F 7026

M.Com DEGREE (C.S.S) EXAMINATION, JANUARY 2022

THIRD SEMESTER
CM010 302-DIRECT TAXES: LAW AND PRACTICE
QPC F 7026 Maximum weight: 30
Section A
Answer any eight questions. Answer shall not exceed one page. Each question carries 1 weight.
1. What is block of assets?
For providing depreciation, assets are grouped into blocks. Block of assets refers to a group of assets
on which same rate of depreciation is prescribed. However, assets of different types on which same
rate of depreciation is applicable cannot be grouped together, through the rate of depreciation is same.
2. What is gratuity?
Gratuity is paid at the time of retirement of an employee in consideration of the past services.
Gratuity is commonly denoted by DCRG (death cum retirement gratuity). Gratuity is exempted as
follows,
a) Govt. employees- fully exempt
b) Employees covered under gratuity act 1972, least of the following is exempt,
i. Actual amount received,
ii. 15 days wages for each completed year of service,
iii. Statutory limit ₹ 20,00,000
c) Employees not covered under gratuity act 1972,
i. Actual amount received,
ii. Half month salary for each completed year of service,
iii. Statutory limit ₹ 20,00,000
3. What is a domestic company
Domestic company means an Indian company, or any other company which, in respect of its income
liable to tax under income tax act, has made the prescribed arrangements for the declaration of
payments of the dividends (including dividends of preference shares) payable out of such income,
within India. Therefore the term domestic company includes:
i. All Indian companies and
ii. A foreign company which has made the prescribed arrangements for the declaration and
payments of dividends (out of taxable income in India) within India.
Out of syllabus, value liberally if students has some idea about this.
4. How to check company’s residential status?
A company is resident in India if:
1) It is an Indian company,
2) Its Place Of Effective Management (POEM) is in India in that year. Therefore, a foreign company
is resident in India if its POEM is in India during the relevant previous year. POEM is applicable
to foreign company only if turnover or gross receipts is more than 50 crore. (with effect from the
previous year 2017-18)
• A company can never be not ordinarily resident.
A company which does not satisfy the above conditions is non-resident. Any foreign company with
turnover not more than 50 crore is always non-resident.
5. What are tax free government securities?
Such securities are issued by the Central government or by a State government. No tax is deductible
on such securities. Hence, the interest on such securities shall not be grossed up. The amount received
or due as the case may be, shall be added to the income.
Tax free securities are issued by a government enterprise to raise fund for a particular purpose. One
example of these bonds issued by municipal corporations. The offer a fixed interest rate and rarely
default, hence are a low-risk investment avenue.
6. Computation of rent free accommodation
Mr. A Mrs. B
a) Actual rental charges (15,000×12)/2 90,000 90,000
b) 15% of salary 45,000 1,05,000
a or b whichever is less (rent free accommodation) 45,000 90,000
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7. Computation of interest deduction for house property

Current year interest + 1/5 of pre-construction period
Pre-construction period 01-04-2014 to 31-03-2016 = 24 months
Loan amount × interest rate × 24/12 for next 5 years, with effect from 2016-17.
Without any loan amount and interest the computation is not possible.
8. (a) income from products of spontaneous growth, wild plants or the like are not agricultural income
(b) Remuneration received is taxed under the head, income from salary, so it’s not an agricultural
income
9. The company share capital = 30,000 shares @ ₹ 10 each.
Amount received = (600/30,000)× 3,00,000= 6,000
Deemed Dividend received (amount received from accumulated profit) =
(600/30,000)×1,50,000 = ₹ 3,000
10. (a) Loss on account of embezzlement by an employee. It is not necessary to prove that embezzlement
was done by particular employee, is deductible loss from business income by virtue of different court
orders.
(b) Expenditure incurred on or after 01-04-1998 for acquiring technical know-how, is eligible for 25%
depreciation.
(c) Loss of stock in trade due to fire is deductible loss, by virtue of different court orders.
(d) Donation paid to a political party is not an expenses, are not admissible under the computation of
business income. But deductible under chapter VI A u/s 80 GGC from gross total income.
Section B
Answer any six questions. Answers shall not exceed two pages. Each question carries 2 weight
11. What is deemed income? Narrate with example
Deemed income means income attributed to another person whether or not the income is actually
available to the person to whom it is deemed. The following are some example of such incomes.
I. Sums, deducted from any income by way of tax deducted at source (TDS)
II. Income of other person clubbed with the income of the assesse,
III. Annual accretion,
IV. Transferred balance,
V. Any dividend declared or distributed or paid by a company is deemed to be the income of the
previous year in which it is declared, distributed or paid.
12. Explain how tax liability of an assesse is determined with reference to his residence.
The scope of total income or tax liability of an assesse is determined with reference to his residence in
India in the previous year. This means that the total income of each person is based upon his residential
status.
Residential status is determined for tax purposes on the basis of the following conditions.
a) Basic condition
1. The assessee is in India during the previous year for a period of 182 days or more; or
2. The assessee is in India during the previous year for a period of 60 days or more and has been
in India for a period of 365 days or more during the 4 years preceding the previous year.
The 60 days mentioned here will be extended to 182 days in the following cases.
i. In the case of an individual who is a citizen of India, who leaves India in any previous
year as a member of the crew of an Indian ship or for the purpose of employment
outsides India and,
ii. In the case of an individual being a citizen of India or a person of Indian origin, who
come on visit to India in any previous year.
b) Additional conditions
1. The assessee has been resident in India (satisfying any one of the basic conditions) in at least
2 out of 10 years preceding the previous year and
2. The assessee has been India for a period of 730 days or more during the 7 years preceding the
previous year.
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Residential status
a) Resident and ordinarily resident- an assessee satisfying any one of the basic condition and
both the additional condition is called resident and ordinarily residents in India for the
previous year.
b) Resident but not ordinarily resident- an assessee satisfying any one of the basic condition and
but not satisfying both the additional condition is called resident but not ordinarily residents
in India for the previous year.
c) Non-resident- an assessee satisfying none of the basic conditions is non-resident in India for
the previous year.
d) Deemed resident: - from the assessment year 2021-22, the concept of deemed resident has
been introduced u/s 6(1A). Accordingly, a person shall be deemed to be resident in India if
the following condition are satisfied.
i) Person is a citizen of India.
ii) Total income during the year (other than from foreign sources) is more than
₹15,00,000
iii) The income is not liable to tax in any other country or territory.

13. Discuss different kinds of agricultural income

Income which is partly agricultural is determined as follows.
a) Growing and manufacturing of Tea (Rule 8)
Income from growing and manufacturing of tea is first computed as if it derived from business,
with all allowable deductions. Expenses like cost of planting tea bushes, cost of replanting and such
other incidental expenses are allowed. 40% of the income so calculated is treated as business income
and remaining 60% is treated as agricultural income. If a person sells green tea leaves, income there
from is 100% agricultural income.
b) Growing and manufacturing of Rubber (Rule 7A)
Income from sale of rubber processed or manufactured from own rubber plant is first computed as
if it were derived from business, with all allowable deductions. Expenses like cost planting rubber,
cost of replanting and such other incidental expenses are allowed. . 35% of the income so calculated
is treated as business income and remaining 65% is treated as agricultural income.
c) Growing and curing of coffee (Rule 7B)
Income from growing and curing of coffee is first computed as if it derived from business, with
all allowable deductions. Expenses like cost of planting coffee bushes, cost of replanting and such
other incidental expenses are allowed. In case of coffee, agricultural income is determined as
follows.
i. Income derived from the sale of coffee grown and cured by the seller- 25% of the income so
calculated is treated as business income and remaining 75% is treated as agricultural income.
ii. Income derived from the sale of coffee grown, cured, roasted and grounded by the seller- 40%
of the income so calculated is treated as business income and remaining 60% is treated as
agricultural income
14. Computation of income from house property
Let out (1/3) Self-occupied (2/3)
Reasonable rent (21,000/3) 7,000
Actual rent (1,400×12) 16,800
Higher (GAV) 16,800
Less: municipal taxes (1,200/3) 400
Annual value 16,400
Less: deduction u/s 24
1. Standard deduction (16,400×30%) 4,920
2. Interest on capital (2,00,000×8%)/3&2/3 5,333 10,667
Income (loss) from house property 6,147 (10,667)
Net loss from house property 6,147 - 10,667= (4,520)
The question gives monthly salary also but computation is only for income from house property.
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15. Computation of agricultural income
Income from coffee 75% agricultural (3,00,000×75%) 2,25,000
Income from tea 60% agricultural (2,50,000×60%) 1,50,000
Income from rubber 65% agricultural (4,00,000×65%) 2,60,000
Income from nursery 100% 2,00,000
Rent from a dwelling house 100% 90,000
Total agricultural income 9,25,000
16. Computation of income from salary
Basic salary (6,000×12) 72,000
DA (3,000×12) 36,000
Academic allowance (1,000×12 = 12,000)
Less: spent for the purposes (700×12=8,400) 3,600
Entertainment allowance (500×12) 6,000
Rent free house (6,000 + 9,180) 15,180
Gross salary 1,32,780
Less: deduction u/s 16
1. Standard deduction 50,000
Income from salary 82,780
Computation of rent free accommodation
According to income tax rules in rent free accommodation in the case of transfer: - an assesse can opt
two houses at same time for 90 days. If exceed 90 days whole amount taxable.
House at Tirunelveli – 81,600×15% ×9/12 or 500×12 whichever is less = 6,000
House at Kolkata – 81,600×15% ×9/12 = 9,180
17. Computation of partners income
As per section 2 (32) of the income tax act, 1961, unless the contest otherwise requires the term “person
who has a substantial interest in the company” in relation to a company, means a person who is the
beneficial owner of shares, not being share entitled to a fixed rate of dividend whether with or without
a right to participate in profits, carrying not less than 20% of the voting power.

Section 64 clubbing of income- where both the husband and the wife have a substantial interest in
concern and both are in receipt of remuneration from the said concern, then the remuneration of both
shall be clubbed together in the hands of that spouse whose gross total income, before including such
remuneration, is higher.
In all 3 cases, both of them together holds substantial interest in the company.
Case 1 – remuneration received from the company will be taxable in the cases of the husband whose
GTI excluding remunerations higher than his spouse.
Case 2 – remuneration received from the company will be taxable in the cases of the husband whose
GTI excluding remunerations higher than his spouse.
Case 3 – remuneration received from the company will be taxable in the cases of the husband whose
GTI excluding remunerations higher than his spouse.
Case I Case II Case III
Mr.bab Mrs.bab Mr.bab Mrs.bab Mr.bab Mrs.bab
Other income 80,000 75,000 80,000 75,000 80,000 75,000
Add: remuneration (3,50,000 +
1,00,000) 4,50,000 4,50,000 4,50,000
Gross total income 5,30,000 75,000 5,30,000 75,000 5,30,000 75,000
18. Computation of income from other sources
Gift from public charitable institution 75,000
Gift from C 50,000
Gift from D 5,000
Gift from grandmother (exempt)
Gift on the occasion of marriage (exempt)
Income from other sources 1,30,000
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Section C
Answer any two questions. Answers shall not exceed five pages. It carries 5 weight
19. Computation of income from business
Net profit as per P&L a/c 1,82,000
Add: expenses disallowed
Extension of building 6,000
Excess depreciation (23,000-19,000) 4,000 10,000
1,92,000
Less: other incomes
Gift received from father (other sources)(exempt) 1,43,000 1,43,000
Income from business 49,000
Amount paid to an approved institution for scientific research – 100% tax exemption u/s 35 (2AA)
20. Computation of income from salary
Basic salary (2,500×12) 30,000
DA (3,500×12) 42,000
Dearness pay (1,250×12) 15,000
Fees 55,000
HRA 37,500
Children education allowance (3,500- 100)×12 40,800
Children allowance (1,500×12) 18,000
Hostel allowance (2,000-300)×12 20,400
Dress allowance (5,000×12) 60,000
Uniform allowance (2,000-1,000)×12 12,000
Tiffin allowance (1,000×12) 12,000
Education allowance (2,000-1,500)×12 6,000
Gross salary 3,48,700
Less: deduction u/s 16
1. Standard deduction 50,000
2. Entertainment allowance Nil
Income from salary 2,98,700
Computation of taxable HRA
a) Actual HRA received (5,000×12) 60,000
b) Rent paid over 10% salary, rent paid 4,500×12 = 54,000
10%of 45,000(basic salary + dearness pay) = 4,500
54,000-4,500 49,500
c) 50% 45,000 22,500
Least of above 22,500 exempt. Taxable HRA = 60,000-22,500 = 37,500
21. Computation of short term capital gain
Full value of consideration 2,90,000
2,500×25 = 62,500
1,000×30 = 30,000
2,500×25 = 62,500
3,000×45 = 1,35,000
Less: cost of acquisition 4,00,000
5,000×80
Short term capital loss 1,10,000

22. Computation total income

1. Income from salary
Salary for 12 months 6,00,000
Less: standard deduction u/s 16 (ia) 50,000 5,50,000
2. Income from house property 19,000
3. Capital gain
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LTCG 70,000
STCG 10,000 80,000
4. Income from other sources
Interest on list securities 3,000
Interest on government securities 5,000
Less : interest paid to purchase Gov. securities 1,000 4,000
Dividend from an Indian company 4,000
Income from mutual fund (exempt up to 1,00,000) Nil 11,000
Gross total income 6,60,000
Less: deduction u/s chapter VI A
1. 80C (12,000+3,000+30,000) 45,000
2. 80G (without limit 100%) 5,000 50,000
Total income 6,10,000
Computation of tax liability under old (normal) provision for the year 2021-22
LTCG 20% (70,000×20%) 14,000
Balance at normal rates (6,10,000-70,000) 5,40,000
First ₹ 2,50,000 - nil
Next ₹ 2,50,000 – 5% 12,500
Balance ₹ 40,000- 20% 8,000
34,500
Add: H&EC 4% of 34,500 1,380
Tax payable 35,880
Computation of tax liability under new provision (u/s 115 BAC) for the year 2021-22 (from financial
year 2020-21 onwards) (value liberally u/s 115 BAC)
Total income u/s 115 BAC = 6,60,000 + 50,000 (standard deduction under salary) = 7,10,000
LTCG 20% (70,000×20%) 14,000
Balance at normal rates (7,10,000-70,000) 6,40,000
First ₹ 2,50,000 – nil
From 2,50,000-5,00,000 – 5% 12,500
Balance 1,40,000 -10% 14,000
40,500
Add: H&EC 4% of 40,500 1,620
Tax payable 42,120
The assesse shall pay tax under normal provision, since payable is lesser
Tax saving options
1. He can contribute more amount u/s 80C as mutual fund, subscription to equity shares or debenturs
of public company, sukanya samridhi account, any fund of UTI, NSC, pension fund etc. get tax
exemption up to ₹ 1,50,000 and contribute NPS (80CCD), can claim additional deduction of ₹ 50,000
2. Contribute without limit donations on which 100 % deduction is allowed, u/s 80G
3. Contribute donation for scientific research or rural development –can claim deduction u/s 80 GGA
4. Contribution to any political party- can claim deduction u/s 80 GGC etc.