INCOME TAX AND PRATICES (PYQ ANSWER’S)

Question 1: What is gross total income and describe various major heads under GTI?
Explain the guidelines under section 80 of the Income Tax Act.

Answer 1: Gross Total Income (GTI) refers to the total income earned by an individual or
entity before making any deductions under the Income Tax Act. The major heads under GTI
include:

1. Income from Salary: Income earned from employment, including basic salary,
allowances, bonuses, etc.
2. Income from House Property: Rental income earned from owning a property after
deducting municipal taxes and standard deduction.
3. Income from Business or Profession: Profits or gains derived from carrying on a
business or profession, after allowing for deductions related to business expenses.
4. Income from Capital Gains: Profits earned from the sale of capital assets such as
property, shares, or mutual funds.
5. Income from Other Sources: Income not classified under the above heads, including
interest income, lottery winnings, etc.

Section 80 Guidelines: Section 80 of the Income Tax Act provides for deductions from
gross total income, thereby reducing the taxable income. It includes various deductions such
as:

 Section 80C: Deductions for investments in instruments like PPF, EPF, life insurance
premiums, NSC, etc.
 Section 80D: Deductions for health insurance premiums.
 Section 80E: Deductions for interest on education loans.
 Section 80G: Deductions for donations to charitable institutions.
 Section 80TTA/TTB: Deductions for savings account interest and interest on deposits
for senior citizens.

These deductions encourage savings, investments, and social welfare activities while
reducing taxable income.

Question 2: Critically describe the term partnership and partnership deed. Explain the
features of a partnership firm.

Answer 2: Partnership: Partnership is a form of business organization where two or more

individuals join together to carry on a business with a view to earning profit. It is governed
by the Indian Partnership Act, 1932. Key aspects include:

 Partnership Deed: A partnership deed is a written agreement that outlines the terms
and conditions of the partnership, such as profit-sharing ratios, roles and
responsibilities of partners, capital contributions, etc.
Features of Partnership Firm:

1. Formation: It is formed through an agreement (partnership deed) between partners.

2. Number of Partners: Minimum 2 and maximum 20 in case of general partnership,
and 2 to 100 in case of banking partnership.
3. Liability: Partners have unlimited liability, meaning they are personally liable for
debts and obligations of the firm.
4. Profit Sharing: Profits are shared among partners based on the terms of the
partnership deed.
5. Management: Partners can actively participate in managing the business unless
otherwise specified.
6. Legal Status: It does not have a separate legal identity from its partners.

Partnership firms are common in professions and small to medium-sized businesses due to
ease of formation and operational flexibility.

Question 3: (a) Explain the rule to compute depreciation allowance in case of income from
business and profession.
(b) Discuss the role of different tax authorities and their function in detail.

Answer 3: (a) Depreciation Allowance: Depreciation is a reduction in the value of tangible

assets due to wear and tear over time. For income from business and profession, depreciation
is calculated as per the Income Tax Act using prescribed rates for different categories of
assets. The calculation considers the cost of the asset, its useful life, and the method of
depreciation (e.g., straight-line or reducing balance).

(b) Tax Authorities and Their Functions:

 Central Board of Direct Taxes (CBDT): Governing body for income tax
administration; formulates policies and regulations.
 Income Tax Department: Implements tax laws, assesses and collects taxes.
 Income Tax Officers (ITO): Assess income tax returns, conduct audits, and enforce
compliance.
 Appellate Authorities (ITAT, CIT(A)): Hear appeals against tax assessments and
decisions.
 Commissioner of Income Tax (CIT): Head of income tax department in a region;
supervises tax assessments.
 Revenue Department: Handles tax collection and enforcement.

Each authority plays a crucial role in ensuring compliance with income tax laws, assessing
taxes fairly, and providing grievance redressal mechanisms for taxpayers.

Question 4: (a) What are the provisions of the Income Tax Act regarding commutation of
pension?
(b) What are fully taxable and fully exempted allowances? Explain with examples.
Answer 4: (a) Commutation of Pension: Commutation refers to converting a portion of
pension into a lump sum payment. Under the Income Tax Act, commuted pension received
by a government employee is fully exempt from tax. For non-government employees, it
depends on whether they are covered under the provisions of the Income Tax Act.

(b) Allowances:

 Fully Taxable: Allowances fully taxable include Dearness Allowance (DA), City
Compensatory Allowance (CCA), Overtime Allowance, etc. These are added to the
salary and taxed as per the individual's tax slab.
 Fully Exempted: Allowances fully exempted from tax include House Rent Allowance
(HRA) under Section 10(13A), Leave Travel Allowance (LTA) under Section 10(5),
etc., subject to specific conditions and limits.

Example: HRA received by an employee is exempt based on actual rent paid, salary level,
and city of residence, subject to certain conditions.

Question 5: Write a short note on:

a. Residential status
b. Gross Total Income
c. Income from House Property
d. Lottery Income

Answer 5: a. Residential Status: Determines the taxability of income in India based on the
period of stay in India during a financial year and preceding years. It categorizes individuals
as Resident, Non-Resident, or Not Ordinarily Resident, impacting their tax liability.

b. Gross Total Income (GTI): Total income earned by an individual before allowing
deductions under the Income Tax Act. It includes income from salary, house property,
business or profession, capital gains, and other sources.

c. Income from House Property: Rental income earned from owning property after
deducting municipal taxes and a standard deduction of 30% of the annual value. Interest on
housing loan can also be deducted.

d. Lottery Income: Income earned from lotteries, crossword puzzles, races, card games,
gambling, betting, etc., is taxable at a special rate under the Income Tax Act, distinct from
other sources of income.

Question 6: (A) Lucy purchased 500 shares of XYZ Co. on 26 October 2018 for Rs. 98.94
per share and sold all the shares on 25 October 2019 for Rs. 119.04 per share. Calculate the
capital gain earned by her in selling these 500 shares.
(B) Explain the term capital gain and also differentiate between short-term and long-term
capital gain.
Answer 6: (A) Capital Gain Calculation:

 Purchase Price = 500 shares × Rs. 98.94 = Rs. 49,470

 Sale Price = 500 shares × Rs. 119.04 = Rs. 59,520
 Capital Gain = Sale Price - Purchase Price = Rs. 59,520 - Rs. 49,470 = Rs. 10,050

(B) Capital Gain: Capital gain is the profit earned from the sale of a capital asset such as
shares, property, or mutual funds. It is classified into:

 Short-term Capital Gain (STCG): Gain arising from the sale of assets held for up to
3 years (2 years for immovable property and shares listed on recognized stock
exchange), taxed at applicable slab rates.
 Long-term Capital Gain (LTCG): Gain arising from the sale of assets held for more
than 3 years (or 2 years for specified assets), taxed at a concessional rate with
indexation benefits for certain assets.

Question 7: (A) An individual taxpayer aged 50 years earns Rs. 300,000 in agricultural
income. Her non-agricultural income is worth Rs. 500,000. Calculate her agricultural income
tax for assessment year 2022-23.
(B) Difference between agricultural and non-agricultural income.

Answer 7: (A) Tax on Agricultural Income:

 Agricultural income up to Rs. 5,000,000 is exempt from tax in India.

 Since the taxpayer's agricultural income is Rs. 300,000, it is fully exempt from tax.
 Tax on non-agricultural income of Rs. 500,000 will be computed as per the applicable
income tax slab rates.

(B) Difference:

 Agricultural Income: Income generated from agricultural activities such as farming,

plantations, and allied activities. It is exempt from income tax up to a certain limit.
 Non-agricultural Income: Income from sources other than agriculture, such as salary,
business profits, capital gains, etc., taxable under the Income Tax Act.

Question 8: Explain the various deductions under 80C to 80U available for individuals and
HUF. Also, state which deductions are considered under the New Tax Regime.

Answer 8: Under the Income Tax Act, deductions under Sections 80C to 80U are available
to individuals and Hindu Undivided Families (HUFs):

 Section 80C: Deductions for investments in instruments like PPF, EPF, life insurance
premiums, NSC, ELSS, etc., up to Rs. 1.5 lakh.
 Section 80CCC: Deductions for contributions to pension plans of insurance
companies.
  Section 80CCD: Deductions for contributions to National Pension Scheme (NPS).

Other notable deductions include:

 Section 80D: Deductions for health insurance premiums.

 Section 80E: Deductions for interest on education loans.
 Section 80G: Deductions for donations to charitable institutions.
 Section 80TTA/TTB: Deductions for savings account interest and interest on deposits
for senior citizens.

New Tax Regime: The new tax regime introduced in 2020 offers lower tax rates but without
most deductions and exemptions available under the old regime, including those under
Sections 80C to 80U. Taxpayers can choose between the old and new regimes based on their
preference for deductions or lower tax rates.

Question 1: Enumerate any 10 incomes which do not form part of total income.
Also, explain the meaning of income as per the Income Tax Act in India.

Answer 1: Incomes not forming part of Total Income:

1. Agricultural Income
2. Dividends received from Indian companies
3. Interest on PPF (Public Provident Fund)
4. Proceeds from life insurance policies
5. Gifts received from relatives
6. Scholarships granted to meet education expenses
7. Income of a local authority
8. Share of profit from a partnership firm (for a partner)
9. Retirement benefits like gratuity, pension, etc., under certain conditions
10. Capital receipts not of a revenue nature (e.g., gifts on marriage)

Meaning of Income as per Income Tax Act: Income, as defined by the Income
Tax Act, includes earnings from various sources such as salary, house property,
business or profession, capital gains, and other sources. It is categorized and
taxed under different heads based on specified rules and exemptions.

Question 2: How will you determine the residential status of an individual and
HUF? What is the scope of total income for an individual?

Answer 2: Residential Status: Residential status of an individual or HUF

(Hindu Undivided Family) is determined based on their physical presence in
India during the financial year (1 April to 31 March) as per the Income Tax Act:
  Resident: A person who is in India for 182 days or more during the
financial year OR has been in India for 60 days or more during the financial
year and 365 days or more in the preceding 4 years.
 Non-Resident: A person who does not satisfy the conditions for residency.
 Not Ordinarily Resident: Resident but meets certain conditions related to
income earned outside India.

Scope of Total Income for an Individual: The scope of total income for an
individual includes income earned from all sources worldwide, subject to
exemptions and deductions allowed under the Income Tax Act. It is categorized
into various heads such as salary, house property, business or profession, capital
gains, and other sources.

Question 3: Explain the term capital gain as per the Income Tax Act. Also,
explain the provisions of 54B with regard to capital gain on the sale of
agricultural land.

Answer 3: Capital Gain: Capital gain refers to the profit earned from the
transfer of a capital asset like land, building, shares, etc. It is categorized into:

 Short-term Capital Gain (STCG): Gain from the sale of assets held for up
to 3 years (or 2 years for certain assets).
 Long-term Capital Gain (LTCG): Gain from the sale of assets held for
more than 3 years (or 2 years for certain assets).

Section 54B - Capital Gain on Sale of Agricultural Land:

 Under Section 54B, if an individual or HUF sells agricultural land and

purchases another agricultural land within 2 years from the date of sale, the
capital gains arising from such sale are exempt from tax.
 Conditions include that the land sold should have been used for agricultural
purposes by the assessee or their parents for a specified period.

Question 4: How will you adjust or set off the following for the assessment year
2019-20: a. Business loss of 2010-11, Rs. 80,000
b. Short-term capital loss of 2011-12, Rs. 15,000
c. Short-term capital loss of 2013-14, Rs. 22,000
d. Long-term capital loss in 2010-11, Rs. 12,000
e. Loss from house property in 2013-14, Rs. 22,000. Give reasons for your
answer.

Answer 4: To adjust or set off losses against income for the assessment year
2019-20:

 Business Loss of 2010-11 (Rs. 80,000): Can be set off against any income
from business or profession in the current year and carried forward for 8
assessment years.
 Short-term Capital Loss of 2011-12 (Rs. 15,000): Can be set off against
short-term or long-term capital gains in the current year and carried forward
for 8 assessment years.
 Short-term Capital Loss of 2013-14 (Rs. 22,000): Can be set off against
any capital gains in the current year and carried forward for 8 assessment
years.
 Long-term Capital Loss of 2010-11 (Rs. 12,000): Can be set off against
long-term capital gains in the current year and carried forward for 8
assessment years.
 Loss from House Property of 2013-14 (Rs. 22,000): Can be set off against
any other heads of income in the current year and carried forward for up to
8 assessment years.

These set-off provisions help in reducing taxable income and managing losses
over subsequent years.

Question 5: "An assessee is not only liable for his/her own incomes for tax
purposes but his liability extends to some other incomes also." Comment.

Answer 5: Under the Income Tax Act, an assessee may be liable to pay tax not
only on their own income but also on income earned by others in certain
situations:

 Clubbing of Income: Income earned by spouse, minor child, or certain

relatives may be clubbed with the income of the assessee under specific
provisions like Section 64.
 Association of Persons: In cases where two or more persons join together
to undertake a business or other activities with a view to earning income
jointly, they may be assessed collectively as an Association of Persons
(AOP).
These provisions prevent income splitting among family members to reduce tax
liability and ensure that income is assessed correctly.

Question 6: Discuss the provision of income tax relating to advance payment of

income-tax.

Answer 6: Advance tax refers to the payment of income tax by the taxpayer on
an estimated income during the financial year itself, rather than paying it as a
lump sum at the end of the year. Provisions related to advance tax include:
 Applicability: Applicable to individuals, HUFs, companies, and other
taxpayers whose estimated tax liability for the year exceeds Rs. 10,000
after TDS.
 Due Dates: Payment is made in installments based on specified due dates
(15th June, 15th September, 15th December, and 15th March).
 Consequences of Non-payment: Interest under Section 234B and 234C is
levied for default in payment or deferment of advance tax.

Advance tax ensures timely collection of taxes and prevents last-minute burden
on taxpayers.

Question 7: R estimates his income for the previous year 2018-19 at Rs.
8,90,000. Besides this income, he has also earned long-term capital gain of Rs.
1,80,000 on the transfer of gold on 1.12.2018. Compute the advance tax payable
by R in various installments.

Answer 7: Advance Tax Calculation for R:

 Estimated Total Income: Rs. 8,90,000 + Rs. 1,80,000 = Rs. 10,70,000
 Advance Tax Installments (assuming no TDS credits):
o 15th June: 15% of Rs. 10,70,000 = Rs. 1,60,500
o 15th September: 45% of Rs. 10,70,000 = Rs. 4,81,500
o 15th December: 75% of Rs. 10,70,000 = Rs. 8,02,500
o 15th March: 100% of Rs. 10,70,000 = Rs. 10,70,000

Total advance tax payable by R in installments would be Rs. 1,60,500 + Rs.

4,81,500 + Rs. 8,02,500 + Rs. 10,70,000 = Rs. 25,14,500.
Question 8: Write a short note on: a. TDS on rental income
b. TDS on income of professionals
c. TDS on winnings from lotteries or crossword puzzles
d. Duties of a person responsible for deduction of TDS

Answer 8: a. TDS on Rental Income: Tenant is required to deduct TDS at 10%

on rental payments exceeding Rs. 2,40,000 per annum. Form 26QC is filed for
TDS payment.

b. TDS on Income of Professionals: TDS is deducted at specified rates on

payments made to professionals like doctors, lawyers, consultants, etc. Form 16A
is issued for TDS.
c. TDS on Winnings from Lotteries or Crossword Puzzles: TDS is deducted at
30% (plus surcharge and cess) on winnings exceeding Rs. 10,000. Form 16A is
issued for TDS.

d. Duties of a Person Responsible for Deduction of TDS: Includes deducting

TDS at applicable rates, depositing TDS to government account, issuing TDS
certificates, filing TDS returns, etc. Non-compliance attracts interest, penalties.

These provisions ensure timely collection of taxes and compliance with tax
deduction norms.

Question 1: Explain the provisions of advance tax along with the due dates of
deposit of the same.
Answer 1: Provisions of Advance Tax: Advance tax is paid by taxpayers on
their estimated income during the financial year, rather than waiting until the end
of the year. It helps in the regular inflow of taxes to the government.

Due Dates for Deposit:

 15th June: 15% of estimated tax liability.
 15th September: 45% of estimated tax liability (less amount already paid).
 15th December: 75% of estimated tax liability (less amounts already paid).
 15th March: 100% of estimated tax liability (less amounts already paid).
Non-payment or underpayment of advance tax attracts interest under Section
234B and 234C of the Income Tax Act.
Question 2: What are the ten incomes which are fully exempt under section 10
of the Income Tax Act, 1961?

Answer 2: Ten incomes fully exempt under Section 10 of the Income Tax Act
include:

1. Agricultural income
2. Gratuity received by government employees
3. Leave travel concession (LTC)
4. HRA (House Rent Allowance)
5. Interest on PPF (Public Provident Fund)
6. Scholarships granted to meet education expenses
7. Awards received in recognition of literary, scientific, or artistic
achievements
8. Commuted pension received by government employees
9. Retirement benefits like PF, EPF, VPF, etc.
10. Income of statutory bodies like SEBI, RBI, etc.

These exemptions are subject to certain conditions and limits as per the
provisions of the Act.

Question 3: The income of a year is assessed in the next year called assessment
year. However, in certain cases, the income of a year is assessed in the same
year. Comment.

Answer 3: Normally, income earned during a financial year is assessed in the

next year, known as the assessment year. However, in certain cases such as:

 Advance Tax: Tax is paid during the financial year on estimated income.
 Tax Deduction at Source (TDS): Tax is deducted by the payer and
deposited with the government during the same year.

In these cases, the income is effectively assessed or taxed in the same year it is
earned, rather than in the subsequent assessment year.

Question 4: Income of Mr. A from all income heads is Rs. 5,80,000. Determine
his tax liability for the assessment year 2017-18 given he purchased a life
insurance policy on his life (sum assured-Rs. 2,00,000 on 2.08.2016) and the
premium paid is Rs. 21,500.
Answer 4: To determine Mr. A's tax liability:

 Total Income: Rs. 5,80,000

 Deduction under Section 80C for life insurance premium: Rs. 21,500 (Note:
Maximum deduction under Section 80C is Rs. 1,50,000)

Taxable Income = Rs. 5,80,000 - Rs. 21,500 = Rs. 5,58,500

Calculate tax liability based on the applicable slab rates for the assessment year
2017-18.

Question 5: What are the clubbing provisions under the Income Tax Act, 1961?

Answer 5: Clubbing provisions under the Income Tax Act require certain
incomes to be added to the income of another person and taxed in their hands.
These include:

 Spouse's Income: Income from assets transferred directly or indirectly to a

spouse is clubbed with the income of the transferor.
 Minor Child's Income: Income arising from assets transferred to a minor
child (except under specific conditions) is clubbed with the income of the
parent whose income is higher.
 Association of Persons (AOP): Income of individuals or entities joining
together to undertake an activity jointly is assessed collectively as an AOP.

Clubbing prevents tax evasion through income splitting among family members
and ensures correct assessment of income.

Question 6: How will you determine the residential status of an individual?

Answer 6: Residential status of an individual is determined based on their

physical presence in India during the financial year and preceding years:
 Resident: Presence in India for 182 days or more during the financial year
OR 60 days or more during the financial year and 365 days or more in the
preceding 4 years.
 Non-Resident: Not satisfying the conditions for residency.
 Not Ordinarily Resident: Resident but meets certain conditions related to
income earned outside India.
Residential status impacts the taxability of income in India.

Question 7: Find out the status of Radhika (for assessment year 2017-18) who
leaves India for Paris on 25.01.2017 and would return after 8 months. She was
born in Delhi in the year 2000. Before 25.01.2017, she visited the United States
from 12.05.2014 to 31.06.2015.

Answer 7: Radhika's residential status for assessment year 2017-18:

 Physical Presence: Radhika was in India from 1 April 2016 to 24 January

2017 (less than 182 days in FY 2016-17).
 Previous Years: Radhika was in India for 365 days or more in the
preceding 4 years (FYs 2013-14 to 2016-17).

Conclusion: Radhika meets the condition of being in India for 60 days or more
during FY 2016-17 and 365 days or more during the preceding 4 years.
Therefore, Radhika qualifies as a Resident in India for assessment year 2017-18.

Question 8: Write short notes on: (a) Section 80C

(b) Section 80D
(c) Section 80E
Answer 8: (a) Section 80C: Provides deductions up to Rs. 1,50,000 for
investments in specified instruments like PPF, EPF, life insurance premiums,
ELSS, NSC, etc. Helps in tax planning by reducing taxable income.

(b) Section 80D: Provides deductions for health insurance premiums paid for
self, spouse, children, and parents (Rs. 25,000 for self/family and Rs. 50,000 for
senior citizens). Promotes health insurance coverage among taxpayers.

(c) Section 80E: Provides deductions for interest paid on education loans for
higher studies (for self, spouse, children, or a student for whom the individual is
a legal guardian). Encourages higher education by reducing financial burden
through tax benefits.

These sections encourage savings, promote health insurance coverage, and

support higher education by offering tax deductions.