Atray MBA-III-Sem MF0003

Master of Business Administration

MF0003 – Taxation Management

Assignment Set- 1

Note: Answer all the questions.

Question 1. List out items that are included in agriculture income under Sec 2(1A). Explain the
meaning of tax evasion and tax avoidance. (10 Marks)

Answer:

Agricultural income" means

a. any rent or revenue derived from land which is situated in India and is used for
agricultural purposes;
b. any income derived from such land by
i. agriculture; or
ii. the performance by a cultivator or receiver of rent-in-kind of any process ordinarily
employed by a cultivator or receiver of rent-in-kind to render the produce raised or
received by him fit to be taken to market; or
iii. the sale by a cultivator or receiver of rent-in-kind of the produce raised or received
by him, in respect of which no process has been performed other than a process of
the nature described in paragraph (ii) of this sub-clause;
c. any income derived from any building owned and occupied by the receiver of the rent or
revenue of any such land, or occupied by the cultivator or the receiver of rent-in-kind, of
any land with respect to which, or the produce of which, any process mentioned in
paragraphs (ii) and (iii) of sub-clause (b) is carried on:
Provided that
i. the building is on or in the immediate vicinity of the land, and is a building which the
receiver of the rent or revenue or the cultivator, or the receiver of rent-in-kind, by
reason of his connection with the land, requires as a dwelling house, or as a store-
house, or other out-building, and
ii. the land is either assessed to land revenue in India or is subject to a local rate
assessed and collected by officers of the Government as such or where the land is
not so assessed to land revenue or subject to a local rate, it is not situated
a) in any area which is comprised within the jurisdiction of a municipality (whether
known as a municipality, municipal corporation, notified area committee, town area
committee, town committee or by any other name) or a cantonment board and
which has a population of not less than ten thousand according to the last
preceding census of which the relevant figures have been published before the first
day of the previous year ; or
b) in any area within such distance, not being more than eight kilometres, from
the local limits of any municipality or cantonment board referred to in item (A), as
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the Central Government may, having regard to the extent of, and scope for,
urbanisation of that area and other relevant considerations, specify in this behalf
by notification in the Official Gazette.

Examples of Agricultural Incomes:

(i) Income from growing flowers and creepers.
(ii) Rent from agricultural land.
(iii) Profit on sale of standing crops or produce after harvest by the cultivating owner or tenant
of agricultural land.
(iv) Income from leasing out agricultural land for grazing cattle required for agricultural
purposes.
(v) Interest on capital received by a partner from his firm engaged in agricultural operations.
(vi) Conversion of latex into smoked sheets.
(vii) Rent from agricultural land received from sub-tenants by the mortgagee in possession.
(viii) Income from sale of mulberry leaves grown on agricultural land.
(ix) Compensation received from an insurance company for damages caused by hailstorm or
floods to the tea plantations.
(x) Income from conversion of timber into planking.

Tax avoidance
A distinction is made between avoidance and evasion of taxes. In the former case affairs are so
manipulated that the tax liability under the existing legislation, is reduced. The intention of the
law is not carried out due to defects or loopholes in legislation.
The taxpayer is able to avoid being subject under the general scope of tax. Some of the
important sources or illustrations of tax avoidance are as follows:
• The absence of a clear and comprehensive definition of income for tax purposes.
• Division of property among members of family to escape the effects of progression.
• The definition of expenses as permissible deduction is elastic. There is over-generous
provision for the relief ‘losses’. Consequently, the businessmen claim all types of
deductions and sometimes “manufacture losses” for tax purposes.
• Judicious use of trusts to reduce tax liability because of exemption.
• The definition of expenses as permissible deduction is elastic.
Tax Evasion
In case of tax evasion, facts are deliberately misrepresented and tax liability is understated. In
either case Government lose the revenue. Both are antisocial as they disturb the equity of tax
as between honest and dishonest tax payers or assesses who can not evade the tax in view of
the circumstances in which income is earned.
Evasion takes place because:
• Some persons are not in the list of assesses of the department,
Atray MBA-III-Sem MF0003

• Some persons are assessed to tax but do not disclose their full income.
• The tax evasion may be partly due to the high rates of taxation and partly due to the
opportunities for making illicit gains, which had to be hidden from the Government.
• The tax department may be ill equipped in the matter of trained staff to cope adequately
with the problem of verifying the accuracy of the returns submitted by the assesses. The
evasion is also encouraged by the mild punishment with which it is let off.
The law permits prosecution, but the offences are usually compounded and tax evader escapes
publicity and prosecution. Tax evaders are not black listed and continue to maintain their
position in the eyes of the public and the Govt. There is also lack of public opinion that would
treat tax evaders as enemies of the society.
In India most of the evasion takes place in non-salary incomes particularly those of self
employed persons, big businessmen, merchants and small traders, middlemen, money lenders
and professional persons .In a large number of cases a complete record of all transactions are
not maintained. In the accounts some receipts are recorded at lower figures and some are not
recorded at all. It is common to maintain duplicate, and at times even triplicate, set of account
books to dodge the taxation authorities. Inadmissible expenses are inserted in the accounts
and these are not always detected.

Question 2. (A.) After serving for 28 years 6 months and 4 days AKRAM retired from Y Ltd. on
31st August. He received Rs. 3,25,000 as gratuity. His last month basic was Rs. 10,000 and
DA Rs 3,000.He is covered under the Payment of Gratuity Act. Compute the taxable gratuity.

(B.) GOVINDA retired from service on 31st March and received a commuted pension of Rs.
1,60,000. Find out taxable commuted pension:
a) if he is in receipt of gratuity
b) if he not in receipt of gratuity.

Answer:
(A.)

Akram who retired from Y Ltd is covered under Payment of Gratuity Act 1972

Hence Least of the following will be exempted from income tax

Atray MBA-III-Sem MF0003

i) One half months salary for each completed year of service

Salary = Rs10000/- +Rs3000/- =Rs13000/-

Years of service =28 years
Exempted gratuity =1/2 *28*13000 = Rs182000/-

ii) Rs350000/-
iii) Gratuity Actually Received =Rs325000/-
So Gratuity exempted from tax =Rs182000/-

Hence Taxable Gratuity =Rs325000.0 –Rs182000/

=Rs143000/-

(B.) Commuted pension Received by Govinda= Rs.1,60,000.

a) if he is in receipt of gratuity then as per section 10(10A)

Exemption from income tax =1/3* Rs.1,60,000.0

=Rs53333.33/-
Taxable commuted pension =Rs160000/ -Rs53333.33
=Rs106666.67/-

b)if he is not in receipt of gratuity then as per section 10(10A)

Exemption from income tax =1/2* Rs.1,60,000.0

=Rs80000/-
Taxable commuted pension =Rs160000/ -Rs80000/
=Rs80000/-

Question 3. What are perquisites? List out tax free perquisites.

Answer:
Perquisites
The term ‘perquisite’ means any benefit, attached to an office or position in addition to salary or
wages. It may be given in cash or in kind. if it is given in kind it is measured in terms of money
and added to find out employee’s salary for tax purpose. The perquisites are taxable under the
head salary only if they are (a) allowed by an employer to an employee; (b) allowed during the
continuance of employment; (c) directly dependent on service; (d) resulting in the nature of
personal advantage to the employee.
Perquisites received from a person other than employer, are taxable under the head ‘profits
and gains of business or profession’ or ‘income from other sources’.
Tax-free Perquisites:
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The value of the following perquisites shall not be included in the salary income of any
employee:
i) Medical benefits
Fixed medical allowance is always taxable.
If bills are in the name of an employee and the employer makes payment, then it is taxable in
the hands of all employees, whether specified or not.
Medical facilities in the hospitals etc. maintained by the employer are tax free.
Medical bills incurred or reimbursed by the employer for the treatment in hospitals etc.
maintained by Govt. or local authority or any approved hospitals is not chargeable in the hands
of any employee.
Medical bills incurred or reimbursed by the employer fir the treatment in private hospitals etc.
are tax free up to Rs. 15,000 in aggregate per year.
Medical facilities outside India for the treatment of employee or any member of the family of
such employee are also tax free provided the expenditure shall be permitted by R.B.I.
Cost on travel of employee/any member of his family and one attendant who accompanies the
patient in connection with the treatment outside India shall also be tax free provided, the
employee’s gross total income before including the expenditure on traveling does not exceed
Rs. 2,00,000.
Medical bills incurred or reimbursed by the employer for the treatment of prescribed diseases,
approved by the chief commissioner are also tax free
Medical insurance premium paid or reimbursed by the employer is tax free.
ii) Tea or snacks or free food or beverages provided in office or factory (work place) or
through paid vouchers which are not transferable and usable only at eating joints.
iii) Facility of motor car(s)
iv) Residential accommodation provided at remote area.
v) Facility of club or health club and similar facilities.
vi) Expenses on telephones including mobile phone.
vii) Employer’s contribution of Staff Group Insurance Scheme
viii) Scholarships to employees or their children paid by the employer.
ix) The facility of conveyance provided by the employer from residence to place of employment
and vice-versa.
x) Refresher courses, etc. If the employer pays fees for an employee taking refresher courses
or management course in order to enable, the employee to perform his services more
efficiently. Such expenses are treated as scholarship.
xi) Free Rations to Armed Personnel. The value of free rations given to the armed forces
personnel.
xii) Facility of guest house or holiday home
xiii) Welfare expenses
xiv) Entertainment expenses
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xv) Free or confessional ticket provided by the employer (engaged in the business of transport)
for private journeys of the employee or his family members.
xvi) Perquisites to Government Employees posted abroad. Any perquisites allowed outside
India by the Government of India to a citizen of India for rendering service outside India. This
exemption is not available to non-government employees and also to those who are not
citizens of India.
xvii) Rent-free house and conveyance facility provided to High Court and Supreme Court
Judges
xviii) The value of rent-free furnished residence provided to a Minister, specified officers of
Parliament or a Leader of the Opposition in Parliament.
xix) Gifts in Kind.
xx) Laptops and computers provided by the employer for personal use of employee or any
member of his household.
xxi) Interest-free or confessional loan, if the amount of loan in aggregate does not exceed Rs.
20,000 during the previous year.
xxii) Transfer without consideration to an employee of a movable asset (other than computers
electronic items and car) by the employer after using it for a period of ten years or more.
xxiii) Periodicals and journals required for discharge of work.
xxiv) Leave travel concession u/s. 10(5).
xxv) Issue of share etc., free of cost or at a confessional price under employee’s Stock Option
Plan- The value of any benefit provided by a company free of cost at a confessional rate to its
employees by way of allotment of shares, debentures or warrants directly or indirectly, under
the Employees’ Stock Option Plan or Scheme offered to employees in accordance with the
guidelines issued by the Central Government.
xxvi) Where loans are made available for medical treatment in respect of diseases specified in
Rule 3A (e.g., cancer, tuberculosis, AIDS, etc) The value shall be taken as nil. However, the
exemption shall not apply to so much of the loan as has been reimbursed to the employee
under any medical insurance scheme.
Atray MBA-III-Sem MF0003

Question 4. Mr. BALU owns four houses. The particulars regarding the houses are as follows::

House 1 House 2 House 3 House 4

15000 18000 20000 -

Municipal valuation

16000 15000 25000 25000

Fair rent
10000 16000 - 30000

Standard rent
9000 20000 18000 20000

Actual rent received

Determine the gross annual value of each of the four houses for the AY 2009-2010.

Answer:

Determination of Gross Annual Value.

Sr House 1 House 2 House 3 House 4

No.
1 Fair rent Value 16000 15000 25000 25000
2 15000 18000 20000 -

Municipal valuation
Atray MBA-III-Sem MF0003

3 Higher of above 16000 18000 25000 25000

( 1 & 2)
4 10000 16000 - 30000

Standard rent
5 Lower of 10000 16000 25000 25000
above(Notional Rent)
(lower of 3 & 4 )
6 9000 20000 18000 20000

Actual rent received

7 GAV(higher of 5 & 60 10000 20000 25000 25000

Question 5. Write short notes on:

a. Tax planning on buildings self-occupied.
b. Tax planning on leave salary.

Answer:
Tax planning refers to an exercise carried out by a tax payer to meet his tax obligation in a
proper, systematic and orderly manner availing all possible exemptions, relief and deductions
available under the Income Tax Act, as may be applicable to his case

The tax paid is an addition to the cost. Just as every businessman tries to maximiz
by reducing the cost, he should arrange his affairs in such away, that he pays the
of tax. This however should be done within the four corners of law and there shou
element of fraud in it.In case of self occupied houses it is discussed in the followin

Buildings self-occupied for residential purposes

The building self-occupied by the owner (an individual or HUF) for residential purposes can be
arrived as under:
House or part of a house occupied by the owner for full previous year for the purposes of his
own residence Sec. 23(2)(a): Where the property consists of one house in the occupation of the
owner for his own residence, the annual value of such house shall be taken to be NIL
Deduction from Annual Value: Interest on borrowed capital. Sec. 24(b)
Atray MBA-III-Sem MF0003

Interest on borrowed capital (of the current year and pre- construction period) is deductible.
However, it is subject to a maximum ceiling given below:
(a) Where such property has been acquired, constructed, repaired, renewed or reconstructed
with borrowed capital, the maximum limit for deduction of interest shall be Rs. 30,000.
(b) Where such house property is constructed/acquired with capital borrowed after 31.3.1999,
the deduction on account of interest shall be allowed up to Rs. 1,50,000. The acquisition or
construction should be completed within three years from the end of the financial year in which
capital was borrowed.
Tax Planning
Those who are staying in rented premises can think of availing loan from banks or approved
institutions. They have the pleasure of staying in their own house. Not bothering to pay monthly
rent, they can reduce their taxable income substantially. Even their disposable income may not
decrease, since they need not pay monthly rent. Even the effective rate of interest may be
reduced, because of tax saving caused by the interest payment (or due). (of course this
requires detailed calculations.)
House self-occupied for part of previous year, let out for part of previous year [Sec. 23(2)(b)]
House self-occupied for part of the previous year and let-out for part of the previous year: Sec.
23(3): The annual value of the house shall NOT be nil. Such a house will be treated as let-out
house annual value will be determined u/s 23(1)
More than one house in the occupation of the owner [Sec. 23(4)
Where the owner of the houses occupies more than one house for his residence for full
previous year, except one (at his option), all other houses are deemed as let out. The
income(s) of deemed let out house(s) shall be computed in the usual manner.
The following points will be considered:
The question of house remaining vacant or unrealized rent will not arise.
The municipal tax paid can be claimed.
The expected rent will be the gross annual value.
Full amount of interest on loan for acquisition, construction etc. will be allowed.

b. Tax planning on leave salary

Leave Salary or Encashment of earned leave:Cash equivalent of leave salary payable to an
employee of the central and the sate government in respect of the earned leave at his credit at
the time of his retirement whether on superannuation or otherwise (e.g. by resigning), is exempt
from tax.
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The least of the following is exempted from tax:

Particulars Amount
1. Maximum of 10 month’s salary on the basis of xxx
the average salary drawn by the employee xxx
during 10 months preceding his retirement on
superannuation or otherwise Rs. 3,00,000
2. Average salary x Approved Period Maximum or xxx
Statutory limit
3. Amount actually received

The Approved period: is defined as Earned leave entitlement cannot exceed 30 days for
every year of actual service
Salary : is defined as Basic pay + Dearness Allowance (given in terms of employment) +
Commission achieved on fixed percentage of turnover
Tax Planning
If a Govt. employee is due for retirement shortly, it is better for him not to encash his salary
while he is in service. This is because he can avoid paying tax on leave encashment which he
receives at the time of retirement. Even an employee in private service gets exemption for a
major part of the amount received as leave encashment. In this connection employee should
also consider the loss of interest on the amount which is not taking to save tax.