 assuming he has not
opted for the provisions of section 115BAC.

Note: Ignore application of section 14A for disallowance of expenditures in respect of any
exempt income.

Answer

Computation of total income of Mr. Raju for the A.Y. 2022-23

Particulars Rs Rs
Profits and gains of business or profession
Net profit as per profit and loss account 5,00,000
Add: Excess commission paid to brother disallowed under 10,000
section 40A(2)
Disallowance under section 40A(3) is not attracted since Nil
the limit for one time cash payment is Rs 35,000 in respect

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 of payment to transport operators. Therefore, amount of
Rs 33,000 paid in cash to a transport carrier is allowable as
deduction.
Salary paid to staff not recorded in the books (Assuming 48,000
that the expenditure is in the nature of unexplained
expenditure and hence, is deemed to be income as per
section 69C and would be taxable @ 60% under section
115BBE – no deduction allowable in respect of such
expenditure) [See Note 1 below]
Bank term loan interest paid after the due date of filing of 40,000
return under section 139(1) – disallowed as per section 43B
State GST penalty paid disallowed [See Note 2 below] 5,000
Depreciation debited to profit and loss account 2,00,000 3,03,000
8,03,000
Less: Dividend from domestic companies [Chargeable to tax 15,000
under the head “Income from Other Sources”+
Income from agriculture [Exempt under section 10(1)] 1,80,000
Depreciation under the Income-tax Act, 1961 (As per 2,23,500 4,18,500
working note)
3,84,500
Income from house property
Annual value of self-occupied property Nil
Less: Deduction u/s 24(b) – interest on housing loan 23,000 (23,000)
Income from Other Sources
Dividend from domestic companies 15,000
Gross Total Income 3,76,500
Less: Deduction under section 80C in respect of Principal 50,000
repayment of housing loan
Total Income 3,26,500

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Working Note:

Computation of depreciation under the Income-tax Act, 1961

Particulars Rs
Depreciation@15% on Rs 14 lakh (WDV as on 31.3.2021 of Rs 14 lakh less 2,08,500
Depreciation for P.Y. 2020-21 of Rs 2.10 lakh plus assets purchased during the
year and used for more than 180 days Rs 2 lakh)
Depreciation @7.5% on Rs 2 lakh (Assets used for < 180 days) 15,000
2,23,500

Notes (Alternate views):

1. It is also possible to take a view that the salary not recorded in the books of account was an
erroneous omission and that the assessee has offered satisfactory explanation for the same.
In such a case, the same should not be added back as unexplained expenditure, but would
be allowable as deduction while computing profits and gains of business and profession.
2. Where the imposition of penalty is not for delay in payment of sales tax or VAT or GST but
for contravention of provisions of the Sales Tax Act or VAT Act or GST Law, the levy is not
compensatory and therefore, not deductible.

However, if the levy is compensatory in nature, it would be fully allowable. Where it is a

composite levy, the portion which is compensatory is allowable and that portion which is penal
is to be disallowed. Since the question only mentions “GST penalty paid” and the reason for
levy of penalty is not given, it has been assumed that the levy is not compensatory and
therefore, not deductible. It is, however, possible to assume that such levy is compensatory in
nature and hence, allowable as deduction. In such a case, the total income would be Rs
3,21,500.

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Question 10

Mr. Tenzingh is engaged in composite business of growing and curing (further processing)
coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant
information pertaining to the year ended 31.3.2022 are given below:

Particulars Rs
Opening balance of car (only asset in the block) as on 1.4.2021 (i.e. WDV as on 3,00,000
31.3.2021 (-) depreciation for P.Y. 2020-21)
Opening balance of machinery as on 1.4.2021 (i.e., WDV as on 31.3.2021 (-) 15,00,000
depreciation for P.Y. 2020-21)
Expenses incurred for growing coffee 3,10,000
Expenditure for curing coffee 3,00,000
Sale value of cured coffee 22,00,000

Besides being used for agricultural operations, the car is also used for personal use;
disallowance for personal use may be taken at 20%. The expenses incurred for car running and
maintenance are Rs 50,000. The machines were used in coffee curing business operations.
Compute the income arising from the above activities for the A.Y. 2022-23.

Answer

Where an assessee is engaged in the composite business of growing and curing of coffee, the
income will be segregated between agricultural income and business income, as per Rule 7B of
the Income-tax Rules, 1962.

As per the above Rule, income derived from sale of coffee grown and cured by the seller in
India shall be computed as if it were income derived from business, and 25% of such income
shall be deemed to be income liable to tax. The balance 75% will be treated as agricultural
income.

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Particulars Rs Rs Rs
Sale value of cured coffee 22,00,000
Less: Expenses for growing coffee 3,10,000
Car expenses (80% of Rs 50,000) 40,000
Depreciation on car (80% of 15% of Rs 3,00,000) [See 36,000
Computation below]
Total cost of agricultural operations 3,86,000
Expenditure for coffee curing operations 3,00,000
Add: Depreciation on machinery (15% of Rs 15,00,000) 2,25,000
[See Computation below]
Total cost of the curing operations 5,25,000
Total cost of composite operations 9,11,000
Total profits from composite activities 12,89,000
Business income (25% of above) 3,22,250
Agricultural income (75% of above) 9,66,750

Computation of depreciation for P.Y. 2021-22

Particulars Rs Rs
Car
Opening balance as on 1.4.2021 (i.e., WDV as on 31.3.2021 3,00,000
(-) depreciation for P.Y.2020-21)
Depreciation thereon at 15% 45,000
Less: Disallowance @20% for personal use 9,000
Depreciation actually allowed 36,000
Machinery
Opening balance as on 1.4.2021 (i.e., WDV as on 31.3.2021 15,00,000
(-) depreciation for P.Y.2020-21)

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Depreciation @ 15% for P.Y. 2021-22 2,25,000

Explanation 7 to section 43(6) provides that in cases of ‘composite income’, for the purpose of
computing written down value of assets acquired before the previous year, the total amount of
depreciation shall be computed as if the entire composite income of the assessee (and not just
25%) is chargeable under the head “Profits and gains of business or profession”. The
depreciation so computed shall be deemed to have been “actually allowed” to the assessee.

UNIT 4: CAPITAL GAINS

Question 1

Mr. Mithun purchased 100 equity shares of M/s Goodmoney Co. Ltd. on 01-04-2005 at rate of
Rs 1,000 per share in public issue of the company by paying securities transaction tax.

Company allotted bonus shares in the ratio of 1:1 on 01.12.2020. He has also received dividend
of Rs 10 per share on 01.05.2021.

He has sold all the shares on 01.10.2021 at the rate of Rs 4,000 per share through a recognized
stock exchange and paid brokerage of 1% and securities transaction tax of 0.02% to celebrate
his 75th birthday.

Compute his total income and tax liability for Assessment Year 2022-23, assuming that he is
having no income other than given above. Fair market value of shares of M/s Goodmoney Co.
Ltd. on 31.1.2018 is Rs 2,000.

Answer

GMTESTSERIES.COM®
Computation of total income and tax liability of Mr. Mithun for A.Y. 2022-23

Particulars Rs.
Long term capital gains on sale of original shares
Gross sale consideration (100 x Rs 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition (100 x Rs 2,000) (Refer Note 2) 2,00,000
Long term capital gains 1,96,000
Short term capital gains on sale of bonus shares
Gross sale consideration (100 x Rs 4,000) 4,00,000
Less: Brokerage@1% 4,000
Net sale consideration 3,96,000
Less: Cost of acquisition of bonus shares NIL
Short term capital gains 3,96,000
Income from other sources
Dividend received from M/s Goodmoney Co. Ltd. is taxable in the hands of 2,000
shareholders [200 shares x 10 per share]
Total Income 5,94,000
Tax Liability
Tax on dividend Nil
15% of (Rs 3,96,000- Rs 2,98,000, being unexhausted basic exemption limit) 14,700
10% of (Rs 1,96,000 – Rs 1,00,000) 9,600
24,300
Add: Health and education cess @4% 972
Tax payable 25,272
Tax payable (rounded off) 25,270

Notes:

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(2) Long-term capital gains exceeding Rs 1 lakh on sale of original shares through a recognized
stock exchange (STT paid at the time of acquisition and sale) is taxable under section 112A
at a concessional rate of 10%, without indexation benefit.
(3) Cost of acquisition of such equity shares acquired before 1.2.2018 is higher of
- Cost of acquisition i.e., Rs 1,000 per share and
- lower of
Fair market value of such asset i.e., Rs 2,000 per share and
Full value of consideration i.e., Rs 4,000 per share.

So, the cost of acquisition of original share is Rs 2,000 per share.

(4) Since bonus shares are held for less than 12 months before sale, the gain arising there from
is a short-term capital gain chargeable to tax@15% as per section 111A after adjusting the
unexhausted basic exemption limit (Rs 3,00,000 less Rs 2,000, being the amount of
dividend). Since Mr. Mithun is over 60 years of age, he is entitled for a higher basic
exemption limit of Rs 3,00,000 for A.Y. 2022-23.
(5) Brokerage paid is allowable since it is an expenditure incurred wholly and exclusively in
connection with the transfer. Hence, it qualifies for deduction under section 48(i).
(6) Cost of bonus shares will be Nil as such shares are allotted after 1.04.2001.
(7) Securities transaction tax is not allowable as deduction.

Question 2

Aarav converts his plot of land purchased in July, 2003 for Rs 80,000 into stock-in-trade on 31st
March, 2021. The fair market value as on 31.3.2021 was Rs 3,00,000. The stock-in-trade was
sold for Rs 3,25,000 in the month of January, 2022.

Find out the taxable income, if any, and if so under which head of income and for which
Assessment Year?

Cost Inflation Index: F.Y. 2003-04:109; F.Y. 2020-21: 301.

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Answer

Conversion of a capital asset into stock-in-trade is a transfer within the meaning of section
2(47) in the previous year in which the asset is so converted. However, the capital gains will be
charged to tax only in the year in which the stock-in-trade is sold.

The cost inflation index of the financial year in which the conversion took place should be
considered for computing indexed cost of acquisition. Further, the fair market value on the date
of conversion would be deemed to be the full value of consideration for transfer of the asset as
per section 45(2). The sale price less the fair market value on the date of conversion would be
treated as the business income of the year in which the stock-in-trade is sold. Therefore, in this
problem, both capital gains and business income would be charged to tax in the A.Y. 2022-23.

Particulars Rs.
Capital Gains
Full value of consideration (Fair market value on the date of conversion) 3,00,000
Less: Indexed cost of acquisition (Rs 80,000 × 301/109) 2,20,917
Long-term capital gain 79,083
Profits & Gains of Business or Profession
Sale price of stock-in-trade 3,25,000
Less: Fair market value on the date of conversion 3,00,000
25,000

Computation of taxable income of Mr. Aarav for A.Y.2022-23

Particulars Rs
Profits and gains from business or profession 25,000
Long term capital gains 79,083
Taxable Income 1,04,083

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Question 3

Mrs. Harshita purchased a land at a cost of Rs 35 lakhs in the financial year 2003-04 and held
the same as her capital asset till 20th March, 2021.

She started her real estate business on 21st March, 2021 and converted the said land into
stock-in-trade of her business on the said date, when the fair market value of the land was Rs
210 lakhs.

She constructed 15 flats of equal size, quality and dimension. Cost of construction of each flat is
Rs 10 lakhs. Construction was completed in February, 2022. She sold 10 flats at Rs 30 lakhs per
flat in March, 2022. The remaining 5 flats were held in stock as on 31st March, 2022.

She invested Rs 50 lakhs in bonds issued by National Highways Authority of India on 31st
March, 2022 and anotherRs 50 lakhs in bonds of Rural Electrification Corporation Ltd. in April,
2022.

Compute the amount of chargeable capital gain and business income in the hands of Mrs.
Harshita arising from the above transactions for Assessment Year 2022-23 indicating clearly the
reasons for treatment for each item.

[Cost Inflation Index: F.Y. 2003-04: 109; F.Y. 2020-21: 301].

Answer

Computation of capital gains and business income of Harshita for A.Y. 2022-23

Particulars Rs
Capital Gains
Fair market value of land on the date of conversion deemed as the full value of 2,10,00,000
consideration for the purposes of section 45(2)
Less: Indexed cost of acquisition [Rs 35,00,000 × 301/109] 96,65,138

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 1,13,34,862
Proportionate capital gains arising during A.Y. 2022-23 [Rs 1,13,34,862 x 2/3] 75,56,575
Less: Exemption under section 54EC 50,00,000
Capital gains chargeable to tax for A.Y.2022-23 25,56,575
Business Income
Sale price of flats [10 × Rs 30 lakhs] 3,00,00,000
Less: Cost of flats
Fair market value of land on the date of conversion [Rs 210 lacs × 2/3] 1,40,00,000
Cost of construction of flats [10 × Rs 10 lakhs] 1,00,00,000
Business income chargeable to tax for A.Y.2022-23 60,00,000

Notes:

(1) The conversion of a capital asset into stock-in-trade is treated as a transfer under section
2(47). It would be treated as a transfer in the year in which the capital asset is converted
into stock-in-trade (i.e., P.Y.2020-21, in this case).
(2) However, as per section 45(2), the capital gains arising from the transfer by way of
conversion of capital assets into stock-in-trade will be chargeable to tax only in the year in
which the stock-in-trade is sold.
(3) The indexation benefit for computing indexed cost of acquisition would, however, be
available only up to the year of conversion of capital asset into stock-in-trade (i.e.,
P.Y.2020-21) and not up to the year of sale of stock-in-trade (i.e., P.Y.2021-22).
(4) For the purpose of computing capital gains in such cases, the fair market value of the
capital asset on the date on which it was converted into stock-in-trade shall be deemed to
be the full value of consideration received or accruing as a result of the transfer of the
capital asset.
In this case, since only 2/3rd of the stock-in-trade (10 flats out of 15 flats) is sold in the
P.Y.2021-22, only proportionate capital gains (i.e., 2/3rd) would be chargeable to tax in the
A.Y.2022-23.

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(5) On sale of such stock-in-trade, business income would arise. The business income
chargeable to tax would be the difference between the price atwhich the stock-in-trade is
sold and the fair market value on the date of conversion of the capital asset into stock-in-
trade.
(6) In case of conversion of capital asset into stock-in-trade and subsequent sale of stock-in-
trade, the period of 6 months is to be reckoned from the date of sale of stock-in-trade for
the purpose of exemption under section 54EC [CBDT Circular No.791 dated 2.6.2000]. In
this case, since the investment in bonds of NHAI has been made within 6 months of sale of
flats, the same qualifies for exemption under section 54EC. With respect to long-term
capital gains arising on land or building or both in any financial year, the maximum
deduction under section 54EC would be Rs 50 lakhs, whether the investment in bonds of
NHAI or RECL are made in the same financial year or next financial year or partly in the
same financial year and partly in the next financial year.
Therefore, even though investment of Rs 50 lakhs has been made in bonds of NHAI during
the P.Y. 2021-22 and investment of Rs 50 lakhs has been made in bonds of RECL during the
P.Y. 2022-23, both within the stipulated six month period, the maximum deduction
allowable for A.Y. 2022-23, in respect of long-term capital gain arising on sale of long-term
capital asset(s) during the P.Y. 2021-22, is only Rs 50 lakhs.

Question 4

Mr. A is an individual carrying on business. His stock and machinery were damaged and
destroyed in a fire accident.

The value of stock lost (total damaged) was Rs 6,50,000. Certain portion of the machinery could
be salvaged. The opening balance of the block as on 1.4.2021 (i.e., WDV as on 31.3.2021 after
providing depreciation for P.Y. 2020-21) was Rs 10,80,000.

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During the process of safeguarding machinery and in the fire fighting operations, Mr. A lost his
gold chain and a diamond ring, which he had purchased in April, 2004 for Rs 1,20,000. The
market value of these two items as on the date of fire accident was Rs 1,80,000.

Mr. A received the following amounts from the insurance company:

(i) Towards loss of stock Rs 4,80,000

(ii) Towards damage of machinery Rs 6,00,000
(iii) Towards gold chain and diamond ring Rs 1,80,000

You are requested to briefly comment on the tax treatment of the above three items under the
provisions of the Income-tax Act, 1961.

Answer

(i) Compensation towards loss of stock: Any compensation received from the insurance
company towards loss/damage to stock in trade is to be construed as a trading receipt.
Hence, Rs 4,80,000 received as insurance claim for loss of stock has to be assessed under
the head “Profit and gains of business or profession”.
Note - The assessee can claim the value of stock destroyed by fire as revenue loss, eligible
for deduction while computing income under the head “Profits and gains of business or
profession”.
(ii) Compensation towards damage to machinery: The question does not mention whether the
salvaged machinery is taken over by the Insurance company or whether there was any
replacement of machinery during the year. Assuming that the salvaged machinery is taken
over by the Insurance company, and there was no fresh addition of machinery during the
year, the block of machinery will cease to exist. Therefore, Rs 4,80,000 being the excess of
written down value (i.e. Rs 10,80,000) over the insurance compensation (i.e. Rs 6,00,000)
will be assessable as a short-term capital loss.
Note – If new machinery is purchased in the next year, it will constitute the new block of
machinery, on which depreciation can be claimed for that year.

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(iii) Compensation towards loss of gold chain and diamond ring: Gold chain and diamond ring
are capital assets as envisaged by section 2(14). They are not “personal effects”, which
alone are to be excluded. If any profit or gain arises in a previous year owing to receipt of
insurance claim, the same shall be chargeable to tax as capital gains. The capital gains has to
be computed by reducing the indexed cost of acquisition of jewellery from the insurance
compensation of Rs 1,80,000.

Question 5

Mr. Sarthak entered into an agreement with Mr. Jaikumar to sell his residential house located
at Kanpur on 16.08.2021 for Rs 1,50,00,000. The sale proceeds were to be paid in the following
manner:

(i) 20% through account payee bank draft on the date of agreement.
(ii) 60% on the date of the possession of the property.
(iii) Balance after the completion of the registration of the title to the property.

Mr. Jaikumar was handed over the possession of the property on 15.12.2021 and the
registration process was completed on 14.01.2022. He paid the sale proceeds as per the sale
agreement.

The value determined by the Stamp Duty Authority-

(a) on 16.08.2021 was Rs 1,70,00,000;

(b) on 15.12.2021 was Rs 1,71,00,000; and
(c) on 14.01.2022 was Rs 1,71,50,000.

Mr. Sarthak had acquired the residential house at Kanpur on 01.04.2001 for Rs 30,00,000. After
recovering the sale proceeds from Jaikumar, he purchased two residential house properties,
one in Kanpur for Rs 20,00,000 on 24.3.2022 and another in Delhi for Rs 35,00,000 on
28.5.2022.

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Compute the income chargeable under the head "Capital Gains" of Mr. Sarthak for the
Assessment Year 2022-23.

Cost Inflation Index for Financial Year(s): 2001-02 - 100; 2021-22 - 317

Answer

Computation of income chargeable under the head “Capital Gains” of Mr. Sarthak for A.Y.
2022-23

Particulars Rs
Capital Gains on sale of residential house
Actual sale consideration Rs 1,50,00,000
Value adopted by Stamp Valuation Authority on the date of agreement Rs
1,70,00,000
[As per section 50C, where the actual sale consideration is less than the value
adopted by the Stamp Valuation Authority for the purpose of charging stamp
duty, and such stamp duty value exceeds 110% of the actual sale consideration,
then, the value adopted by the Stamp Valuation Authority shall be taken
to be the full value of consideration.
In a case where the date of agreement is different from the date of registration,
stamp duty value on the date of agreement can be considered provided the
whole or part of the consideration is paid by way of account payee
cheque/bank draft or by way of ECS through bank account or through such
other electronic mode as may be prescribed, on or before the date of
agreement.
In this case, since 20% of Rs 150 lakhs is paid through account payee bank draft
on the date of agreement, stamp duty value on the date of agreement would
be considered for determining the full value of consideration]
Full value of sale consideration [Stamp duty value on the date of agreement, 1,70,00,000
since it exceeds 110% of the actual sale consideration]

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Less: Indexed cost of acquisition of residential house [Rs 30 lakhs x 317/100] 95,10,000
Long-term capital gains [Since the residential house property was held by Mr. 74,90,000
Sarthak for more than 24 months immediately preceding the date of its
transfer]
Less: Exemption u/s 54 55,00,000
Since, long-term capital gains does not exceed Rs 2 crore, he would be eligible
for exemption in respect of both the residential house properties purchased in
India. The capital gain arising on transfer of a long-term residential property
shall not be chargeable to tax to the extent such capital gain is invested in the
purchase of these residential house properties in India within one year before
or two years after the date of transfer of original asset. Thus, he would be
eligible for exemption of Rs 55,00,000 being Rs 20,00,000 and Rs 35,00,000
invested on acquisition of residential house property in Kanpur and Delhi,
respectively.
Long term capital gains chargeable to tax 19,90,000

Question 6

Mrs. Yuvika bought a vacant land for Rs 80 lakhs in May 2004. Registration and other expenses
were 10% of the cost of land. She constructed a residential building on the said land for Rs 100
lakhs during the financial year 2006-07.

She entered into an agreement for sale of the above said residential house with Mr. Johar (not
a relative) in April 2015. The sale consideration was fixed at Rs 700 lakhs and on 23-4-2015,
Mrs. Yuvika received Rs 20 lakhs as advance in cash by executing an agreement. However, due
to failure on part of Mr. Johar, the said negotiation could not materialise and hence, the said
amount of advance was forfeited by Mrs. Yuvika. Mrs. Yuvika, again entered into an agreement
on 01.08.2021 for sale of this house at Rs 810 lakhs. She received Rs 80 lakhs as advance by

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RTGS. The stamp duty value on the date of agreement was Rs 890 lakhs. The sale deed was
executed and registered on 14-1-2022 for the agreed consideration. However, the State stamp
valuation authority had revised the values, hence, the value of property for stamp duty
purposes was Rs 900 lakhs. Mrs. Yuvika paid 1% as brokerage on sale consideration received.
Subsequent to sale, Mrs. Yuvika made following investments:

(i) Acquired two residential houses at Delhi for Rs 130 lakhs and Rs 50 lakhs on 31.1.2022 and
15.5.2022
(ii) Acquired a residential house at UK for Rs 180 lakhs on 23.3.2022.
(iii) Subscribed to NHAI capital gains bond (approved under section 54EC) for Rs 50 lakhs on
29-3-2022 and for Rs 40 lakhs on 12-5-2022.

Compute the income chargeable under the head 'Capital Gains' of Mrs. Yuvika for A.Y.2022-23.
The choice of exemption must be in the manner most beneficial to the assessee.

Cost Inflation Index: F.Y. 2004-05 – 113; F.Y. 2006-07 – 122; F.Y. 2021-22 - 317.

Answer

Computation of income chargeable under the head “Capital Gains” of Mrs. Yuvika for A.Y.2022-
23

Particulars Rs (in lakhs) Rs (in lakhs)

Capital Gains on sale of residential building
Actual sale consideration Rs 810 lakhs
Value adopted by Stamp Valuation Authority Rs 890 lakhs
[Where the actual sale consideration is less than the
value adopted by the Stamp Valuation Authority for the
purpose of charging stamp duty, and such stamp duty value
exceeds 110% of the actual sale consideration,
then, the value adopted by the Stamp Valuation Authority shall be
taken to be the full value of consideration as per section 50C.

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However, where the date of agreement is different from the date
of registration, stamp duty value on the date of agreement can be
considered provided the whole or part of the consideration is
received by way of account payee cheque/bank draft or by way of
ECS through bank account or through prescribed electronic
modes on or before the date of agreement.
In this case, since advance of Rs 80 lakh is received by RTGS, i.e.,
one of the prescribed modes, stamp duty value on the date of
agreement can be adopted as the full value of consideration.
However, in the present case since stamp duty value on the date
of agreement does not exceed 110% of the actual consideration,
actual sale consideration would be taken as the full value of
consideration)
Gross Sale consideration (actual consideration, since stamp duty 810.00
value on the date of agreement does not exceed 110% of the
actual consideration)
Less: Brokerage @1% of sale consideration (1% of Rs 810 lakhs) 8.10
Net Sale consideration 801.90
Less: Indexed cost of acquisition
- Cost of vacant land, Rs 80 lakhs, plus registration and 246.87
other expenses i.e., Rs 8 lakhs, being 10% of cost of land
[Rs 88 lakhs × 317/113]
- Construction cost of residential building (Rs 100 lakhs x 259.84 506.71
317/122)
Long-term capital gains 295.19
Since the residential house property was held by Mrs. Yuvika for
more than 24 months immediately preceding the date of its
transfer, the resultant gain is a long-term capital gain]
Less: Exemption under section 54 130.00

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Where long-term capital gains exceed Rs 2 crore, the capital gain
arising on transfer of a long-term residential property shall not be
chargeable to tax to the extent such capital gain is invested in the
purchase of one residential house property in India, one year
before or two years after the date of transfer of original asset.
Therefore, in the present case, the exemption would be available
only in respect of the one residential house acquired in India and
not in respect of the residential house in UK. It would be more
beneficial for her to claim the cost of acquisition of residential
house at Delhi, i.e., Rs 130 lakhs as exemption.
Less: Exemption under section 54EC 50.00
Amount invested in capital gains bonds of NHAI within six months
after the date of transfer (i.e., on or before 13.7.2022), of long-
term capital asset, being land or building or both, would qualify
for exemption, to the maximum extent of Rs 50 lakhs, whether
such investment is made in the current financial year or
subsequent financial year.
Therefore, in the present case, exemption can be availed only to
the extent of Rs 50 lakh out of Rs 90 lakhs, even if the both the
investments are made on or before 13.7.2022(i.e., within six
months after the date of transfer).
Long term capital gains chargeable to tax 115.19

Note: Advance of Rs 20 lakhs received from Mr. Johar, would have been chargeable to tax
under the head “Income from other sources”, in the A.Y. 2016-17, as per section 56(2)(ix), since
the same was forfeited on or after 01.4.2014 as a result of failure of negotiation. Hence, the
same should not be deducted while computing indexed cost of acquisition.

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Question 7

Mr. Shiva purchased a house property on February 15, 1979 for Rs 3,24,000. In addition, he has
also paid stamp duty value @10% on the stamp duty value of Rs 3,50,000.

In April, 2007, Mr. Shiva entered into an agreement with Mr. Mohan for sale of such property
for Rs 14,35,000 and received an amount of Rs 1,11,000 as advance. However, the sale
consideration did not materialize and Mr. Shiva forfeited the advance. In May 2014, he again
entered into an agreement for sale of said house for Rs 20,25,000 to Ms. Deepshikha and
received Rs 1,51,000 as advance. However, as Ms. Deepshikha did not pay the balance amount,
Mr. Shiva forfeited the advance. In August, 2014, Mr. Shiva constructed the first floor by
incurring a cost of Rs 3,90,000.

On November 15, 2021, Mr. Shiva entered into an agreement with Mr. Manish for sale of such
house for Rs 30,50,000 and received an amount of Rs 1,50,000 as advance through an account
payee cheque. Mr. Manish paid the balance entire sum and Mr. Shiva transferred the house to
Mr. Manish on February 20, 2022. Mr. Shiva has paid the brokerage @1% of sale consideration
to the broker.

On April 1, 2001, fair market value of the house property was Rs 11,85,000 and Stamp duty
value was Rs 10,70,000. Further, the Valuation as per Stamp duty Authority of such house on
15th November, 2021 was Rs 39,00,000 and on 20th February, 2022 was Rs 41,00,000.

Compute the capital gains in the hands of Mr. Shiva for A.Y.2022-23.

CII for F.Y. 2001-02: 100; F.Y. 2007-08: 129; F.Y. 2014-15: 240; F.Y. 2021-22: 317

Answer

Computation of Capital gains in the hands of Mr. Shiva for A.Y. 2022-23

Particulars Amount (Rs) Amount (Rs)

Actual sale consideration 30,50,000
Valuation as per Stamp duty Authority on the date of 39,00,000

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agreement
(Where the actual sale consideration is less than the value
adopted by the Stamp Valuation Authority for the purpose of
charging stamp duty, and such stamp duty value exceeds 110%
of the actual sale consideration then, the value adopted by the
Stamp Valuation Authority shall be taken to be the full value of
consideration as per section 50C.
However, where the date of agreement is different from the
date of registration, stamp duty value on the date of
agreement can be considered, provided the whole or part of
the consideration is received by way of account payee
cheque/bank draft or by way of ECS through bank account or
such other electronic mode as may be prescribed on or before
the date of agreement. In the present case, since part of the
payment is made by account payee cheque on the date of
agreement, the stamp duty value on the date of agreement
would be considered as full value of consideration)
Deemed Full value of consideration 39,00,000
[Since stamp duty value on the date of agreement exceeds
110% of the actual consideration, stamp duty value would be
deemed as Full Value of Consideration]
Less: Expenses on transfer (Brokerage @1% of Rs 30,50,000) 30,500
Net sale consideration 38,69,500
Less: Indexed cost of acquisition (Note 1) 30,40,030
Less: Indexed cost of improvement (Note 2) 5,15,125 35,55,155
Long term capital gain 3,14,345

Notes:
(1) Computation of indexed cost of acquisition

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Particulars Amount (Rs) Amount (Rs)
Cost of acquisition, 10,70,000
Being the higher of
(i) lower of Fair market value i.e., Rs 11,85,000 and Stamp duty 10,70,000
value i.e., Rs 10,70,000, on April 1, 2001
(ii) Actual cost of acquisition (Rs 3,24,000 + Rs 35,000, being 3,59,000
stamp duty @10% of Rs 3,50,000
Less: Advance money taken from Mr. Mohan and forfeited 1,11,000
Cost of acquisition for indexation 9,59,000
Indexed cost of acquisition (Rs 9,59,000 x 317/100) 30,40,030

(2) Computation of indexed cost of improvement

Particulars Amount (Rs)

Cost of construction of first floor in August, 2014 3,90,000
Indexed cost of improvement (Rs 3,90,000 x 317/240) 5,15,125

(3) Where advance money has been received by the assessee, and retained by him, as a result
of failure of the negotiations, section 51 will apply. The advance retained by the assessee will go
to reduce the cost of acquisition. Indexation is to be done on the cost of acquisition so arrived
at after reducing the advance money forfeited [i.e. Rs 10,70,000 – Rs 1,11,000 (being the
advance money forfeited during the P.Y.2007-08) = Rs 9,59,000]. However, where the advance
money is forfeited during the previous year 2014-15 or thereafter, the amount forfeited would
be taxable under the head “Income from Other Sources” and such amount will not be deducted
from the cost of acquisition of such asset while calculating capital gains. Hence, Rs 1,51,000,
being the advance received from Ms. Deepshikha and retained by him, would have been
taxable under the head “Income from other sources” in the hands of Mr. Shiva in A.Y.2015-16.

GMTESTSERIES.COM®
 UNIT 5: INCOME FROM OTHER SOURCES

Question 1

Examine under which heads the following incomes are taxable:

(i) Rental income in case property held as stock-in-trade for 3 years

(ii) Dividend on shares in case of a dealer in shares
(iii) Salary received by a partner from his partnership firm
(iv) Rental income of machinery
(v) Winnings from lotteries by a person having the same as business activity
(vi) Salaries payable to a Member of Parliament
(vii) Receipts without consideration
(viii) In case of retirement, interest on employee’s contribution if provident fund is
unrecognized.
(ix) Rental income in case of a person engaged in the business of letting out ofproperties.

Answer

Particulars Head of Income

(i) Rental income in case property held as stock-in trade Income from house property
for 3 years
(ii) Dividend on shares in case of a dealer in shares Income from other sources
(iii) Salary by partner from his partnership firm Profits and gains of business or
profession
(iv) Rental income of machinery (See Note below) Profits and gains of businessor
profession/Income from other
sources

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(v) Winnings from lotteries by a person having the same Income from other sources
as business activity
(vi) Salaries payable to a Member of Parliament Income from other sources
(vii) Receipts without consideration Income from other sources
(viii) In case of retirement, interest on employee’s Income from other sources
contribution if provident fund is unrecognized
(ix) Rental income in case of a person engaged in the Profits and gains from business
business of letting out of properties or profession

Note - As per section 56(2)(ii), rental income of machinery would be chargeable to tax under
the head “Income from Other Sources”, if the same is not chargeable to income-tax under the
head “Profits and gains of business or profession”.

Question 2

Examine whether the following are chargeable to tax and the amount liable to tax:

(i) A sum of Rs 1,20,000 was received as gift from non-relatives by Raj on the occasion of the
marriage of his son Pravin.
(ii) Interest on enhanced compensation of Rs 96,000 received on 12-3-2022 for acquisition of
urban land, of which 40% relates to P.Y.2020-21.

Answer

S. Taxable/ Answer Amount Reason

No. Not Taxable liable to tax (Rs)
(i) Taxable 1,20,000 The exemption from applicability of section 56(2)(x)
would be available if, inter alia, gift is received from a
relative or gift is received on the occasion of marriage
of the individual himself. In this case, since gift is

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 received by Mr. Raj from a non-relative on the
occasion of marriage of his son, it would be taxable
in his hands under section 56(2)(x).
(ii) Taxable 48,000 As per section 145B(1), interest received by the
assessee on enhanced compensation shall be deemed
to be the income of the year in which it is received,
irrespective of the method of accounting followed by
the assessee. Interest of Rs 96,000 on enhanced
compensation is chargeable to tax in the year of
receipt i.e. P.Y. 2021-22 under section 56(2)(viii) after
providing deduction of 50% under section 57(iv).
Therefore, Rs 48,000 is chargeable to tax under the
head “Income from other sources”.
Question 3

On 10.10.2021, Mr. Govind (a bank employee) received Rs 5,00,000 towards interest on

enhanced compensation from State Government in respect of compulsory acquisition of his
land effected during the financial year 2014-15.

Out of this interest, Rs 1,50,000 relates to the financial year 2015-16; Rs 1,65,000 to the
financial year 2016-17; and Rs 1,85,000 to the financial year 2017-18. He incurred Rs 50,000 by
way of legal expenses to receive the interest on such enhanced compensation.

How much of interest on enhanced compensation would be chargeable to tax for the
assessment year 2022-23?

Answer

Section 145B provides that interest received by the assessee on enhanced compensation shall
be deemed to be the income of the assessee of the year in which it is received, irrespective of
the method of accounting followed by the assessee and irrespective of the financial year to
which it relates.

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Section 56(2)(viii) states that such income shall be taxable as ‘Income from other sources’. 50%
of such income shall be allowed as deduction by virtue of section 57(iv) and no other deduction
shall be permissible from such Income.

Therefore, legal expenses incurred to receive the interest on enhanced compensation would
not be allowed as deduction from such income.

Computation of interest on enhanced compensation taxable as “Income from other sources”

for the A.Y 2022-23:

Particulars Rs
Interest on enhanced compensation taxable u/s 56(2)(viii) 5,00,000
Less: Deduction under section 57(iv) (50% x Rs 5,00,000) 2,50,000
Taxable interest on enhanced compensation 2,50,000
Question 4

The following details have been furnished by Mrs. Hemali pertaining to the year ended
31.3.2022:

(i) Cash gift of Rs 51,000 received from her friend on the occasion of her “Shastiaptha Poorthi”,
a wedding function celebrated on her husband completing 60 years of age. This was also
her 25th wedding anniversary.
(ii) On the above occasion, a diamond necklace worth Rs 2 lacs was presented byher sister
living in Dubai.
(iii) When she celebrated her daughter's wedding on 21.2.2022, her friend assigned in Mrs.
Hemali's favour, a fixed deposit held by the said friend in a scheduled bank; the value of the
fixed deposit and the accrued interest on the said date was Rs 52,000.

Compute the income, if any, assessable as income from other sources.

Answer

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(i) Any sum of money received by an individual on the occasion of the marriage of the
individual is exempt. This provision is, however, not applicable to a cash gift received during
a wedding function celebrated on completion of 60 years of age.
The gift of Rs 51,000 received from a non-relative is, therefore, chargeable to tax under
section 56(2)(x) in the hands of Mrs. Hemali, since the same exceeds Rs 50,000.
(ii) The provisions of section 56(2)(x) are not attracted in respect of any sum of money or
property received from a relative. Thus, the gift of diamond necklace received from her
sister, being a relative, is not taxable under section 56(2)(x), even though jewellery falls
within the definition of “property”.
(iii) To be exempt from applicability of section 56(2)(x), the property should be received on the
occasion of the marriage of the individual, not that of the individual’s son or daughter.
Therefore, this exemption provision is not attracted in this case.
Any sum of money received without consideration by an individual is chargeable to tax
under section 56(2)(x), if the aggregate value exceeds Rs 50,000 in a year. “Sum of money”
has, however, not been defined under section 56(2)(x).
Therefore, there are two possible views in respect of the value of fixed deposit assigned in
favour of Mrs. Hemali –
(1) The first view is that fixed deposit does not fall within the meaning of “sum of money”
and therefore, the provisions of section 56(2)(x) are not attracted. It may be noted that
fixed deposit is also not included in the definition of “property”.
(2) However, another possible view is that fixed deposit assigned in favour of Mrs. Hemali
falls within the meaning of “sum of money” received.
Income assessable as “Income from other sources”
If the first view is taken, the total amount chargeable to tax as “Income from other sources”
would be Rs 51,000, being cash gift received from a friend on her Shastiaptha Poorthi.
As per the second view, the provisions of section 56(2)(x) would also be attracted in respect
of the fixed deposit assigned and the “Income from other sources” of Mrs. Hemali would be
Rs 1,03,000 (Rs 51,000 + Rs 52,000).

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Question 5

Examine the following transactions in the context of Income-tax Act, 1961:

(i) Mr. B transferred 500 shares of R (P) Ltd. to M/s. B Co. (P) Ltd. on 10.10.2021 for Rs
3,00,000 when the market price was Rs 5,00,000. The indexed cost of acquisition of shares
for Mr. B was computed at Rs 4,45,000. The transfer was not subjected to securities
transaction tax.
Determine the income chargeable to tax in the hands of Mr. B and M/s. B Co. (P) Ltd.
because of the above said transaction.
(ii) Mr. Chezian is employed in a company with taxable salary income of Rs 5,00,000. He
received a cash gift of Rs 1,00,000 from Atma Charitable Trust (registered under section
12AB) in December 2021 for meeting his medical expenses.
Is the cash gift so received from the trust chargeable to tax in the hands of Mr. Chezian?

Answer

(i) Any movable property received for inadequate consideration by any person is chargeable to
tax under section 56(2)(x), if the difference between aggregate Fair Market Value of the
property and consideration exceeds Rs 50,000.
Thus, share received by M/s B. Co. (P) Ltd. from Mr B for inadequate consideration is
chargeable to tax under section 56(2)(x) to the extent of Rs 2,00,000. As per section 50CA,
since, the consideration is less than the fair market value of unquoted shares of R (P) Ltd.,
fair market value of shares of the company would be deemed to be the full value of
consideration. It is presumed that the shares of R (P) Ltd are unquoted shares.
The full value of consideration (Rs 5,00,000) less the indexed cost of acquisition
(Rs 4,45,000) would result in a long term capital gains of Rs 55,000 in the hands of
Mr. B.
(ii) The provisions of section 56(2)(x) would not apply to any sum of money or any property
received from any trust or institution registered under section 12AB. Therefore, the cash
gift of Rs 1 lakh received from Atma Charitable Trust, being a trust registered under section

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 12AB, for meeting medical expenses would not be chargeable to tax under section 56(2)(x)
in the hands of Mr. Chezian.

CHAPTER 5

INCOME OF OTHER PERSONS INCLUDED IN ASSESSEE’S TOTAL

INCOME

Question 1

Mr. Sharma has four children consisting 2 daughters and 2 sons. The annual income of 2
daughters were Rs 9,000 and Rs 4,500 and of sons were Rs 6,200 and Rs 4,300, respectively.
The daughter who has income of Rs 4,500 was suffering from a disability specified under
section 80U.

Compute the amount of income earned by minor children to be clubbed in hands of Mr.
Sharma.

Answer

As per section 64(1A), in computing the total income of an individual, all such income accruing
or arising to a minor child shall be included. However, income of a minor child suffering from
disability specified under section 80U would not be included in the income of the parent but
would be taxable in the hands of the minor child. Therefore, in this case, the income of
daughter suffering from disability specified under section 80U should not be clubbed with the
income of Mr. Sharma.

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Under section 10(32), income of each minor child includible in the hands of the parent under
section 64(1A) would be exempt to the extent of the actual income or Rs 1,500, whichever is
lower. The remaining income would be included in the hands of the parent.

Computation of income earned by minor children to be clubbed with the income of Mr.
Sharma:

Particulars Rs
(i) Income of one daughter 9,000
Less: Income exempt under section 10(32) 1,500
Total (A) 7,500
(ii) Income of two sons (Rs 6,200 + Rs 4,300) 10,500
Less: Income exempt under section 10(32) (Rs 1,500 + Rs 1,500) 3,000
Total (B) 7,500
Total Income to be clubbed as per section 64(1A) (A+B) 15,000
Note: It has been assumed that:

(1) All the four children are minor children;

(2) The income does not accrue or arise to the minor children on account of any manual work
done by them or activity involving application of their skill, talent or specialized knowledge
and experience;
(3) The income of Mr. Sharma, before including the minor children’s income, is greater than the
income of Mrs. Sharma, due to which the income of the minor children would be included
in his hands; and
(4) This is the first year in which clubbing provisions are attracted.

Question 2

During the previous year 2021-22, the following transactions occurred in respect of Mr. A.

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(a) Mr. A had a fixed deposit of Rs 5,00,000 in Bank of India. He instructed the bank to credit
the interest on the deposit @ 9% from 1 -4-2021 to 31-3-2022 to the savings bank account
of Mr. B, son of his brother, to help him in his education.
(b) Mr. A holds 75% profit share in a partnership firm. Mrs. A received a commission of Rs
25,000 from the firm for promoting the sales of the firm. Mrs. A possesses no technical or
professional qualification.
(c) Mr. A gifted a flat to Mrs. A on April 1, 2021. During the previous year 2021-22, Mrs. A’s
“Income from house property” (computed) was Rs 52,000 from such flat.
(d) Mr. A gifted Rs 2,00,000 to his minor son who invested the same in a business and he
derived income of Rs 20,000 from the investment.
(e) Mr. A’s minor son derived an income of Rs 20,000 through a business activity involving
application of his skill and talent.

During the year, Mr. A got a monthly pension of Rs 10,000. He had no other income. Mrs. A
received salary of Rs 20,000 per month from a part time job.

Examine the tax implications of each transaction and compute the total income of Mr. A, Mrs. A
and their minor child assuming they do not wish to opt for section 115BAC.

Answer

Computation of total income of Mr. A, Mrs. A and their minor son for the A.Y. 2022-23

Particulars Mr. A (Rs) Mrs. A (Rs) Minor Son (Rs)

Income under the head “Salaries”
Salary income (of Mrs. A) - 2,40,000 -
Pension income (of Mr. A) (Rs 1,20,000 -
10,000×12)
Less: Standard deduction under 50,000 50,000
section 16(ia)
70,000 1,90,000
Income from House Property [See 52,000 - -

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Note (3) below]
Income from other sources - -
Interest on Mr. A’s fixed deposit with 45,000 - -
Bank of India (Rs 5,00,000×9%) [See
Note (1) below]
Commission received by Mrs. A from 25,000 70,000
a partnership firm, in which Mr. A
has substantial interest [See Note (2)
below]
Income before including income of 1,92,000 1,90,000 -
minor son under section 64(1A)
Income of the minor son from the 18,500 - -
investment made in the business
out of the amount gifted by Mr. A
[See Note (4) below]
Income of the minor son through a - - 20,000
business activity involving application
of his skill and talent [See Note (5)
below]
Total Income 2,10,500 1,90,000 20,000

Notes:

(1) As per section 60, in case there is a transfer of income without transfer of asset from which
such income is derived, such income shall be treated as income of the transferor. Therefore,
the fixed deposit interest of Rs 45,000 transferred by Mr. A to Mr. B shall be included in the
total income of Mr. A.

(2) As per section 64(1)(ii), in case the spouse of the individual receives any amount by way of
income from any concern in which the individual has substantial interest (i.e. holding shares

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carrying at least 20% voting power or entitled to at least 20% of the profits of the concern),
then, such income shall be included in the total income of the individual. The only exception is
in a case where the spouse possesses any technical or professional qualifications and the
income earned is solely attributable to the application of her technical or professional
knowledge and experience, in which case, the clubbing provisions would not apply.

In this case, the commission income of Rs 25,000 received by Mrs. A from the partnership firm
has to be included in the total income of Mr. A, as Mrs. A does not possess any technical or
professional qualification for earning such commission and Mr. A has substantial interest in the
partnership firm as he holds 75% profit share in the firm.

(3) According to section 27(i), an individual who transfers any house property to his or her
spouse otherwise than for adequate consideration or in connection with an agreement to live
apart, shall be deemed to be the owner of the house property so transferred. Hence, Mr. A
shall be deemed to be the owner of the flat gifted to Mrs. A and hence, the income arising
from the same shall be computed in the hands of Mr. A.

Note: The provisions of section 56(2)(x) would not be attracted in the hands of Mrs. A, since she
has received immovable property without consideration from a relative i.e., her husband.

(4) As per section 64(1A), the income of the minor child is to be included in the total income of
the parent whose total income (excluding the income of minor child to be so clubbed) is
greater. Further, as per section 10(32), income of a minor child which is includible in the income
of the parent shall be exempt to the extent of Rs 1,500 per child.

Therefore, the income of Rs 20,000 received by minor son from the investment made out of the
sum gifted by Mr. A shall, after providing for exemption of Rs 1,500 under section 10(32), be
included in the income of Mr.

A, since Mr. A’s income of Rs 1,92,000 (before including the income of the minor child) is
greater than Mrs. A’s income of Rs 1,90,000. Therefore, Rs 18,500 (i.e., Rs 20,000 – Rs 1,500)
shall be included in Mr. A’s income. It is assumed that this is the first year in which clubbing
provisions are attracted.

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Note–The provisions of section 56(2)(x) would not be attracted in the hands of the minor son,
since he has received a sum of money exceeding Rs 50,000 without consideration from a
relative i.e., his father.

(5) In case the income earned by the minor child is on account of any activity involving
application of any skill or talent, then, such income of the minor child shall not be included in
the income of the parent, but shall be taxable in the hands of the minor child.

Therefore, the income of Rs 20,000 derived by Mr. A’s minor son through a business activity
involving application of his skill and talent shall not be clubbed in the hands of the parent. Such
income shall be taxable in the hands of the minor son.

Question 3

Mr. A has gifted a house property valued at Rs 50 lakhs to his wife, Mrs. B, who in turn has
gifted the same to Mrs. C, their daughter-in-law. The house was let out at Rs 25,000 per month
throughout the year. Compute the total income of Mr. A and Mrs. C. Will your answer be
different if the said property was gifted to his son, husband of Mrs. C?

Answer

As per section 27(i), an individual who transfers otherwise than for adequate consideration any
house property to his spouse, not being a transfer in connection with an agreement to live
apart, shall be deemed to be the owner of the house property so transferred.

Therefore, in this case, Mr. A would be the deemed owner of the house property transferred to
his wife Mrs. B without consideration.

As per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or
indirectly, to her by an individual otherwise than for adequate consideration would be included
in the total income of such individual.

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Income from let-out property is Rs 2,10,000 [i.e., Rs 3,00,000, being the actual rent calculated
at Rs 25,000 per month less Rs 90,000, being deduction under section 24@30% of Rs 3,00,000]

In this case, income of Rs 2,10,000 from let -out property arising to Mrs. C, being Mr. A’s son’s
wife, would be included in the income of Mr. A, applying the provisions of section 27(i) and
section 64(1)(vi). Such income would, therefore, not be taxable in the hands of Mrs. C.

In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64 would
not apply, since the son is not a minor child. Therefore, the income of Rs 2,10,000 from letting
out of property gifted to the son would be taxable in the hands of the son.

It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands of
the recipient of house property, since the receipt of property in each case was from a “relative”
of such individual. Therefore, the stamp duty value of house property would not be chargeable
to tax in the hands of the recipient of immovable property, even though the house property
was received by her or him without consideration.

Note - The first part of the question can also be answered by applying the provisions of section
64(1)(vi) directly to include the income of Rs 2,10,000 arising to Mrs. C in the hands of Mr. A.
[without first applying the provisions of section 27(i) to deem Mr. A as the owner of the house
property transferred to his wife Mrs. B without consideration], since section 64(1)(vi) speaks of
clubbing of income arising to son’s wife from indirect transfer of assets to her by her husband’s
parent, without consideration. Gift of house property by Mr. A to Mrs. C, via Mrs. B, can be
viewed as an indirect transfer by Mr. A to Mrs. C.

Question 4

A proprietary business was started by Smt. Rani in the year 2019. As on 1.4.2020 her capital in
business was Rs 3,00,000.

Her husband gifted Rs 2,00,000 on 10.4.2020 to her and such sum is invested by Smt. Rani in
her business on the same date. Smt. Rani earned profits from her proprietary business for the

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Financial year 2020-21, Rs 1,50,000 and Financial year 2021-22 Rs 3,90,000. Compute the
income, to be clubbed in the hands of Rani’s husband for the Assessment year 2022-23 with
reasons.

Answer

Section 64(1) of the Income-tax Act, 1961 provides for the clubbing of income in the hands of
the individual, if the income earned is from the assets transferred directly or indirectly to the
spouse of the individual, otherwise than for adequate consideration. In this case Smt. Rani
received a gift of Rs 2,00,000 from her husband which she invested in her business. The income
to be clubbed in the hands of Smt. Rani’s husband for A.Y.2022-23 is computed as under:

Particulars Smt. Rani’s Capital Contribution Total

Capital Out of gift from
Contribution husband
Rs Rs Rs
Capital as at 1.4.2020 3,00,000 - 3,00,000
Investment on 10.04. 2020 out of gift 2,00,000 2,00,000
received from her husband
3,00,000 2,00,000 5,00,000
Profit for F.Y. 2020-21 to be 1,50,000 1,50,000
apportioned on the basis of capital
employed on the first day of the
previous year i.e., on 1.4.2020
Capital employed as at 1.4.2021 4,50,000 2,00,000 6,50,000
Profit for F.Y.2021-22 to be 2,70,000 1,20,000 3,90,000
apportioned on the basis of capital
employed as at 1.4.2021 (i.e., 45 : 20)

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Therefore, the income to be clubbed in the hands of Smt. Rani’s husband for A.Y.2022-23 is Rs
1,20,000.

Question 5

Mr. B is the Karta of a HUF, whose members derive income as given below:

Particulars Rs
(i) Income from B' s profession 45,000
(ii) Mrs. B' s salary as fashion designer 76,000
(iii) Minor son D (interest on fixed deposits with a bank which were gifted to 10,000
him by his uncle)
(iv) Minor daughter P's earnings from sports 95,000
(v) D's winnings from lottery (gross) 1,95,000
Examine the tax implications in the hands of Mr. and Mrs. B.

Answer

Clubbing of income and other tax implications

As per the provisions of section 64(1A), in case the marriage of the parents subsist, the income
of a minor child shall be clubbed in the hands of the parent whose total income, excluding the
income of the minor child to be clubbed, is greater. In this problem, it has been assumed that
the marriage of Mr. B and Mrs. B subsists.

Further, in case the income arises to the minor child on account of any manual work done by
the child or as a result of any activity involving application of skill, talent, specialized knowledge
or experience of the child, then, the same shall not be clubbed in the hands of the parent.

Tax implications

(i) Income of Rs 45,000 from Mr. B’s profession shall be taxable in the hands of Mr. B under
the head “Profits and gains of business or profession”.

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(ii) Salary of Rs 26,000 (Rs 76,000 less standard deduction under section 16(ia) of Rs 50,000)
shall be taxable as “Salaries” in the hands of Mrs. B.
(iii) Income from fixed deposit of Rs 10,000 arising to the minor son D, shall be clubbed in the
hands of the father, Mr. B as “Income from other sources”, since Mr. B’s income is greater
than income of Mrs. B before including the income of the minor child.
As per section 10(32), income of a minor child which is includible in the income of the
parent shall be exempt to the extent of Rs 1,500 per child. The balance income would be
clubbed in the hands of the parent as “Income from other sources”.
(iv) Income of Rs 95,000 arising to the minor daughter P from sports shall not be included in the
hands of the parent, since such income has arisen to the minor daughter on account of an
activity involving application of her skill.
(v) Income of Rs 1,95,000 arising to minor son D from lottery shall be included in the hands of
Mr. B as “Income from other sources”, since Mr. B’s income is greater than the income of
Mrs. B before including the income of minor child.
Note– Mr. B can reduce the tax deducted at source from such lottery income while
computing his net tax liability.

CHAPTER 6

AGGREGATION OF INCOME, SET-OFF AND CARRY FORWARD

OF LOSSES

Question 1

Compute the gross total income of Mr. F for the A.Y. 2022-23 from the information given below
–

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Particulars Rs
Income from house property (computed) 1,25,000
Income from business (before providing for depreciation) 1,35,000
Short term capital gains on sale of unlisted shares 56,000
Long term capital loss from sale of property (brought forward from A.Y. 2021-22) (90,000)
Income from tea business 1,20,000
Dividends from Indian companies carrying on agricultural operations (Gross) 80,000
Current year depreciation 26,000
Brought forward business loss (loss incurred six years ago) (45,000)

Answer

Gross Total Income of Mr. F for the A.Y. 2022-23

Particulars Rs Rs
Income from house property (Computed) 1,25,000
Income from business
Profits before depreciation 1,35,000
Less: Current year depreciation 26,000
Less: Brought forward business loss 45,000
64,000
Income from tea business (40% is business income) 48,000 1,12,000
Capital gains
Short term capital gains 56,000
Income from Other Sources
Dividend income (taxable in the hands of shareholders) 80,000
Gross Total Income 3,73,000

Note:

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(1) Dividend from Indian companies is fully taxable in the hands of shareholders at normal rates
of tax.
(2) 60% of the income from tea business is treated as agricultural income and therefore,
exempt from tax;
(3) Long-term capital loss can be set-off only against long-term capital gains. Therefore, long-
term capital loss of Rs 90,000 brought forward from A.Y.2021-22 cannot be set-off in the
A.Y.2022-23, since there is no long-term capital gains in that year. It has to be carried
forward for set-off against long-term capital gains, if any, during A.Y.2023-24.

Question 2

Mr. Soohan submits the following details of his income for the assessment year 2022-23:

Particulars Rs
Income from salary (computed) 3,00,000
Loss from let out house property (-) 40,000
Income from sugar business 50,000
Loss from iron ore business b/f (discontinued in P.Y. 2016-17) (-) 1,20,000
Short term capital loss (-) 60,000
Long term capital gain 40,000
Dividend 5,000
Income received from lottery winning (Gross) 50,000
Winnings from card games (Gross) 6,000
Agricultural income 20,000
Short-term capital loss under section 111A (-) 10,000
Bank interest on Fixed deposit 5,000

Calculate gross total income and losses to be carried forward, assuming that he does not opt for
the provisions of section 115BAC.

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Answer

Computation of Gross Total Income of Mr. Soohan for the A.Y.2022-23

Particulars Rs Rs
Salaries
Income from salary 3,00,000
Less: Loss from house property set-off against salary income as per (40,000) 2,60,000
section 71
Profits and gains of business or profession
Income from sugar business 50,000
Less: Brought forward loss of Rs 1,20,000 from iron-ore business set- (50,000) Nil
off as per section 72(1) to the extent of Rs 50,000
Balance business loss of Rs 70,000 of P.Y.2015-16 to be carried
forward to A.Y.2023-24
Capital gains
Long term capital gain 40,000
Less: Short term capital loss of Rs 60,000 set-off to the extent of Rs (40,000) Nil
40,000
Balance short-term capital loss of Rs 20,000 to be carried forward
Short-term capital loss of Rs 10,000 u/s 111A also to be carried
forward
Income from other sources
Dividend (fully taxable in the hands of shareholders) 5,000
Winnings from lottery 50,000
Winnings from card games 6,000
Bank FD interest 5,000 66,000
Gross Total Income 3,26,000
Losses to be carried forward to A.Y.2023-24
Loss of iron-ore business (Rs 1,20,000 – Rs 50,000) 70,000

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Short term capital loss (Rs 20,000 + Rs 10,000) 30,000

Notes:

1. Agricultural income is exempt under section 10(1)

2. It is presumed that loss from iron- ore business relates to P.Y.2016-17, the year in which the
business was discontinued.

Question 3

Mr. Batra furnishes the following details for year ended 31.03.2022:

Particulars Rs
Short term capital gain 1,40,000
Loss from speculative business 60,000
Long term capital gain on sale of land 30,000
Long term capital loss on sale of unlisted shares 1,00,000
Income from business of textile (after allowing current year depreciation) 50,000
Income from activity of owning and maintaining race horses 15,000
Income from salary (computed) 1,00,000
Loss from house property 40,000

Following are the brought forward losses:

(i) Losses from activity of owning and maintaining race horses-pertaining to A.Y.2019-20 Rs
25,000.
(ii) Brought forward loss from business of textile Rs 60,000 - Loss pertains to A.Y. 2014-15.

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Compute gross total income of Mr. Batra for the Assessment Year 2022 -23, assuming that he
does not opt for the provisions of section 115BA C. Also determine the losses eligible for carry
forward to the Assessment Year 2023-24.

Answer

Computation of Gross Total Income of Mr. Batra for the A.Y. 2022-23

Particulars Rs Rs
Salaries 1,00,000
Less: Current year loss from house property (40,000) 60,000
Profit and gains of business or profession
Income from textile business 50,000
Less: Loss of Rs 60,000 from textile business b/f from A.Y. 2014-15 50,000 NIL
set-off to the extent of Rs 50,000
Income from the activity of owning and maintaining race horses 15,000
Less: Loss of Rs 25,000 from activity of owning and maintaining 15,000
race horses b/f from A.Y. 2019-20 set-off to the extent of Rs
15,000
Balance loss of Rs 10,000 to be carried forward to A.Y. 2023-24 NIL
[See Note 2]
Capital Gain
Short term capital gain 1,40,000
Long term capital gain on sale of land 30,000
Less: Long term capital loss of Rs 1,00,000 on sale of unlisted 30,000 NIL
shares set-off to the extent of Rs 30,000
Balance loss of Rs 70,000 to be carried forward to A.Y. 2023-24
[See Note 3]
Gross Total Income 2,00,000

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 Losses to be carried forward to A.Y. 2023-24

Particulars Rs
Current year loss from speculative business [See Note-4] 60,000
Current year long term capital loss on sale of unlisted shares 70,000
Loss from activity of owning and maintaining of race horse pertaining to 10,000
A.Y.2019-20

Notes:-

(1) As per section 72(3), business loss can be carried forward for a maximum of eight
assessment years immediately succeeding the assessment year for which the loss was first
computed. Since the eight year period for carry forward of business loss of A.Y. 2014-15
expired in the A.Y. 2022-23, the balance unabsorbed business loss of Rs 10,000 cannot be
carried forward to A.Y. 2023-24.
(2) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off
against income from any source other than the activity of owning and maintaining race
horses. Such loss can be carried forward for a maximum period of 4 assessment years.
(3) Long-term capital loss on sale of unlisted shares can be set-off against long-term capital
gain on sale of land. The balance loss of Rs 70,000 cannot be set-off against short term
capital gain or against any other head of income. The same has to be carried forward for
set-off against long–term capital gain of the subsequent assessment year. Such long-term
capital loss can be carried forward for a maximum of eight assessment years.
(4) Loss from speculation business cannot be set-off against any income other than profit and
gains of another speculation business. Such loss can, however, be carried forward for a
maximum of four years as per section 73(4) to be set-off against income from speculation
business.

Question 4

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Mr. A furnishes you the following information for the year ended 31.03.2022:

(Rs)
(i) Income from plying of vehicles (computed as per books) (He owned 5 light 3,20,000
goods vehicle throughout the year)
(ii) Income from retail trade of garments 7,50,000
(Computed as per books) (Sales turnover Rs 1,35,70,000)
Mr. A had declared income on presumptive basis under section 44AD for
the first time in A.Y. 2021-22. Assume 10% of the turnover during the
previous year 2021-22 was received in cash and balance through A/c payee
cheque and all the payments in respect of expenditure were also made
through A/c payee cheque or debit card.
(iii) He has brought forward depreciation relating to A.Y. 2020-21 1,00,000

Compute taxable income of Mr. A and his tax liability for the assessment year 2022-23 with
reasons for your computation, assuming that he does not opt for section 115BAC.

Answer

Computation of total income and tax liability of Mr. A for the A.Y. 2022-23

Particulars Rs
Income from retail trade – as per books (See Note 1 below) 7,50,000
Income from plying of vehicles – as per books (See Note 2 below) 3,20,000
10,70,000
Less : Set off of b/f depreciation relating to A.Y. 2020-21 1,00,000
Total income 9,70,000
Tax liability 1,06,500
Add: Health and Education cess @4% 4,260
Total tax liability 1,10,760

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Note:

1. Income from retail trade: Presumptive business income under section 44AD is Rs 8,41,340
i.e., 8% of Rs 13,57,000, being 10% of the turnover received in cash and 6% of Rs 1,22,13,000,
being the amount of sales turnover received through A/c payee cheque. However, the income
computed as per books is Rs 7,50,000 which is to be further reduced by the amount of
unabsorbed depreciation of Rs 1,00,000. Since the income computed as per books is lower than
the income deemed under section 44AD, the assessee can adopt the income as per books.
However, if he does not opt for presumptive taxation under section 44AD, he has to get his
books of accounts audited under section 44AB, since his turnover exceeds Rs 1 crore (the
enhanced limit of Rs 10 crore would not available, since more than 5% of the turnover is
received in cash). Also, his case would be falling under section 44AD(4) and hence tax audit is
mandatory. It may further be noted that he cannot opt for section 44AD for next five A.Ys, if he
does not opt for section 44AD this year.

2. Income from plying of light goods vehicles: Income calculated under section 44AE(1) would
be Rs 7,500 x 12 x 5 which is equal to Rs 4,50,000. However, the income from plying of vehicles
as per books is Rs 3,20,000, which is lower than the presumptive income of Rs 4,50,000
calculated as per section 44AE(1). Hence, the assessee can adopt the income as per books i.e.
Rs 3,20,000, provided he maintains books of account as per section 44AA and gets his accounts
audited and furnishes an audit report as required under section 44AB.

It is to be further noted that in both the above cases, had presumptive income provisions been
opted, all deductions under sections 30 to 38, including depreciation would have been deemed
to have been given full effect to and no further deduction under those sections would be
allowable.

If the assessee opted for income to be assessed on presumptive basis, his total income would
be as under:

Particulars Rs
Income from retail trade under section 44AD [Rs 13,57,000 @ 8% plus Rs 8,41,340

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1,22,13,000 @6%]
Income from plying of light goods vehicles under section 44AE [Rs 7,500 x 12 x 5] 4,50,000
12,91,340
Less: Set off of brought forward depreciation – not possible as it is deemed that Nil
it has been allowed and set off
Total income 12,91,340
Tax thereon 1,99,902
Add : Health and Education cess @4% 7,996
Total tax liability 2,07,898
Total tax liability (rounded off) 2,07,900
Question 5

Mr. Aditya furnishes the following details for the year ended 31-03-2022:

Particulars Amount (Rs)

Loss from speculative business A 25,000
Income from speculative business B 5,000
Loss from specified business covered under section 35AD 20,000
Income from salary (computed) 3,00,000
Loss from let out house property 2,50,000
Income from trading business 45,000
Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid) 75,000
Long-term capital loss on sale of listed shares in recognized stock exchange 1,02,000
(STT paid at the time of acquisition and sale of shares)

Following are the brought forward losses:

(1) Losses from owning and maintaining of race horses pertaining to A.Y. 2020-21Rs 2,000.

(2) Brought forward loss from trading business Rs 5,000 relating to A.Y.2017-18.

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Compute the total income of Mr. Aditya and show the items eligible for carry forward,
assuming that he does not opt for the provisions of section 115BAC.

Answer

Computation of total income of Mr. Aditya for the A.Y.2022-23

Particulars Rs Rs
Salaries
Income from Salary 3,00,000
Less: Loss from house property set-off against salary income as 2,00,000 1,00,000
per section 71(3A)
Loss from house property to the extent not set off i.e.
Rs 50,000 (Rs 2,50,000 – Rs 2,00,000) to be carried forward to A.Y.
2023-24
Profits and gains of business or profession
Income from trading business 45,000
Less: Brought forward loss from trading business of A.Y. 2017-18 5,000 40,000
can be set off against current year income from trading business
as per section 72(1), since the eight year time limit as specified
under section 72(3), within which set-off is permitted, has
not expired.
Income from speculative business B 5,000
Less: Loss of Rs 25,000 from speculative business A set-off as per 5,000
section 73(1) to the extent of Rs 5,000
Balance loss of Rs 20,000 from speculative business A to be Nil
carried forward to A.Y.2023-24 as per section 73(2)
Loss of Rs 20,000 from specified business covered under section
35AD to be carried forward for set-off against income from
specified business as per section 73A.

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Capital Gains
Long term capital gain on sale of urban land 2,00,000
Less: Long term capital loss on sale of shares (STT not paid) set-off 75,000
as per section 74(1)]
Less: Long-term capital loss on sale of listed shares on which STT 1,02,000 23,000
is paid can also be set-off as per section 74(1), since long-term
capital arising on sale of such shares is taxable under section 112A
Total Income 1,63,000

Items eligible for carried forward to A.Y.2023-24

Particulars Rs
Loss from House property 50,000
As per section 71(3A), Loss from house property can be set -off against any other
head of income to the extent of Rs 2,00,000 only.
As per section 71B, balance loss not set-off can be carried forward to the next year
for set -off against income from house property of that year. It can be carried
forward for a maximum of eight assessment years i.e., upto A.Y.2030-31, in this
case.
Loss from speculative business A 20,000
Loss from speculative business can be set -off only against profits from any other
speculation business. As per section 73(2), balance loss not set-off can be carried
forward to the next year for set- off against speculative business income of that
year. Such loss can be carried forward for a maximum of four assessment years i.e.,
upto A.Y.2026-27, in this case, as specified under section 73(4).
Loss from specified business 20,000
Loss from specified business under section 35AD can be set-off only against profits
of any other specified business. If loss cannot be so set-off, the same has to be
carried forward to the subsequent year for set off against income from specified

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business, if any, in that year. As per section 73A(2), such loss can be carried forward
indefinitely for set-off against profits of any specified business.
Loss from the activity of owning and maintaining race horses 2,000
Losses from the activity of owning and maintaining race horses (current year or
brought forward) can be set-off only against income from the activity of owning
and maintaining race horses. If it cannot be so set-off, it has to be carried forward
to the next year for set- off against income from the activity of owning and
maintaining race horses, if any, in that year. It can be carried forward for a
maximum of four assessment years, i.e., upto A.Y.2024-25, in this case, as specified
under section 74A(3).

Question 6

Mr. Garg, a resident individual, furnishes the following particulars of his income and other
details for the previous year 2021-22.

Particulars Rs
(1) Income from Salary (computed) 15,000
(2) Income from business 66,000
(3) Long term capital gain on sale of land 10,800
(4) Loss on maintenance of race horses 15,000
(5) Loss from gambling 9,100

The other details of unabsorbed depreciation and brought forward losses pertaining to
Assessment Year 2021-22 are as follows:

Particulars Rs
Unabsorbed depreciation 11,000
Loss from Speculative business 22,000

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 Short term capital loss 9,800

Compute the Gross total income of Mr. Garg for the Assessment Year 2022-23 and the amount
of loss, if any that can be carried forward or not.

Answer

Computation of Gross Total Income of Mr. Garg for the A.Y. 2022-23

Particulars Rs Rs
(i) Income from salary 15,000
(ii) Profits and gains of business or profession 66,000
Less: Unabsorbed depreciation brought forward from A.Y.2021-22 11,000 55,000
(Unabsorbed depreciation can be set-off against any head of income
other than “salary”)
(iii) Capital gains
Long-term capital gain on sale of land 10,800
Less: Brought forward short-term capital loss
[Short-term capital loss can be set-off against both short-term capital 9,800 1,000
gains and long -term capital gains as per section 74(1)]
Gross Total Income 71,000

Amount of loss to be carried forward to A.Y.2023-24

Particulars Rs
(1) Loss from speculative business [to be carried forward as per section 73] 22,000
[Loss from a speculative business can be set off only against income from
another speculative business. Since there is no income from speculative
business in the current year, the entire loss of Rs 22,000 brought forward
from A.Y.2021-22 has to be carried forward to A.Y. 2023-24 for set-off

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 against speculative business income of that year. It may be noted that
speculative business loss can be carried forward for a maximum of four
years as per section 73(4), i.e., upto A.Y.2025-26]
(2) Loss on maintenance of race horses [to be carried forward as per section 15,000
74A]
[As per section 74A(3), the loss incurred in the activity of owning and
maintaining race horses in any assessment year cannot be set-off against
income from any other source other than the activity of owning and
maintaining race horses. Such loss can be carried forward for a maximum
of four assessment years i.e., upto A.Y.2026-27]
(3) Loss from gambling can neither be set-off nor be carried forward.

Question 7

The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating to the
year ended 31.3.2022:

Particulars Rs
Income from salaries (computed) 2,20,000
Loss from house property 1,90,000
Loss from cloth business 2,40,000
Income from speculation business 30,000
Loss from specified business covered by section 35AD 20,000
Long-term capital gains from sale of urban land 2,50,000
Loss from card games 32,000
Income from betting (Gross) 45,000
Life Insurance Premium paid (10% of the capital sum assured) 45,000

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Compute the total income and show the items eligible for carry forward , assuming that he
does not opt for the provisions of section 115BAC.

Answer

Computation of total income of Mr. Srivatsan for the A.Y.2022-23

Particulars Rs Rs
Salaries
Income from salaries 2,20,000
Less: Loss from house property 1,90,000 30,000
Profits and gains of business or profession
Income from speculation business 30,000
Less: Loss from cloth business of Rs 2,40,000 set off to the 30,000 Nil
extent of Rs 30,000
Capital gains
Long-term capital gains from sale of urban land 2,50,000
Less: Set-off of balance loss of Rs 2,10,000 from cloth business 2,10,000 40,000
Income from other sources
Income from betting 45,000
Gross Total Income 1,15,000
Less: Deduction under section 80C (life insurance premium paid) 30,000
[See Note (iv) below]
Total income 85,000

Losses to be carried forward:

Particulars Rs
(1) Loss from cloth business (Rs 2,40,000 – Rs 30,000 – Rs 2,10,000) Nil
(2) Loss from specified business covered by section 35AD 20,000

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Notes:

(i) Loss from specified business covered by section 35AD can be set-off only against profits and
gains of any other specified business. Therefore, such loss cannot be set off against any
other income. The unabsorbed loss has to be carried forward for set-off against profits and
gains of any specified business in the following year.
(ii) Business loss cannot be set off against salary income. However, the balance business loss of
Rs 2,10,000 (Rs 2,40,000 – Rs 30,000 set-off against income from speculation business) can
be set-off against long-term capital gains of Rs 2,50,000 from sale of urban land.
Consequently, the taxable long–term capital gains would be Rs 40,000.
(iii) Loss from card games can neither be set off against any other income, nor can be carried
forward.
(iv) For providing deduction under Chapter VI-A, gross total income has to be reduced by the
amount of long -term capital gains and casual income. Therefore, the deduction under
section 80C in respect of life insurance premium of Rs 45,000 paid has to be restricted to Rs
30,000 [i.e., Gross Total Income of Rs 1,15,000 – Rs 40,000 (LTCG) – Rs 45,000 (Casual
income)].
(v) Income from betting is chargeable at a flat rate of 30% under section 115BB and no
expenditure or allowance can be allowed as deduction from such income, nor can any loss
be set-off against such income.

Question 8

Mr. Rajat submits the following information for the financial year ending 31st March, 2022. He
desires that you should:

(a) Compute the total income and

(b) Ascertain the amount of losses that can be carried forward.

Particulars Rs

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(i) He has two houses:
(a) House No. I – Income after all statutory deductions 72,000
(b) House No. II – Current year loss (30,000)
(ii) He has three proprietary businesses:
(a) Textile Business:
(i) Discontinued from 31st October, 2021 – Current year loss 40,000
(ii) Brought forward business loss of A.Y.2017-18 95,000
(b) Chemical Business:
(i) Discontinued from 1st March, 2019 – hence no profit/loss Nil
(ii) Bad debts allowed in earlier years recovered during this year 35,000
(iii) Brought forward business loss of A.Y. 2018-19 50,000
(c) Leather Business: Profit for the current year 1,00,000
(d) Share of profit in a firm in which he is partner since 2008 16,550
(iii) (a) Short-term capital gain 60,000
(b) Long-term capital loss 35,000
(iv) Contribution to LIC towards premium 10,000

Answer

Computation of total income of Mr. Rajat for the A.Y. 2022-23

Particulars Rs Rs
1. Income from house property
House No.1 72,000
House No.2 (-) 30,000 42,000
2. Profits and gains of business or profession
Profit from leather business 1,00,000
Bad debts recovered taxable under section 41(4) 35,000
1,35,000

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Less: Current year loss of textile business (-) 40,000
95,000
Less: Brought forward business loss of textile business for A.Y.2017-18 95,000 Nil
set off against the business income of current year
3. Capital Gains
Short-term capital gain 60,000
Gross Total Income 1,02,000
Less: Deduction under Chapter VI-A
Under section 80C – LIC premium paid 10,000
Total Income 92,000

Statement of losses to be carried forward to A.Y. 2023-24

Particulars Rs
Brought forward chemical business loss of A.Y. 2018-19 to be carried forward u/s 50,000
72
Long term capital loss of A.Y. 2022-23 to be carried forward u/s 74 35,000

Notes:

(1) Share of profit from firm of Rs 16,550 is exempt under section 10(2A).

(2) Long-term capital loss cannot be set-off against short-term capital gains. Therefore, it has to
be carried forward to the next year to be set-off against long-term capital gains of that year.

Question 9

Ms. Geeta, a resident individual, provides the following details of her income / losses for the
year ended 31.3.2022:

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(i) Salary received as a partner from a partnership firm Rs 7,50,000. The same was allowed to
the firm.

(ii) Loss on sale of shares listed in BSE Rs 3,00,000. Shares were held for 15 months and STT paid
on sale and acquisition.

(iii) Long-term capital gain on sale of land Rs 5,00,000.

(iv) Rs 51,000 received in cash from friends in party.

(v) Rs 55,000, received towards dividend on listed equity shares of domestic companies.

(vi) Brought forward business loss of assessment year 2020-21 Rs 12,50,000.

Compute gross total income of Ms. Geeta for the Assessment Year 2022-23 and ascertain the
amount of loss that can be carried forward.

Answer

Computation of Gross Total Income of Ms. Geeta for the Assessment Year 2022-23

Particulars Rs
Profits and gains of business and profession
Salary received as a partner from a partnership firm is taxable under the head 7,50,000
“Profits and gains of business and profession”
Less: B/f business loss of A.Y. 2020-21 Rs 12,50,000 to be set-off to the extent 7,50,000
of Rs 7,50,000
Nil
(Balance b/f business loss of Rs 5,00,000 can be carried forward to the next
year)
Capital Gains
Long term capital gain on sale of land5,00,000
Less: Long-term capital loss on shares on STT paid (See Note 2 below) 3,00,000 2,00,000
Income from other sources

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Cash gift received from friends - since the value of cash gift exceeds Rs 50,000,
the entire sum is taxable 51,000
Dividend received from a domestic company is fully taxable in the hands of 1,06,000
shareholders 55,000
Gross Total Income 3,06,000

Notes:

1. Balance brought forward business loss of assessment year 2020-21 of Rs 5,00,000 has to be
carried forward to the next year.

2. Long-term capital loss on sale of shares on which STT is paid at the time of acquisition and
sale can be set -off against long-term capital gain on sale of land since long-term capital gain on
sale of shares (STT paid) is taxable under section 112A . Therefore, it can be set-off against long-
term capital gain on sale of land as per section 70(3).

Question 10

Mr. P, a resident individual, furnishes the following particulars of his income and other details
for the previous year 2021-22:

Sl. No. Particulars Rs

(i) Income from salary (computed) 18,000
(ii) Net annual value of house property 70,000
(iii) Income from business 80,000
(iv) Income from speculative business 12,000
(v) Long term capital gain on sale of land 15,800
(vi) Loss on maintenance of race horse 9,000
(vii) Loss on gambling 8,000

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Depreciation allowable under the Income-tax Act, 1961, comes to Rs 8,000, for which no
treatment is given above.

The other details of unabsorbed depreciation and brought forward losses (pertaining to A.Y.
2021-22) are:

Sl. No. Particulars Rs

(i) Unabsorbed depreciation 9,000
(ii) Loss from speculative business 16,000
(iii) Short term capital loss 7,800

Compute the gross total income of Mr. P for the Assessment year 2022-23, and the amount of
loss that can or cannot be carried forward.

Answer

Computation of Gross Total Income of Mr. P for the A.Y. 2022-23

Particulars Rs Rs
(i) Income from salary 18,000
(ii) Income from House Property
Net Annual Value 70,000
Less: Deduction under section 24 (30% of Rs 70,000) 21,000 49,000
(iii) Income from business and profession
(a) Income from business 80,000
Less : Current year depreciation 8,000
72,000
Less : Unabsorbed depreciation 9,000 63,000
(b) Income from speculative business 12,000
Less : B/f loss of Rs 16,000 from speculative business s/o to the extent 12,000 Nil
of Rs 12,000

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(Balance loss of Rs 4,000 (i.e. Rs 16,000 – Rs 12,000) can be carried
forward to the next year)
(iv) Income from capital gain
Long-term capital gain on sale of land 15,800
Less: Brought forward short-term capital loss 7,800 8,000
Gross total income 1,38,000

Amount of loss to be carried forward to the next year

Particulars Rs
Loss from speculative business (to be carried forward as per section 73) 4,000
Loss on maintenance of race horses (to be carried forward as per section 74A) 9,000

Notes:

(i) Loss on gambling can neither be set-off nor be carried forward.

(ii) As per section 74A(3), the loss incurred on maintenance of race horses cannot be set-off
against income from any other source other than the activity of owning and maintaining
race horses. Such loss can be carried forward for a maximum period of 4 assessment years.
(iii) Brought forward speculative business loss can be set off only against income from
speculative business of the current year and the balance loss can be carried forward to A.Y.
2023-24. It may be noted that speculative business loss can be carried forward for a
maximum of four years as per section 73(4).

CHAPTER 7

DEDUCTIONS FROM GROSS TOTAL INCOME

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Question 1

Examine the following statements with regard to the provisions of the Income –tax Act, 1961:

(i) During the financial year 2021-22, Mr. Amit paid interest on loan availed by him for his son's
higher education. His son is already employed in a firm. Mr. Amit will get the deduction
under section 80E.
(ii) Subscription to notified bonds of NABARD would qualify for deduction under section 80C.
(iii) In order to be eligible to claim deduction under section 80C,
investment/contribution/subscription etc. in eligible or approved modes, should be made
from out of income chargeable to tax.
(iv) Where an individual repays a sum of Rs 30,000 towards principal and Rs 14,000 as interest
in respect of loan taken from a bank for pursuing eligible higher studies, the deduction
allowable under section 80E is Rs 44,000.
(v) Mrs. Sheela, widow of Mr. Satish (who was an employee of M/s. XYZ Ltd.), received Rs 7
lakhs on 1.5.2021, being amount standing to the credit of Mr. Satish in his NPS Account, in
respect of which deduction has been allowed under section 80CCD to Mr. Satish in the
earlier previous years. Such amount received by her as a nominee on closure of the account
is deemed to be her income for A.Y.2022-23.
(vi) Mr. Vishal, a Central Government employee, contributed Rs 50,000 towards Tier II account
of NPS. The same would be eligible for deduction under section 80CCD.

Answer

(i) The statement is correct. The deduction under section 80E available to an individual in
respect of interest on loan taken for his higher education or for the higher education of his
relative. For this purpose, relative means, inter alia, spouse and children of the individual.
Therefore, Mr. Amit will get the deduction under section 80E in respect of interest on loan
availed by him for his son’s higher education. It is immaterial that his son is already
employed in a firm. This would not affect Mr. Amit’s eligibility for deduction under section
80E.

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(ii) The statement is correct. Under section 80C(2) subscription to such bonds issued by
NABARD (as the Central Government may notify in the Official Gazette) would qualify for
deduction under section 80C.
(iii) The statement is not correct. There is no stipulation under section 80C that the investment,
subscription, etc. should be made from out of income chargeable to tax.
(iv) The statement is not correct. Deduction under section 80E is in respect of interest paid on
education loan. Hence, the deduction will be limited to Rs 14,000.
(v) The statement is not correct. The proviso to section 80CCD(3) provides that the amount
received by the nominee, on closure of NPS account on the death of the assessee, shall not
be deemed to be the income of the nominee. Hence, amount received by Mrs. Sheela
would not be deemed to be her income for A.Y. 2022-23.
(vi) The statement is not correct. Contribution to Tier II account of NPS would qualify for
deduction under section 80C and not section 80CCD.

Question 2

Examine the allowability of the following:

(i) Rajan has to pay to a hospital for treatment Rs 62,000 and spent nothing for life insurance
or for maintenance of dependent disabled.
(ii) Raja, a resident Indian, has spent nothing for treatment in the previous year and deposited
Rs 25,000 with LIC for maintenance of dependant disabled.
(iii) Rajan has incurred Rs 20,000 for treatment and Rs 25,000 was deposited with LIC for
maintenance of dependant disabled.
(iv) Payment of Rs 50,000 by cheque to an electoral trust by an Indian company.

Answer

(i) The deduction of Rs 75,000 under section 80DD is allowed, irrespective of the amount of
expenditure incurred or paid by the assessee. If the expenditure is incurred in respect of a
dependant with severe disability, the deduction allowable is Rs 1,25,000.

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(ii) The assessee Rajan has deposited Rs 25,000 for maintenance of dependent disabled. The
assessee is, however, eligible to claim Rs 75,000 since the deduction of Rs 75,000 is allowed,
irrespective of the amount deposited with LIC. In the case of dependant with severe
disability, the deduction allowable is Rs 1,25,000.
(iii) Section 80DD allows a deduction of Rs 75,000 irrespective of the actual amount spent on
maintenance of a dependent disabled and/or actual amount deposited with LIC. Therefore,
the deduction will be Rs 75,000 even though the total amount incurred/deposited is only Rs
45,000. If the dependant is a person with severe disability the quantum of deduction is
Rs 1,25,000.
(iv) Amount paid by an Indian Company to an electoral trust is eligible for deduction under
section 80GGB from gross total income, since such payment is made otherwise than by way
of cash.

Question 3

For the Assessment year 2022-23, the Gross Total Income of Mfr. Chaturvedi, a resident in
India, was Rs 8,18,240 which includes long-term capital gain of Rs 2,45,000 taxable under
section 112 and Short-term capital gain of Rs 58,000. The Gross Total Income also includes
interest income of Rs 12,000 from savings bank deposits with banks and Rs 40,000 interest on
fixed deposits with banks. Mr. Chaturvedi has invested in PPF Rs 1,20,000 and also paid a
medical insurance premium Rs 51,000. Mr. Chaturvedi also contributed Rs 50,000 to Public
Charitable Trust eligible for deduction under section 80G by way of an account payee cheque.
Compute the total income and tax thereon of Mr. Chaturvedi, who is 70 years old as
on 31.3.2022. Ignore the provisions of section 115BAC.

Answer

Computation of total income and tax payable by Mr. Chaturvedi for the A.Y. 2022-23

Particulars Rs Rs

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Gross total income including long term capital gain 8,18,240
Less: Long term capital gain 2,45,000
5,73,240
Less: Deductions under Chapter VI-A:
Under section 80C in respect of PPF deposit 1,20,000
Under section 80D (it is assumed that premium of Rs 51,000 is 50,000
paid by otherwise than by cash. The deduction would be
restricted to Rs 50,000, since Mr. Chaturvedi is a senior citizen)
Under section 80G (See Notes 1 & 2 below) 17,662
Under section 80TTB (See Note 3 below) 50,000 2,37,662
Total income (excluding long term capital gains) 3,35,578
Total income (including long term capital gains) 5,80,578
Total income (rounded off) 5,80,580
Tax on total income (including long-term capital gains of Rs
2,45,000)
LTCG Rs 2,45,000 x 20% 49,000
Balance total income Rs 3,35,580 (See Note 4 below) 1,779
50,779
Add: Health and Education cess @4% 2,031
Total tax liability 52,810

Notes:

1. Computation of deduction under section 80G:

Particulars Rs
Gross total income (excluding long term capital gains) 5,73,240
Less : Deduction under section 80C, 80D & 80TTB 2,20,000
3,53,240

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10% of the above 35,324
Contribution made 50,000
Lower of the two eligible for deduction under section 80G 35,324
Deduction under section 80G – 50% of Rs 35,324 17,662

2. Deduction under section 80G is allowed only if amount is paid by any mode other than cash,
in case of amount exceeding Rs 2,000. Therefore, the contribution made to public charitable
trust is eligible for deduction since it is made by way of an account payee cheque.

3. Deduction of upto Rs 50,000 under section 80TTB is allowed to a senior citizen if gross total
income includes interest income on bank deposits, both fixed deposits and savings account.

4. Mr. Chaturvedi, being a senior citizen is eligible for a higher basic exemption of Rs 3,00,000.

Question 4

Mr. Rajmohan whose gross total income was Rs 6,40,000 for the financial year 2021-22,
furnishes you the following information:

(i) Stamp duty paid on acquisition of residential house (self-occupied) – Rs 50,000.

(ii) Five year post office time deposit –Rs 20,000.

(iii) Donation to a recognized charitable trust Rs 25,000 which is eligible for deduction under
section 80G at the applicable rate.

(iv) Interest on loan taken for higher education of spouse paid during the year – Rs 10,000.

Compute the total income of Mr. Rajmohan for the Assessment year 2022-23, assuming that he
has not opted for section 115BAC.

Answer

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Computation of total income of Mr. Rajmohan for the A.Y.2022-23

Particulars Rs Rs
Gross Total Income 6,40,000
Less: Deduction under Chapter VI-A
Under section 80C
Stamp duty paid on acquisition of residential house 50,000
Five year time deposit with Post Office 20,000
70,000
Under section 80E
Interest on loan taken for higher education of spouse, being 10,000
a relative.
Under section 80G (See Note below)
Donation to recognized charitable trust (50% of Rs 25,000) 12,500 92,500
Total Income 5,47,500

Note: In case of deduction under section 80G in respect of donation to a charitable trust, the
net qualifying amount has to be restricted to 10% of adjusted total income, i.e., gross total
income less deductions under Chapter VI-A except 80G. The adjusted total income is, therefore,
Rs 5,60,000 (i.e. 6,40,000 – Rs 80,000), 10% of which is Rs 56,000, which is higher than the
actual donation of Rs 25,000. Therefore, the deduction under section 80G would be Rs 12,500,
being 50% of the actual donation of Rs 25,000.

Question 5

Compute the eligible deduction under Chapter VI -A for the A.Y. 2022-23 of Ms. Roma, aged 40
years, who has a gross total income of Rs 15,00,000 for the A.Y. 2022-23 and provides the
following information about her investments/payments during the P.Y. 2021-22:

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Sl. No. Particulars Amount
(Rs)
1. Life Insurance premium paid (Policy taken on 31-03-2012 and sum 35,000
assured is Rs 4,40,000)
2. Public Provident Fund contribution 1,50,000
3. Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000
4. Payment to L.I.C. Pension Fund 1,40,000
5. Mediclaim Policy taken for self, wife and dependent children, 30,000
premium paid by cheque
6. Medical Insurance premium paid by cheque for parents (Senior 52,000
Citizens)

Answer

Computation of eligible deduction under Chapter VI-A of Ms. Roma for A.Y. 2022-23

Particulars Rs Rs
Deduction under section 80C
Life insurance premium paid Rs 35,000 35,000
(allowed in full since the same is within the limit of 20% of the sum
assured, the policy being taken before 1.4.2012)
Public Provident Fund 1,50,000
Repayment of housing loan to Bhartiya Mahila Bank, Bangalore 20,000
2,05,000
Restricted to a maximum of Rs 1,50,000 1,50,000
Deduction under section 80CCC for payment towards LIC pension 1,40,000
fund
2,90,000
As per section 80CCE, aggregate deduction under, inter alia, section 1,50,000

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80C and 80CCC, is restricted to
Deduction under section 80D
Payment of medical insurance premium of Rs 30,000 towards medical 25,000
policy taken for self, wife and dependent children restricted to
Medical insurance premium paid Rs 52,000 for parents, being senior 50,000 75,000
citizens, restricted to
Eligible deduction under Chapter VI-A 2,25,000

CHAPTER 8

COMPUTATION OF TOTAL INCOME AND TAX PAYABLE

Question 1

Miss Charlie, an American national, got married to Mr. Radhey of India in USA on 2.03.2021 and
came to India for the first time on 16.03. 2021. She left for USA on 19.9.2021. She returned to
India again on 27.03.2022. While in India, she had purchased a show room in Mumbai on
30.04.2021, which was leased out to a company on a rent of Rs 25,000 p.m. from 1.05.2021.
She had taken loan from a bank for purchase of this show room on which bank had charged
interest of Rs 97,500 upto 31.03.2022. She had received the following cash gifts from her
relatives and friends during 1.4.2021 to 31.3.2022:

- From parents of husband Rs 51,000

- From married sister of husband Rs 11,000
- From two very close friends of her husband (Rs 1,51,000 and Rs 21,000) Rs 1,72,000
(a) Determine her residential status and compute the total income chargeable to tax along with
the amount of tax liability on such income for the Assessment Year 2022-23.

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(b) Would her residential status undergo any change, assuming that she is a person of Indian
origin and her total income from Indian sources is Rs 18,00,000 and she is not liable to tax in
USA?

Answer

I. Under section 6(1), an individual is said to be resident in India in any previous year, if he/she
satisfies any one of the following conditions:
(i) He/she has been in India during the previous year for a total period of 182 days or
more, or
(ii) He/she has been in India during the 4 years immediately preceding the previous year
for a total period of 365 days or more and has been in India for at least 60 days in the
previous year.

If an individual satisfies any one of the conditions mentioned above, he/she is a resident. If
both the above conditions are not satisfied, the individual is a non-resident.

Therefore, the residential status of Miss Charlie, an American National, for A.Y.2022-23 has to
be determined on the basis of her stay in India during the previous year relevant to A.Y. 2022-
23 i.e., P.Y.2021-22 and in the preceding four assessment years.

Her stay in India during the previous year 2021-22 and in the preceding four years are as under:

P.Y. 2021-22

01.04.2021 to 19.09.2021 - 172 days

27.03.2022 to 31.03.2022 - 5 days

Total 177 days

Four preceding previous years

P.Y. 2020-21 [1.4.2020 to 31.3.2021] - 16 days

P.Y.2019-20 [1.4.2019 to 31.3.2020] – Nil

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P.Y.2018-19 [1.4.2018 to 31.3.2019] – Nil

P.Y.2017-18 [1.4.2017 to 31.3.2018] – Nil

Total 16 days

The total stay of the assessee during the previous year in India was less than 182 days and
during the four years preceding this year was for 16 days. Therefore, due to non-fulfillment of
any of the two conditions for a resident, she would be treated as non-resident for the
Assessment Year 2022-23.

Computation of total income of Miss Charlie for the A.Y. 2022-23

Particulars Rs Rs
Income from house property
Show room located in Mumbai remained on rent from 01.05.2021 to 2,75,000
31.03.2022 @ Rs 25,000/- p.m. Gross Annual Value [Rs 25,000 x 11]
(See Note 1 below)
Less: Municipal taxes Nil
Net Annual Value (NAV) 2,75,000
Less: Deduction under section 24
30% of NAV 82,500
Interest on loan97,500 1,80,000 95,000
Income from other sources
Cash gifts received from non-relatives is chargeable to tax as per
section 56(2)(x), if the aggregate value of such gifts exceeds Rs
50,000.
- Rs 50,000 received from parents of husband would be exempt, since Nil
parents of husband fall within the definition of ‘relative’ and gifts
from a relative are not chargeable to tax.
- Rs 11,000 received from married sister of husband is exempt, since Nil

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sister-in-law falls within the definition of relative and gifts from
a relative are not chargeable to tax.
- Gift received from two friends of husband Rs 1,51,000 and Rs 21,000 1,72,000 1,72,000
aggregating to Rs 1,72,000 is taxable under section 56(2)(x)
since the aggregate of Rs 1,72,000 exceeds Rs 50,000. (See Note 2
below)
Total income 2,67,000
Computation of tax liability by Miss Charlie for the A.Y. 2022-23

Particulars Rs
Tax on total income of Rs 2,67,000 850
Add: Health and Education cess@4% 34
Total tax liability 884
Total tax liability (rounded off) 880

Notes:

1. Actual rent received has been taken as the gross annual value in the absence of other
information (i.e. Municipal value, fair rental value and standard rent) in the question.

2. If the aggregate value of taxable gifts received from non-relatives exceed Rs 50,000 during
the year, the entire amount received (i.e. the aggregate value of taxable gifts received) is
taxable. Therefore, the entire amount of Rs 1,72,000 is taxable under section 56(2)(x).

3. Since Miss Charlie is a non-resident for the A.Y. 2022-23, rebate under section 87A would not
be available to her, even though her total income does not exceed Rs 5 lacs.

4. The tax liability of Miss Charlie would be the same even if she opts to pay tax as per section
115BAC, since she would be eligible for deduction under section 24(b), for interest on housing
loan in respect of let out property under regular provisions as well as under section 115BAC of
the Income-tax Act, 1961.

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II. Residential status of Miss Charlie in case she is a person of Indian origin and her total
income from Indian sources exceeds Rs 18,00,000

If she is a person of Indian origin and her total income from Indian sources exceeds Rs
15,00,000 (Rs 18,00,000, in her case), the condition of stay in India for a period exceeding 120
days during the previous year and 365 days during the four immediately preceding previous
years would be applicable for being treated as a resident . Since her stay in India exceeds 120
days in the P.Y.2021-22 but the period of her stay in India during the four immediately
preceding previous years is less than 365 days (only 16 days), her residential status as per
section 6(1) would continue to be same i.e., non-resident in India.

Further, since she is not a citizen of India, the provisions of section 6(1A) deeming an individual
to be a citizen of India would not get attracted in her case, even though she is a person of
Indian origin and her total income from Indian sources exceeds Rs 15,00,000 and she is not
liable to pay tax in USA.

Therefore, her residential status would be non-resident in India for t he previous year 2021-22.

Question 2

Dr. Niranjana, a resident individual, aged 60 years is running a clinic in Surat. Her
Income and Expenditure Account for the year ending March 31st, 2022 is as under:

Expenditure Rs Income Rs
To Medicine consumed 35,38,400 By Consultation and medical 58,85,850
charges
To Staff salary 13,80,000 By Income-tax refund (principal 5,450
Rs 5,000, interest Rs 450)
To Clinic consumables 1,10,000 By Dividend from units of 10,500
UTI (Gross)
To Rent paid 90,000 By Winning from game show on 35,000

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 T.V. (net of TDS of Rs 15,000)
To Administrative expenses 2,55,000 By Rent 27,000
To Amount paid to scientific 1,50,000
research association approved
u/s 35
To Net profit 4,40,400
59,63,800 59,63,800
(i) Rent paid includes Rs 30,000 paid by cheque towards rent for her residential house in
Surat.
(ii) Clinic equipments are:
1.4.2021 Opening W.D.V. – Rs 5,00,000
7.12.2021 Acquired (cost) by cheque – Rs 2,00,000
(iii) Rent received relates to residential house property situated at Surat. Gross Annual Value
Rs 27,000. The municipal tax of Rs 2,000, paid in December, 2021, has been included in
"administrative expenses".
(iv) She received salary of Rs 7,500 p.m. from "Full Cure Hospital" which has not been included
in the "consultation and medical charges".
(v) Dr. Niranjana availed a loan of Rs 5,50,000 from a bank for higher education of her
daughter. She repaid principal of Rs 1,00,000, and interest thereon Rs 55,000 during the
previous year 2021-22.
(vi) She paid Rs 1,00,000 as tuition fee (not in the nature of development fees/donation) to the
university for full time education of her daughter.
(vii) An amount of Rs 28,000 has also been paid by cheque on 27th March, 2022 for her medical
insurance premium.

From the above, compute the total income of Dr. Smt. Niranjana for the A.Y. 2022-23 under the
regular provisions of the Income-tax Act, 1961, assuming that she has not opted for to pay tax
under section 115BAC.

Answer

GMTESTSERIES.COM®
 Computation of total income of Dr. Niranjana for A.Y. 2022-23

Particulars Rs Rs Rs
I Income from Salary
Basic Salary (Rs 7,500 x 12) 90,000
Less: Standard deduction u/s 16(ia) 50,000 40,000
II Income from house property
Gross Annual Value (GAV) 27,000
Less : Municipal taxes paid 2,000
Net Annual Value (NAV) 25,000
Less: Deduction u/s 24 @ 30% of Rs 25,000 7,500 17,500
III Income from profession
Net profit as per Income and Expenditure 4,40,400
account
Less: Items of income to be treated separately
(i) Rent received (taxable under the head 27,000
“Income from house property”)
(ii) Dividend from units of UTI (taxable under 10,500
the head “Income from other sources”)
(iii) Winning from game show on T.V.(net of 35,000
TDS) – taxable under the head “Income from
other sources”
(iv) Income tax refund 5,450 77,950
3,62,450
Less: Allowable expenditure
Depreciation on clinic equipments
on Rs 5,00,000@15% 75,000
on Rs 2,00,[email protected]% 15,000
(On equipments acquired during the year in

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 December 2021, she is entitled to depreciation
@50% of normal depreciation, since the same
are put to use for less than 180 days during
the year)
100% deduction is allowable in respect of the - 90,000
amount paid to scientific research association
allowable, since whole of the amount is already
debited to Income & Expenditure A/c, no
further adjustment is required.
2,72,450
Add: Items of expenditure not allowable while
computing business income
(i) Rent for her residential accommodation 30,000
included in Income and Expenditure A/c
(ii) Municipal tax paid relating to residential 2,000 32,000 3,04,450
house at Surat included in administrative
expenses
IV Income from other sources
(a) Interest on income-tax refund 450
(b) Dividend from UTI (taxable in the hands of 10,500
unit holders)
(c) Winnings from TV game show (Rs 35,000 + 50,000 60,950
Rs 15,000)
Gross Total Income 4,22,900
Less: Deductions under Chapter VI-A:
(a) Section 80C - Tuition fee paid to university 1,00,000
for full time education of her daughter
(b) Section 80D - Medical insurance premium 28,000
(fully allowed since she is a senior citizen)

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 (c) Section 80E - Interest on loan taken for 55,000 1,83,000
higher education is deductible
Total income 2,39,900

Notes:

(i) The principal amount received towards income-tax refund will be excluded from
computation of total income. Interest received will be taxed under the head “Income from
other sources”.
(ii) Winnings from game show on T.V. should be grossed up for the chargeability under the
head “Income from other sources” (Rs 35,000 + Rs 15,000). Thereafter, while computing tax
liability, TDS of Rs 15,000 should be deducted to arrive at the tax payable. Winnings from
game show are subject to tax @30% as per section 115BB.
(iii) Dr. Niranjana would not be eligible for deduction u/s 80GG, as she owns a house in Surat, a
place where she is residing as well as carrying on her profession.

Question 3

Ms. Purvi, aged 55 years, is a Chartered Accountant in practice. She maintains her accounts on
cash basis. Her Income and Expenditure account for the year ended March 31, 2022 reads as
follows:

Expenditure (Rs) Income (Rs) (Rs)

Salary to staff 15,50,000 Fees earned:
Stipend to articled 1,37,000 Audit 27,88,000
Assistants
Incentive to articled 13,000 Taxation services 15,40,300
Assistants
Office rent 12,24,000 Consultancy 12,70,000 55,98,300

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Printing and stationery 12,22,000 Dividend on shares of X Ltd., 10,524
an Indian company (Gross)
Meeting, seminar and 31,600 Income from UTI (Gross) 7,600
conference
Purchase of car (for 80,000 Honorarium received from 15,800
official use) various institutions for
valuation of answer papers
Repair, maintenance 4,000 Rent received from residential 85,600
and petrol of car flat let out
Travelling expenses 5,25,000
Municipal tax paid in 3,000
respect of house
property
Net Profit 9,28,224
57,17,824 57,17,824

Other Information:

(i) Allowable rate of depreciation on motor car is 15%.

(ii) Value of benefits received from clients during the course of profession is Rs 10,500.
(iii) Incentives to articled assistants represent amount paid to two articled assistants for
passing IPCC Examination at first attempt.
(iv) Repairs and maintenance of car include Rs 2,000 for the period from 1-10-2021 to 30-09-
2022.
(v) Salary includes Rs 30,000 to a computer specialist in cash for assisting Ms. Purvi in one
professional assignment.
(vi) The travelling expenses include expenditure incurred on foreign tour of Rs 32,000 which
was within the RBI norms.

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(vii) Medical Insurance Premium on the health of dependent brother and major son dependent
on her amounts to Rs 5,000 and Rs 10,000, respectively, paid in cash.
(viii) She invested an amount of Rs 10,000 in National Saving Certificate.
(ix) She has paid Rs 70,000 towards advance tax during the P.Y. 2021-22.

Compute the total income and tax payable of Ms. Purvi for the assessment year 2022-23.

Answer

Computation of total income and tax payable of Ms. Purvi for the A.Y. 2022-23 under the
regular provisions of the Act

Particulars Rs Rs
Income from house property (See Working Note 1) 57,820
Profit and gains of business or profession (See Working Note 2) 9,20,200
Income from other sources (See Working Note 3) 33,924
Gross Total Income 10,11,944
Less: Deductions under Chapter VI-A (See Working Note 4) 10,000
Total Income 10,01,944
Total Income (rounded off) 10,01,940
Tax on total income
Upto Rs 2,50,000 Nil
Rs 2,50,001 – Rs 5,00,000 @5% 12,500
Rs 5,00,001 – Rs 10,00,000 @20% 1,00,000
Rs 10,00,001 – Rs 10,01,940 @ 30% 582 1,13,082
Add: Health and Education cess @ 4% 4,523
Total tax liability 1,17,605
Less: Advance tax paid 70,000
Less: Tax deducted at source on dividend income from an 1,052
Indian Company u/s 194
Tax deducted at source on income from UTI u/s 194K 760 1,812

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Tax Payable 45,793
Tax Payable (rounded off) 45,790

Computation of tax payable in accordance with the provisions of section 115BAC

Particulars Rs Rs
Gross Total Income 10,11,944
*Income under the “ Income from house property” “Profits and
gains from business or profession” and “Income from other
sources” would remain the same even if Ms. Purvi opts for
special provisions under section 115BAC, since deduction
claimed by her under these heads is allowable even under
section 115BAC]
Less: Deductions under Chapter VI -A [No deduction is allowable Nil
under Chapter VI-A, by virtue of section 115BAC(2)]

Total Income 10,11,944

Total Income (rounded off) 10,11,940
Tax on total income
Upto Rs 2,50,000 Nil
Rs 2,50,001 – Rs 5,00,000 @5% 12,500
Rs 5,00,000 - Rs 7,50,000 @10% 25,000
Rs 7,50,000 - Rs 10,00,000 @15% 37,500
Rs 10,00,000 – Rs 10,11,940 @ 20% 2,388 77,388
Add: Health and Education cess @ 4% 3,096
Total tax liability 80,484
Less: Advance tax paid 70,000
Less: Tax deducted at source on dividend income from Indian 1,052
Companies u/s 194

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Tax deducted at source on income from UTI u/s 194K 760 1,812
Tax Payable 8,672
Tax Payable (rounded off) 8,670

Since tax payable as per the provisions of section 115BAC is lower than the tax payable under
the regular provisions of the Income-tax Act, 1961, it would be beneficial for Ms. Purvi to opt
for section 115BAC. She has to exercise this option on or before the due date of furnishing the
return of income i.e., 31st October 2022, in her case since she is liable to get her books of
account audited. Further, since she is having income from business or profession during the
previous year 2021-22, if she opts for section 115BAC for this previous year, the said provisions
would apply for subsequent assessment years as well.

Working Notes:

(1) Income from House Property

Particulars Rs Rs
Gross Annual Value under section 23(1) 85,600
Less: Municipal taxes paid 3,000
Net Annual Value (NAV) 82,600
Less: Deduction u/s 24@30% of NAV 24,780 57,820

Note - Rent received has been taken as the Gross Annual Value in the absence of other
information relating to Municipal Value, Fair Rent and Standard Rent.

(2) Income under the head “Profits & Gains of Business or Profession”

Particulars Rs Rs
Net profit as per Income and Expenditure account 9,28,224
Add: Expenses debited but not allowable

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(i) Salary paid to computer specialist in cash disallowed under 30,000
section 40A(3), since such cash payment exceeds Rs 10,000
(ii) Amount paid for purchase of car is not allowable under section 80,000
37(1) since it is a capital expenditure
(ii) Municipal Taxes paid in respect of residential flat let out 3,000 1,13,000
10,41,224
Add: Value of benefit received from clients during the course of 10,500
profession [taxable as business income under section 28(iv)]
10,51,724
Less: Income credited but not taxable under this head:
(i) Dividend on shares of X Ltd., an Indian company (taxable under 10,524
the head “Income from other sources")
(ii) Income from UTI (taxable under the head “Income from other 7,600
sources")
(iii) Honorarium for valuation of answer papers 15,800
(iv) Rent received from letting out of residential flat 85,600 1,19,524
9,32,200
Less: Depreciation on motor car @15% (See Note (i) below) 12,000
9,20,200

Notes:

(i) It has been assumed that the motor car was put to use for more than 180 days during the
previous year and hence, full depreciation @ 15% has been provided for under section
32(1)(ii).
Note: Alternatively, the question can be solved by assuming that motor car has been put
to use for less than 180 days and accordingly, only 50% of depreciation would be
allowable as per the second proviso below section 32(1)(ii).

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(ii) Incentive to articled assistants for passing IPCC examination in their first attempt is
deductible under section 37(1).
(iii) Repairs and maintenance paid in advance for the period 1.4. 2022 to 30.9.2022 i.e. for 6
months amounting to Rs 1,000 is allowable since Ms. Purvi is following the cash system of
accounting.
(iv) Rs 32,000 expended on foreign tour is allowable as deduction assuming that it was
incurred in connection with her professional work. Since it has already been debited to
income and expenditure account, no further adjustment is required.

(3) Income from other sources

Particulars Rs
Dividend on shares of X Ltd., an Indian company (taxable in the hands of 10,524
shareholders)
Income from UTI (taxable in the hands of unit holders) 7,600
Honorarium for valuation of answer papers 15,800
33,924

(4) Deduction under Chapter VI-A:

Particulars Rs
Deduction under section 80C (Investment in NSC) 10,000
Deduction under section 80D (See Notes (i) & (ii) below) Nil
Total deduction under Chapter VI-A 10,000

Notes:

(i) Premium paid to insure the health of brother is not eligible for deduction under section
80D, even though he is a dependent, since brother is not included in the definition of
“family” under section 80D.

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(ii) Premium paid to insure the health of major son is not eligible for deduction, even though he
is a dependent, since payment is made in cash.

Question 4

Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year ended
31-3-2022 revealed the following information:

(1) The net profit was Rs 11,20,000.

(2) The following incomes were credited in the profit and loss account:
(a) Income from UTI Rs 22,000 (Gross)
(b) Interest on debentures Rs 17,500 (Gross)
(c) Winnings from horse races Rs 15,000 (Gross)
(3) It was found that some stocks were omitted to be included in both the opening and closing
stocks, the value of which were: Opening stock Rs 8,000. Closing stock Rs 12,000.
(4) Rs 1,00,000 was debited in the profit and loss account, being contribution to a
University approved and notified under section 35(1)(ii).
(5) Salary includes Rs 20,000 paid to his brother which is unreasonable to the extent of Rs
2,500.
(6) Advertisement expenses include 15 gift packets of dry fruits costing Rs 1,000
per packet presented to important customers.
(7) Total expenses on car was Rs 78,000. The car was used both for business and personal
purposes. ¾th is for business purposes.
(8) Miscellaneous expenses included Rs 30,000 paid to A &Co., a goods transport operator in
cash on 31 -1-2022 for distribution of the company’s product to the warehouses.
(9) Depreciation debited in the books was Rs 55,000. Depreciation allowed as per Income-tax
Rules, 1962 was Rs 50,000.
(10) Drawings Rs 10,000.
(11) Investment in NSC Rs 15,000.

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Compute the total income of Mr. Y for the assessment year 2022-23, assuming that he has not
opted to pay tax under section 115BAC.

Answer

Computation of total income of Mr. Y for the A.Y. 2022-23

Particulars Rs
Profits and gains of business or profession (See Working Note 1 below) 11,21,500
Income from other sources (See Working Note 2 below) 54,500
Gross Total Income 11,76,000
Less: Deduction under section 80C (Investment in NSC) 15,000
Total Income 11,61,000

Working Notes:

1. Computation of profits and gains of business or profession

Particulars Rs Rs
Net profit as per profit and loss account 11,20,000
Add: Expenses debited to profit and loss account but not allowable as
deduction
Salary paid to brother disallowed to the extent considered 2,500
unreasonable [Section 40A(2)]
Motor car expenses attributable to personal use not allowable (Rs 19,500
78,000 × ¼)
Depreciation debited in the books of account 55,000
Drawings (not allowable since it is personal in nature) [See Note (iii)] 10,000
Investment in NSC [See Note (iii)] 15,000 1,02,000
12,22,000
Add: Under statement of closing stock 12,000

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 12,34,000
Less: Under statement of opening stock 8,000
Less: Contribution to a University approved and notified under -
section 35(1)(ii) is eligible for 100% deduction. Since whole of the
actual contribution (100%) has been debited to profit and loss
account, no further adjustment is required.
12,26,000
Less: Incomes credited to profit and loss account but not taxable as
business income
Income from UTI [taxable under the head “Income from other 22,000
sources”+
Interest on debentures (taxable under the head “Income from other 17,500
sources”)
Winnings from horse races (taxable under the head “Income from 15,000 54,500
other sources”)
11,71,500
Less: Depreciation allowable under the Income-tax Rules, 1962 50,000
11,21,500

Notes:
(i) Advertisement expenses of revenue nature, namely, gift of dry fruits to important
customers, is incurred wholly and exclusively for business purposes. Hence, the same is
allowable as deduction under section 37.

(ii) Disallowance under section 40A(3) is not attracted in respect of cash payment exceeding Rs
10,000 to A & Co., a goods transport operator, since, in case of payment made for plying, hiring
or leasing goods carriages, an increased limit of Rs 35,000 is applicable (i.e. payment of
upto Rs 35,000 can be made in cash without attracting disallowance under section 40A(3))

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(iii) Since drawings and investment in NSC have been given effect to in the profit and loss
account, the same have to be added back to arrive at the business income.

(iv) In point no. 9 of the question, it has been given that depreciation as per Income-tax Rules,
1962 is Rs 50,000. It has been assumed that, in the said figure of Rs 50,000, only the
proportional depreciation (i.e., 75% for business purposes) has been included in respect of
motor car.

2. Computation of “Income from Other Sources”

Particulars Rs
Dividend from UTI 22,000
Interest on debentures 17,500
Winnings from races 15,000
54,500

Question 5

Balamurugan furnishes the following information for the year ended 31-03-2022:

Particulars Rs
Income from textile business (1,35,000)
Income from house property (15,000)
Lottery winning (Gross) 5,00,000
Speculation business income 1,00,000
Income by way of salary (Computed) 60,000
Long term capital gain u/s 112 70,000

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Compute his total income, tax liability and advance tax obligations. Assume he does not opt for
section 115BAC.

Answer

Computation of total income of Balamurugan for the year ended 31.03.2022

Particulars Rs Rs
Salaries 60,000
Less: Loss from house property (Can be set off from long term (15,000)
capital gain also)
Net Salary (after set off of loss from house property) 45,000
Profits and gains of business or profession
Speculation business income 1,00,000
Less: Business loss of Rs 1,35,000 set-off to the extent of Rs (1,00,000)
1,00,000
Nil
Balance current year business loss of Rs 35,000 to be set-off against
long-term capital gain
Capital Gains
Long term capital gain 70,000
Less: Balance current year business loss set-off (35,000)
Long term capital gain after set off of business loss 35,000
Income from other sources
Lottery winnings (Gross) 5,00,000
Total Income 5,80,000

Computation of tax liability for A.Y.2022-23

Particulars Rs

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On total income of Rs 45,000 (excluding lottery winning and LTCG) Nil
On LTCG of Rs 35,000 (unexhausted basic exemption limit can be adjusted Nil
against LTCG taxable u/s 112)
On lottery winnings of Rs 5,00,000 @ 30% 1,50,000
1,50,000
Add: Health and Education cess @ 4% 6,000
Total tax liability 1,56,000

The assessee need not pay advance tax since the total income (excluding lottery income) liable
to tax is below the basic exemption limit. Further, in respect of lottery income, tax would have
been deducted at source @ 30% under section 194B. Since the remaining tax liability of Rs
6,000 (Rs 1,56,000 – Rs 1,50,000) is less than Rs 10,000, advance tax liability is not attracted.

Notes:

(1) The basic exemption limit of Rs 2,50,000 has to be first exhausted against salary income of
Rs 45,000. The unexhausted basic exemption limit of Rs 2,05,000 can be adjusted against
long-term capital gains of Rs 35,000 as per section 112, but not against lottery winnings
which are taxable at a flat rate of 30% under section 115BB.
(2) The first proviso to section 234C(1) provides that since it is not possible for the assessee to
estimate his income from lotteries, the entire amount of tax payable (after considering TDS)
on such income should be paid in the remaining instalments of advance tax which are due.
Where no such instalment is due, the entire tax should be paid by 31st March, 2022. The
first proviso to section 234C(1) would be attracted only in case of non-deduction or short-
deduction of tax at source under section 194B. In this case, it has been assumed that tax
deductible at source under section 194B has been fully deducted from lottery income. Since
the remaining tax liability of Rs 6,000 (Rs 1,56,000 – Rs 1,50,000) is less than Rs 10,000,
advance tax liability is not attracted.

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Question 6

Mr. Rajiv, aged 50 years, a resident individual and practicing Chartered Accountant, furnishes
you the receipts and payments account for the financial year 2021-22. Receipts and Payments
Account

Receipts Rs Payments Rs
Opening balance (1.4.2021) 12,000 Staff salary, bonus and stipend to 21,50,000
articled clerks
Cash on hand and at Bank Other administrative expenses 11,48,000
Fee from professional services 59,38,000 Office rent 30,000
(Gross)
Rent 50,000 Housing loan repaid to SBI 1,88,000
(includes interest of Rs 88,000)
Motor car loan from Canara 2,50,000 Life insurance premium (10% of 24,000
Bank (@ 9% p.a.) sum assured)
Motor car (acquired in Jan. 2022 4,25,000
by A/c payee cheque)
Medical insurance premium (for 18,000
self and wife)(paid by A/c Payee
cheque)
Books bought on 1.07.2021 20,000
(annual publications by A/c
payee cheque)
Computer acquired on 1.11.2021
by A/c payee cheque (for
professional use)
Domestic drawings 2,72,000

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 Public provident fund 20,000
subscription
Motor car maintenance 10,000
Closing balance (31.3.2022) Cash 19,15,000
on hand and at Bank
62,50,000 62,50,000

Following further information is given to you:

(1) He occupies 50% of the building for own residence and let out the balance for residential
use at a monthly rent of Rs 5,000. The building was constructed during the year 1997-98,
when the housing loan was taken.
(2) Motor car was put to use both for official and personal purpose. One-fifth of the motor car
use is for personal purpose. No car loan interest was paid during the year.
(3) The written down value of assets as on 1-4-2021 are given below:

Furniture & Fittings Rs 60,000

Plant & Machinery Rs 80,000

(Air-conditioners, Photocopiers, etc.)

Computers Rs 50,000

Note: Mr. Rajiv follows regularly the cash system of accounting.

Compute the total income of Mr. Rajiv for the assessment year 2022-23 assuming that he has
not opted to pay tax under section 115BAC.

Answer

Computation of total income of Mr. Rajiv for the assessment year 2022-23

Particulars Rs Rs Rs

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Income from house property
Self-occupied
Annual value Nil
Less: Deduction under section 24(b)
Interest on housing loan 50% of Rs 88,000 = 44,000 but 30,000 (30,000)
limited to Loss from self occupied property
Let out property
Annual value (Rent receivable has been taken as the 60,000
annual value in the absence of other information)
Less: Deductions u/s 24
30% of Net Annual Value 18,000
Interest on housing loan (50% of Rs 88,000) 44,000 62,000 (2,000)
Loss from house property (32,000)
Profits and gains of business or profession
Fees from professional services 59,38,000
Less: Expenses allowable as deduction
Staff salary, bonus and stipend 21,50,000
Other administrative expenses 11,48,000
Office rent 30,000
Motor car maintenance (10,000 x 4/5) 8,000
Car loan interest – not allowable (since the same has not Nil 33,36,000
been paid and the assessee follows cash system of
accounting)
26,02,000
Motor car Rs 4,25,000 x 7.5% x 4/5 25,500
Books being annual publications@40% 8,000
Furniture and fittings@10% of Rs 60,000 6,000
Plant and machinery@15% of Rs 80,000 12,000

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Computer@40% of Rs 50,000 20,000
Computer (New) Rs 30,000 @ 40% x 50% 6,000 77,500 25,24,500
Gross Total income 24,92,500
Less: Deductions under Chapter VI-A
Deduction under section 80C
Housing loan principal repayment 1,00,000
PPF subscription 20,000
Life insurance premium 24,000
Total amount of Rs 1,44,000 is allowed as deduction 1,44,000
since it is within the limit of Rs 1,50,000
Deduction under section 80D
Medical insurance premium paid Rs 18,000 18,000 1,62,000
Total income 23,30,500

Question 7

From the following details, compute the total income and tax liability of Siddhant, aged 31
years, of Delhi both as per the regular provisions of the Income-tax Act, 1961 and as per section
115BAC for the A.Y.2022-23. Advise Mr. Siddhant whether he would opt for section 115BAC:

Particulars Rs
Salary including dearness allowance 3,35,000
Bonus 11,000
Salary of servant provided by the employer 12,000
Rent paid by Siddhant for his accommodation 49,600
Bills paid by the employer for gas, electricity and water provided free of cost 11,000
at the above flat

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Siddhant purchased a flat in a co-operative housing society in Delhi for Rs 4,75,000 in April,
2015, which was financed by a loan from Life Insurance Corporation of India of Rs
1,60,000@15% interest, his own savings of Rs 65,000 and a deposit from a nationalized bank
for Rs 2,50,000 to whom this flat was given on lease for ten years. The rent payable by the bank
was Rs 3,500 per month. The following particulars are relevant:

(a) Municipal taxes paid by Mr. Siddhant Rs 4,300 (per annum)

(b) House Insurance Rs 860
(c) He earned Rs 2,700 in share speculation business and lost Rs 4,200 in cotton speculation
business.
(d) In the year 2016-17, he had gifted Rs 30,000 to his wife and Rs 20,000 to his son who was
aged 11. The gifted amounts were advanced to Mr. Rajesh, who was paying interest@19%
per annum.
(e) Siddhant received a gift of Rs 30,000 each from four friends.
(f) He contributed Rs 50,000 to Public Provident Fund.

Answer

Computation of total income and tax liability of Siddhant for the A.Y. 2022-23

Particulars Rs Rs
Salary Income
Salary including dearness allowance 3,35,000
Bonus 11,000
Value of perquisites:
(i) Salary of servant 12,000
(ii) Free gas, electricity and water 11,000 23,000
3,69,000
Less: Standard deduction under section 16(ia) 50,000
3,19,000
Income from house property

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Gross Annual Value (GAV) (Rent receivable is taken as GAV in the 42,000
absence of other information) (Rs 3,500 × 12)
Less: Municipal taxes paid 4,300
Net Annual Value (NAV) 37,700
Less: Deductions under section 24
(i) 30% of NAV Rs 11,310
(ii) Interest on loan from LIC @15% of Rs 1,60,000 [See Note 2] Rs 35,310 2,390
24,000
Income from speculative business
Income from share speculation business 2,700
Less: Loss of Rs 4,200 from cotton speculation business set-off to the 2,700 Nil
extent of Rs 2,700
Balance loss of Rs 1,500 from cotton speculation business has to be
carried forward to the next year as it cannot be set off against any
other head of income.
Income from Other Sources
(i) Income on account of interest earned from advancing money 3,800
gifted to his minor son is includible in the hands of Siddhant as per
section 64(1A)
Less: Exempt under section 10(32) 1,500
2,300
(ii) Interest income earned from advancing money gifted to wife has 5,700
to be clubbed with the income of the assessee as per section 64(1)
(iii) Gift received from four friends (taxable under section 56(2)(x) as 1,20,000 1,28,000
the aggregate amount received during the year exceeds Rs 50,000)
Gross Total Income 4,49,390
Less: Deduction under section 80C
Contribution to Public Provident Fund 50,000
Total Income 3,99,390

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Particulars Rs
Tax on total income of Rs 3,99,390 [Rs 3,99,390 – Rs 2,50,000 = Rs 1,49,390@5%] 7,470
Less: Rebate u/s 87A, since total income does not exceed Rs 5,00,000 7,470
Tax liability Nil

Computation of total income and tax liability of Siddhant in accordance with the provisions of
section 115BAC for the A.Y. 2022-23

Particulars Rs Rs
Salary Income
Salary including dearness allowance 3,35,000
Bonus 11,000
Value of perquisites:
(i) Salary of servant 12,000
(ii) Free gas, electricity and water 11,000 23,000
3,69,000
Less: Standard deduction under section 16(ia) [not allowable as per Nil
section 115BAC(2)]
3,69,000
Income from house property
Gross Annual Value (GAV) (Rent receivable is taken as GAV in the 42,000
absence of other information) (Rs 3,500 × 12)
Less: Municipal taxes paid 4,300
Net Annual Value (NAV) 37,700
Less: Deductions under section 24
(i) 30% of NAV Rs 11,310
(ii) Interest on loan from LIC @15% of Rs 1,60,000 [See Note 2] Rs 35,310 2,390

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24,000
Income from speculative business
Income from share speculation business 2,700
Less: Loss of Rs 4,200 from cotton speculation business set-off to the 2,700 Nil
extent of Rs 2,700
Balance loss of Rs 1,500 from cotton speculation business has to be
carried forward to the next year as it cannot be set off against any
other head of income.
Income from Other Sources
(i) Income on account of interest earned from advancing money 3,800
gifted to his minor son is includible in the hands of Siddhant as per
section 64(1A) [Exemption under section 10(32) would not be
available]
(ii) Interest income earned from advancing money gifted to wife has 5,700
to be clubbed with the income of the assessee as per section 64(1)
(iii) Gift received from four friends (taxable under section 56(2)(x) as 1,20,000 1,29,500
the aggregate amount received during the year exceeds Rs 50,000)
Gross Total Income 5,00,890
Deduction under section 80C [No deduction under Chapter VI-A Nil
would be allowed as per section 115BAC(2)]
Total Income 5,00,890

Particulars Rs
Tax on total income [5% of Rs 2,50,000 + 10% of Rs 890] 12,589
Add: Health and education cess @4% 504
Tax liability 13,093
Tax liability (rounded off) 13,090

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Since Mr. Siddhant is not liable to pay any tax as per the regular provisions of the Income-tax
Act, 1961, it would be beneficial for him to not opt for section 115BAC for A.Y.2022-23.

Notes:

(1) It is assumed that the entire loan of Rs 1,60,000 is outstanding as on 31.3.2022;

(2) Since Siddhant’s own flat in a co -operative housing society, which he has rented out to a
nationalized bank, is also in Delhi, he is not eligible for deduction under section 80GG in
respect of rent paid by him for his accommodation in Delhi, since one of t he conditions to
be satisfied for claiming deduction under section 80GG is that the assessee should not own
any residential accommodation in the same place.
(3) Alternatively, computation total income as per the special provisions of section 115BAC
can also be presented as follows:

Particulars Rs Rs
Total Income as per regular provisions of the Income-tax Act 3,99,390
Add:(i) Standard deduction u/s 16(ia), as it would not be 50,000
allowable under the special provisions
(ii) Exemption under section 10(32), as it would not be available 1,500
under the special provisions
(iii) Deduction under section 80C, as no deduction under Chapter 50,000 1,01,500
VI-A would be allowed under the special provisions
Total Income 5,00,890

Question 8

Ramdin, aged 33 years, working as Manager (Sales) with Frozen Foods Ltd., provides the
following information for the year ended 31.03.2022:

− Basic Salary Rs 15,000 p.m.

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− DA (50% of it is meant for retirement benefits) Rs 12,000 p.m.

− Commission as a percentage of turnover of the Company 0.5 %

− Turnover of the Company Rs 50 lacs

− Bonus Rs 50,000

− Gratuity Rs 30,000

− Own Contribution to R.P.F. Rs 30,000

− Employer’s contribution to R.P.F. 20% of basic salary

− Interest credited in the R.P.F. account @ 15% p.a. Rs 15,000

− Gold Ring worth Rs 10,000 was given by employer on his 25th wedding anniversary.

− Music System purchased on 01.04.2021 by the company for Rs 85,000 and was given to him
for personal use.

− Two old light goods vehicles owned by him were leased to a transport company against the
fixed charges of Rs 6,500 p.m. Books of account are not maintained.

− Received interest of Rs 5,860 on bank FDRs on 24.4.2021 and interest of Rs 6,786 (Net) from
the debentures of Indian Companies on 5.5.2021.

− Made payment by cheques of Rs 15,370 towards premium on Life Insurance policies and Rs
22,500 for Mediclaim Insurance policy for self and spouse.

− Invested in NSC Rs 30,000 and in FDR of SBI for 5 years Rs 50,000.

− Donations of Rs 11,000 to an institution approved u/s 80G and of Rs 5,100 to Prime Minister’s
National Relief Fund were given during the year by way of cheque.

Compute the total income and tax payable thereon for the A.Y. 2022-23. Assume Ramdin does
not opt for section 115BAC.

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Answer

Computation of Total Income for the A.Y.2022-23

Particulars Rs Rs
Income from Salaries
Basic Salary (Rs 15,000 x 12) 1,80,000
Dearness Allowance (Rs 12,000 x12) 1,44,000
Commission on Turnover (0.5% of Rs 50 lacs) 25,000
Bonus 50,000
Gratuity (See Note 1) 30,000
Employer’s contribution to recognized provident fund
Actual contribution [20% of Rs 1,80,000] 36,000
Less: Exempt (See Note 2) 33,240 2,760
Interest credited in recognized provident fund account @15% p.a. 15,000
Less: Exempt upto 9.5% p.a. 9,500 5,500
Gift of gold ring worth Rs 10,000 on 25th wedding anniversary by 10,000
employer (See Note 3)
Perquisite value of music system given for personal use (being 10% 8,500
of actual cost) i.e. 10% of Rs 85,000
4,55,760
Less: Standard deduction under section 16(ia) 50,000
4,05,760
Profits and Gains of Business or Profession
Lease of 2 light goods vehicles on contract basis against fixed 1,80,000
charges of Rs 6,500 p.m. In this case, presumptive tax provisions of
section 44AE will apply i.e. Rs 7,500 p.m. for each of the two light
goods vehicle (Rs 7,500 x 2 x 12). He cannot claim lower profits and
gains since he has not maintained books of account.
Income from Other Sources

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Interest on bank FDRs 5,860
Interest on debentures (Rs 6786 x 100/90) 7,540 13,400
Gross total Income 5,99,160
Less: Deductions under Chapter VI-A
Section 80C
Premium on life insurance policy 15,370
Investment in NSC 30,000
FDR of SBI for 5 years 50,000
Employee’s contribution to recognized provident fund 30,000 1,25,370
Section 80D – Mediclaim Insurance 22,500
Section 80G (See Note 4) 10,600
Total Income 4,40,690
Tax on total income
Income-tax [5% of Rs 1,90,690 (i.e., Rs 4,40,690 – Rs 2,50,000) 9,535
Add: Rebate u/s 87A, since total income does not exceed Rs 9,535
5,00,000
Tax liability Nil
Less: Tax deducted at source (Rs 7,540 – Rs 6,786) 754
Net tax refundable 754
Tax refundable (rounded off) 750

Notes:

1. Gratuity received during service is fully taxable.

2. Employer’s contribution in the recognized provident fund is exempt up to 12% of the salary
i.e. 12% of (Basic Salary + DA for retirement benefits + Commission based on turnover)
=12% of (Rs 1,80,000+ (50% of Rs 1,44,000)+ Rs 25,000)
=12% of 2,77,000 = Rs 33,240

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3. An alternate view possible is that only the sum in excess of Rs 5,000 is taxable in view of the
language of Circular No.15/2001 dated 12.12.2001 that such gifts upto Rs 5,000 in the
aggregate per annum would be exempt, beyond which it would be taxed as a perquisite. As
per this view, the value of perquisite would be Rs 5,000. In such a case the Income from
Salaries would be Rs 4,00,760.
4. Deduction under section 80G is computed as under:

Particulars Rs
Donation to PM National Relief Fund (100%) 5,100
Donation to institution approved under section 80G (50% of Rs 11,000) 5,500
(amount contributed Rs 11,000 or 10% of Adjusted Total Income i.e. Rs 45,129,
whichever is lower)
Total deduction 10,600

Adjusted Total Income = Gross Total Income − Deductions under section 80C and 80D=Rs
5,99,160 −Rs 1,47,870 =Rs 4,51,290.

Question 9

From the following particulars furnished by Mr. X for the year ended 31.3.2022, you are
requested to compute his total income and tax payable for the assessment year 2022-23,
assuming that he does not opt for paying tax under section 115BAC.

(a) Mr. X retired on 31.12.2021 at the age of 58, after putting in 26 years and 1 month of
service, from a private company at Mumbai.
(b) He was paid a salary of Rs 25,000 p.m. and house rent allowance of Rs 6,000 p.m. He paid
rent of Rs 6,500 p.m. during his tenure of service.

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(c) On retirement, he was paid a gratuity of Rs 3,50,000. He was covered by the payment of
Gratuity Act. Mr. X had not received any other gratuity at any point of time earlier, other
than this gratuity.
(d) He had accumulated leave of 15 days per annum during the period of his service; this was
encashed by Mr. X at the time of his retirement. A sum of Rs 3,15,000 was received by him
in this regard. His average salary for last 10 months may be taken as Rs 24,500. Employer
allowed 30 days leave per annum.
(e) After retirement, he ventured into textile business and incurred a loss of Rs 80,000 for the
period upto 31.3.2022.
(f) Mr. X has deposited Rs 1,00,000 in public provident fund.

Answer

Computation of total income of Mr. X for A.Y.2022-23

Particulars Rs Rs
Income from Salaries
Basic salary (Rs 25,000 x 9 months) 2,25,000
House rent allowance:
Actual amount received (Rs 6,000 x 9 months) 54,000
Less : Exemption under section 10(13A)(Note 1) 36,000 18,000
Gratuity:
Actual amount received 3,50,000
Less: Exemption under section 10(10)(ii) (Note 2) 3,50,000 -
Leave encashment:
Actual amount received 3,15,000
Less : Exemption under section 10(10AA) (Note 3) 2,45,000 70,000
Gross Salary 3,13,000
Less: Standard deduction under section 16(ia) 50,000
2,63,000

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Profits and gains of business or profession
Business loss of Rs 80,000 to be carried forward as the same Nil
cannot be set off against salary income
Gross Total income 2,63,000
Less : Deduction under section 80C
Deposit in Public Provident Fund 1,00,000
Total income 1,63,000
Tax on total income (Nil, since it is lower than the basic Nil
exemption limit of Rs 2,50,000)
Notes:

(1) As per section 10(13A), house rent allowance will be exempt to the extent of least of the
following three amounts:

Rs
(i) HRA actually received (Rs 6,000 x 9) 54,000
(ii) Rent paid in excess of 10% of salary (Rs 6,500 –Rs 2,500) x 9 months 36,000
(iii) 50% of salary 1,12,500

(2) Gratuity of Rs 3,50,000 is exempt under section 10(10)(ii), being the minimum of the
following amounts:

Rs
(i) Actual amount received 3,50,000
(ii) Half month salary for each year of completed service [(Rs 25,000 x 15/26) x 3,75,000
26 years]
(iii) Statutory limit 20,00,000

(3) Leave encashment is exempt upto the least of the following:

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 Rs
(i) Actual amount received 3,15,000
(ii) 10 months average salary (Rs 24,500 x 10) 2,45,000
(iii) Cash equivalent of unavailed leave calculated on the basis of maximum 30 3,18,500
days for every year of actual service rendered to the employer from whose
service he retired (See Note 4 below)
(iv) Statutory limit 3,00,000

(4) Since the leave entitlement of Mr. X as per his employer’s rules is 30 days credit for each
year of service and he had accumulated 15 days per annum during the period of his service, he
would have availed/taken the balance 15 days leave every year.

Leave entitlement of Mr. X on the basis of 30 days for = 30 days/year x 26= 780 days
every year of actual service rendered by him to the
employer
Less: Leave taken /availed by Mr. X during the period of = 15 days/year x 26= 390 days
his service
Earned leave to the credit of Mr. X at the time of his 390 days
retirement
Cash equivalent of earned leave to the credit of Mr. X at = 390 × Rs 24,500 /30= Rs 3,18,500
the time of his retirement

Question 10

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Rosy and Mary are sisters, born and brought up at Mumbai. Rosy got married in 1982 and
settled at Canada since 1982. Mary got married and settled in Mumbai. Both of them are below
60 years. The following are the details of their income for the previous year ended 31.3.2022:

S. No. Particulars Rosy Rs Mary Rs

1. Pension received from State Government -- 60,000
2. Pension received from Canadian Government 20,000 --
3. Long-term capital gain on sale of land at 1,00,000 1,00,000
Mumbai
4. Short-term capital gain on sale of shares of Indian 20,000 2,50,000
listed companies in respect of which STT was paid
5. LIC premium paid -- 10,000
6. Premium paid to Canadian Life Insurance Corporation 40,000 --
at Canada
7. Mediclaim policy premium paid by A/c Payee Cheque -- 25,000
8. Deposit in PPF -- 20,000
9. Rent received in respect of house property at Mumbai 60,000 30,000

Compute the taxable income and tax liability of Mrs. Rosy and Mrs. Mary for the Assessment
Year 2022-23 and tax thereon. Ignore the provisions of section 115BAC.

Answer

Computation of taxable income of Mrs. Rosy and Mrs. Mary for the A.Y.2022-23

S. No. Particulars Mrs. Rosy Mrs. Mary

(Non- (ROR)
resident)
Rs Rs
(I) Salaries

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 Pension received from State Govt. Rs 60,000
Less: Standard deduction u/s 16(ia) Rs 50,000 - 10,000
Pension received from Canadian Government is not - -
taxable in the case of a non-resident since it is earned
and received outside India
- 10,000
(II) Income from house property
Rent received from house property at Mumbai 60,000 30,000
(assumed to be the annual value in the absence of other
information i.e. municipal value, fair rent and standard
rent)
Less: Deduction under section 24(a)@30% 18,000 9,000
42,000 21,000
(III) Capital gains
Long-term capital gain on sale of land at Mumbai 1,00,000 1,00,000
Short term capital gain on sale of shares of Indian listed 20,000 2,50,000
companies in respect of which STT was paid
1,20,00 3,50,000
(A) Gross Total Income [(I)+(II)+(III)] 1,62,000 3,81,000
Less: Deductions under Chapter VIA
1. Deduction under section 80C
1. LIC Premium paid - 10,000
2. Premium paid to Canadian Life Insurance Corporation 40,000 -
3. Deposit in PPF - 20,000
40,000 30,000
2. Deduction under section 80D – Mediclaim premium paid 25,000
40,000 55,000
(B) Total deduction under Chapter VI-A is restricted to 40,000 31,000

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 income other than capital gains taxable under sections
111A & 112
(C) Total income (A-B) 1,22,000 3,50,000
Tax liability of Mrs. Rosy for A.Y.2022-23
Tax on long -term capital gains @20% of Rs 1,00,000 20,000
Tax on short -term capital gains @15% of Rs 20,000 3,000
Tax on balance income of Rs 2,000 Nil
23,000
Tax liability of Mrs. Mary for A.Y.2022-23
Tax on STCG @15% of Rs 1,00,000 [i.e. Rs 2,50,000 less 15,000
Rs 1,50,000, being the unexhausted basic exemption
limit as per proviso to section 111A] [See Notes 3 & 4
below]
Less: Rebate under section 87A would be lower of Rs 12,500
12,500 or tax liability, since total income does not
exceed Rs 5,00,000
2,500
Add: Health and Education cess@4% 920 100
Total tax liability 23,920 2,600

Notes:

(1) Long-term capital gains on sale of land is chargeable to tax@20% as per section 112.
(2) Short-term capital gains on transfer of equity shares in respect of which securities
transaction tax is paid is subject to tax@15% as per section 111A.
(3) In case of resident individuals, if the basic exemption limit is not fully exhausted against
other income, then, the long-term capital gains u/s 112/short-term capital gains u/s 111A
will be reduced by the unexhausted basic exemption limit and only the balance will be taxed
at 20%/15%, respectively. However, this benefit is not available to non-residents. Therefore,

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 while Mrs. Mary can adjust unexhausted basic exemption limit against long-term capital
gains taxable under section 112 and short-term capital gains taxable under section 111A,
Mrs. Rosy cannot do so.
(4) Since long-term capital gains is taxable at the rate of 20% and short-term capital gains is
taxable at the rate of 15%, it is more beneficial for Mrs. Mary to first exhaust her basic
exemption limit of Rs 2,50,000 against long-term capital gains of Rs 100,000 and the
balance limit of Rs 1,50,000 (i.e., Rs 2,50,000 – Rs 1,50,000) against short-term capital gains.
(5) Rebate under section 87A would not be available to Mrs. Rosy even though her total
income does not exceed Rs 5,00,000, since she is non-resident for the A.Y. 2022-23.

Question 11

Mr. X, an individual set up a unit in Special Economic Zone (SEZ) in the financial year 2017-18
for production of washing machines. The unit fulfills all the conditions of section 10AA of the
Income-tax Act, 1961. During the financial year 2020-21, he has also set up a warehousing
facility in a district of Tamil Nadu for storage of agricultural produce. It fulfills all the conditions
of section 35AD. Capital expenditure in respect of warehouse amounted to Rs 75 lakhs
(including cost of land Rs 10 lakhs). The warehouse became operational with effect from 1st
April, 2021 and the expenditure of Rs 75 lakhs was capitalized in the books on that date.
Relevant details for the financial year 2021-22 are as follows:

Particulars Rs
Profit of unit located in SEZ 40,00,000
Export sales of above unit 80,00,000
Domestic sales of above unit 20,00,000
Profit from operation of warehousing facility (before considering deduction 1,05,00,000
under Section 35AD)

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Compute income-tax (including AMT under Section 115JC) liability of Mr. X for Assessment Year
2022-23 both as per regular provisions of the Income-tax Act and as per section 115BAC for
Assessment Year 2022-23. Advise Mr. X whether he should opt for section 115BAC.

Answer

Computation of total income and tax liability of Mr. X for A.Y.2022-23 (under the regular
provisions of the Income-tax Act, 1961)

Particulars Rs Rs
Profits and gains of business or profession
Profit from unit in SEZ 40,00,000
Less: Deduction u/s 10AA [See Note (1) below] 32,00,000
Business income of SEZ unit chargeable to tax 8,00,000
Profit from operation of warehousing facility 1,05,00,000
Less: Deduction u/s 35AD [See Note (2) below 65,00,000
Business income of warehousing facility chargeable to tax 40,00,000
Total Income 48,00,000
Computation of tax liability (under the normal/regular provisions)
Tax on Rs 48,00,000 12,52,500
Add: Health and Education cess@4% 50,100
Total tax liability 13,02,600

Computation of adjusted total income of Mr. X for levy of Alternate Minimum Tax

Particulars Rs Rs
Total Income (computed above as per regular provisions of income 48,00,000
tax)
Add: Deduction under section 10AA 32,00,000
80,00,000

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Add: Deduction under section 35AD 65,00,000
Less: Depreciation under section 32 On building @10% of Rs 65 6,50,000 58,50,000
lakhs1
Adjusted Total Income 1,38,50,000
Alternate Minimum [email protected]% 25,62,250
Add: Surcharge@15% (since adjusted total income > Rs 1 crore) 3,84,338
29,46,588
Add: Health and Education cess@4% 1,17,863
30,64,451
Tax liability u/s 115JC (rounded off) 30,64,450
1 Assuming the capital expenditure of Rs 65 lakhs is incurred entirely on buildings

Since the regular income-tax payable is less than the alternate minimum tax payable, the
adjusted total income shall be deemed to be the total income and tax is leviable @18.5%
thereof plus surcharge@15% and cess@4%. Therefore, tax liability as per section 115JC is Rs
30,64,450.

Computation of total income and tax liability of Mr. X for A.Y.2022-23 (under the provisions
of section 115BAC of the Income-tax Act, 1961)

Particulars Rs Rs
Total Income (as computed above as per regular provisions of 48,00,000
income tax)
Add: Deduction under section 10AA (not allowable) 32,00,000
80,00,000
Add: Deduction under section 35AD
Less: Depreciation under section 32
On building @10% of Rs 65 lakhs (normal depreciation under section 6,50,000 58,50,000
32 is allowable)
Total Income 1,38,50,000

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Computation of tax liability as per section 115BAC
Tax on Rs 1,38,50,000 38,92,500
Add: Surcharge@15% 5,83,875
44,76,375
Add: Health and Education cess@4% 1,79,055
Total tax liability 46,55,430

Notes:

(1) Deductions u/s 10AA and 35AD are not allowable as per section 115BAC(2). However,
normal depreciation u/s 32 is allowable.
(2) Individuals or HUFs exercising option u/s 115BAC are not liable to alternate minimum tax
u/s 115JC.

Since the tax liability of Mr. X under section 115JC is lower than the tax liability as computed u/s
115BAC, it would be beneficial for him not to opt for section 115BAC for A.Y. 2022-23.
Moreover, benefit of alternate minimum tax credit is also available to the extent of tax paid in
excess over regular tax.

AMT Credit to be carried forward under section 115JEE

Rs
Tax liability under section 115JC 30,64,450
Less: Tax liability under the regular provisions of the Income-tax Act, 1961 13,02,600
17,61,850

Notes:

(1) Deduction under section 10AA in respect of Unit in SEZ =

Export turnover of the Unit in SEZ
Profit of the Unit in SEZ × Total turnover of the Unit in SEZ

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 Rs 80,00,000
Rs 40,00,000 X Rs 1,00,00,000 = Rs 32,00,000

(2) Deduction@100% of the capital expenditure is available under section 35AD for A.Y.2022-
23 in respect of specified business of setting up and operating a warehousing facility for
storage of agricultural produce which commences operation on or after 01.04.2009.
Further, the expenditure incurred, wholly and exclusively, for the purposes of such specified
business, shall be allowed as deduction during the previous year in which he commences
operations of his specified business if the expenditure is incurred prior to the
commencement of its operations and the amount is capitalized in the books of account of
the assessee on the date of commencement of its operations.
Deduction under section 35AD would, however, not be available on expenditure incurred
on acquisition of land.
In this case, since the capital expenditure of Rs 65 lakhs (i.e., Rs 75 lakhs – Rs 10 lakhs, being
expenditure on acquisition of land) has been incurred in the F.Y.2020-21 and capitalized in
the books of account on 1.4.2021, being the date when the warehouse became operational,
Rs 65,00,000, being 100% of Rs 65 lakhs would qualify for deduction under section 35AD.

CHAPTER 9

ADVANCE TAX, TAX DEDUCTION AT SOURCE AND

INTRODUCTION TO TAX COLLECTION AT SOURCE

Question 1

Ashwin doing manufacture and wholesale trade furnishes you the following information:

Total turnover for the financial year

Particulars Rs
2020-21 1,05,00,000

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2021-22 95,00,000

Examine whether tax deduction at source provisions are attracted for the below said expenses
incurred during the financial year 2021-22:

Particulars Rs
Interest paid to UCO Bank on 15.8.2021 41,000
Contract payment to Raj (2 contracts of Rs 12,000 each) on 12.12.2021 24,000
Shop rent paid (one payee) on 21.1.2022 2,50,000
Commission paid to Balu on 15.3.2022 7,000

Answer

As the turnover of business carried on by Ashwin for F.Y. 2020-21, has exceeded Rs 1 crore, he
has to comply with the tax deduction provisions during the financial year 2021-22, subject to,
the exemptions provided for under the relevant sections for applicability of TDS provisions.

Interest paid to UCO Bank

TDS under section 194A is not attracted in respect of interest paid to a banking company.

Contract payment of Rs 24,000 to Raj for 2 contracts of Rs 12,000 each

TDS provisions under section 194C would not be attracted if the amount paid to a contractor
does not exceed Rs 30,000 in a single payment or Rs 1,00,000 in the aggregate during the
financial year. Therefore, TDS provisions under section 194C are not attracted in this case.

Shop Rent paid to one payee – Tax has to be deducted@10% under section 194-I as the annual
rental payment exceeds Rs 2,40,000.

Commission paid to Balu – No, tax has to be deducted under section 194 H in this case as the
commission does not exceed Rs 15,000.

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Question 2

Compute the amount of tax deduction at source on the following payments made by M/s. S Ltd.
during the financial year 2021- 22 as per the provisions of the Income-tax Act, 1961.

Sr. No. Date Nature of Payment

(i) 1-10-2021 Payment of Rs 2,00,000 to Mr. R, a transporter who owns 8 goods
carriages throughout the previous year and furnishes a declaration
to this effect along with his PAN.
(ii) 1-11-2021 Payment of fee for technical services of Rs 25,000 and Royalty of Rs
20,000 to Mr. Shyam who is having PAN.
(iii) 30-06-2021 Payment of Rs 25,000 to M/s X Ltd. for repair of building.
(iv) 01-01-2022 Payment of Rs 2,00,000 made to Mr. A for purchase of diaries made
according to specifications of M/s S Ltd. However, no material was
supplied for such diaries to Mr. A by M/s S Ltd or its associates.
(v) 01-01-2022 Payment of Rs 2,30,000 made to Mr. Bharat for compulsory
acquisition of his house as per law of the State Government.
(vi) 01-02-2022 Payment of commission of Rs 14,000 to Mr. Y.

Answer

(i) No tax is required to be deducted at source under section 194C by M/s S Ltd. on payment to
transporter Mr. R, since he satisfies the following conditions:
(1) He owns ten or less goods carriages at any time during the previous year.
(2) He is engaged in the business of plying, hiring or leasing goods carriages;
(3) He has furnished a declaration to this effect along with his PAN.
(ii) As per section 194J, liability to deduct tax is attracted only in case the payment made as
fees for technical services and royalty, individually, exceeds Rs 30,000 during the financial
year. In the given case, since, the individual payments for fee of technical services i.e., Rs

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 25,000 and royalty Rs 20,000 is less than Rs 30,000 each, there is no liability to deduct tax at
source. It is assumed that no other payment towards fees for technical services and royalty
were made during the year to Mr. Shyam.
(iii) Provisions of section 194C are not attracted in this case, since the payment for repair of
building on 30.06.2021 to M/s. X Ltd. is less than the threshold limit of Rs 30,000.
(iv) According to section 194C, the definition of “work” does not include the manufacturing or
supply of product according to the specification by customer in case the material is
purchased from a person other than the customer or associate of such customer.
Therefore, there is no liability to deduct tax at source in respect of payment
of Rs 2,00,000 to Mr. A, since the contract is a contract for ‘sale’.
(v) As per section 194LA, any person responsible for payment to a resident, any sum in the
nature of compensation or consideration on account of compulsory acquisition under any
law, of any immovable property, is responsible for deduction of tax at source if such
payment or the aggregate amount of such payments to the resident during the financial
year exceeds Rs 2,50,000. In the given case, no liability to deduct tax at source is attracted
as the payment made does not exceed Rs 2,50,000.
(vi) As per section 194H, tax is deductible at source if the amount of commission or brokerage
or the aggregate of the amounts of commission or brokerage credited or paid during the
financial year exceeds Rs 15,000. Since the commission payment made to Mr. Y does not
exceed Rs 15,000, the provisions of section 194H are not attracted.

Question 3

Examine the applicability of TDS provisions and TDS amount in the following cases:

(a) Rent paid for hire of machinery by B Ltd. to Mr. Raman Rs 2,60,000 on 27.9.2021.
(b) Fee paid on 1.12.2021 to Dr. Srivatsan by Sundar (HUF) Rs 35,000 for surgery performed on
a member of the family.
(c) ABC and Co. Ltd. paid Rs 19,000 to one of its Directors as sitting fees on 01-01-2022.

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Answer

(a) Since the rent paid for hire of machinery by B. Ltd. to Mr. Raman exceeds Rs 2,40,000, the
provisions of section 194-I for deduction of tax at source are attracted.
The rate applicable for deduction of tax at source under section 194 -I on rent paid for hire
of plant and machinery is 2%, assuming that Mr. Raman had furnished his permanent
account number to B Ltd.
Therefore, the amount of tax to be deducted at source:
= Rs 2,60,000 x 2% = Rs 5,200.
Note: In case Mr. Raman does not furnish his permanent account number to B Ltd., tax shall
be deducted @ 20% on Rs 2,60,000, by virtue of provisions of section 206AA.
(b) As per the provisions of section 194J, a Hindu Undivided Family is required to deduct tax at
source on fees paid for professional services only if the total sales, gross receipts or
turnover form the business or profession exceed Rs 1 crore in case of business or Rs 50
lakhs in case of profession, as the case may be, in the financial year preceding the current
financial year and such payment made for professional services is not exclusively for the
personal purpose of any member of Hindu Undivided Family.
Section 194M, provides for deduction of tax at source by a HUF (which is not required to
deduct tax at source under section 194J) in respect of fees for professional service if such
sum or aggregate of such sum exceeds Rs 50 lakhs during the financial year.
In the given case, the fees for professional service to Dr. Srivatsan is paid on 1.12.2021 for a
personal purpose, therefore, section 194J is not attracted. Section 194M would have been
attracted, if the payment or aggregate of payments exceeded Rs 50 lakhs in the P.Y.2021-
22. However, since the payment does not exceed Rs 50 lakh in this case, there is no liability
to deduct tax at source under section 194M also.
(c) Section 194J provides for deduction of tax at source @ 10% from any sum paid by way of
any remuneration or fees or commission, by whatever name called, to a resident director,
which is not in the nature of salary on which tax is deductible under section 192. The
threshold limit of Rs 30,000 upto which the provisions of tax deduction at source are not

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 attracted in respect of every other payment covered under section 194J is, however, not
applicable in respect of sum paid to a director.
Therefore, tax@10% has to be deducted at source under section 194J in respect of the sum
of Rs 19,000 paid by ABC Ltd. to its director.
Therefore, the amount of tax to be deducted at source:
= Rs 19,000 x 10% = Rs 1,900

Question 4

Examine the applicability of tax deduction at source provisions, the rate and amount of tax
deduction in the following cases for the financial year 2021-22:

(1) Payment of Rs 27,000 made to Jacques Kallis, a South African cricketer, by an Indian
newspaper agency on 02-07-2021 for contribution of articles in relation to the sport of
cricket.
(2) Payment made by a company to Mr. Ram, sub-contractor, Rs 3,00,000 with outstanding
balance of Rs 1,20,000 shown in the books as on 31-03-2022.
(3) Winning from horse race Rs 1,50,000 paid to Mr. Shyam, an Indian resident.
(4) Rs 2,00,000 paid to Mr. A, a resident individual, on 22-02-2022 by the State of Uttar
Pradesh on compulsory acquisition of his urban land.

Answer

(1) Section 194E provides that the person responsible for payment of any amount to a non-
resident sportsman who is not a citizen of India for contribution of articles relating to any
game or sport in India in a newspaper has to deduct tax at source@20%. Further, since
Jacques Kallis, a South African cricketer, is a non-resident, health and education cess@4%
on TDS should also be added.
Therefore, tax to be deducted = Rs 27,000 x 20.80% = Rs 5,616.
(2) Provisions of tax deduction at source under section 194C are attracted in respect of
payment by a company to a sub-contractor. Under section 194C, tax is deductible at the

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 time of credit or payment, whichever is earlier @ 1% in case the payment is made to an
individual.
Since the aggregate amount credited or paid during the year is Rs 4,20,000, tax is deductible
@ 1% on Rs 4,20,000.
Tax to be deducted = Rs 4,20,000 x 1% = Rs 4,200
(3) Under section 194BB, tax is to be deducted at source, if the winnings from horse races
exceed Rs 10,000. The rate of deduction of tax at source is 30%.
Hence, tax to be deducted = Rs 1,50,000 x 30% = Rs 45,000.
(4) As per section 194LA, any person responsible for payment to a resident, any sum in the
nature of compensation or consideration on account of compulsory acquisition under any
law, of any immovable property, is required to deduct tax at source, if such payment or the
aggregate amount of such payments to the resident during the financial year exceeds
Rs 2,50,000.
In the given case, there is no liability to deduct tax at source as the payment made to Mr. A
does not exceed Rs 2,50,000.

Question 5

Briefly discuss the provisions relating to payment of advance tax on income arising from capital
gains and casual income.

Answer

The proviso to section 234C contains the provisions for payment of advance tax in case of
capital gains and casual income.

Advance tax is payable by an assessee on his/its total income, which includes capital gains and
casual income like income from lotteries, crossword puzzles, etc.

Since it is not possible for the assessee to estimate his capital gains, or income from lotteries
etc., it has been provided that if any such income arises after the due date for any instalment,

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then, the entire amount of the tax payable (after considering tax deducted at source) on such
capital gains or casual income should be paid in the remaining instalments of advance tax,
which are due.

Where no such instalment is due, the entire tax should be paid by 31st March of the relevant
financial year.

No interest liability on late payment would arise if the entire tax liability is so paid.

Note: In case of casual income the entire tax liability is fully deductible at source @30% under
section 194B and 194BB. Therefore, advance tax liability would arise only if the surcharge, if
any, and health and education cess@4% in respect thereof, along with tax liability in respect of
other income, if any, is Rs 10,000 or more.

Question 6

Mr. Jay having total income of Rs 8,70,000, did not pay any advance tax during the previous
year 2021-22. He wishes to pay the whole of the tax, along with interest if any, on filing the
return in the month of July, 2022. What is total tax which Mr. Jay has to deposit as self-
assessment tax along with interest, if he files the return on 29.07.2022? Assume that he does
not exercise the option under section 115BAC.

Answer

Obligation to pay advance tax arises in every case, where the advance tax payable is Rs 10,000
or more. As a consequence of such failure, assessee may be charged with interest under section
234B and 234C.

In the given case, since Mr. Jay did not deposit any amount of advance tax during the previous
year, he will need to pay the total tax due on his income along with interest for default in

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payment of advance tax [under section 234B] and interest for deferment of advance tax [under
section 234C] before filing of his return.

Total tax due on returned income of Rs 8,70,000 is Rs 89,960 [(20% of Rs 3,70,000 + Rs 12,500)
+ cess@4%]

Interest under section 234B

Interest under section 234B is attracted - a) When the assessee, who is liable to pay advance
tax has failed to pay such tax; or b) Where the advance tax paid by the assessee is less than 90%
of the assessed tax.

Since, Mr. Jay did not pay any amount as advance tax, interest under section 234B at 1% per
month or part of the month will be levied beginning from 1st April of the following year i.e.,
01.04.2022 till the time he deposits the whole tax under self - assessment.

Interest will be levied on tax liability of Rs 89,900 (rounded off to nearest hundred, ignoring
fraction) at 1% for four months i.e., from 1st April to 29th July.

The interest under section 234B amount to Rs 3,596

Interest under section 234C

Assessees, other than assessees who declare profits and gains in accordance with provision of
section 44AD(1) or section 44ADA(1), are liable to pay advance tax in 4 installments during the
previous year. Section 234C is attracted, if the actual installment paid by the assessee is the less
than the amount required to be paid by him on such instalments. The interest shall be
calculated at 1% per month or part of the month for short payment or non-payment of each
instalment.
In the given scenario, since Mr. Jay, did not deposit any amount as advance tax, the interest
under section 234C is calculated as under –

Date of Specified % of Amount due and unpaid Period Interest @ 1%

Instalment estimated tax (rounded off to nearest Rs

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 100, ignoring fraction)
15th June 2021 15% 13,400 3 months 402
15th September 45% 40,400 3 months 1,212
2021
15th December 75% 67,400 3 months 2,022
2021
15th March 2022 100% 89,900 1 month 899
Total interest under section 234C 4,535

Mr. Jay needs to pay Rs 98,091 as total of tax and interest on or before filing of return in the
month of July, 2022.

CHAPTER 10

PROVISIONS FOR FILING RETURN OF INCOME AND SELF

ASSESSMENT

Question 1

State with reasons whether you agree or disagree with the following statements:

(a) Return of income of Limited Liability Partnership (LLP) could be verified by any partner.

(b) Time limit for filing return under section 139(1) in the case of Mr. A having total turnover of
Rs 160 lakhs (Rs 100 lakhs received in cash) for the year ended 31.03.2022, whether or not
opting to offer presumptive income under section 44AD, is 31st October, 2022.

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Answer

(a) Disagree

The return of income of LLP should be verified by a designated partner. Any other partner can
verify the Return of Income of LLP only in the following cases:-

(i) where for any unavoidable reason such designated partner is not able to verify the return,
or,
(ii) where there is no designated partner.

(b) Disagree

In case Mr. A opts to offer his income as per the presumptive taxation provisions of section
44AD, then, the due date under section 139(1) for filing of return of income for the year ended
31.03.2022, shall be 31st July, 2022.

In case, Mr. A does not opt for presumptive taxation provisions under section 44AD, he has to
get his accounts audited under section 44AB, since his turnover exceeds Rs 1 crore, in which
case, the due date for filing return would be 31st October, 2022.

Question 2

Mr. Vineet submits his return of income on 12-09-2022 for A.Y 2022-23 consisting of income
under the head “S alaries”, “Income from house property” and bank interest. On 21-12-2022,
he realized that he had not claimed deduction under section 80TTA in respect of his interest
income on the Savings Bank Account. He wants to revise his return of income. Can he do so?
Examine. Would your answer be different if he discovered this omission on 21-03-2023?

Answer

Since Mr. Vineet has income only under the heads “Salaries”, “Income from house property”
and “Income from other sources”, he does not fall under the category of a person whose

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accounts are required to be audited under the Income-tax Act, 1961 or any other law in force.
Therefore, the due date of filing return for A.Y.2022-23 under section 139(1), in his case, is 31 st
July, 2022. Since Mr. Vineet had submitted his return only on 12.9.2022, the said return is a
belated return under section 139(4).

As per section 139(5), a return furnished under section 139(1) or a belated return u/s 139(4)
can be revised. Thus, a belated return under section 139(4) can also be revised. Therefore, Mr.
Vineet can revise the return of income filed by him under section 139(4) in December 2022, to
claim deduction under section 80TTA, since the time limit for filing a revised return is three
months prior to the end of the relevant assessment year, which is 31.12.2022.

However, he cannot revise return had he discovered this omission only on 21-03- 2023, since it
is beyond 31.12.2022.

Question 3

Examine with reasons, whether the following statements are true or false, with regard to the
provisions of the Income-tax Act, 1961:

(i) The Assessing Officer has the power, inter alia, to allot PAN to any person by whom no tax is
payable.
(ii) Where the Karta of a HUF is absent from India, the return of income can be verified by any
male member of the family.

Answer

(i) True: Section 139A(2) provides that the Assessing Officer may, having regard to the nature
of transactions as may be prescribed, also allot a PAN to any other person, whether any tax
is payable by him or not, in the manner and in accordance with the procedure as may be
prescribed.

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(ii) False: Section 140(b) provides that where the Karta of a HUF is absent from India, the
return of income can be verified by any other adult member of the family; such member
can be a male or female member.

Question 4

Explain the term “return of loss” under the Income-tax Act, 1961. Can any loss be carried
forward even if return of loss has not been filed as required?

Answer

A return of loss is a return which shows certain losses. Section 80 provides that the losses
specified therein cannot be carried forward, unless such losses are determined in pursuance of
return filed under the provisions of section 139(3).

Section 139(3) states that to carry forward the losses specified therein, the return should be
filed within the time specified in section 139(1).

Following losses are covered by section 139(3):

• business loss to be carried forward under section 72(1),

• speculation business loss to be carried forward under section 73(2),
• Loss from specified business to be carried forward under section 73A(2).
• loss under the head “Capital Gains” to be carried forward under section 74(1); and
• loss incurred in the activity of owning and maintaining race horses to be carried forward
under section 74A(3)

However, loss from house property to be carried forward under section 71B and unabsorbed
depreciation under section 32 can be carried forward even if return of loss has not been filed as
required under section 139(3).

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Question 5

Mr. Aakash has undertaken certain transactions during the F.Y.2021-22, which are listed below.
You are required to identify the transactions in respect of which quoting of PAN is mandatory in
the related documents –

S. No. Transaction
1. Payment of life insurance premium of Rs 45,000 in the F.Y.2021 -22 by account payee
cheque to LIC for insuring life of self and spouse
2. Payment of Rs 1,00,000 to a five -star hotel for stay for 5 days with family, out of which
Rs 60,000 was paid in cash
3. Payment of Rs 80,000 by ECS through bank account for acquiring the debentures of A
Ltd., an Indian company
4. Payment of Rs 95,000 by account payee cheque to Thomas Cook for travel to Dubai for
3 days to visit relative
5. Applied to SBI for issue of credit card.

Answer

Transaction Is quoting of PAN mandatory in related

documents?
1. Payment of life insurance premium of Rs No, since the amount paid does not exceed Rs
45,000 in the F.Y.2021-22 by account 50,000 in the F.Y.2021-22.
payee cheque to LIC for insuring life of
self and spouse
2. Payment of Rs 1,00,000 to a five –star Yes, since the amount paid in cash exceeds Rs
hotel for stay for 5 days with family, out 50,000
of which Rs 60,000 was paid in cash
3. Payment of Rs 80,000, by ECS through Yes, since the amount paid for acquiring
bank account, for acquiring the debentures exceeds Rs 50,000. Mode of

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 debentures of A Ltd., an Indian company payment is not relevant in this case.
4. Payment of Rs 95,000 by account payee No, since the amount was paid by account
cheque to Thomas Cook for travel to payee cheque, quoting of PAN is not
Dubai for 3 days to visit relatives mandatory even though the payment exceeds
Rs 50,000
5. Applied to SBI for issue of credit card. Yes, quoting of PAN is mandatory on making
an application to a banking company for issue
of credit card.

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