Economic Legislation II 1005

Question Paper
Economic Legislation-II (162) : October 2005

• Answer all questions.
• Marks are indicated against each question
1. Mr. Pasha, an official of the US embassy in India, receives remuneration in India. What is the < Answer >
maximum amount that is exempted from tax for the Assessment year 2005-06 in the hands of Mr.
Pasha?
(a) The entire amount is exempted from tax
(b) The entire amount is exempted from tax only if the corresponding Indian official enjoys a similar
exemption in the US
(c) No exemption is allowed
(d) He can claim the same exemptions as any other Indian assessee
(e) Only 50% of the remuneration is exempted from tax.
(1 mark)
2. Under which of the following situations, is clubbing of agricultural income with < Answer >
non-agricultural income, in the hands of Hindu Undivided Family (HUF) not applicable for the
Assessment Year 2005-06?
(a) Where the agricultural income is Rs.4,000 and the non-agricultural income is Rs.90,000
(b) Where the agricultural income is Rs.6,000 and the non-agricultural income is Rs.1,00,000
(c) Where the agricultural income is Rs.5,500 and the non-agricultural income is Rs.1,50,000
(d) Where the agricultural income is Rs.5,500 and the non-agricultural income is Rs.1,10,000
(e) Where the agricultural income is Rs.7,000 and the non-agricultural income is Rs.1,85,000.
(1 mark)
3. Which of the following statements is true in respect of the salary and other allowances received by a < Answer >
Member of Parliament?
(a) It is taxable under the head ‘Income from salaries’
(b) It is taxable under the head ‘Profits and gains from business or profession’
(c) It is taxable under the head ‘Income from other sources’
(d) It is taxable under the head ‘Income from salaries’ in respect of the salary and ‘Income from other
sources’ in respect of the allowances
(e) It is exempted from tax.
(1 mark)
< Answer >
4. Mr.Purohit has the following income for the previous year 2004-05:
Particulars Rs.
Income from salaries (net) 4,25,000
Income from long term capital gains covered by 1,15,000
Securities Transaction Tax
Income from lotteries (gross) 1,40,000
What is the tax liability of Mr.Purohit for the assessment year 2005-06?
(a) Rs.1,78,000 (b) Rs.1,66,500 (c) Rs.1,70,700
(d) Rs.1,70,200 (e) Rs.1,46,370.
(2 marks)
< Answer >
5. Which of the following incomes of a professional institution is/are exempted from income Tax?
(a) Income from the house property held by the Institute
(b) Interest on the investments
(c) Income received for rendering any specific services
(d) Any income other than the income from the house property, interest/ dividends and from rendering
specific services
(e) Dividends on the investments.
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(1 mark)
< Answer >
6. Which of the following incomes is not exempted u/s 10 of the Income Tax Act?
(a) Income received from farm buildings used for dwelling purpose
(b) Daily allowance received by Member of Parliament
(c) Share of profit from a partnership firm
(d) Amount received from Life Insurance policies
(e) Stipend receipts
(1 mark)
7. Which of the following is true in respect of the pension earned and received abroad, but later remitted < Answer >
to India, by a pensioner?
(a) It is chargeable to tax if the pensioner is non-resident
(b) It is chargeable to tax if the pensioner is resident and ordinarily resident
(c) It is chargeable to tax if the pensioner is resident but not ordinarily resident
(d) It is not chargeable to tax as it is received abroad
(e) Pension is not taxable.
(1 mark)
8. Mr.Peeyush, a citizen of China, visited India for the first time in June 2000. The number of days he was < Answer >
in India for the past 5 years is as under:
Financial year Day
2000-2001 92
2001-2002 96
2002-2003 86
2003-2004 97
2004-2005 78
The residential status of Mr.Peeyush for the assessment year 2005-06 is

(a) Resident and ordinarily resident
(b) Resident but not ordinarily resident
(c) Non-resident
(d) Non-resident and ordinarily resident
(e) Non-resident and not ordinarily resident.
(1 mark)
< Answer >
9. The surcharge in the case of the domestic company assessees for the assessment year 2005-06 is
(a) 5 percent (b) 10 percent (c) 2.5 percent (d) 12 percent (e) Nil.
(1 mark)
< Answer >
10. Mr. Prashant received on maturity an amount of Rs.4,75,000 from the LIC in respect of a policy issued
after March 31, 2003 with an assured value of Rs.3,50,000. The annual premium paid by him was
Rs.85,000 during the life of the policy .What is the amount that is taxable in the hands of Mr.Prashant
for the assessment year 2005-06?
(a) Rs.4,75,000 (b) Rs.3,50,000 (c) Rs.1,25,000
(d) Rs.Nil (e) Rs.62,500.
(2 marks)
< Answer >
11. Mr.Pramod, who is employed in public sector company has non-agricultural income and agricultural
income for the previous year 2004-05 amounting to Rs.1,65,000 and Rs.45,000 respectively. The
income tax liability of Mr.Pramod for the assessment year 2005-06 is
(a) Rs.Nil (b) Rs.29,580 (c) Rs.7,500
(d) Rs.17,000 (e) Rs.11,550.
(1 mark)
< Answer >
12. Mr. Pandit has been provided by his employer M/s. Linda and Co. two cars for both official and the
personal use. He is drawing a salary of Rs.4,50,000 per annum. The expenses incurred by the employer
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in respect of the cars are as under:
Car 1 (1300 c.c.) Car 2 (1650 c.c.)
Cost of the car Rs.3,50,000 Cost of the car Rs.4,75,000
Maintenance expenses Rs.37,500 Maintenance expenses Rs.42,500
No driver is provided Salary of the driver Rs.24,000.
If Mr.Pandit uses one car for both official and private purposes and the other only for the private
purpose, what is the minimum taxable value (assuming Mr.Pandit goes for the best option) of the
perquisite in respect of the cars for the assessment year 2005-06 in the hands of Mr.Pandit?
(a) Rs.1,04,400 (b) Rs.98,900 (c) Rs.86,900 (d) Rs.1,09,200 (e) Nil.
(1 mark)
< Answer >
13. Ms.Purba retires on March 31, 2005 from a private company. As per the company policy she was
entitled for an annual leave of 20 days. Balance leave to be encashed at the time of retirement is 200
days. Her salary at the time of retirement was Rs.14,500. She was given an increment of Rs.2,500 from
the month of November 2004. An amount of Rs.1,25,000 was paid to her as leave encashment at the
time of retirement. What is the taxable portion of the leave encashment for the assessment year 2005-
06?
(a) Rs.1,25,000 (b) Rs.88,333 (c) Rs.36,667 (d) Rs.1,32,500 (e) Rs.Nil.
(2 marks)
< Answer >
14. Ms.Parvati, retired from service with effect from December 31, 2004 at the age of 65 years (she was
born on October 31,1939). She furnishes the following information in respect of the salary and the
pension received by her for the previous year 2004-05:
Particulars Amount
Rs.
Salary upto December 31, 2004 (basic) 2,50,000
Pension from January, 2005 24,000
Employer’s contribution to the Recognised Provident Fund 30,000
Lumpsum received from the provident fund 6,75,000
Income from the deposit of the retirement benefits (in companies) 85,000
What is the tax liability of Ms.Parvati for the assessment year 2005-06?
(a) Rs.72,700 (b) Rs.69,100 (c) Rs.67,700
(d) Rs.49,154 (e) Rs.47,200.
(3 marks)
< Answer >
15. Mrs. Prerna is an employee of a private company in the city of Baroda. She draws an amount of
Rs.30,000 pm. as basic salary. Besides, her employer also pays an amount of Rs.7,500 p.m as HRA. She
takes a house on rent only from September 01, 2004 @ Rs.8,000 per month. What is the quantum of
HRA taxable in the hands of Ms.Prerna for the assessment year 2005-06?
(a) Rs.30,000 (b) Rs.55,000 (c) Rs.82,000
(d) Rs.32,500 (e) Rs.28,000.
(2 marks)
< Answer >
16. Pallavi Transports, a transport company grants allowances to its drivers to meet their personal
expenditure in the course of their duty. Mr. Prasad is working as a driver from May 2004 and gets an
amount of Rs.65,000 as the allowance for the year 2004-05 and he is not in receipt of the daily
allowance. What is the taxable portion of the allowance in the hands of Mr.Prasad for the assessment
year 2005-06?
(a) Rs.72,000 (b) Rs.45,500 (c) Rs.66,000 (d) Rs.19,500 (e) Rs.65,000.
(1 mark)
< Answer >
17. Mr.Pattabhi retires from service on December 31, 2004 and he has the following income for the
previous year 2004-05:
Particulars Rs.
Basic pay @Rs.16,000 per month for 9 months 1,44,000

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Dearness pay (50% forms part of the retirement benefits) Rs.8,000 per month for 9
months 72,000
Dearness pay (50% forms part of the retirement benefits) Rs.8,000 per month for 9
months 72,000
Lumpsum payment received from the Unrecognised Provident Fund 6,00,000
Deposits in the PPF account 40,000
Out of the amount received from the provident fund, the employers share was Rs.2,20,000 and the
interest thereon Rs.50,000. The employee’s share was Rs.2,70,000 and the interest thereon Rs.60,000.
What is the taxable portion of the amount received from the unrecognized provident fund in the hands
of Mr. Pattabhi for the assessment year 2005-06?
(a) Rs.3,30,000 (b) Rs.2,70,000 (c) Rs.2,80,000 (d) Rs.1,10,000 (e) Rs.6,00,000.
(2 marks)
< Answer >
18. The salary of Mr. Pillai for the Assessment year 2005-06, after the deduction of the tax at source of
Rs.8,000 and his contribution to the provident fund at 15% is Rs.1,24,600. What is the gross salary of
Mr.Pillai for the Assessment year 2005-06?
(1 mark)
< Answer >
19. Ms. Pratibha, an employee of a private company, is entitled to a pension of Rs.5,500 per month but no
gratuity. She retires on March 31, 2004 and gets 25% of pension commuted on December 31,2004 for
Rs.1,80,000. The amount of pension taxable in the hands of Ms.Pratibha for the assessment year 2005-
06 is
(a) Rs.1,80,000 (b) Rs.49,500 (c) Rs.Nil (d) Rs.61,875 (e) Rs.66,000.
(1 mark)
< Answer >
20. Mr.Prakash, an employee of PQR Ltd., sends his 2 children and a dependant brother to the school
owned and maintained by the company. The company incurs an expenditure of Rs.1,00,000 on the
children and Rs.90,000 on the brother for providing the education. It recovers an amount of Rs.45,000
and Rs.30,000 respectively from Mr.Prakash. What is the taxable value of the perquisite in the hands of
Mr.Prakash for the assessment year 2005-06?
(a) Rs.67,000 (b) Rs.1,21,000 (c) Rs.91,000 (d) Rs.1,15,000 (e) Rs.79,000.
(1 mark)
< Answer >
21. Mr.Parmesh has the following sources of income for the previous year 2004-05:
Particulars Amount Rs.
Income from long term capital gains (chargeable to Securities 2,75,000
Transaction Tax)
Income from profession 1,90,000
Deposit in the PPF 12,000
Investment in the infrastructure company 70,000
Investment in the MEP 2004 10,000
What is the tax liability of Mr.Parmesh for the assessment year 2005-06?
(a) Rs.1,15,770 (b) Rs.84,580 (c) Rs.47,600 (d) Rs.15,550 (e) Rs.17,820.
(2 marks)
< Answer >
22. The scholarships given by the employer-company to the children of its employees at its discretion over
and above the terms of the employment is
(a) Taxable in the hands of all the employees
(b) Taxable in the hands of specified employees only
(c) Taxable in the hands of non-specified employees only
(d) Not assessed as a perquisite
(e) Taxable at a specific percentage.
(1 mark)
< Answer >
23. In respect of a non-government employee (not covered by the Payment of Gratuity Act), the number of
completed years of service is equal to
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(a) The total service, including the fraction of the year
(b) Total service, ignoring the fraction of the year
(c) The total service, including the fraction of the year, in excess of six months
(d) Total service ignoring the fraction of the year less than six months
(e) Maximum of thirty years.
(1 mark)
< Answer >
24. Mr.Partha has been given the following allowances in addition to the salary, by his employer
Particulars Actual allowance Actual amount
received (Rs.) spent (Rs.)
Transport allowance 20,000 15,000
Transfer allowance 50,000 56,000
Research allowance 25,000 19,0 00
Uniform allowance 14,000 14,000
What is the total amount of the allowances taxable in the hands of Mr.Partha?
(a) Rs.1,09,000 (b) Rs.1,04,000 (c) Rs.5,000 (d) Rs.16,400 (e) Rs.11,000.
(2 marks)
< Answer >
25. Ms.Priya received the following emoluments for the previous year 2004-05.
Particulars Amount (Rs.)
Basic salary 3,75,000
Bonus 25,000
City compensatory allowance 1,15,000
Entertainment allowance 5,000
Professional tax paid 2,400
Calculate the tax liability of Ms.Priya for the assessment year 2005-06.
(a) Rs.1,01,266 (b) Rs.1,25,746 (c) Rs.1,07,386 (d) Rs.95,780 (e) Rs.93,280.
(2 marks)
< Answer >
26. For the Assessment year 2005-06, XY.Ltd. a private company has a taxable income of Rs.95,000. The
amount of rebate that can be claimed by XY.Ltd. for the Assessment year 2005-06 under section 88D is
(a) Rs.29,070 (b) Rs.33,250 (c) Rs.10,000 (d) Rs.5,000 (e) Nil.
(1 mark)
< Answer >
27. The lump sum paid for long and meritorious service rendered by an employee is
(a) Pension (b) Gratuity
(c) Contractual Bonus (d) Retrenchment Compensation (e) Honorarium.
(1 mark)
< Answer >
28. Consider the following data of a house property which is let out during the assessment year 2005-2006:
Particulars Rs.
Municipal value 1,90,000
Fair rent 2,00,000
Standard rent under Rent Control Act 2,10,000
Annual rent 2,40,000
Unrealized rent during the year 44,000
Loss due to vacancy 6,000
Vacancy period 1.5 months
The Gross annual value of the property
(a) Rs.2,40,000 (b) Rs.2,00,000 (c) Rs.1,80,000 (d) Rs.1,70,000 (e) Rs.1,60,000
(3 marks)
< Answer >
29. Which of the following statements is/ are false in respect of the interest on the house property loan?
(a) The interest can be claimed as a deduction irrespective of whether paid or not during the previous
year
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(b) Deduction is available only if either the principal or the interest is a charge on the property
(c) Interest on the unpaid interest is not deductible
(d) Interest on a fresh loan taken to repay the original loan raised for the purchase, construction or
repair of the house property is allowed as a deduction
(e) No deduction is allowed for any brokerage or commission for arranging the loan.
(1 mark)
< Answer >
30. Ms.Pushpa and Ms.Priyadarshini are the co-owners of a property, sharing in the ratio of 7:3. The
property has been self occupied and the municipal taxes paid are Rs.27,000. The interest on the loan
borrowed for the purpose of the said house is Rs.75,000. The loan was borrowed in the year 1998. What
is the annual value of the property chargeable in the hands of Ms.Pushpa for the assessment year 2005-
06?
(a) Rs.52,500 (loss) (b) Rs.30,000 (loss)
(c) Rs.22,500 (loss) (d) Rs.52,500 (e) Rs.30,000.
(1 mark)
< Answer >
31. Income from which of the following properties is not covered under the head income from house
property?
(a) Income from the house property in a foreign country held by a resident
(b) Income from the disputed house property
(c) Income from the property held as stock-in-trade
(d) Income from the letting of the property where the letting is only incidental and subservient to the
main business of the assessee
(e) Income from the house property held by co-owners.
(1 mark)
< Answer >
32. Ms.Poona owns a house property, which has 2 equal units, one of which is self-occupied and the other
let out. The fair rent of the entire property is Rs.1,60,000, municipal value is Rs.1,65,000 and the
standard rent fixed by the rent controller is Rs.1,64,000. The rent received from the tenant is Rs.6,000
per month. Interest on the capital (borrowed in 2002 for the construction of the property) is Rs.72,000.
What is the annual income from the property to be taxed in the hands of Ms. Poona for the assessment
year 2005-06?
(a) Rs.14,600 (loss) (b) Rs.36,000 (loss)
(c) Rs.21,400 (d) Rs.22,800 (e) Rs.43,500
(3 marks)
< Answer >
33. Mr.Pillai raises a loan of Rs.6,00,000 at 15% for the construction of the house on April 1, 2003. The
house has been completed on April 1, 2004 and self occupied. The loan repayment commences from
April, 2005. What is the amount of the interest to be charged in the assessment year 2005-06?
(a) Rs.90,000 (b) Rs.1,08,000 (c) Rs.84,000 (d) Rs.1,02,000 (e) Rs.98,000.
(1 mark)
< Answer >
34. Ms.Parvati purchases a house property in the year March 1981 for Rs.1,80,000 and an amount of
Rs.95,000 was spent on the improvement and repairs of the property before the end of March, 1981.
The property was proposed to be sold to Mrs. Jaya in the month of June 2000 and an advance of
Rs.40,000 was taken from her. As the entire money was not paid in time Ms.Parvati forfeited the
advance and subsequently sold the property to Mrs.Lavanya in the month of March 2005 for
Rs.12,50,000. The fair value of the property on April 1, 1981 was Rs.2,90,000. What is the capital gain
chargeable in the hands of Ms.Parvati for the assessment year 2005-06?
Cost of inflation index:
1981-82 100
2000-01 389
2002-03 447
2003-04 463
2004-05 480
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(a) Rs.92,700 (Long term capital loss)
(b) Rs.92,500 (Long term capital gain)
(c) Rs.23,250 (Long term capital loss)
(d) Rs.50,000 (Long term capital gain)
(e) Rs.92,700 (Long term capital gain).
(2 marks)
< Answer >
35. P Ltd., converts its capital asset acquired for an amount of Rs.90,000 in the year April, 1991 into stock-
in-trade in the month of April, 1995. The fair market value of the asset on the date of conversion is
Rs.2,15,000. The stock-in-trade was sold for an amount of Rs.3,75,000 in the month of December,
2004. What is the capital gains chargeable to tax in the assessment year 2005-06?
Cost of the inflation index:
1991-92 199 1995-96 281
1992-93 223 2003-04 463
1994-95 259 2004-05 480
(a) Rs.61,263 (Long term gain) (b) Rs.65,603 (long term gain)
(c) Rs.66,708 (long term gain) (d) Rs.66,708 (short term gain)
(e) Rs.61,263 (short term gain).
(2 marks)
< Answer >
36. Ms.Priyadarshini purchases 1,000 equity shares in A.Ltd. at the rate of Rs.18 per share(brokerage : 1
percent) January 1980. She gets 500 bonus shares by virtue of holding 1000 shares on January 1985.
Fair market value of the shares of A.Ltd. on April 01, 1981 is Rs.25. In January 2005 she transfers
1,000 original shares and 500 bonus shares @Rs.80 per share on a recognized stock exchange in India
and the transaction is chargeable to securities transaction tax. Compute the capital gains taxable in the
hands of Ms.Priyadarshini for the assessment year 2005-06 for transfer of original shares
Cost of inflation index:
1981-82 100 2002-03 447
1984-85 125 2003-04 463
2001-02 426 2004-05 480
(a) Rs.41,200 (Long term capital gain)

(b) Rs.41,200 (Long term capital loss)
(c) Rs.39,400(Long term capital gain)
(d) Rs.39,400(Short term capital gain)
(e) Nil.
(1 mark)
< Answer >
37. The time limit within which the capital gain from sale of agricultural land needs to be invested in
agricultural land to avail exemption u/s 54B of Income Tax Act is
(a) 6 months from the date of the transfer of the original agricultural land
(b) One year from the date of the transfer of the original agricultural land
(c) 15 months from the date of the transfer of the original agricultural land
(d) 2 years from the date of the transfer of the original agricultural land
(e) 3 years from the date of the transfer of the original agricultural land
(1 mark)
< Answer >
38. Which of the following statements are true in respect of the clubbing provisions, where both the
husband and the wife have the substantial interest in the concern and both receive the remuneration
from the concern?
(I) The remuneration received from the concern, is taxable in the hands of the respective recipients.
(II) Remuneration will be included in the total income of either the husband or the wife, whose total
income, excluding such remuneration is greater.
(III) Remuneration once taxed in the hands of one spouse, cannot be included in the income of the
other spouse in subsequent years, without the assessing officer giving an opportunity of being
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heard, to the assessee in whose hands he would like to charge the income.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (II) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
39. P has the following income for the previous year 2004-05:
Particulars Rs.
Income from the business of owning and maintaining the race horses 75,000
Income from other business 85,000
Brought forward business loss (other than the loss from the business of owning and 50,000
maintaining the race horses)
Brought forward business loss (from the business of owning and maintaining the race 96,000
horses)
What is the business income taxable in the hands of P for the assessment year 2005-06?
(a) Rs.35,000 (b) Rs.14,000 (c) Rs.64,000 (d) Rs.1,10,000 (e) Rs.Nil.
(2 marks)
< Answer >
40. Mr.Puneet, a resident individual, furnishes the following particulars for the previous year 2004-05:
Income from Salary (Net) 45,000
Income from the house property (24,000)
Income from business - Non speculative (22,000)
Income from speculative business (4,000)
Capital gains (Short term) (25,000)
Capital gains (Long term) 19,000
What is the total income chargeable to tax for the assessment year 2005-06?
(a) Nil (b) Rs.18,000 (c) Rs.21,000 (d) Rs.40,000 (e) Rs.14,000.
(2 marks)
< Answer >
41. Mr.Pratap is employed by the Central Government in the Ministry of Labour. During the previous year
2004-05 his basic salary was Rs.15,000 per month. He contributes 12% of his salary towards notified
pension scheme. The Central Government also contributes 11% of his salary towards the same. The
amount allowable as deduction under section 80CCD for the Assessment year 2005-06 is
(1 mark)
< Answer >
42. Mr.Pandu , an Indian citizen makes the following donations during the previous year 2004-05. His
Adjusted Gross Total income for the computation of deduction under section 80G is Rs.3,00,500. The
amount of deduction under section 80G is
Donation to National Defence Fund Rs. 24,000
Donation to Government of India for promotion of family planning Rs. 28,000
Donation to Prime ministers National Relief Fund Rs. 18,000
Donation to Africa Fund Rs. 10,000
Donation in Kind to an approved Charitable trust Rs. 7,000
Donation to an approved Charitable trust Rs. 20,000
(a) Rs.1,07,000 (b) Rs.1,00,000 (c) Rs.80,000 (d) Rs.81,025 (e) Rs.82,050.
(2marks)
< Answer >
43. Mr. Purohit, a citizen of India, doing business globally acquired various assets movable and immovable
in different parts of the globe. His residential status for the current previous year is resident but not
ordinarily resident in India. He wants to file his wealth tax return for the assessment year 2005-06. The
value of assets held by him as on March 31, 2005 is as follows:
Nature of asset Rs.
1. Motor cars of foreign make not held as stock-in-trade 15,00,000
2. Gold held in the form of ornaments 4,50,000
3. 7% Gold Bonds under Gold Deposit Scheme 12,00,000
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3. 7% Gold Bonds under Gold Deposit Scheme 12,00,000
4. Urban land purchased for factory site on January 01, 2001 6,00,000
5. Cash in hand 95,000
6. Cash at bank 2,58,000
7. Fixed assets situated in U.K 65,00,000
8. Shares of Reliance Industries Ltd. 1,50,000
9. Shares of various Nationalized Banks 7,00,000
10. Residential house property at Hyderabad
(Let-out with effect from June 5, 2002) 15,00,000
11. Loan from Housing Society for construction of residential house at
Hyderabad ( Loan taken Rs.12,50,000) 9,50,000
The wealth tax liability of Mr. Purohit for the assessment year 2005-2006 is
(3 marks)
< Answer >
44. Mr.Patrick a non-resident foreign national, has the following assets as on March 31, 2005:
Particulars Rs.
Property in India used solely for the residential purposes 36,00,000
Property held abroad 47,00,000
Jewellery in India 50,00,000
Motor car (Imported) held in India 36,00,000
Motor car held abroad 45,00,000
Compute the taxable wealth in the hands of Mr. Patrick for the assessment year 2005-06?
(a) Rs.77,00,000 (b) Rs.92,00,000 (c) Rs.71,00,000
(d) Rs.1,07,00,000 (e) Rs.1,18,00,000.
(1 mark)
< Answer >
45. The Union Government is vested with the power to levy the excise duty on most of the goods except
(a) Mineral products (b) Arms and Ammunition
(c) Stone products (d) Vehicles
(e) Alcoholic liquor for the human consumption, opium, Indian hemp and other narcotic drugs.
(1 mark)
< Answer >
46. Which of the following statements is/are true in respect of the dutiability of the site related activities?
(I) Excise duty is chargeable on the goods or the components leaving the factory in the state in which
they are.
(II) At the site, duty would be chargeable if the assembly of the parts or the components results in a
different movable and marketable commodity before installation.
(III) Mere bringing of the components together also attracts the duty.
(IV) In case of the piece-by-piece erection of the component at the site resulting in an immovable
property, no duty is leviable.
(a) Both (I) and (IV) above (b) (I), (II) and (IV) above
(c) (II), (III) and (IV) above (d) Both (III) and (IV) above
(e) (I), (III) and (IV) above.
(1 mark)
< Answer >
47. As per the provisions of the Central Excise, which of the following records have to be furnished by the
assessee to the Officer, duly empowered by the Commissioner or the audit party of the C&AG for
scrutiny?
(I) Financial Books and Financial Statements under section 204 of the Companies Act.
(II) Cost Audit Records under section 233B of the Companies Act.
(III) Income Tax Audit Report under section 44AB of the Income Tax Act.
(IV) Records maintained as per the Rule 22(2) and the Cost Audit Report under section 233B of the
Companies Act.
(a) Only (I) above (b) Both (I) and (II) above
9
(c) (I), (II), and (III) above (d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
48. An appeal against the order of the Tribunal relating to the classification of the goods or the valuation as
per the central Excise can be made to the
(a) High Court within 30 days
(b) Supreme Court within 30 days
(c) Central Government within 30 days
(d) Supreme Court within 60 days from the date of the order of the Tribunal
(e) Central Government within 60 days from the date of the order of the Tribunal.
(1 mark)
< Answer >
49. Which of the following statements pertaining to Section 11BB dealing with delayed refunds is false?
(a) Interest on delayed refunds will be paid only on the amount that is finally held to be refundable
(b) Interest payable will be at the rate fixed by the Board
(c) Interest will be compound interest
(d) Where there is a refund of any fine or penalty, no interest is payable on such refund
(e) Interest will be payable on refunds arising from proceedings initiated under section 11B.
(1 mark)
< Answer >
50. The state in which the dealer has one or more places of business is called
(a) The place of business (b) An appropriate State
(c) The principal state (d) An auxiliary state
(e) The domain state.
(1 mark)
< Answer >
51. The maximum percentage of the tax that can be levied on the interstate sale of the declared goods to the
unregistered dealers is
(a) 4%
(b) Twice the rate applicable in the case of the local sales
(c) 8% or twice the rate applicable in the case of the local sales
(d) 10% or twice the rate applicable in the case of the local sales
(e) 8%.
(1 mark)
< Answer >
52. As per the provisions of the section 10A of the Central Sales Tax Act, any person purchasing the goods
is guilty of an offence of mis representing the facts at the time of the purchase, is punishable with a fine
which may extend upto
(a) The tax leviable on him is respect of the goods sold to him
(b) 50% of the tax leviable on him
(c) 100% of the tax leviable on him
(d) 150% of the tax leviable on him
(e) 125% of the tax leviable on him.
(1 mark)
< Answer >
53. The gross interstate sales of PQR Ltd for the year 2004-05 were Rs.20,00,000. If the products are sold
in the home state of Punjab, the sales tax rate is 12%.
Consider the additional information given below:
Sale of Rs.12,00,000 is inclusive of the erection expenses of Rs.85,000 and the discount of
Rs.25,000. The ‘C’ form was furnished by the buyer in respect of this sale.
The sale of Rs.8,00,000 was without the ‘C’ form to an unregistered dealer and the buyer also
returned goods worth Rs.40,000 within a period of 5 months.
What is the turnover taxable in the hands of PQR Ltd for the year 2004-05?
(2 marks)
< Answer >
54. Uniform Commercial Code covers
10
(a) Sale of goods and contracts to sell goods at a future time in the US
(b) Sale of the goods in Germany
(c) Bankruptcy and insolvency in the US
(d) Sale of good in Asian countries
(e) Consumer protection Code in the US.
(1 mark)
< Answer >
55. If any goods are pilfered after the unloading and before the proper officer has made an order for the
clearance for home consumption or the deposit in a warehouse
(a) The importer will not be liable to pay the customs duty leviable on such goods in any case
(b) The importer will be liable to pay the full customs duty leviable on such goods
(c) The importer will be liable to pay 50% of the customs duty liable on such goods
(d) The importer will be liable to pay the full customs duty but is entitled to claim the refund of the
same
(e) The importer will be liable to pay the duty only if such goods are restored to him after the
pilferage.
(1 mark)
< Answer >
56. Under the provision of the Customs Act, the warehousing bond required to be executed by the importer
of the dutiable goods binds him to a sum equal to
(a) Half the amount of the duty assessed on the imported gods
(b) The amount of the duty assessed on the imported goods
(c) One and half times the amount of the duty assessed
(d) Two times the duty assessed
(e) Three times the duty assessed.
(1 mark)
< Answer >
57. Any customs station area where the imported goods or the exported goods are kept before the clearance
by the Customs Authorities is called
(a) Customs Airport (b) Customs Port
(c) Customs Area (d) Customs Station (e) Warehouse.
(1 mark)
< Answer >
58. The process by which the imported goods are permitted to be changed into an other form with an
intention to attract the duty at lower rates is called
(a) Deterioration of the goods (b) Downsizing of the goods
(c) Processing of the goods (d) Denaturing of the goods
(e) Reforming of the goods
(1 mark)
< Answer >
59. The import manifest has to be filed by the person-in-charge of the of the conveyance within
(a) 10 hours of arrival at the customs station
(b) 15 hours of arrival at the customs station
(c) 18 hours of arrival at the customs station
(d) 20 hours of arrival at the customs station
(e) 24 hours of arrival at the customs station.
(1 mark)
< Answer >
60. Which of the following statements is false in respect of the adhoc exemption that the Central
Government can grant in respect of the Customs duty payable?
(a) The exemption can be granted only in exceptional circumstances
(b) There is no power to grant the general exemption if adhoc exemption is given
(c) An adhoc exemption can be granted in each individual case
(d) The governments can modify the form and the method of duty apart from the reduction of the duty
(e) An ad valorem rate can be changed to specific rate.
(1 mark)
< Answer >
61. The additional depreciation on the assets is allowed to the industrial undertakings existing before April
1, 2002. If the increase in the installed capacity as a result of the new machinery is
11
(a) Not less than 10 percent of the original capacity
(b) Not less than 25 percent of the original capacity
(c) Not less than 12 percent of the original capacity
(d) Not less than 15 percent of the original capacity
(e) Not less than 20 percent of the original capacity.
(1 mark)
< Answer >
62. D Ltd. furnishes the following information in respect of the newly acquired assets during the year 2004-
05(being the third year of its operations) and requests you to ascertain the total depreciation that it can
claim on these new assets for the year 2004-05 given the rate of present depreciation to be 25%.
Name of the asset Date of acquisition Additional capacity Cost of the asset
(Rs.)
Plant A May 15, 2004 18% 12,50,000
Plant B June 10, 2004 26% 18,75,000
Plant C October 25, 2004 22% 15,50,000
(a) Rs.11,68,750 (b) Rs.7,01,250 (c) Rs.18,70,000

(d) Rs.15,60,000 (e) Rs.14,50,000.
(2 marks)
< Answer >
63. Plaza Ltd., engaged in the business of manufacture and production of the drugs, incurred the following
expenditure on the scientific research during the year 2004-05.
Rs.
Paid to the agricultural research institute, approved for the purpose of the scientific 90,000
research
Paid to National research laboratory for the scientific research 1,25,000
Expenditure incurred on the in house research and development 2,00,000
What is the deduction that the company claim in respect of the scientific research for the assessment
year 2005-06?
(a) Rs.5,68,750 (b) Rs.6,22,500 (c) Rs.5,18,750
(d) Rs.5,72,500 (e) Rs.5,91,250.
(1 mark)
< Answer >
64. Peter Ltd., was incorporated on the April 20, 2004, with an estimated cost of the project of Rs.35,00000
and the capital employed in the business was Rs.33,00,000. The preliminary expenses incurred at the
time of the formation of the company are as under:
Particulars Rs.
Expenses of incorporation, public issue of the shares and the printing of the 1,00,000
prospectus and the memorandum
Preparation of the project feasibility report, by an agency not approved by the 56,000
board
Consultancy charges to the architects, a firm approved by the board 25,000
What is the amount of the preliminary expenses that qualifies for a deduction under section 35D?
(2 marks)
< Answer >
65. The deduction in respect of the family planning expenditure under section 36(1)(ix) can be claimed by
(a) Partnership firms (b) Corporate assessees
(c) Proprietary concerns (d) Association of persons (e) Individuals.
(1 mark)
< Answer >
66. M purchases goods from P on two different dates amounting to Rs.17,000 and Rs.18,000 respectively
on credit. He makes the payments to P on the expiry of the credit period of 30 days by cash Rs.35,000.
What is the amount that is to be disallowed?
(a) Rs.7,500 (b) Rs.7,000 (c) Rs.3,500 (d) Rs.15,000 (e) Nil.
12
(1 mark)
< Answer >
67. P & Pis a partnership firm engaged in the business of construction and has gross receipts of Rs.38 lakhs
for the previous year 2004-05.The partnership deed provides for the payment of salary at the rate of
Rs.6,000 per month to each partner and the depreciation on the assets (WDV Rs.2,50,000) to be
provided at the rate of 10%. The net profit of the firm is Rs.4,50,000. What is the net profit of the firm
chargeable to tax if the firm adopts the scheme under section 44AD of the Income Tax Act, 1961?
(2 marks)
< Answer >
68. Mr.Patil aged 66 years earned an amount of Rs.1,00,000 from the lotteries during the previous year
2004-05. He has invested an amount of Rs.20,000 in the national savings certificates. What is the tax
liability of Mr.Patil for the assessment year 2005-06?
(1 mark)
< Answer >
69. Pluto Ltd., is engaged in the business of carriage of goods and owns 9 trucks, 5 of which are heavy
goods vehicles and the others are light goods vehicles. On June 12, 2004, the company purchased
another heavy goods vehicle at a cost of Rs.22,00,000. The total freight collection was Rs.22,00,000
and the operational expenses were Rs.12,50,000, depreciation Rs.2,75,000 and other administrative
expenses were Rs.1,25,000. What is the total income chargeable to tax for the assessment year 2005-
06, if the assessee adopts the provisions of section 44AE?
(3 marks)
< Answer >
70. An individual resident assessee has made the following investments for the previous year 2004-05:
Insurance premium paid on the life of the spouse (Assured value Rs.1,00,000) 18,000
Insurance premium on the dependant mother’s life 6,000
Medical insurance premium on the daughter, who is employed 14,000
Medical insurance premium on self 12,000
Contribution to the PPF 20,000
Investments in the National Savings Certificates 10,000
Investment in the infrastructure securities 25,000
What is the amount that qualifies for the rebate under section 88?
(a) Rs.89,000 (b) Rs.83,000 (c) Rs.1,00,000 (d) Rs.70,000 (e) Rs.80,000.
(2 marks)
< Answer >
71. Rectification of the mistake u/s 154 can be made under the Income Tax Act, within a period of
(a) 2 years from the end of the financial year in which the return of income was filed
(b) 2 years from the end of the financial year in which the order sought to be rectified was passed
(c) 4 years from the end of the financial year in which the order sought to be rectified was passed
(d) 3 years from the end of the financial year in which the order sought to be rectified was passed
(e) 4 years from the end of the financial year in which the return of income was filed.
(1 mark)
< Answer >
72. Y, a practicing consultant has an income of Rs.12,25,000 for the previous year 2004-05. The due date
for the filing of the return of income for the assessment year 2005-06 is
(a) June 30, 2005 (b) July 31, 2005
(c) September 30, 2005 (d) October 31, 2005
(e) August 31, 2005.
(1 mark)
13
Suggested Answers
Economic Legislation-II (162): October 2005
1. Answer : (b) < TOP >
Reason : Salary of diplomatic personnel: Any remuneration received by a person who is an official of
an embassy, high commission, legation, commission, consulate or trade representation of a
foreign state, or a member of the staff of any of these officials will be exempt from tax if the
corresponding Indian officials in that foreign country enjoy a similar exemption as per the
provisions of section 10(6)(ii) of the Income Tax Act, 1961.
2. Answer : (a) < TOP >
Reason : The aggregation of non-agricultural income is not required if (i) The non-agricultural income
does not exceed the basic exemption limit , ie Rs.50,000 in the case of individual & HUF(ii)
The agricultural income does not exceeds Rs.5,000 . Since in the option (a), the agricultural
income does not exceed Rs.5,000, no clubbing of income is required.
3. Answer : (c) < TOP >
Reason : The amount which is received from a person other than the employer cannot be termed as
salary. A Member of Parliament or a State Legislature is not treated as an employee of the
Government. Hence the salary and other allowances received by Member of Parliament is
taxable under the head Income from other sources.
4. Answer : (e) < TOP >
Reason : Calculation of the tax liability of Mr.Purohit for the assessment year 2005-06 : Taxable
Income :
Particulars Rs.
Income from salaries (net) 4,25,000
Income from long term capital gains covered by securities transaction tax Nil
(Exempt from AY 2005-06 under section 10(38)
Income from lotteries (gross) 1,40,000
Taxable income 5,65,000
Tax liability thereon :
Income tax on the winnings from lotteries (@30% on Rs.1,40,000) 42,000
Income tax on the balance income (Rs.5,65,000– Rs.1,40,000) ie. 1,01,500
Rs.4,25,000 as per the slabs
Total tax liability 1,43,500
Add cess @2% 2,870
Total tax liability including cess & surcharge 1,46,370
For the AY 2005-06, where the net income range is Rs.1,50,000 to Rs.8,50,000 , the income
tax rate is Rs.19,000 + 30% of (total income minus Rs.1,50,000)
5. Answer : (d) < TOP >
Reason : As per the provisions of the section 10(23A) of the Income Tax Act, 1961, any income (other
than the income from house property, income received for rendering any specific services,
income by way of interest or dividends on investments) of a professional institute is exempt
from tax subject to the fulfillment of certain conditions. Hence the option (d) is correct.
Reason : The following incomes are exempt under Section 10 : (a) Agricultural Income – Section
10(1) (b) Daily allowance of Members of Parliament – Section 10(17) (c) Share of profit
from a partnership firm (section 10(2A) (d) Amount received under Life-Insurance policies –
Section 10(10D) e. Stipend receipts are not exempt under sec 10
Reason : Pension earned and received abroad and later remitted to India is taxable in the hands of the
14
resident and ordinarily resident. Hence the option (b) is the answer. It is exempt from tax in
the hands of the resident but not ordinarily resident and a non-resident
Reason : According to section 6(1), an individual is said to be a resident if he satisfies atleast one of
the following two basic conditions : He is in India in the previous year for a period of 182
days or more; He is in India for a period of 60 days or more during the previous year and 365
days or more during the 4 years immediately preceding the previous year. According to
section 6(6), a resident is said to be an ordinarily resident if he satisfies the following two
additional conditions : He has been resident in India in at least 2 out of 10 previous years
immediately preceding the previous year. He has been in India for a period of 730 days or
more during 7 years immediately preceding the previous year. Mr. Peeyush was in India for
78 days during the previous year 2004-05 and for 371 days during the 4 years preceding the
previous year. Hence, he is a resident. However as he was not in India for 730 days during 7
years preceding the previous year . Hence he does not satisfy the additonal condition. Hence
the residential status of Mr.Peeyush for the assessment year 2005-06 is Resident but not
ordinarily resident
Reason : Ms. Purba being a non government employee the exemption in respect of the leave
encashment is calculated as under :
Actual money received Rs.1,25,000
10 months average salary (note 1) Rs.1,32,500
Maximum amount allowed Rs.3,00,000
Cash equivalent of the leave to her credit at the Rs.88,333
time of retirement (Rs.13,250 x 6.67 months)
Least of the above four is exempt from tax i.e Rs.88,333. The taxable portion of the leave
encashment is Rs.36,667 (Rs.1,25,000-Rs.88,333)
Note 1 Calculation of the average salary for 10 months :
Salary from June, 2004 to October, 2004 Rs.12,000x5= Rs.60,000
Salary from November, 2004 to March, 2005 Rs.14,500x5= Rs.72,500
Salary for 10 months Rs.1,32,500 Average salary Rs.13,250
Reason : Calculation of the tax liability of Ms.Parvati for the assessment year 2005-06 :
Pension 24,000
Income from salaries 2,74,000
Less standard deduction 30,000
Net taxable salary 2,44,000
Income from other sources
Interest on the company deposits 85,000
Gross total income 3,29,000
Deductions under chapter VI are nil -
Net taxable income 3,29,000
Tax liability thereon 72,700
2% cess 1,454
Tax liability 74,154
Rebate under section 88B (senior citizen) 20,000
Rebate under section 88C (women assessee) 5,000
Net tax payable 49,154
For the Assessment year 2005-06, the rebate under section 88C is available if the tax payer
was born at any time after April 01,1939. For the Assessment year 2005-06, the rebate under
Section 88B is available if the taxpayer was born at any time before April 01, 1940.
Reason : Calculation of the taxable portion of the HRA in the hands of Ms.Prerna: As she had taken
the house on rent only for a part of the year, the exemption is calculated in respect of that
period only. For the rest of the period, HRA is fully taxable. Monthly salary Rs.30,000,
Monthly HRA Rs.7,500, Rent paid per month Rs.8,000 from September 2004. As the house
is situated in the city of Baroda, the least of the following is exempt from tax; 40% of the
salary (Rs.30,000x40%) Rs.12,000, Actual HRA received Rs.7,500, Excess of rent paid over
10% of salary (Rs.8,000 -Rs.3,000 (Rs.30,000x10%) Rs.5,000.
Rs.5,000 per month being the least of the above is exempt and the balance HRA is taxable.
Therefore the total taxable portion of the HRA in the hands of Ms.Prerna for the assessment
year 2005-06 is HRA (Rs7,500x12) Rs.90,000 Exempted HRA (Rs.5,000 x 7) Rs.35,000,
Taxable HRA Rs.55,000. (The exemption is calculated only for 7 months as she has taken the
house on rent only from September, 2004)
Reason : The exemption in respect of the allowances received by the transport employees during the
course of their duties is calculated as under :
70% of the allowance received Rs.65,000x70% = Rs.45,500
Rs.6,000 per month Rs.6,000x11 = Rs. 66,000
Rs.45,500 being the lower of the above, is exempted and the balance is taxable.
16
Therefore the taxable portion of the allowance is Rs.65,000-Rs.45,500= Rs.19,500
17. Answer : (a ) < TOP >
Reason : Calculation of the taxable amount of the Lumpsum received from the unrecognized provident
fund by Mr. Pattabhi for the assessment year 2005-06:
Share of the amount taxable as salary:
Employer’s share in the payment received from the Unrecognized Provident Fund Rs.2,20,000
Interest on the employer’s share Rs.50,000
Rs.2,70,000
Amount taxable under the head income from other sources :
Interest on the employee’s share Rs.60,000
Total amount taxable from the amount received from the fund Rs.3,30,000
The employee’s share received from the Unrecognised Provident Fund is exempt from tax.
18. Answer : (c)
Reason : The gross salary of Mr.Pillai for the year is calculated as under :
Rs.
Amount of salary after the tax deductx deductx deduct
Total tax liability 31,620
Rebate under section 88
Deposit in the PPF Rs. 12,000
Investment in the infrastructure company Rs. 70,000
Investment in the MEP 2004 Rs. 10,000
Total Rs. 92,000
Rebate at 15% on Rs.92,000 = 13,800 restricted to 13,800
tax liability
Entire rebate cannot be claimed as the same is not
available against the tax on the long term capital
gains. Hence the rebate is restricted to the tax
payable on the business income
Balance tax payable 17,820
< TOP >
22. Answer : (d)
Reason : The amount of the scholarship given by the employer to the children of its employees solely
at its discretion without reference to the terms of the employment is not assessed as a
perquisite in the hands of the employees. CIT v. M.N.Nadkarni (1986) 161 ITR 544 (Bom.)
< TOP >
23. Answer : (b)
Reason : In case of non-government employees not covered by the Payment of Gratuity Act, the
completed years of service is taken as equal to the whole number of years, ignoring a fraction
of the year . Hence the option (b) is the correct answer. The other alternatives are wrong.
Reason :
Actual allowance Actual amount Eligible amount Amount
received spent (Rs.) taxable
(Rs.) (Rs.) (Rs.)
Transport allowance 20,000 15,000 Rs.800 pm 10,400
ie. Rs.9,600
Transfer allowance 50,000 56,000 Amount spent 0
Research allowance 25,000 19,000 Amount spent 6,000
Uniform allowance 14,000 14,000 Amount spent 0
The total allowances taxable are Rs.16,400. The travelling allowance, transfer allowance,
research allowance and the uniform allowance are all taxable on the basis of the actual
allowance received or the actual expenditure incurred whichever is lower.
Reason : Calculation of the taxable income of Ms.Priya for the assessment year 2005-06
Bonus 25,000
City compensatory allowance 1,15,000
Entertainment allowance 5,000
Gross total income 5,20,000
5,00,000
Less profession tax 2,400
Net taxable income 4,97,600
Tax liability 1,23,280
Cess 2,466
Total tax liability 1,25,746
No deduction is allowed in respect of the entertainment allowance as Ms.Priya is a non-
government employee and hence the entertainment is taxable in full. Hence after deducting
from the gross taxable income the entertainment allowance (if any) and the professional tax
and standard deduction, the balance is the Gross total income. Since Ms.Priya has no
investments the whole amount is taxable.
Reason : The benefit of rebate under section 88 D is only if the taxpayer is an individual. Hence no
rebate under the section is available to XY.Ltd.
18
Reason : Gratuity (b) is the sum paid for the long and meritorious services rendered by an employee.
Gratuity payment has become legally compulsory. Pension (a) is a periodical payment of
money for past service and it is received by the employee after retirement and is taxed as
salary. Contractual Bonus (c) is taxable in the year of receipt. It is treated as salary.
Compensation (d) is taxable as salary or profit in lieu of salary. It is computed in accordance
with the provisions of Industrial Disputes Act 1947. Honorarium (e) is the payment received
for honorary services. Thus, (a), (c), (d) and (e) do not mean the lump sum received for long
meritorious services rendered.
Reason : Computation of gross annual value Municipal value or fair rent whichever is higher, subject
to maximum standard rent. Here, standard rent is more than the municipal value and fair rent,
Therefore, the value Rs.2,00,000
Actual rent Rs.2,40,000
Less : Unrealized rent Rs. 44,000
Less : Loss due to vacancy Rs.6,000 Rs.1,90,000
Higher of the above two values is Rs.2,00,000
Rs. 30,000
Less : Vacancy allowance – Rs.2,40,000 ×
Gross annual value Rs.1,70,000
29. Answer : (b)
Reason : The interest on the borrowed capital is allowed as a deduction under section 24(b) as per the u
following: As the deduction is available on the accrual basis, itshould be claimed as a
deduction on a yearly basis even if the interest is not actually paid during the previous year.
Deduction is availabins832(uabi)Tj10.02 e0 10.02 234.9702 499.400274labiuabis87s av
Net annual value of the property Nil 82,000
Less standard deduction@ 30% Nil 24,600
Less Interest on the capital borrowed 36,000 36,000
Net income from the property (36,000) 21,400
Total income from the property (14,600)
Reason : Interest on the loan for the construction period : April 1, 2003 to March 31, 2004 Rs.6,00,000
@ 15% p.a. = 90,000 The above interest can be claimed as a deduction in 5 equal instalments
starting from the previous year in which the house construction is completed. Hence the
amount of the pre-construction periods interest to be charged in 2004-05 is Rs.90,000/5 =
Rs.18,000 Interest for the year 2004-05 (On the full amount as the repayment commences
only during the year 2005-06) Rs.6,00,000 x 15% = Rs.90,000 Therefore the total interest to
be charged in the assessment year 2005-06 is Rs.1,08,000. (Rs.90,000 + Rs.18,000)
Reason : The capital gains in the hands of Ms.Parvati for the assessment year 2005-06 are computed as
under :
Cost of acquisition (Fair market value as on April 1, 1981) 2,90,000
Less advance taken and forfeited 40,000
Cost for the purposes of indexation 2,50,000
Indexed cost of acquisition (Rs.2,50,000 x 480/100) 12,00,000
Sale proceeds 12,50,000
Less indexed cost of acquisition as computed above 12,00,000
Long term capital gains 50,000
< TOP >
35. Answer : (a)
Reason : The capital gains on the sale of the capital asset converted to stock-in-trade is taxable in the
given case as the same was done after April 1, 1985. It is calculated as under :
Full value of the consideration (Fair value as on the date of 2,15,000
the conversion)
Less the cost of the acquisition (90,000 x 480/281) 1,53,737
Long term capital gain 61,263
Note : The cost of inflation index (base year) is taken to be
the year in which the asset is converted into the stock-in-trade
Reason : If shares are long term equity shares transferred on or after October 01,2004 in a recognised
stock exchange in India, the long term captial gain is not chageable to tax.
Reason : To avail exemption from Capital Gain Tax under Section 54B, the capital gains from sale of
land need to be invested in Agricultural Land within a time period of 2 years (24 months)
Reason : When both the husband and the wife are having substantial interest in the company and both
are in receipt of the remuneration from the concern, remuneration will be included in the total
income of the husband or the wife whose total income, excluding such remuneration is
higher. And remuneration once taxed in the hands of one spouse, cannot be included in the
income of the other spouse in subsequent years, without the assessing officer giving an
opportunity of being heard, to the assessee in whose hands he would like to charge the
income. Hence statement II & III are true.
Reason : The business income taxable is calculated as under :

Rs.
Income from the business of owning and maintaining race 75,000

horses
Less Brought forward business loss (from the business of 96,000
owning and maintaining the race horses
Business loss from the activity of owning and maintaining (21,000)
the race horses to be carried forward for four assessment
20
first computed and cannot be set off against any other
income.
Income from other business 85,000
Brought forward business loss (other than the loss from the 50,000
business of owning and maintaining the race horses)
Net business income 35,000
Reason : The total income chargeable to tax for The assessment year 2005-06 is calculated as under :
Income from Salaries 45,000
Income from house property (24,000)
Income from the business Note (1) (22,000)
Nil
Income from the capital gains

Short term capital loss (25,000)
Long term capital gain Note (2) 19,000
Taxable income for AY 2005-06 21,000
Note: Loss from the speculative business – can be setoff only against the income from the
speculative business.
Capital losses: Short term capital loss can be set off against both short term capital gain and
long term capital gain. However, capital loss of Rs.6,000 cannot be setoff against any other
income and can be carried forward.
From the AY 2005-06, LOSS FROM BUSINESS or profession cannot be set off against
income under the head ‘salaries’. Since in the above case the balance after setoff of
houseproperty loss is income from salaries , loss from speculative and non speculative
business cannot be set off.
Reason : Under section 80 CCD

Employees contribution towards the pension scheme limited to 10% of the salary of
employee.
Employers contribution towards the pension scheme limited to 10% of the salary of the
employee.
Hence 10% of (Rs.15,000 x 12) = Rs.18,000
Employees contribution = Rs.18,000 + employers contribution Rs.18,000 = Rs.36,000.
Reason :
Particulars Gross Net Rate of Amount of
Qualifying Qualifying deduction Deduction
amount amount
Donation to National Defence Fund 24,000 24,000 100% 24,000
Donation to Government of India for 28,000 28,000* 100% 28,000
promotion of family planning
Donation to Prime ministers National 18,000 18,000 100% 18,000
Relief Fund
Donation to Africa Fund 10,000 10,000 100% 10,000
Donation in Kind to an approved 7,000 Nil Nil
Charitable trust
Donation to an approved Charitable trust 20,000 2,050* 50% 1,025
81,025
Since the Adjusted Gross total income is Rs. 3,00,500, the donation towards Family planning
and donation to an approved Charitable trust is limited to 10% of adjusted gross total income
i.e Rs.30,050. Therefore after Rs.28,000 is allowed for Family planning promotion the
balance of Rs. 2,050 is allowable for donation to Approved charitable fund.
Computation of Wealth tax liability of Mr. Purohit for the assessment year 2005-2006
21
Description of asset Rs.
1 Motor cars of foreign make not held as stock in trade 15,00,000
2 Gold ornaments 4,50,000
3 Gold bonds are not assets Nil
4 Urban land purchased for factory site held for 2 years
from the date of acquisition is not an asset. As two
years has already lapsed, the urban land is an asset. 6,00,000
5 Cash on hand (above Rs.50,000) 45,000
6 Cash at bank – not an asset Nil
7 Fixed assets outside India in case of not ordinary Nil
resident are not assets
8 Shares of Reliance Industries Ltd. (not asset) Nil
9 Shares of a nationalized banks (not asset) Nil
10 Residential house property let out for a period of 300 Nil
days is not an asset
11 Hence, debt against it cannot be considered Nil
Net wealth 25,95,000
Exempted limit 15,00,000
Taxable wealth 10,95,000
Wealth tax liability @ 1% = Rs 10,950
Reason : Computation of the taxable wealth of Mr.Patrick for the assessment year 2005-06 :
Mr.Patrick being a foreign citizen, only the wealth held in India is taxable and the assets held
outside India are tax free.
Wealth in India : Rs.
Property (Not taxable as it is held for the
residential purposes
Jewellery in India 50,00,000
Motor car 36,00,000 86,00,000
Less the amount exempted 15,00,000
Taxable wealth 71,00,000
Reason : The Union Government is vested with the power to levy the excise duty on most of the goods
except Alcoholic liquor for the human consumption, opium, Indian hemp and other narcotic
drugs as the same are covered in the Entry 51 of the State list and excise duty on these can be
levied only by the State Government
Reason : The statements (I), (II) and (IV) are true

(I) Excise duty is chargeable on the goods or the components leaving the factory in the
state in which they are.
(II) At the site, duty would be chargeable if the assembly of the parts or the components
results in a different movable and the marketable commodity before installation.
(III) Mere bringing of the components together will not attract duty
(IV) In case of the piece-by-piece erection of the component at the site resulting in an
immovable property, no duty is leviable.
Reason : The following records have to submitted by an assessee to the Officer duly empowered by
the Commissioner or the audit party of the C&AG for scrutiny:
Records maintained as per the Rule 22(2), The Income Tax Audit Report under section 44AB
of the Income Tax Act and The Cost Audit Report under section 233B of the Companies Act
Reason : An appeal against the order of the Tribunal relating to the classification of the goods or the
valuation as per the central Excise can be made to the Supreme Court within 60 days
22
Reason : Section 11BB dealing with interest on delayed payments provides that
Interest on delayed refunds will be paid only on the amount that is finally held to be
refundable
Interest payable will be at the rate fixed by the Board
Interest will be simple interest. Currently 6% p.a.
Where there is a refund of any fine or penalty, no interest is payable on such refund
Interest will be payable on refunds arising from proceedings initiated under section 11B.
Hence option (c ) is false.
Reason : As per section 2(a) the appropnriate State is defined in relation to a dealer who has one or
more places of business in the same state, that state.
Reason : As per the provisions of the section 15 of the CST Act, no State shall levy a tax on the
declared goods exceeding 4%. Hence the sales tax on any interstate sale of the declared
goods to the unregistered dealer is equal to twice the local sales tax rate.
Reason : As per the provisions of the section 10A of the CST Act, where any person purchasing the
goods is guilty of an offence of mis representing the facts at the time of the purchase, is
punishable with a fine which may extend upto 150% of the tax leviable on him in respect of
the sale of goods to him if the same is covered under section 8(2)
Reason : When the ‘C’ form has been issued the CST is payable at 4%. The amount of the erection
charges and the discount are to be deducted. Hence in respect of the first sale of
Rs.12,00,000, the aggregate price is calculated as under:
Total price as per the invoice Rs.12,00,000
Less the erection charges 85,000
Less the discount 25,000 Rs. 1,10,000
Net aggregate sale price 10,90,000
In the case of the second transaction where no ‘C’form has been furnished, the tax to be
charged is 10% or the local tax rate whichever is higher (as the dealer is an unregistered) The
aggregate sale price is calculated after deducting the sales returns as the same are returned
within a period of 5 months. Hence the price is Rs,8,00,000-40,000 = 7,60,000.
The tax payable is as under: CST Turnover
Rs.10,90,000 @ 4% 10,90,000*4/104 = 41,923 10,48,077
Rs.7,60,000 @ 12% 7,60,000*12/112 = 81,428 6,78,572
Total 1,23,351 17,26,649
Reason : The Uniform Commercial Code covers the Sale of goods and contracts to sell goods at a
future time in the US
Reason : If any goods are pilfered after the unloading and before the proper officer has made an order
for the clearance for home consumption or the deposit in a warehouse, The importer will be
liable to pay the duty only if such goods are restored to him after the pilferage
Reason : The importer of any goods, specified in the subsection(1) of section 61, which has been
entered for the warehousing and assessed to duty under section 17 or 18 shall execute the
bond binding him with a sum equal to twice the duty assessed on such goods
Reason : Any area where the imported goods or the exported goods are kept before the clearance by
the Customs Authorities is called customs Area as per the provisions of the section 2(11) of
the Customs Act
23
Reason : The process by which the imported goods are permitted to be changed into an other form
with an intention to attract the duty at lower rates is called Denaturing or the mutilation of the
goods
Reason : The import report has to be filed by the person-in-charge of the of the conveyance within 24
hours of arrival at the customs statio
Reason : (a) The exemption can be granted only in exceptional circumstances -True
(b) There is no power to grant the general exemption - False
(c) An adhoc exemption can be granted in each individual case - True
(d) The governments can modify the form and the method of duty apart from the reduction
of the duty - True
(e) An ad valorem rate can be changed to specific rate - True.
Section 25
Reason : In respect of the undertakings established before April 1, 2002, the additional depreciation is
allowed only if the increase in the installed capacity is not less than 10%. Hence the option
(a) is the answer.
Reason : The depreciation that can be claimed by D Ltd., for the year 2004-05 is as under :
Name of the asset Date of Additional Cost of Normal Additional
acquisition capacity the asset depreciation depreciation
Plant A May 15, 18% 12,50,000 3,12,500 1,87,500
2004
Plant B June 10, 26% 18,75,000 4,68,750 2,81,250
2004
Plant C October 22% 15,50,000 1,93,750 1,16,250
25, 2004
The normal depreciation that can be claimed is Rs.9,75,000
(Rs.3,12,500+4,68,750+1,93,750)
The additional depreciation that can be claimed is Rs.1,87,500 + Rs.2,81,250 + Rs.1,16,250 =
Rs. 5,85,000.
Total depreciation = Rs.9,75,000 + RS.5,85,000 = Rs.15,60,000.
All the plants are eligible for additional deprecation of 15% since they resulted in increased
capacity of more than 10%. Also the Plant C is eligible only for 50% of the normal
depreciation as it has been put to use for less than 180 days and 7.5% additional depreciation.
Reason : The deduction that can be claimed in respect of the expenditure on the scientific research is
calculated as under :
Donation to the agricultural research institute 90,000 125% 1,12,500
Donation to the National research laboratory 1,25,000 125% 1,56,250
Expenditure on the in-house research 2,00,000 150% 3,00,000
5,68,750
Reason : The deduction in respect of the preliminary expenses is allowed over a period of 5 years an d
the amount that qualifies for the deduction is subject to a maximum of 5% of the cost of the
project or the capital employed, whichever is higher.
5% of the cost of the project (Rs.35,00,000 x 5%) = Rs.1,75,000
5% of the capital employed (Rs.33,00,000 x 5%) = Rs.1,65,000
Actual expenses incurred :
Incorporation expenses Rs.1,00,000
24
Project feasibility report (not allowed as it is
Done by an agency not approved) -
Consultancy charges Rs.25,000 Rs.1,25,000
The actual preliminary expenses being the least, qualifies for the deduction under section 35
D.
Hence the option (d) is the answer.
Reason : No deduction is allowed under section 36(1)(ix) in the case of the non-corporate assessee.
The deduction can be claimed by them only under section 32 and 37(1) if all the relevant
conditions are satisfied.
Reason : No amount is to be disallowed though the total payment in cash exceeds Rs.20,000. The
payments is in respect of two bills and both the bills are of value less than Rs.20,000. For the
provisions of section 40A(3) to be applied, both the value of the individual bills and the
payment should be in excess of Rs.20,000.
Reason : The profits of the firm engaged in the business of civil construction are calculated as under if
the scheme under section 44AD is adopted :
Profit from the business (8% of Rs.38,00,0000) 3,04,000
Less remuneration to the partners (note 1) 1,74,100
Income from the business 1,29,900
Note : No depreciation is calculated when the profits are taken as a
percentage of the profits and not the actual profit calculated as
per the books.
Note 1 : The remuneration to the partners is calculated as under :
On the first Rs.75,000 (Rs.50,000 or 90% of Rs.75,000 67,500
whichever is more)
On the next Rs.75,000 @ 60% 45,000
On the balance profits @ 40% (3,04,000-1,50,000) 61,600
1,74,100
Reason : The tax calculation is as under in respect of Mr.Patil.

Tax on the winnings from lotteries (@ 30%) 30,000
Less the rebate under section 88 (20% of Rs.20,000) 4,000
Less rebate under section 88B 20,000
Balance tax payable 6,000
2% cess 120
Tax Liability 6,120
Reason : The income in respect of eth business of plying / hiring / leasing of the trucks is calculated as
per the provisions of section 44AE as under :
Type of the carriage Period of holding of Number of months Rate per Amount
the trucks including part of truck per
the month month
Light goods vehicle – 4 April 1, 2004 to 12 3,150 1,51,200
Nos. March 31, 2005
Heavy goods vehicle – 5 April 1, 2004 to 12 3,500 2,10,000
nos. March 31, 2005
Heavy goods vehicle 1 no. June 12, 2004 to 10 3,500 35,000
March 31, 2005
Total Income 3,96,200
Reason : The amount that qualifies for the rebate under section 88 is calculated as under:
Insurance premium paid on the life of the spouse (Assured value Rs.1,00,000) 18,000
Insurance premium on the dependant mother’s life ( not allowed)
Medical insurance premium on the daughter, who is employed (not allowed)
25
Medical insurance premium on the daughter, who is employed (not allowed)
Medical insurance premium on self (Restricted to Rs.10,000) (80D) 10,000
Contribution to the PPF 20,000
Investments in the National Savings Certificates 10,000
Investment in the infrastructure securities 25,000
Total amount that qualifies for the rebate 83,000
Reason : Rectification of the mistake can be made under the Income Tax Act, within a period of 4
years from the end of the financial year in which the order sought to be rectified was passed.
Section 154.
Reason : A professional having the income above Rs.10,00,000 has to get the tax audit done and hence
the return on income is to be filed on or before October 31, 2005.
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Economic Legislation II 1005

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Question Paper

Economic Legislation-II (162) : October 2005

The residential status of Mr.Peeyush for the assessment year 2005-06 is

Basic pay @Rs.16,000 per month for 9 months 1,44,000

(a) Rs.41,200 (Long term capital gain)

(a) Rs.11,68,750 (b) Rs.7,01,250 (c) Rs.18,70,000

Reason : The business income taxable is calculated as under :

Income from the business of owning and maintaining race 75,000

Income from the capital gains

Reason : Under section 80 CCD

Reason : The statements (I), (II) and (IV) are true

Reason : The tax calculation is as under in respect of Mr.Patil.

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