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Sunday, January 19, 2014

IGNOU SOLVED ASSIGNMENTS: ECO - 11

Answer of Q.N.1.(a).

Previous Year: [Sec. 3]
As the word ‘Previous’ means ‘coming before’ , hence it can be simply said that the Previous Year is the Financial Year preceding the Assessment Year  e.g. for Assessment Year 2013-2014 the  Previous Year should be the Financial Year ending 31st March 2013. The term previous year is very important because it is the earned during the previous year is to be assessed to tax in the assessment year. The simple rule is that the income of a previous year is taxed in its relevant assessment year. At present the previous Year 2012-2013 (1-4-2012 to 31-3-2013) is going on.  For a new business started during during financial year, the previous year will be the financial year in which the business is started.
The rule that the income of the previous year is taxable as the income of the immediately following assessment year has certain exceptions. These are: 

1.       Income of non-residents from shipping subject to following conditions
a)      Assessee should be Non Resident (NR).
b)      Assessee should own a Ship or Chartered by NR.
c)       Business of carrying passengers, livestock, mail or goods shipped at a port in India.
d)      The NR may (may not) have an agent in India.

2.       Income of persons leaving India either permanently or for a long period of time subject to following conditions
a)      It appears to the Assessing Officer that an Individual may leave India during the current Assessment Year (A.Y.) or shortly thereafter.
b)      He has no present intention of returning to India.
c)       The total income upto the probable date of his departure from India shall be chargeable to tax in that A.Y.

3.       Income of bodies formed for short duration subject to following conditions
a)      There is an Association of Persons (AOP) or a Body of Individuals (BOI) or an artificial judicial person, formed or established or incorporated for a particular event or purpose.
b)      It appears to the Assessing officer (A.O.) that it is likely to get dissolved in the A.Y. in which it is formed or immediately after such A.Y. 

4.       Income of a person trying to alienate his assets with a view to avoiding payment of tax
a)      It appears to the A.O. during any current Assessment Year that a person is likely to charge, sell, transfer, and dispose of any of his asset.
b)      Such asset may be movable or immovable.
c)       The intention is to avoid tax liability ; and 

5.       Income of a discontinued business. In these cases, income of a previous year may be taxed as the income of the assessment year immediately proceeding the normal assessment year.  These exceptions have been incorporated in order to ensure smooth collection of income tax from the aforesaid taxpayers who may not be traceable if tax assessment procedure is postponed till the commencement of the normal assessment.

Answer of Q.N.1.(b).(i)

Residential Status of An individual
Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year.
Ø  Resident in India: Satisfying any one of two BASIC conditions given u/s 6(1). Further classified into two parts:
a)      Resident and Ordinarily Resident: Satisfying One of the Basic Conditions [6(1] + Both the Additional Conditions [6(6)(a)&(b)

b)      Resident but not Ordinarily Resident: Satisfying One of the Basic Conditions [6(1] + Not satisfying any of the Additional Conditions [6(6)(a)&(b)

Ø  Non – Resident [Sec. 2(30)]: Not satisfying any of the Basic Conditions mentioned in [6(1)].
(Remember: Ordinarily Resident and Resident but not ordinarily residential status is Applicable to individual and HUF Only)

Basic Conditions Under section 6(1):
a)      182 days or more during P/Y, or
b)      At least 60 days during the relevant P/Y  + 365 days during the four years preceding that P/Y subject to following exceptions:
Ø  Individual + Citizen of India + Leaving India during P/Y + For Employment
Ø  Individual + Citizen of India + Leaving India during P/Y + As Crew member of India Ship
Ø  Individual + Citizen of India or Person of India Origin + Visit India during P/Y
(Here, Person of Indian Origin: Himself + Parents + Grandparents (maternal and paternal grandparents) Born in Undivided India )

Additional Conditions section 6(6):
a)      Resident in India in at least 2 out of 10 previous years (according to basic conditions noted above) preceding the relevant previous year;
b)      In India for a period of at least 730 days during 7 years proceeding the relevant previous year.

Answer of Q.N.1.(b).(ii)

Determination of Residential Status of Shri Ajay during Assessment year 2012 – 2013 (Previous year 2011 – 2012)
Total Stay during Previous year  (10th June, 2011 to 25th December,2011)
June = 21 days, July = 31 days, August = 31 days, September = 30 days, October = 31 days, November  = 30 days, December = 25 days.
Total days = 199 days
Since, total stay of Shri Ajaj during relevant previous year is more than 182 days, therefore shri ajay is said to be resident in india.
Again, he comes to India for the first time from America, therefore he is said to be RESIDENT BUT NOT ORDINARILY RESIDENT in India.

Answer of Q.N.2.(a).

Perquisites (Sec. 17[2]):
The term perquisite is defined to signify some benefit in addition to the amount that may be legally due by way of contract of services rendered. Section 17(2) gives an inclusive definition of perquisites. As per the Terms of Section 17(2), Perquisites Includes:
(i) The value of rent-free accommodation provided (used or not) to the assessee by his employer;
(ii) The value of any concession in the matter of rent respecting any accommodation provided (used or not) to the assessee by his employer;
(iii) The value of any benefit or amenity granted or provided (used or not) free of cost or at concessional rate in any of the following cases (specified employee):
(a) By a company to an employee, who is a director thereof;
(b) By a company to an employee being a person who has a substantial interest in the company;
‘Substantial Interest’ : In relation to a company, means a person who is the beneficial owner of shares, not being shares 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.
(c) by any employer (including a company) to an employee to whom the provision of clause (a) and (b) do not apply and whose income under the head of Salaries (whether due from, or paid or allowed by, one or more employer), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs. 50,000.
(iv) Any sum actually paid by the employer in respect of any obligation on behalf of the employee;
(v) any sum payable (not necessarily paid) by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity;
(vi) the value of any other fringe benefit or amenity as may be prescribed.

Perquisites which are taxable for specified employees only: The following Perquisites are taxable in the hands of specified employees.
Ø  Domestic servants provided by employer.
Ø  Gas, electricity or water for household purpose provided by employer.
Ø  Education facility provided employer.
Ø  Leave travel concession
Ø  Car or any other automotive conveyance.
Ø  Transport facility by a transport under taking.


Answer of Q.N. 2. (b).

Computation of Salary Income of Mr. Nitin Kumar Gupta for the Assessment year (2012 - 2013)
Particulars
Amount
Amount
Basic Salary
Dearness Allowance (10% of Salary)
Entertainment Allowance (No deduction is allowed for Private sector employees)
Bonus
Personal Expenses Allowance
Education Allowance
Less: Exempted @ 100 p.m. for One chirldren
Hostel Allowance
Less: Exempted @ 300 p.m. for One chirldren
House Rent Allowance
(Since no rent is paid, HRA is fully taxable)





3600
1200
3600
3600

120000
12000
4800
20000
6000

2400

Nil
18000
Gross Salary

183200

Answer of Q.N.3.(a).
Annual Value (Section 23)
The Annual Value of a house property is the inherent capacity of the property to earn income and  it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.
Computation of annual value: Computation of Annual Value for the determination of Income from House property requires three steps.
Ø  STEP 1 Determine the Gross Annual Value(GAV)
Ø  STEP 2 Determine the value of Municipal taxes
Ø  STEP 3 Compute the Net Annual Value
STEP 1- Determine the Gross Annual Value (GAV):
Calculation of GAV based on the following factors:
1) Fair Rental Value (FRV): The amount of rent which a similar property (similar to the house property the GAV of which is to be determined) in the same locality would fetch.
2) Municipal Rental Value (MRV): The value of the house property under consideration as determined by the Municipal authorities for the purpose of levying Municipal taxes.
3) Standard Rental Value (SRV): The maximum amount of rent which a person can recover from his tenant, legally, as determined by the Rent Control Act.
4) Expected Rental Value (ERV): The Fair rent or Municipal value, whichever is higher, subject to the Standard rent.
5) Unrealised rent: The amount of rent which is not capable of being realised. The amount of Unrealised rent shall not be included in the actual amount of rent receivable from the house property if all the following for conditions are satisfied:
a) Tenancy is in good-faith.
b) The defaulting tenant has vacated or steps must have been taken to vacate such tenant.
c) The defaulting tenant doesn't continue to occupy any other property of the assessee.
d) Assessee has taken all the reasonable steps to proceed against the defaulting tenant legally or he must satisfy the assessing officer that if such steps are taken, it will be of no use. 
6) Actual rent receivable (ARR): The amount of rent which is equal to the difference between the Rent receivable and the unrealised rent.
7) Unoccupied property: The House property which cannot be occupied by its owner by reason of his employment, business or profession being in some other place and he resides at that place in a property not owned by him.
It should be noted that the procedure for determination of Gross Annual Value is not same in all the cases. It varies according to the given situation. Various situations and the respective procedures for computation of GAV are given below:
1) Property is let out throughout the previous year (Section 23(1) (a)/ (b)): GAV = ERV or ARR, whichever is higher.
2) Let out property is vacant for a part of the year (Section 23(1) (c)):  If the ARR < ERV only because the property was vacant for a part of the year, GAV = ERV.  If the ARR < ERV for any other reason, GAV = ERV.  If the ARR > ERV even though it was vacant for a part of the year, GAV = ARR. In all the cases, ARR is computed for the let out period only and the ERV is for whole year as usual.
3) Self-occupied or Unoccupied property (Section 23(2)): GAV = Nil 
4) Let out for a part of the year and self-occupied for a part of the year (Section 23(3)):  GAV = Higher of ERV (calculated for the whole year) and ARR (calculated for let out period only)
5) Deemed to be let out property (Section 23(4)):  This case arises when the assessee has more than one Self-occupied properties in a previous year. In such case, only one of such properties is treated as self-occupied and the remaining shall be treated as Deemed to be let out properties. Here, GAV = ERV.
6) A portion of the property is let out and the remaining portion is self-occupied:  GAV is calculated separately for self-occupied part and the let out part. The values of FR, MV, SR and Municipal taxes are apportioned on the given basis.
Thus, there is a scope for charging tax on Notional rent too. This happens when the GAV determined according to the above steps is the ERV.
Now that the Gross Annual Value of the house property is determined, the next step is to determine the value of Municipal taxes paid that is deductible from the Gross Annual Value.
STEP 2 - Determine the value of Municipal taxes:
The municipal tax or the property tax paid is allowed as deduction from the Gross Annual Value if the following two conditions are satisfied.
(a)    The property is let out during the whole or any part of the previous year,
(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.
STEP 3 - Compute the Net Annual Value:
Gross Annual Value                                        ++++++
Less: Municipal Taxes                                     ++++++
Net Annual Value                                            ++++++

Deductions allowable under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a)    Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.
(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Limit of deduction u/s 24(b)
A. In case of Let out/ deemed to be let out house property: Interest on Money borrowed is allowed as deduction without any limit. Here interest on money borrowed = interest of P/Y + 1/5 of Pre-construction period (PCP) interest. PCP started from the date of borrowing and ended on 31st mar immediately preceeding (Before) the year of completion.
B. In Case of Self Occupied House Property:  Max. Rs. 1,50,000 is allowed as deduction if the following conditions are satisfied:
Ø  Loan taken after 1 – 4 – 99
Ø  For construction/purchase (Capital expenditure) of house
Ø  Construction completed within 3years from the end of financial year in which loan is borrowed.
Ø  Loan certificate is obtained
For all other cases maximum allowed deduction is Rs. 30000


Answer of Q.N.3.(b).
Capital Gains
Capital gain is the gain which arises from the transfer of a capital asset. Any profit or gain, which arises during a previous year, is chargeable under the head "capital gains" under Section 45. For a gain to be charged under the head "capital gain," it should arise due to a transfer of a capital asset. Such a profit or gain should not be exempt from tax under sections 54, 54B, 54D, 54EC, 54ED, 54FD, and 54G of Income Tax Act.
Under section 2(14), property of any kind, held by any assessee, is a capital asset for the purpose of Income Tax Act. However, the following assets are excluded from the definition of capital assets.
a)      Any stock in trade, consumable stores or raw material, held for the purposes of business or profession.
b)      Personal effects of the assessee, i.e. movable property, including wearing apparel and furniture, held for his personal use or for the use of any member of his family, dependent upon him.
c)       Agricultural land in India, provided it is not situated (a) in any area within the territorial jurisdiction of a municipality or a cantonment board, having a population of 1000 or more or (b) n any notified area.
d)      6.5 % gold bonds, 1977 or 7% Gold bonds, 10980 or National Defense Gold Bonds, 1980,issued by the Central Government.
e)      Special Bearer Bonds 1991.
f)       Gold Deposit Bonds, issued under gold Deposit Scheme, 1999.

Exempted Capital Gains
A. Compensation received on compulsory acquisition of agricultural urban land on or after 1 – 4 - 2004[Section 10(37)]:
Ø  For individual and HUF only
Ø  Such land has been used for agricultural purposes during the preceding two years by such individual or a parent of his or by such HUF.
B. Exemption of long-term capital gain arising from sale of shares and units [Section 10(38)]
Ø  Such equity shares are sold through recognised stock exchange,
Ø  Whereas units of equity oriented fund may either be sold though the recognised stock exchange or may be sold to the mutual fund.
Ø  Such transaction is chargeable to securities transaction tax.

C. Exemption of capital gains under sections 54, 54B, 54D, 54EC, 54F, 54G and 54GA
Sec.
Assessee to whom allowed
Conditions to be satisfied
Quantum of exemption
54
Individual/ HUF
Ø Long Term Residential house Property income of which is chargeable under the head 'Income from house property'.
Ø Purchase of another residential house should be within one year before or 2 years after, or construction should be within 3 years after the date of transfer.
Actual amount invested in new asset or the capital gain whichever is less.
54B
Individual
Ø Transfer (excluding compulsory acquisition) should be of urban agricultural land.
Ø It must have been used in the 2 years immediately preceding the date of transfer for agricultural purposes either by the assessee or his parent.
Ø Another agricultural land should be purchased within 2 years after the date of transfer.
Actual amount invested in new asset or the capital gain whichever is less.
54D
Any assessee which is an industrial undertaking
Ø There must be compulsory acquisition.
Ø The property compulsorily acquired should be land and building forming part of an industrial undertaking.
—do—


Ø The asset must have been used in the 2 years immediately preceding the date of transfer of the assessee for the purpose of the business of the undertaking.
Ø Within a period of 3 years after the date of compulsory acquisition any other land or building should be purchased or constructed for the use of existing or newly set up industrial undertaking.

54EC
Any assessee
Ø The asset transferred should be a long-term capital asset
Ø Within a period of 6 months after the date of transfer, the capital gain must he invested in the specified assets i.e. bonds redeemable after 3 years issued on or after 1-4-2007 by NHAI & RECL
Actual amount invested subject to maximum Rs. 50 lakhs in new asset or the capital gain whichever is less.
54F
Individual/ HUF
Ø The asset transferred should be a long-term capital asset, not being a residential house.
Ø Within a period of 1 year before or 2 years after the date of transfer, a residential house should be purchased or constructed within a period of 3 years after the date of transfer.
If the cost of the new residential house is not less than the net consideration then the whole of the capital gain. Otherwise, LTCG ´


Ø The assessee should not own more than one residential house on the date of transfer.



Ø The assessee should not within a period of 2 years purchase or should not within a period of 3 years construct any residential house other than the new asset.

54G
Any assessee being an industrial undertaking
Ø Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred.
Ø Transfer should be due to shifting to any area other than an urban area.
Ø Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.
If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.
54GA
Any assessee being an industrial undertaking
Ø Machinery, plant, building, or land used for the business of an industrial undertaking situated in an urban area should have been transferred.
Ø Transfer should be due to shifting to any Special Economic Zone whether developed in any urban area or any other area.
Ø Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.
If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.


Answer of Q.N. 5.

Calculation of Annual Value of House Property of Mrs. Navneet Kaur for the Assessment year (2012 – 2013)
Particulars
Amount
a) Municipal Rental Value (MRV)
b) Fair Rental Value (FRV)
c) Expected Rental Value (Higher of MRV or FRV)
d) Actual rent receivable for the year less Unrealised rent (10 months)
e) Higher of c) or d) will be Annual Rental value
Less: Loss due to Vacancy (3 months)
40000
48000
48000
42000
48000
12600
Balance will be Gross Annual Value
Less: Municipal taxes paid during the year by landlord
35400
3400
Net Annual Value
32000