Income From Other Sources

NEERAJ GUPTA CA IPCC TAX CLASSES
IFOS
CHAPTER - 7 INCOME FROM OTHER SOURCES

Section 56(1) 56(2) 56(2)(ib) 56(2)(vi)/(vii) 56(2)(viia) 57(i) 57(ii) 57(iia) 58 59 2(22) 10(35) 94 115BB 2(28B) 145 Particulars Income from other sources Charging section Specific incomes included under income from other sources. Winning from lotteries. Crossword, puzzles etc. Income to include gift of money/property from unrelated person. Value of shares received by a firm or a company for inadequate consideration or without consideration to be taxed in the hands of the receipient Deduction in case of dividends and interest on securities. Deductions permissible for letting out of machinery, plant, furniture and building. Deduction from family pension received by legal heirs of deceased employee. Amounts not deductible. Deemed income chargeable to tax. Deemed dividend. Exemption of income from units. Bond washing transaction. Rate of tax in case of winning from lotteries, crossword, puzzles etc. Interest on securities Method of accounting
This is the last and residuary head of income. Any income which is taxable under the Act but does not find place under any of the remaining four heads of income (i.e. Salaries, House Property, Business and Capital Gains) will be taxable under this residuary head 'Income from Other Sources'. DIVIDEND Main points of dividend income is discussed below in brief : (i) (ii) Dividend income from Domestic Company is exempt from tax for shareholder u/s 10(34). The Domestic company is liable to pay Dividend tax u/s 115-O @ 16.2225% [ 15% + 5% surcharge + 2% EC + 1% SHEC]. Surcharge is being computed on basic rate of 15% & EC/SHEC being calculated on Basic rate + surcharge. It is payable within 14 days of declaration or distribution, whichever is earlier. Dividend income is taxable as income from other source if such income is from a foreign company or from a cooperative society. From the gross dividend income, interest on borrowed capital to invest in such shares & brokerage etc. is fully deductible. Here income can be negative. Assessment Year 2013-14 For sms only 9810139214 Page 1
(iii)
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IFOS
(iv) (v)
Such dividend from foreign company is taxable as income from other source even if shares are held as stock-in-trade. Deemed dividend u/s 2(22)(e) is still taxable for recipients as IFOS. TDS applicable u/s 194 @ 10%.
Meaning of Domestic Company As per section 2(22A), Domestic Company means an Indian company, or any other company which, has made the prescribed arrangements for the declaration and payment, within India, of the Dividends income. Meaning of prescribed arrangements: [Rule 27] A company shall be considered to have made prescribed arrangements if it has complied with the following conditions: 1) The share-register of the company for the shareholders shall be regularly maintained at its principal place of business within India in respect of any assessment year from a date not later than 1st April of such year 2) The AGM for passing the accounts and for declaring the dividends shall be held only at a place within India. 3) The dividends declared, shall be payable only within India to all shareholders.
DIVIDEND
The dividend is the distribution of divisible profits by a joint stock company to its shareholders by way of return on investments in the shares of the company. DIVIDEND UNDER THE INCOME TAX ACT (DEEMED DIVIDENDS) Sec. 2(22) gives the definition of Deemed dividend which is chargeable to tax under the head Income from other source even if the receipt is not regarded as dividend under the Companies Act. Under section 2(22), following payments or distribution by a Company to its shareholders is deemed as dividends to the extent of accumulated profits of the company. ACCUMULATED PROFITS Accumulated profits should include the credit balance of the Profit and loss account, general reserves, investment allowance, capitalised profits (Bonus shares) and profits of the year upto the date of distribution/ liquidation. Even Reserve created out of agriculture income, Capital redemption reserve, Dividend equalisation reserve, Workmen Compensation reserve, Debenture redemption reserve, shipping reserve, Reserve for contingency etc. form part of Accumulated reserves.
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IFOS
However, provisions and reserves meant for specific liability, to the extent of the liability shall not be included. Provision for Income tax, provision for dividend, reserve for depreciation do not form a part of the accumulated profits. Share premium a/c shall not form part of accumulated profits. Accumulated profits includes tax free incomes e.g. agricultural income. SECTION 2 (22) (a) - ANY DISTRIBUTION BY A COMPANY TO THE EXTENT OF ACCUMULATED PROFITS INVOLVING THE RELEASE OF THE ASSET OF THE COMPANY: DIVIDEND INCLUDES any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company. It basically includes distribution of assets whether in cash or in kind. Example: A Ltd has share capital of Rs 50 lacs. The Company has General Reserves of Rs 20 lakhs and has distributed dividends. One of the shareholder Mr Ajay has received dividends of Rs 67,000 and is holding 4% of the shares. In this case, his share in accumulated profits is Rs 80,000 and hence entire amount of Rs 67,000 received by him shall be considered to be dividend. Held in Shashibala Navnitlal that Issue of bonus shares does not entail release of any assets of the company as the asset side remains intact. Hence it is not treated as dividend u/s 2(22)(a). Held in Central India Industries Ltd. (SC) When assets are distributed under section 2 (22) (a), the market value of the asset on the date of distribution has to be taken for computing the dividend. Question 1: A Ltd has accumulated profits of Rs 4,00,000 excluding capitalized profits i.e. bonus shares of Rs 1,00,000 issued in the past. The company distributed assets of Rs 3,50,000 to the shareholders. Compute the amount taxable as dividend if the market value of the asset on the date of distribution is : a) Rs 3,00,000 b) Rs 4,40,000 c) Rs 6,70,000 Note: The taxable amount is basically taxable for company @ 16.2225%. Section 2 (22) (b) Distribution of Debenture/ Deposit Certificates to Shareholders and bonus shares to preference shareholders: DIVIDEND INCLUDES (i) any distribution to its both equity and preference shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest and any distribution to its preference shareholders of shares by way of bonus. to the extent to which the company possesses accumulated profits, whether capitalised or not. Assessment Year 2013-14 For sms only 9810139214 Page 3
(ii)
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IFOS
Section 2(22)(c) Distribution to shareholders on liquidation of the company DIVIDEND INCLUDES any distribution made to the shareholders of a company on its liquidation, to the extent to which such distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not. Section 2 (22) (d) Distribution on reduction of share capital DIVIDEND INCLUDES any distribution to its shareholders by a company on reduction of its capital to the extent to which the company possesses accumulated profits, whether capitalised or not. Special note: Section 2(22)(c) & Section 2(22)(d) above do not include distribution in respect of preference shares issued for full cash consideration. Section 2 (22) (e) Loans/ Advances to certain shareholders/ concerns Before reading the provisions, please note that the provisions explained here are basically applicable for Private companies and not for listed public limited companies. DIVIDEND INCLUDES any payment by a company not being a company in which public are substantially interested [CLOSELY HELD COMAPANY] of any sum by way of loan/ advance to (i) a shareholder being the beneficial owner of shares &holding not less than ten percent of voting power. or (ii) to any concern - HUF/Firm/Company/AOP/BOI.in which such a shareholder ( i.e. beneficial owner of 10% or more of shareholding)is a member or a partner and in which he has a substantial interest - 20% of income/voting power at any time during P/Y. or (iii) to any person, on behalf of or for the individual benefit of such a shareholder( i.e. beneficial owner of 10% or more of shareholding) To the extent to which the company possesses accumulated profits.(excluding capitalised profits) Example 1: AB Pvt. Ltd. is a closely held company in which Mr. A is having 60% of share holding & Mr. B is having the remaining 40% of the shareholding. Situation I : AB Pvt Ltd. gives loan to Mr. A of Rs. 5,00,000 It is taxable for Mr. A as Income from other sources. Company will deduct TDS @10% on 5,00,000. Situation II. AB Pvt. Ltd gives loan to Mrs. A/brother of A/Friend of A for benefit of A/on behalf of A/on recommendation of A It is taxable for Mr. A as Income from other sources. Company will deduct TDS @10% on 5,00,000.
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IFOS
Situation III : AB Pvt Ltd. gives loan to Mr. A/relatives of A in the form of Medical facility/Housing facility/Telephone facility or any other facility It is taxable for Mr. A as Income from other sources. Company will deduct TDS @10% on 5,00,000. Example 2 : AB Pvt. Ltd. is a closely held company in which Mr. A is having 60% of share holding & Mr. B is having the remaining 40% of the shareholding. AXY Pvt Ltd./AXY (a partnership firm)/AXY(Any other concern) in which Mr. A has a share of 30%, Mr. X has a share of 50% , Mr. Y has a share of 20%. AB Pvt Ltd. gives loan of Rs. 5,00,000 to such concern. It is taxable for AXY as deemed dividend U/s 2(22) (e) under the head Income from other sources Company will deduct TDS @10% on 5,00,000. Special points: U/S 2 (22) (e), if loan is given to a Shareholder and on date of loan, his share holding was less than 10% and subsequently it is increased to 10% or more than Sec. 2 (22) (e) is not attracted. Thus, 10% or more shareholding is to be seen as on the date of loan. Even trade deposit to a shareholder will be treated as dividend u/s 2(22)(e). Payment on behalf of shareholder: Section 2(22)(e) covers not only advances and loans to shareholders but any other payments by the company on behalf of or for the benefit of individual shareholders, such as payments of shareholders personal expenses like air tickets etc., insurance premium, etc., to the extent of the accumulated profits of the company. If any such loan was given to more than one such shareholders, accumulated profits shall be reduced by the amount of the loan given to the earlier shareholder. As decided in CIT v. G. Narasimhan (1979)(Mad HC). Example : A Ltd has General reserves of Rs 20,00,000. The company has given a loan of Rs 15,00,000 on 18.7.2012 to Mr P holding 10% of the voting power and the company has given a loan of Rs 7,00,000 to Mr Q on 11.12.2012 who is holding 10% of the voting power. In this case, dividends in the hands of Mr P shall be Rs 15 lacs and in the hands of Mr Q, it will be Rs 5 lacs. If loan or advance was given to any such shareholder and subsequently the loan amount was repaid by him, even in such cases the loan or advance shall be considered to be dividend. As decided in Tarulata Shyam v. CIT (1977)(SC). Following are exempt u/s 2(22)(e) Any advance or loan made to a shareholder or a concern by a company in the ordinary course of it business where money lending is substantial part of the business of the company. Ordinary course of business shall mean that the loan or advance should be given to such shareholder at the same rate and terms as it is given to other borrowers. Any dividend paid by a company which is set off by the company against the whole or any part of the loan which has been deemed as dividend under section 2(22)(e) www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 5
IFOS
Example : AB Pvt. Ltd. an Indian company gives loan to Mr. A who is having 15% of shareholding in the company on 10th July 2012 of Rs.5,00,000. This amount will be taxable in the hands of Mr. A as Income from other sources. Now, the company at its AGM held on 28 Sep. 2012 declares dividend. Mr. A received Rs.3,00,000 as amount of dividend which is set off against the loan taken by from the company. This dividend is exempt in the hands of Mr. A U/s 10(34). No Corporate Dividend Tax U/s 115-O is payable by the company. More points: Dividend does not include any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act, 1956. Dividend does not include any distribution of shares made in accordance with the scheme of demerger by the resulting company to the shareholders of the demerged company whether or not there is a reduction of capital in the demerged company. Deductions for expenses from dividend income [Section 57(i) and 57(iii)] The following expenses can be claimed as deductions from gross dividend income: (a) Collection charges: e.g. commission or remuneration to a banker or any other agent/broker for the purpose of realising the dividend. Interest on loan: Interest on money borrowed for purchasing the shares can be claimed as deduction. This deduction can exceed the amount received by way of dividend. It interest is payable outside India, TDS must be done, otherwise deduction is not available. Practically, dividend declared by Indian company is exempt, hence above deductions cannot be claimed. But still dividend declared by foreign companies / cooperative societies is taxable and so deductions discussed above can be claimed.
(b)
BASIS OF CHARGE Method of accounting regularly employed by the assessee does not effect basis of charge of dividend income fixed by Section 8: Normal Dividend-Normal dividend declared at annual general meeting is deemed to be the income of the previous year in which it is declared. Deemed dividend-Notional dividend under section 2(22) is treated as the income of the previous year in which it is so distributed or paid. Interim dividend- Interim dividend is deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to a shareholder. Corporate Dividend Tax Section 115 O The Corporate Dividend tax payable by companies during financial year 2012 -13 is 16.2225%. [basic rate 15% + 5% surcharge + 2% education cess + 1% secondary & higher education cess]. This is payable by a company on equity dividend, preference dividend & deemed dividend u/s 2(22)(a)-(d). No CDT on 2(22)(e) deemed dividend.
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IFOS
Note : Surcharge on Corporate Dividend Tax is applicable irrespective of the Amount declared. Place of Accrual [Sec 9(1)(iv)] : Dividend paid by an Indian company is deemed to accrue or arise in India. Capital gain on distribution of assets by companies in liquidation [Section 46] Notwithstanding anything contained in Section 45, where the assets of the Company are distributed to its shareholders on its liquidation, such distribution shall not be regarded as a transfer by the company. Section 46(2) Where a shareholder on the liquidation of a company receives any money and/ or other assets from the company, then he shall be chargeable to income tax under the head capital gains and the sales consideration for such purpose shall be as under: Money received [+] Market value of the assets received as on the date of distribution Less: Amount assessed as Dividend u/s 2(22)(c) -----------------------------------------------------------------------------= Deemed Sales consideration for the shares in the liquidating company Less: Cost/ Indexed cost of shares ------------------------------------------------------------------------------= STCG / LTCG or [STCL / LTCL] For determining the nature of capital gains arising from the shares in liquidating company the period subsequent to the date on which the company goes into liquidation shall not be considered. Sales of assets received on liquidation [Section 55] Where the capital asset became the property of the assessee on distribution of capital assets by a company on its liquidation and the shareholder has been assessed to income tax under the head capital gains in respect of that asset u/s 46, the cost of acquisition of the asset will be the fair market value of the asset on the date of distribution. Question 2: X purchase 6,000 equity shares in A Ltd. on May 18, 1987 at the rate of Rs 15 per shares. A Ltd. goes into liquidation on October 31, 2012. The balance sheet of the company as on October 31, 2012 is as follows Rs. 6, 00,000 10,000 non listed shares in B Ltd. (cost: Rs 5,00,000, acquired in 2006) 40, 00,000 Cash in hand 6, 48,900 52, 48,900 Rs.
60,000 equity shares
Accumulated profit Provision for dividend tax
35, 00,000 17, 48,900 52, 48,900
The assets are distributed to the shareholders. Consequently, X gets 1,000 shares in B Ltd. (Market value Rs 3,50,000) and Rs 1,10,000 in cash on October 31, 2012. He transfers 1,000 shares on March 22, 2013 for Rs 4,40,000. Find out the tax consequence of these transactions.
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IFOS
Question 3: X holds 400 shares in A Ltd. since 1987 88 (Cost of acquisition: Rs 8,000). A Ltd. goes into liquidation on October 31, 2012. The balance sheet of the company as on October 31, 2012 is as follows Rs. 20,000 5 plots in Surat (cost of each plot: Rs 40,000 acquired on March 1, 2008) 22, 00,000 Cash in hand 3, 56,895 25, 76,895 Rs.
2,000 equity shares
Profit and loss A/c Provision for dividend tax
20,00,000 5, 76,895 25,76,895
At the time of liquidation, X gets 1 plot and Rs 44,000 in cash. X transferred the flat for Rs 5,20,000 on March 16, 2013. Ascertain the tax consequence of these transactions in hands of X and A Ltd. Question 4. Explain the Law Relating to Taxation of Gifts? TAXATION OF GIFT [SECTION 56(2)(vii)] Before studying the law relating to taxation of gifts, first understand the following basic terms as applicable to this concept: Immovable property : It includes land or building or both Movable property : It includes (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Shares and securities Jewellery Archaeological collections (museum type collections) Drawings Paintings Sculptures Any work of art Bullion (gold or silver coins or bars)
Jewellery for this purpose includes: 1. Ornaments made of gold, silver, platinum or any other precious metal. It may be part of a dress. 2. Precious or semi precious stones. It may be a part of any furniture, utensil or any other article. Important Date : The law discussed below is applicable only on gifts on October 1, 2009 or thereafter. Relevant persons : The law is applicable only on Individual or HUF.
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IFOS
Relative means 1. Spouse of the individual 2. Brother or sister of individual 3. Brother or sister of the spouse of the individual 4. Brother or sister of either of the parents of the individual 5. Any lineal ascendant or descendant of the individual 6. Any lineal ascendant or descendant of the spouse of the individual 7. Spouse of the person referred to in (2) to (6) The law 1. Gift of Cash / Cheque / Draft : If, through one or more transactions, gift received is upto Rs 50,000 per financial year, then nothing is taxable. If gift is Rs 50,001 or above, then it is fully taxable. For example, if gift of Rs 70,000 is received in cash, then taxable amount is Rs 70,000 and not Rs 20,000. 2. Gift of immovable property : In this case, if Stamp duty value is upto Rs 50,000 then nothing is taxable. If it is above Rs 50,000, then fully taxable. It is applicable for each individual transaction. Unlike above, if more than one transaction of Gift, below Rs 50,000, than they shall not be aggregated. Similarly, if there is consideration, may be less or say if difference between the actual selling price and Stamp duty value is more than 50,000, then the above law is not applicable. It is applicable only in case of gift i.e. when property is transferred without consideration. 3. Gift of movable property (one or more transactions) : If fair market value of all movable properties gifted in one financial year is upto Rs 50,000, then nothing is taxable. But if it is more than Rs 50,000, then it is fully taxable. 4. Movable property transferred for inadequate consideration : If difference between actual consideration and fair market value is more than Rs 50,000, all transactions of one financial year combined together, then the difference is fully taxable. If difference is upto Rs 50,000, than nothing is taxable. Exempted Gifts : 1. 2. 3. 4. 5. 6. Money / property received from a relative or by HUF from its members Money / property received on the occasion of the marriage of the individual Money / property received by way of will/inheritance Money / property received in contemplation of death of the payer. Money / property received from a local authority Money / property received from any fund, foundation, university, other educational institution, hospital, medical institution, any trust, or institution referred to in the section 10(23C). 7. Money / property received from a charitable institute registered u/s 12AA.
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IFOS
Special points 1. Gift on the occasion of birthday, marriage anniversary etc is not exempt. 2. Donor / Recipient may be resident or non resident. 3. Gift of non capital asset is not covered like personal car, rural agl land, stock in trade etc. Valuation of Jewellery, archaeological collections, drawings, paintings, sculptures or any work of art : Situation 1 : Purchased from a registered dealer : The invoice value shall be treated like fair market value. Situation 2 : In any other case : The price which such items would fetch if sold in the open market on the date of receipt of gift. EXAMPLES TO EXPLAIN THE LAW: 1. Gift before 1/10/2009 : The above law is not applicable. For example, Mr X gifts a plot to Mr Y on 22/9/2009. Stamp duty value is Rs 6 lacs. Mr X is not taxable under capital gains as it is not a transfer. Section 50C is not applicable. Mr Y is also not taxable as the gift is before 1/10/2009. If subsequent Mr Y sells the plot, the concept of previous owner is applicable. 2. Immovable property Stamp duty value upto Rs 50,000 Say Mr X gifts a plot having stamp duty value of Rs 45,000 to Mr Y. In this case, no transfer, so Mr X is not taxable. Mr Y is also not taxable as gift is upto Rs 50,000. In case of sale of plot by Mr Y, the concept of previous owner shall apply. 3. Immovable property Stamp duty value above Rs 50,000 Say Mr X gifts a property having stamp duty value of Rs 30,00,000 to Mr Y. Mr Y is taxable under the head IFOS for Rs 30,00,000. Mr X is not taxable as it is not a transfer. If Mr Y subsequently sells the property, COA shall be Rs 30,00,000 and period of asset shall be counted from the date of gift. Concept of previous owner not applicable. Question 5: Mr A purchased a building for Rs 5,00,000 in 2004-05. Cost of improvement in 2006-07 of Mr B sold the building on 13.1.2013 for Rs 50,00,000 (SDV is Rs 52,00,000). Compute taxable incomes for both Mr A & Mr B. 4. Immvoable property Inadequate consideration Gift law not applicable in this case. Normal provisions shall apply. Question 6: Mr A purchased a building for Rs 5,00,000 in 2004-05. Cost of improvement in 2006-07 is Rs 7,00,000. He sold it to his friend Mr B on 10.4.2012 for Rs 30,00,000. (SDV on this date is Rs 45,00,000). Mr B sold the building on 13.1.2013 for Rs 50,00,000 (SDV is Rs 52,00,000). Compute taxable incomes for both Mr A & Mr B. (CII for 2004-05 : 480, 2006-07 : 519)
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IFOS
5. Gift of Rural Agl Land / Motor car This law not applicable as gift of non-capital assets is not covered. 6. Purchase of Jewellery etc. from registered dealer : Suppose Jewellery is purchased from registered dealer against proper bill (invoice) at a price which is less than market value. In this case nothing is taxable for the purchaser. For example, Jewellery is purchased for Rs 6 lacs while market value is easily Rs 6,70,000. In this case, no deemed gift income. 7. Purchase of Jewellery etc from a person other than registered dealer : In this case, difference, if above Rs 50,000, then difference is taxable. Like in above case, if purchase is not from registered dealer, Rs 70,000 shall be taxable as IFOS. In case of subsequent sale by purchaser, Rs 6,70,000 shall be taken as COA.
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IFOS
Question 7: X receives the following gifts during the previous year 2012-13 1. On the occasion of marriage of X, he gets Rs.3,00,000 as gift on April 2, 2012 (out of which Rs.2,40,000 is received from friends of X and Mrs. X and remaining amount is received from close relatives of X and Mrs. X ) 2. On June 22, 2012, he gets a gifts of Rs.30,000 from P, who is cousin of his mother. 3. On July 24, 2012, he gets a gift of Rs.16,000 from D, who is elder brother of his grandfather. 4. On September 23, 2012, he gets a gift of Rs. 5,00,000 from his grandmother. 5. A computer received from his employer (it was purchased for Rs.57,000 by the employer on June 1, 2012 and given as gift to on September 27, 2012) 6. On November 3, 2012, purchases a house property from his friend D for Rs.89,000 (stamp duty value of the property is Rs. 8,90,000) 7. On November 27, 2012, X gets a gift of a building from his grandfather (stamp duty value is Rs.12,00,000). 8. In December 11, 2012, X gets by gift a commercial plot from the elder brother of his father-in-law (stamp duty value is Rs.22,00,000). 9. On January 8, 2013, he gets a gift of Rs.3,00,000 (cash gift of Rs.25,000 and gift of a work of art whose market value is Rs.2,75,000) from a notified public charitable institution. 10. X receives on January 15, 2013 a house property under will of a person known to him. The stamp duty value is Rs.45,50,000. 11. On January 24, 2013, he gets a wrist watch by gift (fair market value : Rs.33,000) from his friend B. 12. On January 29, 2013, he purchases a work of art for Rs.22,00,000 from an exhibition in London (the fair market value of the work of art on the date of purchase is Rs.23,00,000). 13. On February 2, 2013, he purchases an Office for Rs.9,00,000 (stamp duty value is Rs. 10,60,000). 14. On February 7, 2013, he gets a birthday gift of a gold chain (fair market value : Rs.22,000) from his friend. 15. On February 9, 2013, X gets by way of gift a plot of land in Pune from a partnership firm. The partnership firm has only two partners father of X and Mrs. X. The stamp duty value of the plot of land is Rs.22,00,000.
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IFOS
16. On February 17, 2013, X purchases 400 shares in Bata Chemicals from his friend D at Rs.80 per share (outside stock exchange). The lowest market quotation in the Bombay Stock Exchange on the date of purchase is Rs.400. 17. On March 3, 2013, X gets a gift of gold ring from a cousin of his father-in-law. The fair market value is Rs.22,000. 18. On March 22, 2013, X gets a paining by way of gift from PQR Ltd. Mrs X holds 60 per cent shares in PQR Ltd. The fair market value of paining is Rs.22,000. 19. On March 29, 2013, X gets a small plot of land by way of gift from a cousin of Mrs. X (stamp duty value is Rs.43,000). Compute the amount chargeable to tax in the hand of X under the head Income from other sources for the assessment year 2013-14. Question 8 . X receives the following gifts during the previous year 2012-13 : September 8, 2012 Cash gift of Rs.78,000 from a friend on marriage anniversary/ Birthday September 29,2012 Purchase of a house property from a friend for Rs.12,00,000 (stamp duty value is Rs.38,00,000) December 22, 2012 Purchase of a house property from Mrs. X for Rs.17,00,000 (stamp duty value is Rs.67,00,000) December 27, 2012 Purchase of a painting from an art gallery (being registered dealer under HARYANA VAT) for a concessional price of Rs.70,000 (invoice value is Rs.70,000, however, this painting can be easily sold for Rs.1,80,000) March 11, 2013 Cash gift of Rs.30,000 from a colleague March 14, 2013 Purchase of a second hand car for Rs.1,70,000 (fair market value is Rs.3,40,000) March 29, 2013 Cash gift of Rs.60,000 from a non-resident friend. Find out the amount chargeable to tax under the head Income from other sources for the assessment year 2013-14. Does it make any difference if X is a dealer in second hand cars and on March 14, 2013 the car is purchased as stock-in-trade? Question 9: How will you treat the gift of shares received by a closely held company. Ans: Receipt of shares by a firm or a closely held company Clause (viia) has been inserted in section 56(2) with effect from June 1, 2010. This clause is applicable, if the following conditions are satisfied 1. Recipient is a firm or a closely held company (i.e., a company in which the public are not substantially interested). 2. The asset (which is received) is in the form of shares in a closely held company (i.e. a company in which the public are not substantially interested). 3. These shares are received from any person. 4. Such shares are received on or after June 1, 2010. 5. Such shares are received without consideration or for an inadequate consideration.
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IFOS
6. Such shares are not received by way of a transaction referred to in section 47 (via)/(vic)/(vicb)/(vid)/(vii) [i.e., receipt of shares by a shareholder in a scheme of amalgamation, demerger, etc.] Consequences if these conditions are satisfied. If these conditions are satisfied, then value of such shares will be taxable in the hands of recipient (i.e., a firm or a closely held company) as follows Different situations Taxability in the hands of recipient (i.e. a firm or closely held company) Situation 1 Shares are received without Nothing is taxable in the hands of recipient. consideration and aggregate fair market value of these shares received during the previous year does not exceed Rs.50,000. Situation 2 Shares are received without Aggregate fair market value will be taxable in consideration and aggregate fair market the hands of recipient. value of these shares received during the previous year exceeds Rs.50,000 Situation 3 Shares are received for a Nothing is taxable in the hands of recipient. consideration which is less than fair market value and the aggregate difference does not exceed Rs.50,000 Situation 4 Shares are received for a Aggregate difference shall become taxable. consideration which is less than fair market value and the aggregate difference exceeds Rs.50,000 Note Situation Nos. 2 and 4 cannot be combined. Provisions illustrated X YZ Co. is a partnership firm (or it is a company in which the public are not substantially interested). It gets following assets Transactio n No. Nature of asset Consider ation paid by XYZ Co. Rs. Nil Nil 10,000 Nil Fair market value Rs. 9,00,000 22,00,000 5,30,000 7,00,000 Date of transfer
1 2 3 4
Fixed deposit receipt Shares in A Ltd. (a listed public limited company) Shares in B Ltd. (a listed public limited company) Shares in C Ltd. (in which public are not substantially interested) Shares in D Ltd. (in which public are not substantially interested) Shares in E Ltd. (in which public are not substantially interested)
July 7, 2012 July 8, 2012 July 6, 2012 May29, 2010 June 1, 2012 September 1, 2012 Page 14
Nil
10,000
Nil
40,000
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IFOS
Shares in F Ltd. ( in which public are not substantially interested) Shares in G Ltd. ( in which public are not substantially interested) Shares in H Ltd. (received in the scheme of merger of K Ltd. with H Ltd.)
70,000
1,50,000
October 11, 2012 November 11, 2012 December 11, 2012
9,000
19,000
N.A.
8,00,000
In the above cases 1. Transaction Nos. 1, 2, 3 and 9 are not covered by section 56(2) (viia). Consequently, in these cases nothing is taxable in the hands of X Co. 2. Shares are received in Transaction No. 4 before June 1, 2010. Section 56(2) (viia) is not applicable. 3. Transaction Nos. 5, 6, 7 and 8 are covered by section 56(2) (viia). Out of these transactions, shares are received without consideration in the case of Transaction Nos. 5 and 6. Since the aggregate fair market value (i.e., Rs.10,000 + Rs.40,000) does not exceed Rs.50,000, section 56(2) (viia) will not be applicable. Shares are received for inadequate consideration in Transaction Nos. 7 and 8. The aggregate difference of Rs 90,000 is taxable. Question 10 : What is the tax treatment if a closely held company receives money by way of share premium. Ans : Share premium in excess of fair market value [Sec.56(2) (viib), applicable from the assessment year 2013-14]. It is applicable as follows 1. Recipient is a company (not being a company in which the public are substantially interested.) 2. It receives consideration for issue of shares (preference shares or equity shares) from a resident person. 3. The consideration received for issue of shares exceeds the face value of such shares. In other words, shares are issued at a premium. If the above conditions are satisfied, the aggregate consideration received for such shares as exceeds the fair market value of the shares, shall be chargeable to income-tax in the hands of recipient-company under section 56(2) (viib) under the head Income from other sources. The above provisions are not applicable in the following two cases a. Where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund; or b. Where the consideration for issue of shares is received by a company from a class or classes of person as notified by the Central Government.
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The fair market value of the shares shall be the higher of the value a. As may be determined in accordance with the method as may be prescribed; or b. As may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, knowhow, patents copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. Question 11: What is the tax treatment of income from units of UTI / Mutual funds. Ans: Income from Units of UTI and Mutual Fund : Income from units of UTI and Mutual Fund is exempt from tax as per section 10(35). Note : On sale of Units Capital Gain is attracted. Question 12: What is the tax treatment of income from lotteries, horse racing etc. Ans: WINNINGS FROM LOTTERIES & betting, CROSSWORD PUZZLES, HORSE RACES AND CARD GAMES etc. SEC. 115 BB. It also includes income through draw of lots, television game shows and similar other games. Taxable at a flat rate of 30% without claiming any allowance or expenditure. Even if income is less than Rs 2,00,000 for the financial year 2012 13, these incomes are fully taxable. 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. 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. Deductions u/s 80C to 80U are not available against such incomes. Surcharge & education cess will apply in a usual way. 100 Net amount received X -----------------------100 (-) rate of TDS
Formula for grossing up:
TDS RATE: As per section 194B the TDS rate for lottery, crossword puzzles or card games or other games is 30% [No TDS if lottery etc. upto Rs 10,000 but if amount exceeds Rs 10,000 then TDS on whole amount]. As per section 194BB, the TDS rate for winning from horse races is 30% [No TDS if winning upto Rs 5000 but if winnings exceed Rs 5000 then TDS on whole winnings]. Note : No TDS is deducted if Lottery Price is less than Rs.10,000 but still the tax is payable by the assessee. Similarly no TDS in case of Winning from other races, gambling or betting.
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Question 13. Compute tax liability for assessment year 2013 14: (a) Salary income : Rs 20,000 pm (b) Dividend income from Indian company: Rs 45,000 (c ) Winning from Lottery : Rs 35,000 (d) Winning from Horse races: Rs 40,000 (e) Public provident fund contribution: Rs 20,000 Question 14. Compute tax liability for assessment year 2013 -14 (a) Business income: Rs 1,60,000 (b) Winning from card games: Rs 20,000 (c) Winning from betting: Rs 15,000 (d) Life insurance premium paid: Rs 26,000 Question 15: How will you tax the interest on securities. Ans: INTEREST ON SECURITIES: Such income is taxable under the head Profit and gains of business or profession, if the securities are held as stock-in-trade. And if they are held as investment, the interest will be taxable under the head Income from other sources. Interest on securities is taxable for the registered owner of securities, i.e. who is registered owner on the date, on which the interest falls due, even if he is not the owner of security for the period for which the Interest is being paid. For example, if the due date of interest for Debentures of XYZ Ltd. is 31st March, then who so ever is the owner of debentures on 31st March, shall be entitled to receive the interest for the full year, as well as he is taxable for the same, even though he might have purchased these debentures just one or two month back. It is the gross amount, which is taxable.
Grossing up of Interest: Interest is paid after TDS at following rates: Govt. Securities: Nil (In case of 8% saving bonds, if amount of interest exceeds Rs 10,000 then there is a TDS @ 10%) Listed / Non listed securities: 10% 100 Formula for grossing up: Net amount received X -----------------------100 (-) rate of TDS
Note: No tax is deductible on debentures issued by a widely held company if interest is paid/payable to an individual, resident in India and the aggregate amount of such interest paid or payable during the financial year does not exceed Rs 2500.
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Expenses deductible from Interest income The following expenses can be claimed as deductions from grossed up Interest income : (a) Collection charges: e.g. commission or remuneration to a banker or any other agent/broker for the purpose of realising the interest. (b) Interest on loan: Interest on money borrowed for purchasing the securities can be claimed as deduction. This deduction can exceed the amount received by way of interest. If interest is payable outside India, TDS must be done, otherwise deduction is not available. Basis of charge Interest on securities is chargeable on receipt basis if the books of accounts of such income are maintained on cash basis. If, however, books of accounts are not maintained or maintained on the basis of mercantile system of accounting, then interest on securities is taxable on accrual basis. Deduction of collection charges, interest on borrowed capital is allowed as per the method of accounting followed by the assessee. Interest exempt from tax [Sec. 10(15)] Interest on the following is exempt from tax: 1. Interest on notified securities, bonds or certificates: a. National Defence Gold Bonds, 1980 b. Special bearer bonds, 1991 c. Post office Cash certificates d. National Plan Certificates e. National Plan Savings certificates f. Post Office National Savings Certificates g. Post Office Savings Bank Account h. Post Office Cumulative Time Deposit Rules,1981 i. Special deposit Scheme, 1981 Interest on National Relief Bonds (only for individual and HUF) 7% Capital Investment Bonds (only for individual and HUF) Interest on notified bonds/ debentures of Public Sector companies Interest on deposits in a specified scheme made by a retired govt./public sector employee out of retirement benefits. Interest on Gold Deposit bonds Interest received by a non-resident Indian from notified bonds (i.e. NRI bonds).
2. 3. 4. 5. 6. 7.
Question 16: Discuss the various tax avoidance measures taken by investors to avoid tax on interest on securities. Ans: Bond Washing transactions and Chargeability of Interest (Section 94) Section 94(1) : The holder of securities is normally assessable on the whole interest, which falls due on the date of interest. But this rule is not applicable to bond washing transactions. A bond washing transaction consists of selling of securities just on the eve of due date of interest and buying back securities after the due date of interest is over. Thus, a high-income group assessee may avoid or reduce his tax liability by transferring the securities before the due date of interest to a person (generally a friend or relative) who has no taxable income or whose rate of tax is quite low. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 18
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As a result, the whole interest is includible in the income of the transferee who holds the securities on the due date of interest. Thus the tax liability may be wholly avoided or substantially reduced depending upon the total income of the transferee. To prevent this, it has been provided [under Sec. 94(1)] that the whole interest in respect of a bond washing transaction is deemed to be the income of the transferor and not that of transferee. Section 94(2): Another method of avoiding tax is sale of securities cum-interest. Section 94(2) provides that if an assessee, having beneficial interest in securities during the previous year, sells them in such a way that either no income is received or income received is less than the sum he would have received if interest had accrued from day to day, then income from such securities for such year would be deemed as income of such person. Exceptions: The assessing officer shall not apply the above rule in the following cases: (1) If the assessee proves to the satisfaction of the Assessing Officer that there has been no avoidance of income tax; or (2) If the assessee proves that the avoidance of income tax is exceptional and not systematic; and there was no avoidance of income tax in any of the three preceding years. Question 17: Family pension is taxable as IFOS. If there any deduction allowed against such income ? Ans: Standard deduction in the case of family pension [Sec. 57(iia)] In the case of income in the nature of family pension, the amount deductible is Rs. 15,000 or 331/3 per cent of such income, whichever is less. For this purpose family pension means a regular monthly amount payable by the employer to a person belonging to the family of an employee in the event of his death. Question 18: Whether income from letting of machinery, plant, furniture are IFOS. Ans: Income from letting out of machinery, plant or furniture [Section 56(2)(ii)] Income from machinery, plant or furniture, belonging to the assessee and let on hire, is chargeable as income from other sources, if the income is not chargeable to Income-tax under the head Profits and Gains of Business or Profession. In case any such assets are hired out as a part of the business activity carried on by the assessee or as commercial assets belonging to the assessee, the income derived there from is assessable as business income u/s 28 and not as income from other source u/s 56.
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Question 19: Discuss the taxation of composite letting of building and furnitures. Ans : Income from composite letting of machinery, plant or furniture and buildings [Section 56(2)(iii)]: Where an assessee lets on hire the machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, known as composite rent, if it is not chargeable to Income tax under the head Profits and gains from Business or profession, shall be chargeable as income from other sources. Deductions permissible from letting out of machinery, plant or furniture and buildings [Section 57(ii) and (iii)]: The following deductions are allowable: (a) Current repairs, rates and taxes of the building if given to others on composite rent. {Rent and taxes, however, shall be subject to Section 43B as in the case of Business or Profession}. (b) Insurance premium against risk of damage or destruction of the premises. (c) Repairs and insurance of machinery, plant or furniture. (d) Depreciation as per section 32 (e) Any other expenditure, expanded wholly and exclusively for the purpose of making or earning such income. Question 20: Write a note on tax treatment of Deep Discount bonds. Ans : Deep discount bonds : Vide Circular No. 2/2002, dated February 15, 2002, the Board has issued certain clarifications. Position before issue of circular no. 2/2002 : The Board had earlier clarified that the difference between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated as interest income assessable under the Income-tax Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds were held as investment, and as business income where the bonds were held as trading assets. On final redemption, however, no capital gains will arise. Example : Subscription Price Face Value
= 5,000 = 1,00,000
Situation I : No Sale of Bonds takes Place : Rs.1,00,00 Received on Maturity. As per Tax Provisions Rs.95,000 is taxable as Interest Income in the year of Maturity. No Capital Gain will be attracted. Situation II : Bonds sold before Maturity Date Selling Price (-) Subscription Price = Capital Gain the year of sale. No Interest Income will arise. Position after issue of circular no. 2/2002 : Substantial changes has been made vide Circular No. 2/2002 which are given below. These are applicable only in respect of bonds issued after February 15, 2002 : www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 20
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(1) Every person holding a Deep Discount Bond will make a market valuation of the bond as on the March 31 of each financial year. (2) The difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond during the relevant financial year and will be taxable as interest income (where the bonds are held as investments) or business income (where the bonds are held as trading assets). (3) Where the bonds is transferred at any time before the maturity date, the difference between the sale price and the cost of the bond will be taxable as short-term capital gains in the hands of an investor or as business income in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost for which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor upto to the date of transfer. (4) Where the bond is redeemed by the original subscriber, the difference between the redemption price and the value as on the last valuation date immediately preceding the maturity date will be taxed as interest income in the case of investors, or business income in the case of traders. (5) Investors holding Deep Discount Bonds up to an aggregate face value of Rs. 1,00,000 may, at their option, continue to offer income for tax in accordance with the earlier clarifications issued by the Board referred to in para above. Example : Subscription Price on 8th October 2012 = Rs.10,000 Market Value on 31st March, 2013 = Rs.18,000 On 31st March, 2014 = Rs.29,000 Treatment for Previous Year 2012-13, interest income will be = Rs.18,000 (-) Rs.10,000 = Rs.8,000 Interest Income for Previous year 2013-14 = 29,000 (-) 18,000 = 11,000 If Bonds sold during Previous Year 2012-13 the cost shall be taken as 10,000. If Bonds sold during 2013-14 then cost shall be =18,000. If Bonds sold during 2014-15, then cost shall be = 29,000. Interest on National Savings Certificates: REFER CHAPTER DEDUCTIONS UNDER SECTION 80C TO 80U. Question 21: Discuss various deductions and disallowances in the chapter IFOS. Ans: DEDUCTIONS AGAINST INCOME FROM OTHER SOURCE U/S 57 a. b. c. d. e. commission or remuneration for realising dividend or interest on securities Section 57(i) Repairs, depreciation in case of letting out of plant, machinery, furniture, building etc. Standard deduction in case of family pension 57(iia) Any other expenditure of revenue nature [57(iii)] Interest on borrowed capital [loan taken to invest in shares/ debentures etc.]
SPECIFIC DISALLOWANCES U/S 58 1. personal expenses 2. Interest paid outside India without TDS www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 21
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3. 4. 5. 6.
Salary paid outside India without TDS Wealth tax Amount specified by Section 40A [section 58(2)] No deduction in respect of winning from lottery, gambling income etc. [Section 58(4)] Where however, a certain percentage has to be foregone by the winner to the Govt./ agency conducting the lotteries, it is deductible (as it amounts to diversion by overriding title) Circular no. 461, dated July 9, 1986.
Deemed income chargeable to tax [Sec. 59] Where a deduction has been made in respect of a loss, expenditure or liability and subsequently any amount is received or benefit is derived in respect of such expenditure, then it shall be deemed as income in the year in which the amount is received or the benefit is accrued. Question 22: What are the incomes taxable under the head IFOS. Ans: SPECIFIC INCOME FROM OTHER SOURCES Section 56(2) Sub-section (2) of section 56 specifies nine incomes which are always taxable under the head Income from other sources. 1. Dividend 2. Winning from lotteries, etc. 3. Employees contribution towards staff welfare scheme If it is not taxable as business income 4. Interest on securities 5. Rental income of machinery, plant or furniture 6. Rental income of letting out of plant, machinery or furniture along with letting out of building and the two lettings are not separable 7. Sum received under Keyman insurance policy Any sum received under a Keyman insurance policy (including bonus) is taxable as income from other sources (if the same is not taxable as salary income or business income). 8. Gift 9. Interest on compensation or enhanced compensation MISC EXAMPLES OF IFOS (1) (2) (3) (4) (5) (6) (7) (8) Any fees or commission received by an employee from a person other than his employer. Any annuity received under a Will. It does not include an annuity received by an employee from his employer. All interest other than interest on securities, e.g., interest on bank deposits, interest on loan, or interest on provident fund, etc. Income of a tenant from sub-letting the whole or a part of the house property. Remuneration received by a teacher or a lawyer for doing examination work. Income of Royalty. Director's fees (for attending meetings etc). Rent of land not adjoining to any building. Assessment Year 2013-14 For sms only 9810139214 Page 22
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(9)
Agricultural Income from land situated outside India.
(10) Income from markets, ferries and fisheries, etc. (11) Income from leasehold property. (12) Income of other persons included in the total income of the assessee under sections 60 to 64 (clubbing of income). (13) Remuneration received for writing articles in Journals. (14) Interest received on foreign government securities. (15) Income from undisclosed sources. (16) Interest received by an employee on his own contributions to an unrecognized provident fund. (17) Salary of a Member of Parliament, Member of Legislative Assembly or Council. (18) Interest received on securities of co-operative society. (19) Family pension received by the widow and heirs of deceased employees (20) Income received from units of Unit Trust of India. (21) Director's Commission for giving guarantee to bank. (22) Director's Commission for underwriting shares of a new company. (23) Insurance Commission. Question 23: Whether any deduction is allowed against the dividend income. Ans : Deduction allowable from dividend income- There was a conflict of opinion whether interest on money borrowed for investing in shares was allowable as deduction if shares had not yielded income. The controversy was, however, laid to rest by the Supreme Court in CIT v. Rajendera Prasad Moody [1978] 115 ITR 519, wherein the Court held that interest paid is allowable as deduction even if the shares have not yielded any income during the previous year. Provisions illustrated The following illustrations are given to have a better understanding 1. X purchases shares in a foreign company by investing borrowed capital. Dividend from foreign company is chargeable to tax. During the previous year 2012-13 while income of X from dividend from the foreign company is Rs.70,000, interest on borrowed capital is Rs.99,000. In this case, income from other sources is (-) Rs.29,000, after deducting the entire interest liability of Rs.99,000 2. Suppose, in the above case dividend income is zero, then income from other sources would be (-) Rs.99,000. 3. Y purchases shares in an Indian listed company by investing borrowed capital. Dividend from an Indian company is not chargeable to tax in the hands of shareholders. Consequently, interest on borrowed capital is not deductible.
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Question 24: Whether any deduction is allowed against interest received on compensation. Ans : Amount deductible from interest on compensation [Sec.57 (iv)] Income by way of interest received on compensation or on enhanced compensation, shall be assessed under the head Income from other sources in the year in which it is received. This rule is applicable from the assessment year 2010-11. Under section 57(iv), 50 per cent of such interest is deductible. However, no other deduction is permitted. Provisions illustrated X owned a house property at Madurai. It was acquired by the Government in 2005-06. Compensation is awarded during 2010-11. Along with compensation, a sum of Rs.1,60,000 is payable by the Government for late payment of compensation (expenditure incurred by X for getting interest sanctioned is Rs.15,000)). The interest belongs to the previous years 2005-06 to 2010-11. Out of this interest, Rs.1,30,000 is received by X on March 31, 2012 and Rs.30,000 is received on April 10, 2012. The following income will be taxable under the head Income from other sources Assessment year 2012-13 Rs. 1,30,000 65,000 Nil Assessment year 2013-14 Rs. 30,000 15,000 Nil
Interest received Less : Amount deductible under section 57(iv) [50% of interest) Less : Actual expenditure of Rs.14,000 Income taxable under the head Income from other sources
65,000 Question 25. X, a resident individual, previous year ending March 31, 2013: DividendName of payer company Is it dividend under section 2(22) (e)
15,000
submits the following particulars of his income for the
Date declaration dividend
A Ltd., a foreign company B. Ltd., a foreign company C.Ltd., an Indian company D Ltd., an Indian company
No No No Yes
of Amount of of TDS under section 194@ 10% Rs. Jun 20, 2012 Nil July 8, 2012 Oct 22, 2012 Oct 31, 2012 Nil Nil 3000
Net amount paid to X
Rs. 60,000 40,000 20,000 27000
Interest paid by X on capital borrowed to invest in shares Rs. 70,000 5,000 1,000 4,000
Rent from letting a factory along with plant and machinery (letting out of factory cannot be separated from letting out of plant and machinery): Rs. 50,000. Collection charges in respect of rent: Rs. 500. Fire insurance premium in respect of building: Rs. 800. Fire insurance premium in respect of plant and machinery: Rs. 600. Repairs is respect of building: Rs. 2,000. Depreciation of building, plant and machinery: Rs. 7,000. Winnings from lottery on October 5, 2012: net amount: Rs. 56,000; tax deducted of source: Rs. 24,000. www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 24
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Winnings from card games : Rs. 13,500 (gross). Interest on securities issued by the Government of USA: Rs 20,000. During the previous year, X has received the following gifts Gift from whom Gift from a friend Gift from a known person Gift from brother Gift from grandmother received by will Gift from friend at the time of marriage of X Gift from a neighbor Date of gift June 13, 2012 August 19, 2012 September 11, 2012 October 10,2012 November 18, 2012 December 5, 2012 Amount Rs. 1,50,000 70,000 80,000 8,00,000 3,00,000 30,000
Determine the income chargeable under the head Income from other sources for the assessment year 2013-14 & Compute the tax liability. Question 26. X, a resident and ordinarily resident in India, gives the following particulars of his income and expenditure for the previous year ending March 31, 2013: Rent from letting a building (in Ajmer) along with plant and machinery (letting out of building cannot be separated from letting out of plant and machinery): Rs. 89,000; depreciation of building in Ajmer: Rs. 4,000; repairs and insurance of building (in Ajmer) and plant and machinery: Rs. 5,000. Dividend on Preference shares from an Indian company declared on July 31, 2012 : Rs. 20,000. Loan from another Indian company which is deemed as dividend under section 2(22) (e) is given on August 20, 2012 [net amount received: Rs. 36000, tax deducted at source: Rs. 4,000]. Royalty income : Rs. 20,000 Winnings from camel races on September 2, 2012 [net amount received: Rs. 25,000, tax deducted at source: Nil] Interest on 7 per cent Capital investment Bonds: Rs. 33,000. Gift received on Feb 20,2013 in foreign currency from a school friend : Rs. 30,000. Gift from another friend on March 31, 2013: Rs. 20,000 Determine the income chargeable under the head Income from other sources for the assessment year 2013-14. Also compute tax liability
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Question 27. X holds the following securities on April 1, 2012: Rs. 6,00,000 Rs. 70,000 6% MP Government loan (date of payment of interest: Oct 15) 5% Non listed debentures of XYZ Ltd. (dates of payment of interest : Apr 15 and Oct 15 every year). 10% debentures of ABX Ltd, (dates of payment of interest: July 25 and Jan 25 every year).
Rs. 40,000
In september 2012, he received interest of Rs 18,000 from Relief Bonds. On Oct 19, 2012, X sells Rs. 40,000 10% debentures of ABX Ltd, Calculate the taxable income of X for the assessment year 2013-14 on the assumption that he has capital gain of Rs 50,000 and he has received a gift of Rs. 3 lakhs in foreign currency from a friend on March 30, 2013 on his marriage anniversary which is also his birthday. He also received a gift of Rs 60,000 from his wife & a diamond ring from his uncle worth Rs 70,000 on the same day Question 28. X holds the following securities on April 1, 2012: Rs. 60,000 8% securities of Punjab Government (date of payment of interest : Nov 30 every year). Rs. 80,000 9% securities of HP Government (date of payment of interest : March 25 every year). Rs. 90,000 6% debentures of XYZ Ltd. (date of payment of interest: June 22 every year). On September 30, 2012, he sells Rs. 80,000 6% debentures of XYZ Ltd. and invests the sale proceeds in listed debentures of ABC Ltd. During the previous year 2012-13, he receives Rs, 14,400 (net) as interest on listed debentures of ABC Ltd. Interest on 9% HP Government securities which has accrued on March 25, 2013, is received by X on April 2, 2013. Calculate the taxable income of X for the assessment year 2012-13, assuming that his income from House property is Rs. 80,000. X maintains books on mercantile system of accounting.
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QUESTIONS BASED ON PRACTICE MANUAL Question 29. The following details have been furnished by Mrs. Hemali pertaining to the year ended 31.3.2013 : (i) Cash gift of Rs.51,000 received from her friend on the occasion of her Shastiaptha Poorti, a wedding function celebrated on her husband completing 60 years of age. This was also her 25th wedding anniversary. On the above occasion, a diamond necklace worth Rs.2 lacs was presented by her sister living in Dubai. When she celebrated her daughters wedding on 21.2.2013, her friend assigned in Mrs. Hemalis 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.51,000.
(ii) (iii)
Compute the income, if any, assessable as income from other sources. Question 30. Decide the following transactions in the context of Income-tax Act, 1961 : (i) Mr. B transferred 500 shares of Reliance Industries Ltd. to M/s B Co. (P) Ltd. on 10.10.2012 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 12AA) in December 2012 for meeting his medical expenses.
Question 31. Rahul holding 28% of equity shares in a company took a loan of Rs.5,00,000 from the same company. On the date of granting the loan, the company had accumulated profit of Rs.4,00,000. The company is engaged in some manufacturing activity. (i) Is the amount of loan taxable as deemed dividend in the hands of Rahul, if the company is a company in which the public are substantially interested? (ii) What would be your answer, if the lending company is a private limited company (i.e.) a company in which the public are not substantially interested? Question 32. From the following particulars of Pankaj for the previous year ended 31st March, 2013, compute the income chargeable under the head Income from other sources . Rs. (i) Directors fee from a company 10,000 (ii) Interest on bank deposits 3,000 (iii) Income from undisclosed source 12,000 (iv) Winnings from lotteries (Net) 35,000 (v) Royalty on a book written by him 9,000 (vi) Lectures in seminars 5,000 (vii) Interest on loan given to a relative 7,000 Interest on debentures of a company 3,600 www.ngpacollege.com Assessment Year 2013-14 For sms only 9810139214 Page 27
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(viii) (ix) (x) (xi)
(listed in a recognized stock exchange) net of taxes Interest on Post Office Savings Bank Account Interest on Government Securities Interest on Monthly Income Scheme of Post Office
500 2,200 33,000
He paid Rs.1,000 typing the manuscript of book written by him. Question. 33. Choose the correct answer with reference to the provisions of the Income-tax Act, 1961. (i) Rakesh received Rs.70,000 from his friend on the occasion of his birthday. (a) The entire amount of Rs.70,000 is taxable (b) Rs.20,000 is taxable ( c) The entire amount is exempt (d) None of the above. (ii) Family pension received by a widow of a member of the armed forces where the death of the member has occurred in the course of the operational duties in the circumstances and subject to prescribed conditions, is (a) (b) (c) (d) (iii) Exempt upto Rs.3,00,000 Exempt upto Rs.3,50,000 Totally exempt under section 10(19) Totally chargeable to tax Gift of Rs.5,00,000 received on 10th July, 2012 through account payee cheque from a non-relative regularly assessed to income-tax, is (a) A capital receipt not chargeable to tax (b) Chargeable to tax as income from other sources (c) Chargeable to tax as business income (d) Exempt upto Rs.50,000 and balance chargeable to tax as income from other sources.
Question 34. State whether True/False with proper reasons of the following statements with regard to provisions of Income-tax Act, 1961: A receives Rs.2 lakh from his friends on the occasion of his marriage on 22.12.2012 and Rs.1 lakh from the brother of his father-in-law on 31.12.2012. As income includible under other sources for the previous year 2012-13 would be Rs.3 lakh.
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IFOS
Question 35. Check the taxability of her marriage gifts received by Mrs. Rashmi during the previous year 2012-13 and compute the taxable income from gifts for Assessment Year 201314: (i) On the occasion of her marriage on 14.8.2012, she has received Rs.90,000 as gift out of which Rs.70,000 are from relatives and balance from friends. (ii) On 12.9.2012, she has received gift of Rs.18,000 from cousin of her mother. (iii) A cell phone worth Rs.21,000 is gifted by her friend on 15.8.2012. (iv) She gets a cash gift of Rs.25,000 from the elder brother of her husbands grandfather on 25.10.2012. (v) She has received a cash gift of Rs.12,000 from her friend on 14.4.2012. QUESTIONS BASED ON STUDY MODULE Question 36. Mr. A, a dealer in shares received the following without consideration during the P.Y. 2012-13 from his friend Mr. B 1. Cash gift of Rs.75,000 on his anniversary, 15th April, 2012. 2. Bullion, the fair market value of which was Rs.60,000, on his birthday, 19th June, 2012. 3. A plot of land at Faridabad on 1st July, 2012, the stamp value of which is Rs.5 lakh on that date. Mr. B had purchased the land in April, 2007. Mr. A purchased from his friend C, who is also a dealer in shares, 1000 shares of X Ltd. @ Rs. 400 each on 19th June, 2012, the fair market value of which was Rs.600 each on that date. Mr. A sold these shares in the course of his business on 23rd June, 2012. Further, on 1st November, 2012, Mr. A took possession of property (building) booked by him two years back at Rs.20 lakh. The stamp duty value of the property as on 1st November, 2012 is Rs.32 lakh. On 1st March, 2013, he sold the plot of land at Faridabad for Rs.7 lakh. Compute the income of Mr. A chargeable under the head Income from other sources and Capital Gains for A.Y.2013-14. Question 37. Interest on enhanced compensation received by Mr. G during the previous year 2012-13 is Rs.5,00,000. Out of this interest Rs.1,50,000 relates to the previous year 2007-08, Rs.1,65,000 relates to previous year 2008-09 and Rs.1,85,000 relates to previous year 2009-10. He incurred Rs.50,000 by way of legal expenses to receive the interest on such enhanced compensation. Discuss the tax implication, if any, of such interest income for A.Y.2013-14.
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IFOS
EXAMINATION QUESIONS PCC MAY-2012

Question 38 (1 Marks) State whether the following are chargeable to tax and the amount liable to tax. 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.
IPCC MAY-2011
Question (4 Marks) Already covered in Practice Manual questions
PCC MAY-2011
IPCC NOV-2011
IPCC NOV-2010
Question39. State under which heads the following incomes are taxable: (i) Rental income in case of dealer in property (ii) Dividend on shares in case of a dealer in shares (iii) Salary 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 (4 Marks)
IPCC JUNE-2009
Question 40. (2 Marks) Mr. P, a shareholder of a closely held company, holding 16% shares, received advances from that company which is to be deemed as dividend from an Indian Company, hence exempted under section 10(34) of the Income-tax Act, 1961. State whether it is true or false.
IPCC NOV 2009

Question Already covered.
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IFOS
PE-II NOV- 2008

Question ( 6 Marks) Already covererd
PCC MAY- 2008

Question 41. (8 Marks) Mr. X purchased 10,000 equity shares of Rejesh Co. Pvt. Ltd. on 28.02.2012 for Rs. 1,20,000. The company was wound up on 31.07.2012. The following is the summarized financial position of the company as on 31.07.2012: Liability 1,00,000 Equity shares General reserve Provision for taxation Rs. Assets 10,00,000 Land 40,00,000 Cash at bank 2,50,000 52,50,000 Rs. 42,00,000 10,50,000 52,50,000
The tax liability (towards dividend distribution tax) was ascertained at Rs. 3,00,000. The remaining assets were distributed to the shareholders in the proportion of their shareholding. The market value of land as on 31.07.2012 is Rs.100,00,000. The land received above was sold by Mr. X on 28.02.2013 for Rs. 15,00,000. Discuss the tax consequences in the hands of the company and Mr. X
PE-II MAY-2008
Question Already covered (1 Mark)
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NEERAJ GUPTA CA IPCC TAX CLASSES

CHAPTER - 7 INCOME FROM OTHER SOURCES

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

60,000 equity shares

Accumulated profit Provision for dividend tax

35, 00,000 17, 48,900 52, 48,900

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

2,000 equity shares

Profit and loss A/c Provision for dividend tax

20,00,000 5, 76,895 25,76,895

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

October 11, 2012 November 11, 2012 December 11, 2012

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Formula for grossing up:

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

NEERAJ GUPTA CA IPCC TAX CLASSES

Assessment Year 2013-14

For sms only 9810139214

NEERAJ GUPTA CA IPCC TAX CLASSES

NEERAJ GUPTA CA IPCC TAX CLASSES

NEERAJ GUPTA CA IPCC TAX CLASSES

NEERAJ GUPTA CA IPCC TAX CLASSES