SMU BBA 4 BB0019 ASSIGNMENT SOLVED

Bachelor of Business Administration-BBA Semester 4

BB0019 –Taxation - 4 Credits

(Book ID: B1064 )

Assignment Set- 1 (60 Marks)

Note: Answer all the questions.

Q1. Explain the term income. Give the list of items that are to be treated as income under

sec 2(24) of the Income Tax Act.

A1. Income is the consumption and savings opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings received... in a given period of time." In the field of public economics, the term may refer to the accumulation of both monetary and non-monetary consumption ability, with the former (monetary) being used as a proxy for total income. Increase in income - Income per capita has been increasing steadily in almost every country. Many factors contribute to people having a higher income such as Education, globalization and favorable political circumstances such as economic freedom and peace. Increase income also tends to lead to people choosing to work less working hours. Developed countries defined as countries with a "developed economy" and higher incomes as opposed to a developing countries tend to have lower incomes. In consumer theory 'income' is another name for the "budget constraint," an amount to be spent on different goods x and y in quantities and at prices. The theoretical generalization to more than one period is a multi-period wealth and income constraint. For example the same person can gain more productive skills or acquire more productive income-earning assets to earn a higher income. In the multi-period case, something might also happen to the economy beyond the control of the individual to reduce (or increase) the flow of income. Changing measured income and its relation to consumption over time might be modeled accordingly, such as in the permanent income hypothesis

Section 2(24): Income

(24) "income" includes—

(i) profits and gains;

(ii) dividend;

[(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes 19[or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) 20[or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C) of section 10 21[or by an electoral trust]].

Explanation For the purposes of this sub-clause, "trust" includes any other legal obligation ;]

(iii) the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17 ; 22[(iiia) any special allowance or benefit, other than perquisite included under sub clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit ;

(iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living ;]

(iv) the value of any benefit or perquisite23, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid ;

24[(iva) the value of any benefit or perquisite23, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (such person being hereafter in this sub-clause referred to as the "beneficiary") and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary ;]

(v) any sum chargeable to income-tax under clauses (ii) and (iii) of section 28 or section 41 or section 59 ;

(vi) any capital gains chargeable under section 45 ;

(vii) the profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of provisions contained in the First Schedule ;

30[(viia) the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;]

(viii) [Omitted by the Finance Act, 1988, w.e.f. 1-4-1988. Original sub-clause (viii) was inserted by the Finance Act, 1964, w.e.f. 1-4-1964;]

31[(ix) any winnings from lotteries32, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.]

33[Explanation.—For the purposes of this sub-clause,—

(i) "lottery" includes winnings from prizes awarded to any person by draw of lots or by chance or in any other manner whatsoever, under any scheme or arrangement by whatever name called;

(ii) "card game and other game of any sort" includes any game show, an entertainment programme on television or electronic mode, in which people compete to win prizes or any other similar game ;

34[(x) any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees' State Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees ;]

35[(xi) any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy.

Explanation.—For the purposes of this clause*, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (10D) of section 10 ;]

36[(xii) any sum referred to in 37[clause (va)] of section 28;]

38[(xiii) any sum referred to in clause (v) of sub-section (2) of section 56;]

39[(xiv) any sum referred to in clause (vi) of sub-section (2) of section 56;]40[(xv) any sum of money or value of property referred to in clause (vii) 41[or clause (viia)] of sub-section (2) of section 56;]

The following sub-clause (xvi) shall be inserted after sub-clause (xv) of clause (24) of section 2 by the Finance Act, 2012, w.e.f. 1-4-2013 :

(xvi) any consideration received for issue of shares as exceeds the fair market value of the shares referred to in clause (viib) of sub-section (2) of section 56;

(a) Income from Salary/ Pension; or
(b) Income from One House Property (excluding cases where loss is brought forward from previous years); or
(c) Income from Other Sources (excluding Winning from Lottery and Income from Race Horses)

 

Bachelor of Business Administration-BBA Semester 4

BB0019 –Taxation - 4 Credits

(Book ID: B 1064)

Assignment Set- 2

Q1. Explain the residential status of an assesse according to Section 4 of the Income tax act.

Ans. Residential status is determined for each category of persons separately.

1.    Residential status is always determined for the every previous year separately.

2.    If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other source of income. [Section 6(5)]

3.    A person may be a resident of more than one country for any previous year.

4.    Citizenship of a country and residential status of that country are separate concepts.

It is the duty of the assesse to place all material facts before the assessing officer to enable him to determine his correct residential status.

Q2. What is meant by block of assets? Explain the rules governing depreciation.

Ans. Concept "Block of Assets" is used in Income Tax Act 1961. It means a group of assets on which same rate of depreciation is allowed. As per act following definition of block of assets has been given. “Block of assets” means a group of assets falling within a class of assets comprising:-

(a) Tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed.

Rules governing depreciation:-

1.     Where an asset is put to use for less than 180 days in a previous year in which it is purchased, depreciation thereon shall be allowed at 50% of the depreciation allowable in respect of the block of asset comprising such asset.

2.     Buildings include roads, bridges, culverts, wells and tubewells

3.     Plant has been held to include:

a.     movable partitions [Jarrold vs. John Good & Sons Ltd., 40 TC 681 (CA)]

b.    sanitary & pipeline fitting [CIT vs. Taj Mahal Hotel, 82 ITR 44 (SC)]

c.     Ceiling and pedestal fans [CIT vs. Jagadees Chandran & Co., 75 ITR 697(Mad); Sundaram Motors Pvt. Ltd. vs. CIT, 71 ITR 587 (Mad); CIT vs. Tarun Commercial Ltd., 151 ITR 75 (Guj)].

d.    Wells [CIT vs. Warner Hindustan Ltd., 117 ITR 15 (AP)].

e.     Hospital [CIT vs. Dr. B. Venkata Rao 111 Taxman 635 (SC)]. However, w.e.f. A.Y. 2004-05, it shall not include buildings, furniture and fittings.

4.     Depreciation on assets acquired on hire purchase basis should be allowed to the hirer where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment [Circular No. 9 (R. Dis. No. 27(4) - IT/43), dated 23-3-1943].

5.     Depreciation in respect of motor car manufactured outside India acquired on or after 28-2-75 or before 1-4-2001 shall be allowed.

6.     The claim of depreciation is mandatory w.e.f. A. Y. 2002-03 overriding Supreme Court’s decision in CIT vs. Mahendra Mills 109 Taxman 225 which held that the depreciation claim is optional.

7.     Total depreciation allowable in the year of succession/amalgamation/demerger, to predecessor/amalgamating/demerged co. and successor/amalgamated/resulting co. is to be restricted to depreciation allowable as if succession/ amalgamation/demerger had not taken place, and such depreciation is to be apportioned on the basis of number of days usage by each of them.

8.     Depreciation is allowable even on jointly owned assets.

9.     No amortisation benefits u/ss. 35A and 35AB can be claimed in respect of intangible assets.

10.  In respect of depreciable assets employed in power projects, depreciation may be computed under the Straight Line Method on individual assets [Rule5 (1A)] — [Appendix IA]. Alternatively, the undertaking may at its option, also claim depreciation at the normal rates (Rule 5(1) — Appendix I), subject to the option being exercised prior to the due date of filing the return of income. In the event of sale or disposal of such assets, if the sale consideration

A)    Is less than WDV of such assets — Balance (i.e., WDV – sale consideration) can be claimed as depreciation, provided that such a deficiency is written off in the books.

B)    is in excess of the WDV — Excess (to the extent of the difference between actual cost and WDV will be taxable as business profit and the balance as Capital Gains)

11.   Additional Depreciation @ 20% of actual cost of new machinery or plan together than ships and aircrafts) acquired and installed after 31st March, 2005 by an assesse engaged in the business of manufacture or production of an article or thing shall be allowed on satisfying certain conditions.

Q3. Mr. Bhargava owns four houses and the details are as under:

	I	II	III	IV
Annual MV	20,000	16,000	24,000	30,000
FRV	24,000	30,000	20,000	24,000
Rent received	30,000	28,000	Self	Self
Standard rent	27,200	36,000	30,000	20,000
Municipal taxes paid	1,600	1,200	Nil	2,400
Municipal taxes due	0	0	1,000	0
Repairs	Nil	24,000	8,000	12,000

For the construction of IV house, he had borrowed Rs.160000 at 15% p.a. on 1-1-2005. The house was completed on 1-8-2008

This loan is not cleared. Compute his income from house property for PY 2008-09 and nothing was paid towards principal of the loan

Ans.

Q4. Mrs. Tejaswini Hemanth has the following assets: (10 Marks)

4 Lorries - WDV 5.5 lakh

Office factory, godown buildings – WDV Rs. 15 lakh

Computers – newly acquired – Rs.4.5 lakh (date of acquisition 10-10-2008)

Patents – WDV Rs. 2 lakh

Office furniture – WDV Rs. 2.5 lakh

From the above details answer the following questions:

a. What is the amount of depreciation available for Lorries?

b. What is the amount of deprecation available for computers?

c. What is the amount of depreciation available for Patents?

d. What is the total amount of deprecation available for her for the A Y 2009-10?

Ans.

Q5. Distinguish between short term capital gains and long term capital gains.

Ans. The sale of a capital asset will result in a capital gain.  Depending on the holding period of this asset, the gain will either be short-term or long-term. Long-term gains have a lower, preferred income tax rate.  The holding period begins on the day the asset is purchased, as measured by the trade date, to the day the asset is sold. Assets that are inherited are deemed to be held long term.

Capital Assets Include:

Stocks

Bonds

Mutual Funds

Short-Term Capital Gains

Short-term capital gains result from the sale of capital assets held one year or less.  Short-term capital gains are taxed at ordinary income tax rates.  The highest federal ordinary income tax rate for a married couple filing a joint return for 2010 was 35% on taxable incomes of over $373,650. These tax brackets are adjusted for inflation annually by the Internal Revenue Service ("IRS").

Long-Term Capital Gains

Long-term capital gains are from the sale of capital assets held longer than one year. These gains are taxed mostly at 15%.  In 2011 for married couples filing a joint tax return whose taxable income is below $69,000 there is no capital gains tax. A large long-term capital gain relative to the other income declared by a taxpayer may result in an Alternative Minimum Tax ("AMT").  The highest stated rate of the AMT is 28%. The reality is, depending on the facts and circumstances a taxpayer subject to an AMT may pay a tax rate anywhere between 15% and 28%.