B.com 3rd Semester income tax law and practice chapter 1 questions answer ( Dibrugarh University )

INTORODUCTION Unit – 1

Basic concepts : Income , agricultural income , person assessee , assessment year , previous year , gross total income , total income .

Residential Status ; Scope of total income on the basis of residential status Exempted income under section 10 .

B.com 3rd Semester Income Tax Law & Practice very Short type question and answer

A. Multiple Choice Questions :

1. Income accruing in India in previous year is taxable for-

(a) Resident (b) Not ordinarily resident

(c) Non-resident (d) All of the above.

Ans: (d) All of the above.

2. Income accruing from agriculture in a foreign country is taxable in the case of an assessee who is –

(a) Resident (b) Not-ordinarily resident (c) Non-resident

(d) None of the above.

Ans : (a) Resident

3. Foreign income received in India during the previous year is taxable in the case of-

(a) Resident (b) Not-ordinarily resident (c) Non-resident

(d) All of the above.

Ans: (d) All of the above.

4. Every year, the residential status of an assessee

(a) May change (b) Will certainly change

(c) Will not change (d) None of the above.

Ans : (a) May change .

5 . Income tax in India is charged at the rate prescribed by:

(a) The Finance Act (b) The Income Tax Act

(c) The Central Board of Direct Taxes (d) The Ministry of Finance

Ans: (a) The Finance Act

6. The term ‘income” includes the following types of incomes

(a) Legal (b) Illegal (c) Legal and illegal both (d) None of the above

Ans: (c) Legal and illegal both

7. Which of the following income is not included in the term ‘income’ under the Income Tax Act, 1961:

(a) Profits and gains

(b) Profit in lieu of salary

(c) Dividend

(d) Reimbursement of travelling expenses.

Ans: (d) Reimbursement of travelling expenses.

B. Fill in the Blanks:

(a) The residential status of an assessee is determined for the relevant________________ .

Ans : Previous year

b) The incidence of tax on any assessee depends upon his __________________under the Act.

Ans: Residential status; 3 Non-Resident

(c) If control and management of the affairs HUF is situated wholly outside India it would become a __________

Ans: Non-Resident.

(d) _________________is levied on the total income of the previous year of every person.

Ans: Income Tax

(e) Aggregate of incomes computed under the 5 heads of income after applying clubbing provisions and making adjustments of set off and carry forward of losses is known as _____________ .

Ans: Gross Total Income.

(f) Generally, the year in which income is earned is taxed is known ______________.

Ans: Assessment year.

(g) Present income tax enacted in a year _____________ .

Ans: 1961

(h) Present Income Tax Act came into force with effect from ______________ .

Ans: 1″ April 1962

C. Sate the statement whether True or False:

1. An Indian company is always resident in India no matter where and to what extent its control and management is situated. Ans: True.
2. Sandeep Ltd. is a company registered in Japan. The place of effective management of its affairs is in India. Sandeep Ltd. is non-resident company in India. Ans: False.
3. Radha Govinda Baruah College is an association of Person. Ans: False.
4. Previous Year and Assessment year is always different. Ans: False.
5. Income of all Private Nursing Home is exempted from tax. Ans: False.

Income Tax Law & Practice Unit1 ( Short & long type question and answers )

1. What is The Finance Act?

Ans: The purpose of the Finance Act is mainly to prescribe the rate of tax that would be applicable for a given assessment year. However, any desired change in the provisions of the Income-tax Act can also be mad by incorporating them in the Finance Bill presented every year before the Parliament. When the Bill is passed, it becomes the Finance Act,

2. Define Assessce.

Ans: An assessee is a person by whom any tax or any other sum of money is payable under Section 2(7) the Income-tax Act. The term assessee also includes the following:

(a) every person in respect of whom any proceeding under the Income-tax Act has been initiated for the assessment of his income or assessment of fringe benefits or loss or any amount of refund due to him or for the assessment of income, loss or refund of any other person in respect of which he is assessable.

(b) every person who is deemed to be an assessee under any provision of the Income-tax Act;

(c) every person who is deemed to be an assessee in default under any provision of the Income-tax

3. What is Gross total income?

Ans: The total income of an assessee before making any deduction under Sections 80C to 80U is called Gross Total Income. In other words, it is the aggregate of income under the five heads of income mentioned under Section 14 of the Act.

4. Define agricultural income.

Ans: The definition of agricultural income given under the Act is broad enough. Under Section 2(1A), the following are treated as agricultural income.

5. What is Total income.

Ans: Total income is the back-bone [Section 2(45)] of the Income-tax Act, 1961. It is this income on which an assessee pays tax at the rates prescribed by the Finance Act. Under the Act, it is the gross total income as reduced by permissible deductions under Sections 80C to 80U.

6.What is Deemed Assessee?

Ans: A person who is deemed to be an assessee for some other person, is called “Deemed Assessee”. For example, (i) after the death of a person, his legal representative will be treated as an assessee for the income of me deceased on which tax has not been paid by the deceased before his death; (ii) a person representing a foreigner or a minor or a lunatic is treated as an assessee for the income of such foreigner or minor or lunatic.

7. What is Assessee in Default?

Ans: When a person is responsible for doing any work under the Act and he fails to do it, he is called an ‘Assessee in Default’. For example, under the income Tax Act. the person making the payment is liable to deduct income tax thereon at source. if such person does not deduct the amount of income tax therefrom, or having deducted it, does not deposit the same in Government Treasury, he will be treated as an assessee in default.

8 . According to income Tax Act Person means.

Ans: According to the Income-tax Act, 1961[Section 2(31)], the definition of person includes the following seven types of units of assessment:

(a) an individual,

(b) a Hindu undivided family (HUF),

(c) a Company,

(d) a Firm,

(e) an association of persons or body of individuals, whether incorporated or not.

(f)a local authority, and

(g) every artificial juridical person, not falling within any of the above categories.

With effect from the assessment year 2002-2003, Finance Act, 2002 has inserted an explanation to the existing provisions of Section 2(31). Accordingly, an association of persons or body of individuals or a localauthority or an artificial juridical perion shall be deemed to be a person whether or not auch person or body or authority or juridical person was formed or established or incorporated with the object of deriving income profits or gains.

Q . Define Heads of Income.

Ans: According to Section 14 of the Income-tax Act, 1961, for the purpose of computation of total income, all income of an assessee shall be classified under the following five heads:

(a) Income under the head-Salaries.

(b) Income from house property.

(c) Profits and gains of business or profession.

(d) Capital gains.

(e) Income from other sources.

10. What is Agricultural Income.

Ans: While Section 2(1A) defines agricultural income, Section 10(1) provides that agricultural income is exempt from tax. Agricultural income is exempt from income-tax because under the Constitution, Parliament has no power to impose tax on agricultural income. By virtue of the provisions contained in entry # 46 of List II (State List) of the Seventh Schedule to the Constitution, only the State Legislature is entitled to impose tax on agriculture. However, in terms of the special provisions made by the Finance Act 1973, agricultural income is to be aggregated with the non-agricultural incomes. This aggregation is only for the purpose of determining the rate of tax that would apply to non-agricultural income.

11. Define Assessment year.

Ans: Assessment year Section 2(9)] means the period of twelve months commencing on the Ist day of April every year and ending on the 31st March of the following year. The scheme of the Income-tax Act is to levy tax for each financial year beginning with the 1st day of April at the rates prescribed in the Finance Act for the year. The year in which tax is paid is thus called the assessment year or Income-tax Year, while the year in respect of the income of which the tax is paid is called the previous year or the accounting year. The concepts of assessment year and previous year are thus interrelated

12. Define Previous year.

Ans: Previous year [Section 3] means the financial year (1st day of April to 31st of March of following year)Immediately preceding the assessment year. However, in the case of a business or profession newly set up, or a source of income newly coming into existence in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the new source of income comes into existence and ending with the said Financial year i.e. March 31, 2017

For example, if an assessee starts his business on the 1st day of January, he has to close his books of account on 31st March next following. In this case his first previous year for this business will be for a period of three months only.

13 . What are the Basis charge of income tax?

Ans: All though Section 14 of the Income-tax Act classifies income under five distinct heads, tax is not imposed on each of the heads separately. Under Section 4, which is the charging section and the backbone of the Act, the charge is on a single tax base called-total income. Section 4 thus provides that:

(a) the charge of tax shall arise in respect of the total income of every person defined in Section 2(31);

(b) the subject matter of tax is the total income of the previous year,

(c) the tax is to be charged at the rate or rates in force;

(d) the provisions of section 4 are subject to the other provisions of the Act.

14 . What is treated as agricultural income?

Ans: The following are some examples of incomes which have been held to be agricultural income:

(a) Income from use of land for grazing of cattle required for agricultural pursuit .

(1) Profit on sale of crops after harvest, made by cultivator or regelver of rent-in-kind.

(c) Compensation received from insurance company for damage caused to the crops by hailstorm or flood

(d) Salary, interest on capital, share of profits, etc., received by partner of a firm having agricultural income.

(e) Income from running a dairy which is purely incidental to agriculture Rangoon Income from growing flowers and creepers

(f) Income from saplings and seedlings grown in nursery [Explanation 3 to Section 2(1A)]

15 . What is treated as non-agricultural income?

Ans: The following are some examples of incomes which have been held to be non-agricultural income:

(a) Income from sale of trees, flowers and fruits growing spontaneously in forests Profits arising from purchase and sale of standing crops

(b) Remuneration received by a manager as a percentage of profit from a firm having agricultural income

(c) Dividends paid by a company from its agricultural incomes

(d) Income from fisheries. Royalty income from mines

(e) Poultry farming.

(f) Annuity received for transfer of agricultural land

(g) Interest on arrears of rent payable in respect of agricultural land

(h) Interest received by a money lender in the form of crops.

16.Define Income.

Ans: The expression-Income” is of utmost importance, because under the Income-tax Act, it is income for which a person is to be charged to tax. Yet the term income has not been defined in the Income-tax Act, except that Section 2(24) enumerates certain things to be considered as income. According to the definition given by Section 2(24); income includes –

(a) profits and gains of business or profession ;

(b) dividend ;

(C )voluntary contributions received by a Charitable Trust/Religious Trust or University/Educational Institution or Hospital ;

(d) the value of any perquisite of profit in lieu of salary taxable u/s 17 and any special allowance or benefit, specifically granted either to meet personal expenses or for performance of duties of an office or an employment of profit.

(e) the value of any benefit or perquisite, whether convertible into money or not, received by a director or any of his relatives including the sums paid by the company which otherwise would have been payable by those persons;

(f) the value of any benefit or perquisite, whether convertible into money or not, obtained by a representative assessee or by any person on whose behalf or for whose benefit any income is received by the representative assessee, including any sum paid by the representative assessee, which would otherwise have been payable by the beneficiary;

(g) any sum chargeable to income-tax under sub-clauses (ii), (iii), (iiia), (iiib), (iiic), (iv), (v), (va) of Section 28, Section 41 or Section59;

(h)any capital gains chargeable under Section 45;

(i) the profits and gains of business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with Section44;

(j)The profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members;

(k) any winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatso ever.

(l) any sum received by the assessee from his employees towards welfare fund contributions such as Provident Fund, Superannuation Fund etc.

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

(n) any sum referred to in clause (viia) or clause (viib) of Section 56(2).

(o) any sum of money referred to in clause (ix) of sub-section (2) of section 56. Section 2(56)(2), as inserted by the Finance Act 2014, relates to advance money forfeited when negotiations do not result in transfer of capital assets.

(p) assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver orconcession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee other than the subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to Section 43(1) (Inserted by the Finance Act 2015, w.e.f. AY2016-17).

17 . How Residential status of an Individuals determine?

Ans: For any assessment year an individual may enjoy any of the following residential status:

(a) Resident and ordinarily resident in India

(b) Resident but not ordinarily resident in India

(c) Non-resident in India.

(a) Resident and ordinarily resident: An individual is said to be resident in India when he fulfils any one of the basic conditions mentioned under section 6(1). However, in order to be resident and ordinarily resident, one must also fulfil both the additional conditions mentioned under section 6(6)(a).

Basic conditions [Section 6(1)]: An individual is said to be a resident in India in any previous year, if he:

(a) is in India in that year for a period or periods amounting in all to 182 days or more [Section6(1)(a)], or

(b)is in India for a period of 365 days or more during the four years preceding the previous year and is also present in India for a period of 60 days or more during the relevant previous year. [Section 6(1)(c)].

Additional Conditions [Section 6(6)(a)]: The additional conditions mentioned under section 6(6)(a) are:

(a) The assessee has been a resident in India in at least 2 out of 10 previous years preceding the relevant previous year, and

(b) He or she has been in India for a period or periods amounting in all to 730 days or more during the 7 years preceding the relevant previous year.

18 . How Residential status of a company is determined?

Ans: A company is either a resident or a non-resident. Companies cannot be-ordinarily or-not ordinarily residents.

(a) Resident: According to Section 6(3), a company is said to be resident in India in any previous year if:

(1)it is an Indian company, or,

(2) its place of effective management, in that previous year, is in India.

(b) Non-resident: An Indian company shall always be a resident in India. Only a foreign company shall be treated as a non-resident in India, if during the previous year the control and management of its affairs is either wholly or partly situated outside India.

19. How Residential status of Hindu Undivided Family is determined?

Ans: The residential status for a Hindu undivided family, are as under:

(a) a resident and ordinarily resident, (b) a resident but not ordinarily resident, and (c) non-resident.

(a) Resident and ordinarily resident: According to Section 6(2), a Hindu undivided family shall be called a resident in India in any previous year if the control and management of its affairs is wholly or partly situated in India. A Hindu undivided family shall be called a resident and ordinarily resident in India if the manager or karta of the family fulfils the following two additional conditions mentioned under Section 6(6)(b):

(i) the manager or karta has been resident in India at least in 2 out of 10 previous years preceding the relevant previous year, and

(ii) the manager or karta has been in India for a period of 730 days or more during the 7 previous years preceding the relevant previous year.

(b) Resident but not ordinarily resident: A Hindu undivided family is said to be resident but not ordinarily resident in India if the control and management of its affairs during the previous year is wholly or partly situated in India, but the manager or karta of the family does not satisfy both the additional conditions mentioned under Section 6(6)(b).

(c) Non-resident: According to Section 6(2), a Hindu undivided family is said to be non-resident in India in any previous year if the control and management of its affairs is situated wholly outside India.

20 . State Incidence of Tax of different types of resident.

Ans: Section 5 provides the scope of the total income of the assessee because the incidence of tax on any person depends upon his residential status.

The scope of total income of an assessee depends upon the following three important considerations:

(i) the residential status of the assessee.

(ii) the place of accrual or receipt of income, whether actual or deemed and

(iii) the point of time at which the income had accrued to or was received by or on behalf of the assessee.

Tax incidence vis-a-vis residential status of all assesses is indicated in the following table.

21. State the exempted income as per Income Tax Act.

Ans: All receipts, which give rise to income, are taxable under the income-tax Act unless it is specifically provided that it does not form part of total income. Such incomes which do not form part of total income may also be called incomes exempt from tax. As per section 10 to 13A, certain incomes are either totally exempt from tax or exempt up to a certain amount. Therefore, these incomes, to the extent these are exempt, are not included in the total income of an assessee for computation of his total income.

(1) 10(1) Agricultural Income

(2) 10(2) Sum received by a member from HUF

(3) 10(2A) Share of profit if a partner from a firm

(4) 10(4) Interest in Non-resident (External) Account

(5) 10(10AA) Leave encashment subject to certain limits specified

(6) 10(108) Compensation on retrenchment subject to maximum of Rs 5,00,000

(7) 10(10BB) Payments under Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985

(8) 10(10BC) Compensation received or receivable on account of any disaster

(9) 10(10C) Amount received on voluntary retirement subject to maximum of Rs 5,00,000

(10) 10(10CC) Tax on non-monetary requisites paid by employer

(11) 10(11) Provident Fund

(12) 10(12) Payments from Recognized Provident Fund

(13) 10(13A) House Rent Allowance subject to certain limits specified

(14) 10(14) Notified Special Allowance subject to certain limits specified

(15) 10(16) Scholarships granted to meet the cost of education

(16) 10(17) Daily and consultancy allowance, etc. received by MPs and MLAs

(17) 10(17A) Award or Reward given by the Government

(18) 10(18) Pension received by certain awardees/any member of their families

(19 ) 10(21) Income of an approved scientific research association

(20) 10(22B) Income of specified news agency

22 . Difference between Marginal Tax Rate vs. Flat Tax Rate .

Ans: The other type of tax rate is the flat tax rate, which a few states implement for state income tax. Under this system of taxation, people aren’t taxed on a scale (like the marginal tax rate), but rather, flat across the board. In other words, everyone is charged the same rate, regardless of income level. Most systems that use a flat tax rate do not allow for deductions and are seen in countries with a rising economy. Those who support this system of taxation describe it as fair, as it taxes all people and businesses at the same rate. Those who oppose it believe that it results in high-income taxpayers paying less than they should for an equitable society.

23 . Define Marginal Tax Rate.

Ans: Under a marginal tax rate, taxpayers are most often divided inte tax tax brackets or ranges, which determine the rate applied to the taxable income of the tax filer. As income increases, what is earned will be taxed at a higher rate than the first dollar earned. In other words, the first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range into which it falls.

Marginal tax rates can be changed by new tax laws. The current marginal tax rates went into effect in the United States as of Jan. 1, 2018, with the passage of the Tax Cuts and Jobs Act (TCJA). Under the previous law, the seven brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new plan, signed into law by President Donald Trump in Dec. 2017, keeps the seven bracket-structure. However, adjustments were made to the tax rates and income levels. Under the TCJA, the new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

24. What’s The Difference Between Marginal And Average Tax Rates?

Ans: After the past week’s posts about the fiscal cliff and how it will affect you, I thought a post about the difference between your marginal tax rate and your average tax rate would be appropriate. It will be easier to follow this post if you simply watch the video, but I’ve included a brief summary below.

The United States’s tax system is progressive.

Basically, this means as your income increases, your income will fall into higher and higher marginal tax brackets. Marginal tax is the tax you will pay on your next dollar of income. If your next dollar of income falls within the 35% tax bracket, the tax rate that you pay on the next dollar of your earnings is 35%. So, the part of your income that falls within each tax bracket is taxed at the rate specified for that tax bracket.

Average tax is the taxes you have paid divided by your total income.

Therefore, your average percentage of your income you pay in taxes will almost always be less than the marginal tax rate of the tax bracket your income falls within.

It’s easier to describe this in video format, so watch the video below for a more thorough explanation.

Unfortunately I had to remove the video, but I’m working on an updated version which should be up by the end of July 2014.

As always, if you have any questions, feel free to post them in the comments section and I’ll be sure to address them.

25 . What is PAN ? How can it be procured as per the provisions of the Income Tax Act.

Ans: Permanent Account Number (PAN) [Section 139A]

(a) Where any person in the following category has not been allotted a Permanent Account Number (PAN), heshould apply to the Assessing Officer within the prescribed time for allotment of a PAN-

(1) Every person whose total income or the total income of any other person in respect of which the person isassessable under this Act during any Previous Year exceeded the basic exemption limit, or

(ii) Every person carrying on any business or profession whose total sales, turnover or gross receipts exceeds oris likely to exceed Rs.5 lakhs in any Previous Year; or

(iii) Every person who is required to furnish a return of income under section 139(4A); or

(b) The CBDT had introduced a new scheme of allotment of computerized 10 digits PAN. Such PAN comprises of 10 alphanumeric characters and is issued in the form of a laminated card.

(c) All persons who were allotted PAN (Old PAN) earlier and all those persons who were not so allotted but wererequired to apply for PAN, shall apply to the Assessing Officer for a new series PAN within specified time.

(d) Once the new series PAN is allotted to any person, the old PAN shall cease to have effect. No person who hasobtained the new series PAN shall apply, obtain or process another PAN.

(e) On receipt of allotment of PAN it must be mentioned on all tax payment challans, returns, correspondence.

(f) Where TDS or TCS is made, the person from whom it is made must communicate his PAN to the persondeducting or collecting tax.

(g) Every person receiving any document relating to a transaction prescribed under clause (c) of subsection.

(h) Shall ensure that the Permanent Account Number or the General Index Register Number has been duly quoted in the document.