Taxation Laws:

1. Short Notes:

 Entertainment Allowances: 9[(ii) a deduction in respect of any allowance in

the nature of an entertainment allowance specifically granted by an employer
to the assessee who is in receipt of a salary from the Government, a sum equal
to one fifth of his salary (exclusive of any allowance, benefit or other
perquisite) or five thousand rupees, whichever is less;]

The provisions regarding the entertainment allowance and its deduction from salary
are discussed below –
Entertainment allowance as per Section 16(ii) is first included in salary
income under the head “Salaries” and thereafter a deduction is given on the
basis enumerated in the following points:
A. In the case of a Government employee (i.e., Central Government or a State
Government employee), the least of the following is deductible:
(i). 5,000
(ii). 20 percent of basic salary; or
(iii). Amount of entertainment allowance granted during the previous year.
In order to determine amount of entertainment allowance deductible
from salary Income, the following points need consideration:
(i). For this purpose “salary” excludes any allowance, benefit or other
perquisites.
(ii). Amount actually expended towards entertainment (out of entertainment
allowance received) is not taken into consideration.
B. In the case of a non-Governmental employee (including employees of
statutory corporation and local authority), entertainment allowances is not
deductible, and are completely chargeable to tax.

 Profession: Book page no. 2.174

 Perquisite: “perquisite” includes— 2 (i) the value of rent-free accommodation

provided to the assessee by his employer; (ii) the value of any concession in
the matter of rent3 respecting any accommodation provided to the assessee by
his employer; 4 [Explanation 1.—For the purposes of this sub-clause,
concession in the matter of rent shall be deemed to have been provided if,—
5[(a) in a case where an unfurnished accommodation is provided by any
employer other than the Central Government or any State Government and—

(i) the accommodation is owned by the employer, the value of the

accommodation determined at the specified rate in respect of the
period during which the said accommodation was occupied by the
assessee during the previous year, exceeds the rent recoverable from,
or payable by, the assessee;
(ii) (ii) the accommodation is taken on lease or rent by the employer, the
value of the accommodation being the actual amount of lease rental
paid or payable by the employer or fifteen per cent of salary,
whichever is lower, in respect of the period during which the said
 accommodation was occupied by the assessee during the previous year,
exceeds the rent recoverable from, or payable by, the assessee;]

Perquisites is defined as a benefit which one enjoys or is entitled to on

account of one’s job or position in the dictionary. Hence, perquisites
are added to the head Salaries while filing income tax return. Under
section 17(2) of the Income Tax Act, perquisites include:
1. Value of rent free accommodation provided to the assessee by his employer.
2. Value of any concession in the matter of rent in respect of any accommodation
provided to the assessee by his employer.
3. Value of any benefit or amenity granted or provided free of cost or at concessional
rate in any of the following cases:
1. By a company to an employee who is a director thereof.
2. By a company to an employee being a person having substantial interest in the
company; or
3. By any employer, including a company, to any employee whose income under
the head ‘salaries’ excluding the value of all benefits or amenities not provided
for by way of monetary payments exceeds fifty thousand rupees.
However, use of any vehicle provided for journey by the assessee from his
residence to his office or other place of work and back to his residence shall
not be regarded as a benefit or amenity granted or provided to him free of cost
or at concessional rate.
4. Amount paid by the employer in respect of any obligation which, but for such
payment, would have been payable by the assessee.
5. Amount paid to affect an assurance on the life of the assessee or to effect a contract
for an annuity otherwise through a specified or approved fund.
6. Value of employee stock options or sweat equity shares allotted or transferred free of
cost or at concessional rate to the employee.
7. Employer’s contribution to superannuation fund, not exceeding rupees one lakh fifty
thousand.
8. Value of any other fringe benefit or amenity which include:
1. Value of accommodation provided to the employee.
2. Value of use of motor car provided to the employee.
3. Value of services of a sweeper, watchman, gardener and personal attendant.
4. Value of supply of gas, electricity or water for employee’s household
consumption.
5. Value of free or concessional educational facilities provided to members of
household of the employee.
6. Value of free of cost or concessional fare by an employer engaged in business
of carriage of goods or passengers provided to any member of the household
of employee.
7. Value of benefit arising from the provision of interest-free or concessional
loan provided to the employee or any member of the household of the
employee.
8. Value of travelling, touring, accommodation and any other expenses paid for
or borne or reimbursed by the employer for any holiday availed of by the
employee or any member of his household.
 9. Value of free food and non-alcoholic beverages provided by the employer to
an employee excluding such provision during working hours at office or
business premises or through non-transferable paid vouchers useable at only
eating joints.
10. Value of any gift or voucher or token in lieu of which such gift can be
received by the employee or any member of his household, where such value
in aggregate exceeds rupees five thousand during the previous year.
11. Amount of membership fee and annual fee incurred by the employee or any
member of his household charged to a credit card including any add-on card
borne by the employer.
12. Amount of annual or periodical fee in a club incurred by the employee or any
member of his household borne by the employer.
13. Value of usage of any movable asset of the employer used by the employee or
any member of his household.
14. Value of benefit arising from the transfer of a movable asset belonging to the
employer to the employee or any member of his household.
15. Value of any other benefit or amenity, service, right or privilege provided by
the employer.

 House Rent Allowances: House rent allowance or HRA granted by an employer

to his employee is tax exempted to the extent provided under section 10 (13A) of
income tax act 1961. Employees in India, receive house rent allowance or HRA from
their employer every month as a part of the terms and conditions of employment.
Employer use to provide HRA benefit to employees to meet the cost of a
rented house at employer’s work location. As per Income Tax Act provision,
HRA is partly exempted if certain terms and conditions met by the employee.

Exemption for house rent allowance or HRA is divided based on the city
where employee live. Income tax act specifies two types of cities for the
calculation of house rent allowance exemption;
Metro Cities i.e. Mumbai, Calcutta, Chennai and Delhi:

If you have taken a rented accommodation in a metro city i.e. Mumbai, Kolkata,
Chennai and Delhi then your house rent allowance will be exempted to the extent of
following;
 Actual house rent allowance or HRA received from the employer
 Actual house rent paid minus 10% of your salary due for the relevant period
 50% of salary due for the relevant period

So the minimum of the above three will be deducted from your HRA you
receive and the balance will be taxable.

Non Metro Cities:

If you are not living in non metro cities i.e. cities other than Chennai, Mumbai,
Kolkata and Delhi then your house rent allowance or HRA exemption calculation will
 differ. In this case, the least of followings will be exempted in the case of non metro
cities;

 Actual House rent allowance or HRA received from employer

 Actual house rent paid minus 10% of your salary due for the relevant period
 40% of your salary due for the relevant period

For both cases, Salary means basic salary plus dearness allowance if provided in
terms of employment plus commission as a percentage of turnover. Salary for the
calculation of house rent allowance or HRA exemption is taken on due basis. If you
have received any advance salary then that amount will not be included in house rent
allowance or HRA exemption calculation.

2. State the procedure of computation of income from a let out house property.

Ans. Book page no. 2.131

3. Write a note on the procedure of calculating the deduction in respect of donation

under section 80G.

Ans.

Donations Eligible for 100% Deduction Without Qualifying Limit

 National Defence Fund set up by the Central Government

 Prime Minister’s National Relief Fund
 National Foundation for Communal Harmony
 An approved university/educational institution of National eminence
 Zila Saksharta Samiti constituted in any district under the chairmanship of the Collector of
that district
 Fund set up by a State Government for the medical relief to the poor
 National Illness Assistance Fund
 National Blood Transfusion Council or to any State Blood Transfusion Council
 National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation, and
Multiple Disabilities
 National Sports Fund
 National Cultural Fund
 Fund for Technology Development and Application
 National Children’s Fund
 Chief Minister’s Relief Fund or Lieutenant Governor’s Relief Fund with respect to any State
or Union Territory
 The Army Central Welfare Fund or the Indian Naval Benevolent Fund or the Air Force Central
Welfare Fund, Andhra Pradesh Chief Minister’s Cyclone Relief Fund, 1996
 The Maharashtra Chief Minister’s Relief Fund during October 1, 1993 and October 6, 1993
 Chief Minister’s Earthquake Relief Fund, Maharashtra
 Any fund set up by the State Government of Gujarat exclusively for providing relief to the
victims of the earthquake in Gujarat
 Any trust, institution or fund to which Section 80G(5C) applies for providing relief to the
victims of the earthquake in Gujarat (contribution made during January 26, 2001, and
September 30, 2001) or
 Prime Minister’s Armenia Earthquake Relief Fund
 Africa (Public Contributions – India) Fund
 Swachh Bharat Kosh (applicable from FY 2014-15)
 Clean Ganga Fund (applicable from FY 2014-15)
 National Fund for Control of Drug Abuse (applicable from FY 2015-16)

Donations Eligible for 50% Deduction Without Qualifying Limit

 Jawaharlal Nehru Memorial Fund

 Prime Minister’s Drought Relief Fund
 Indira Gandhi Memorial Trust
 Rajiv Gandhi Foundation

Donations Eligible for 100% Deduction Subject to 10% of Adjusted Gross Total Income

 Donations to the government or any approved local authority, institution or association to

be utilized for the purpose of promoting family planning
 Donation by a Company to the Indian Olympic Association or to any other notified
association or institution established in India for the development of infrastructure for
sports and games in India, or the sponsorship of sports and games in India.

Donations Eligible for 50% Deduction Subject to 10% of Adjusted Gross Total Income

 Any other fund or any institution which satisfies the conditions mentioned in Section 80G(5)
 Government or any local authority, to be utilized for any charitable purpose other than the
purpose of promoting family planning
 Any authority constituted in India for the purpose of dealing with and satisfying the need for
housing accommodation or for the purpose of planning, development or improvement of
cities, towns, villages or both
 Any corporation referred to in Section 10(26BB) for promoting the interest of the minority
community
 For repairs or renovation of any notified temple, mosque, gurudwara, church or other
places.

4. Explain the distinctions between Tax avoidance and Tax evasion.

Ans. Tax Avoidance Vs Tax Evasion

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
 BASIS FOR
TAX AVOIDANCE TAX EVASION
COMPARISON

Meaning Minimization of tax Reducing tax

liability, by taking such liability by using
means which do not illegal ways is
violate the tax rules, is known as Tax
Tax Avoidance. Evasion.

What is it? Hedging of tax Concealment of tax

Attributes Immoral in nature, Illegal and

which involves bending objectionable, both
the law without in script and moral.
breaking it.

Concept Taking unfair advantage Deliberate

of the shortcomings in manipulations in
the tax laws. accounts resulting
in fraud.

Legal implication Use of Justified means Use of such means

that are forbidden
by law

Happened when Before the occurrence After tax liability

of tax liability. arises.

Type of act Legal Criminal

Consequences Deferment of tax Penalty or

liability imprisonment

Objective To reduce tax liability To reduce tax

by applying the script of liability by
law. exercising unfair
means.

Definition of Tax Avoidance

An arrangement made to beat the intent of the law by taking unfair advantage of the
shortcomings in the tax rules is known as Tax Avoidance. It refers to finding out new
methods or tools to avoid the payment of taxes which are within the limits of the law.
This can be done by adjusting the accounts in a manner that it will not violate any tax
rules, as well as the tax incurrence, will also be minimised. Formerly tax avoidance is
considered as lawful, but now it comes to the category of crime in some special cases.
The only purpose of tax avoidance is to postpone or shift or eliminate the tax liability.
This can be done investing in government schemes and offers like the tax credit, tax
privileges, deductions, exemptions, etc., which will result in the reduction in the tax
liability without making any offence or breach of law.
 Definition of Tax Evasion
An illegal act, made to escape from paying taxes is known as Tax Evasion. Such
illegal practices can be deliberate concealment of income, manipulation in accounts,
disclosure of unreal expenses for deductions, showing personal expenditure as
business expenses, overstatement of tax credit or exemptions suppression of profits
and capital gains, etc. This will result in the disclosure of income which is not the
actual income earned by the entity.
Tax Evasion is a criminal activity for which the assessee is subject to punishment
under the law. It involves acts like:
 Deliberate misrepresentation of material facts.
 Hiding relevant documents.
 Not maintaining complete records of all the transactions.
 Making false statements.

Key Differences Between Tax Avoidance and Tax Evasion

The following are the major differences between Tax Avoidance and Tax Evasion:
1. A planning made to reduce the tax burden without infringement of the legislature is
known as Tax Avoidance. An unlawful act, done to avoid tax payment is known as
Tax Evasion.
2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax.
3. Tax avoidance is immoral that tends to bend the law without causing any damage to
it. Unlike tax evasion, which is illegal and objectionable both according to law and
morality.
4. Tax avoidance aims at minimising the tax burden by applying the script of law.
However, tax evasion minimises the tax liability by exercising unfair means.
5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax
Evasion includes the deliberate concealment of material facts.
6. The arrangement for tax avoidance is made prior to the occurrence of tax liability.
Unlike Tax Evasion, where the arrangements for it, are made after the occurrence of
the tax liability.
7. Tax avoidance is completely legal however Tax Evasion is a criminal activity.
8. The result of tax avoidance is the postponement of the tax, whereas the consequence
of tax evasion if the assessee is found guilty of doing so, is either imprisonment or
penalty or both.

5. What is Gross Total Income?

Ans. As the name suggests Gross Total Income is the aggregate of all the income
earned by you during a specified period. According to Section 14 of the Income Tax
Act 1961, the income of a person or an assessee can be categorised under these five
heads,

 Income from Salaries

 Income from House Property
 Profits and Gains of Business and Profession
 Capital Gains
 Income from Other Sources

And, Gross Total income is arrived at when your earnings from all these five heads of
income is taken together.

What is the difference between Gross Total Income and Total Income?
Gross Total Income is calculated foremost by adding your income under all five heads
of income. Now, to arrive at the Total income you must subtract from it
the deductions under chapter VI A of the Income Tax Act 1961. I.e. the deduction
ranging from section 80C to 80U. Which means

Income from Salary ……………………………………………………………xxx

Add: Income Under the Head House Property………………………………….xxx
Add: Profits and Gains of Business and Profession……………………………..xxx
Add: capital gains Income……………………………………………………….xxx
Add: Income from Other Sources………………………………………………..xxx
Gross Total Income…………………………………………………………….XXX
Less: Deductions under Section 80C to 80U…………………………………….xxx
Total Income……………………………………………………………………XXX

6. What is uniform previous year?

Ans. Uniform previous year means the previous year for which you are filing return
should remain same for all the sources of income i.e. salary, capital gain, house
property etc.

7. Explain the meaning of capital assets.

Ans. Definition of ‘Capital Asset’ is contained under section 2(14) of the Income Tax
Act, 1961. As per the said section, capital assets mean property of any kind held by
the person, whether the same is connected with his business or profession or not
connected with his business or profession.

On the basis of above definition, it can be concluded that capital assets include
property of any kind whether movable or immovable, tangible or intangible, fixed or
circulating. Some of the examples of capital assets are land, building, plant and
machinery, motor car, jewelry, furniture, patent, trademarks, share, debentures etc.

8. What is meant by Net Annual Value of a let our house property?

Ans. Net Annual Value of a house property means the Gross Annual Value Less
Municipal taxes actually paid by the owner during the previous year.

9. Explain deduction from Gross Income under section 80D.

 Ans. Deduction for the premium paid for Medical Insurance
You (as an individual or HUF) can claim a deduction of Rs.25,000 under section 80D
on insurance for self, spouse and dependent children. An additional deduction for
insurance of parents is available up to Rs 25,000, if they are less than 60 years of age.
If the parents are aged above 60, the deduction amount is Rs 50,000, which has been
increased in Budget 2018 from Rs 30,000.
In case, both taxpayer and parent(s) are 60 years or above, the maximum deduction
available under this section is up to Rs.1 lakh.
Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum
deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a
cumulative additional deduction of Rs. 5,000 is allowed for preventive health check.

10. Write short note on Tax Planning respect to specific management decisions.

Ans. MAKE OR BUY

When a business concern requires a product or any part or component of the product
for its existing unit, it has to decide whether it should make the product, part or
component or buy it from other manufacturers. There are many costing and non-
costing considerations guiding the decision towards make or buy it. Some of the
important factors affecting such decision are :

1. Whether for manufacture infra-structural facilities are available.

2. Whether the present capacity of the undertaking is fully utilised. If not, it can be
utilised in making the required product.
3. If an additional unit is required for manufacture the required product, the concern
possesses adequate funds for establishing the unit and the whole production of the
unit will be consumed by the concern or there is market for the sale of extra
production.
4. Whether the product is available in the market easily and at reasonable terms.
5. If the cost of manufacture of a product/component is lower than the cost of
purchase, it may be manufactured.

6. If the product is not manufactured it has to be imported then import trade control
regulations and foreign exchange control regulations have also a role.
7. If there is change in technology in production of that product, the concern will be in
a position to acquire the new technology without much difficulty. If the product has to
be imported, if not manufactured, and such product may tell upon the security of the
country, it must be manufactured in the country, whatever the cost of manufacture
may be.

TAX CONSIDERATIONS
1. If a concern has surplus capacity and even decide to buy a product it may require to
sell a part of its plant and machinery. In such a case it may be liable to capital gains
tax.
2. If a new industrial undertaking (unit) is established to make the product, which
fulfils the conditions laid down in Section 80IB/80IC/80IE of the Act, a deduction
will be allowed in computing the income of the undertaking (unit) for tax purposes.

3. If the product, either manufactured or purchased, is a capital asset, its cost will not
be allowed as a deduction in computing the income However, if the asset is such on
which depreciation is allowed, it will be allowed in both the cases i.e., manufactured
or purchased.
4. If the product is a consumable one, raw material or required to replace a worn out
part at the time of repair, its cost will be treated as revenue expenses and deductible in
computing the income.

OWN OR LEASE
A lease of property is a transfer of right to enjoy such property, made for certain time,
in consideration of a price payable periodically to the transferor by the transferee.

In other words, leasing is an arrangement that provides a person with the use and
control over an asset, for a price payable periodically, without having a title of
ownership. In case of lease agreement the owner of the asset is called the lessor and
the user is called the lessee.

When a person needs an asset for his business purposes, he has to decide whether the
asset should be purchased or taken on lease. While taking this decision he should keep
in mind the following factors :

1. Cash position. When a person has sufficient cash or he can borrow funds at a
reasonable rate of interest to purchase an asset or can acquire the asset under hire
purchase/instalment system, he may decide to buy it. The cost of own asset is not
deductible in computing the income but the interest on borrowed funds or under hire
purchase/instalment system is deductible in computing the income. If he neither has
sufficient cash nor he can borrow due to stringent credit control, he has to take the
asset on lease. The lease rent is deductible in computing the income.

2. Depreciation. When the asset is purchased or acquired under hire

purchase/instalment system, the depreciation is allowed in computing income. When
the asset is taken on lease the depreciation is not allowed to the lessee, because he is
not the owner of the asset, but it is allowed to the lessor. Non-availability of
depreciation to the lessee will increase his tax liability.
 If the asset is such on which depreciation is not allowed, e.g. land, the increase or
decrease in the value of the asset in future must be considered. If the asset is such
where increase in the value is expected, it may be purchased otherwise it may be
taken on lease.

3. Obsolescence risk. When a plant or machinery is purchased and it becomes

obsolete earlier than its expected working life, it has to be replaced. The replacement
cost can be met partly out of depreciation fund and partly by arranging further cash. In
case of lease the asset will be replaced by the lessor. However, the lessor will also
keep in mind the risk of obsolescence and increase the lease rent to offset such a loss.

4. Residual Value. When a person purchases an asset, he has full rights to the value of
the asset at the end of any given period. In the case of asset with large residual value it
is better to purchase it rather than taken on lease.

5. Profit margin. Where profit margin is low, it is better to purchase the asset. If the
asset has been purchased by borrowed funds the cash outflow would be equal to loan
instalment, interest payment and slightly higher tax. On the other hand, in case of
leasing the lease rent would be equal to part of the cost of asset to lessor, interest on
investment and profit to the lessor. The cash outflow will be equal to lease rent less
nominal tax saving. In case of lease, the profit of the lessor will be the loss to the
lessee.

5. Consider profit after tax. It is an important consideration in tax planning. The assessee
should follow such a method for obtaining an asset which reduces his tax liability and
the profits after tax are greater. For this purpose some people suggest that own funds
should not be used in purchase of an asset because interest on own funds is not
deductible in computing the income, whereas interest on borrowed funds is
deductible. But one should keep in mind that if own funds are invested outside the
business, the interest earned will offset the interest payment. Further, he must
consider the difficulty involved in raising loans and the cost factors incidental thereto.

11. What do you mean by Gross Total Income? Name the various deductions allowable
from Gross Total Income in case of salaried employee.

Ans. Gross Total Income is a cumulative income which is computed under the five
heads of income, i.e. salary, house property, business or profession, capital gain and
other sources. Gross total income is calculated after the clubbing provisions and
making adjustments of set-off and carry forward of losses. In this article, we look at
transactions covered under Section 68 to 69D of the Income Tax Act, 1961 which
must be included in Gross Total Income.

Salaried employees form the major chunk of the overall taxpayers in the country and
the contribution they make to the tax collection is quite significant. Income tax
deductions offer a gamut of opportunities for saving tax for the salaried class. With
 the help of these deductions and exemptions and, one could reduce his/her tax
substantially.

To list some of the major deductions and allowances, available to the salaried persons,
using which one can reduce their income tax liability.
 Exemption of House Rent Allowance
 Standard Deduction
 Leave Travel Allowance (LTA)
 Section 80C, 80CCC and 80CCD(1)
 Medical Insurance Deduction (Section 80D)
 Interest on Home Loan (Section 80C and Section 24)
 Deduction for Loan for Higher Studies (Section 80E)
 Deduction for Donations (Section 80G)
 Deduction on Savings Account Interest (Section 80TTA)
 Additional Deduction for Interest on Home Loan (Section 80EE) (Section
80TTA)

12. What is previous year for a newly set up business?

Ans. Business or profession newly set up, or a source of income newly coming into
existence, in the said financial year, the previous year shall be the period beginning
with the date of setting up of the business or profession or, as the case may be, the
date on which the source of income newly comes into existence and ending with the
said financial year.

Or

For a new business or for a new source of income which has come into existence,
previous year would start from date of setting up of new business or from date when
new source of income has come into existence

13. Define perquisite.

Ans. “Perquisite” may be defined as any casual emolument or benefit

attached to an office or position in addition to salary or wages. In
essence, these are usually non-cash benefits given by an employer
to employees in addition to cash salary or wages. However, they
may include cases where the employer reimburses expenses or
pays for obligations incurred by the employee. Perquisites are also
referred to as fringe benefits.
Broadly, “perquisite” is defined in the section 17(2) of the
Income-tax Act as including:
1) Value of rent-free or concessional rent accommodation
provided by the employer.
2) Value of any benefit/amenity granted free or at concessional
rate to specified employees etc.
3) Any sum paid by employer in respect of an obligation, which
 was actually payable by the assessee.
4) Any sum paid by the employer for assurance on life of the
employee or to effect a contract for an annuity.
5) Value of any other fringe benefit as may be prescribed.

14. Define Tax Planning.

Ans. Tax Planning involves planning in order to avail all exemptions, deductions and
rebates provided in Act. The Income Tax law itself provides for various methods for
Tax Planning, Generally it is provided under exemptions u/s 10, deductions u/s 80C to
80U and rebates and relief’s. Some of the provisions are enumerated below :

 Investment in securities provided u/s 10(15) . Interest on such securities is

fully exempt from tax.
 Exemptions u/s 10A, 10B, and 10BA
 Residential Status of the person
 Choice of accounting system
 Choice of organization.

For availing benefits, one should resort to bonafide means by complying with the
provisions of law in letter and in spirit.

Or

Tax planning is a process individuals, businesses, and organizations used to evaluate

their financial profile, with the aim of minimizing the amount of taxes paid on
personal income or business profit. Effective tax planning entails analyzing
investment instruments, expenditures, and other factors such as filing status for their
tax liability impact. Accounting, finance, banking, and insurance firms all emphasize
slightly different aspects of tax planning in accordance with the types of services they
provide and the laws governing their industries

Tax Planning involves planning in order to avail all exemptions, deductions and
rebates provided in Act. The Income Tax law itself provides for various methods for
Tax Planning, Generally it is provided under exemptions u/s 10, deductions u/s 80C to
80U and rebates and reliefs.

15. Who is an assessee?

Ans. An assessee is any individual who is liable to pay taxes to the government
against any kind of income earned or any losses incurred by him for a particular
assessment year. Each and every person who has been taxed in the previous years for
income earned by him is treated as an Assessee under the Income Tax Act, 1961.

An Assessee may be any individual liable to pay taxes for himself or to pay tax on
behalf of somebody else. The Income Tax Act, 1961 has classified Assessee in
different categories. An Assessee may either be a normal Assessee, a Representative
Assessee, a Deemed Assessee or an Assessee in Default.
  Normal Assessee: A normal Assessee is an individual who is liable to pay
taxes for the income earned by him for a particular financial year. Each and
every Individual who has paid taxes in preceding years against the income
earned or losses incurred by him is liable to make payments to the government
in the form of tax. Any individual who is supposed to make payments to the
government in the form of interest or penalty or anybody who is entitled to tax
refund under the IT Act is an Assessee. All such individuals are grouped under
the category of Normal Assessee.

 Representative Assessee: Many times, it so happens that an individual is liable

to pay taxes for income or losses incurred not only by him, but also for income
or losses incurred by a third party. Such an individual is known as
Representative Assessee. Basically, he acts as a representative for people who
themselves are not in a position to file and pay their taxes themselves.
Generally, the people who need representatives are non-residents, minors or
lunatics. And the people representing them are either their agents or guardians.
Such people are deemed to be Representative Assesses

 Deemed Assessee: Deemed Assessee is an individual who is put in a position

to pay taxes for some other person by the legal authorities.

16. Define the term business as per Income Tax Act, 1961.

Ans. The word business has seen a lot of dispute between tax payer and the tax
department , because the income from business is assessed in an exclusive head
“Profit & Gains from Business or Profession ” under section 28 to section 44 of the
Income Tax Act. The computation os the income or loss from business is quite
different . Now section 2(13) of the Income Tax Act defines business as under :

(13) “Business”Includes Any Trade, Commerce Or Manufacture Or Any

Adventureor Concern In The Nature Of Trade, Commerce Or Manufacture

Naturally when the definition of a simple word “Business” can be so complex , the
matter will reach various Tribunals and Courts . So , here is what is the thought of
courts on the meaning of the word “business” .

17. Short note on tax planning with respect to –

(a). Location of Business: TAX MANAGEMENT IN LOCATION OF THE NEW

BUSINESS

Sec. [ 10A]: Tax Holiday for newly established undertaking in Free Trade Zone:
First 5 Years – 100 % of profits and gains is allowed as deduction

Next 2 Years: 50% of such Profit and Gains is deductible for further 2 assessment
years.
Next 3 Years: for the next three consecutive assessment years, so much of the amount
not exceeding 50% of the profit as is debited to the profit and loss account year in
respect of which the deduction is to be allowed and credited to a reserve account (to
be called the ''Special Economic Zone Re-investment Allowance Reserve Account'')
to be created and utilised for the purposes of the business of the assessee.

(b). Nature of Business: TAX MANAGEMENT IN NATURE OF THE NEW

BUSINESS

1. Sec. [ 10(1) ] : Agricultural Income– fully exempted (100%.

2. Sec. [10(23FB)] : Dividend or Long-Term Capital Gain ( LTCG) accruing to

Venture Capital or a Venture Company – 100% tax exempted.
3. Sec. [ 33 AB) ] : Tea Development Account, Coffee Development Account
and Rubber Development Account.
4. Sec. [ 35 D ] : Amortization of Certain Preliminary Expenses.
5. Sec. [ 35 E ] : Profits from Prospecting Certain Minerals.
6. Sec. [ 35 ABB ] : Expenditure for obtaining licence to operate
telecommunication services,
7. Sec. [ 36(1)(viii) ] : Special Reserve Created by Financial Corporation.
8. Sec. [ 42 ] : Special provision for deductions in the case of business for
prospecting, etc., for mineral oil
9. Sec. [ 44BB ] : Special provision for computing profits and gains in
connection with the business of exploration, etc., of mineral oils
10. Sec. [ 44 AD ] : Special provision for computing profits and gains of
business of civil construction, etc.
11. Sec. [ 44 AE ] : Special provision for computing profits and gains of
business of plying, hiring or leasing goods carriages.
12. Sec. [ 44 AF ] : Special provisions for computing profits and gains of retail
business.
13. Sec. [ 44B ] : Special provision for computing profits and gains of
shipping business in the case of non-residents.
14. Sec. [ 44 BBA ] : Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents

(c). Form of Business Organization: FORMS OF ORGANIZATION

The selection of particular form of organisation depends not only on the magnitude of
financial requirements and owner’s liability, but also on the tax considerations. In the
case of a company the law interferes with the corporate planning process from the
moment it comes into existence. At times, tax laws affect even the periods prior to the
existence of a company and it can also extend upto the point of time when the
company ceases to exist.

(A)Sole proprietorship:
The most common form of ownership found in the business world is sole
proprietorship. In this form of organization, the proprietor is the only owner of the
business assesed and he is solely responsible for the affairs of the business. — A sole
 proprietorship is easy to establish because of little interference of government
regulations. — The cost of adopting this form of organization is small because of
there being no legal requirement. — All the profits of the business go in the hands of
proprietor himself.

(B)Undivided Family:
A joint Hindu family pays tax on its total income at prescribed rates on the basis of
slab system. The family can pay reasonable remuneration to the Karta and other
family members for their services to the business and it is allowed as a deduction in
computing the business income. However, interest on capital contributed by the
family for the business is not deductible in computing business income. The member
of the family, who has received the remuneration from the family will include it in his
income under the head Salaries.

(C) Partnership Firm:

A partnership form of organization is easy to establish. The only procedure for the
formation of partnership is to draw up a partnership deed and a nominal charge in
terms of cost of stamps for the deed is to be incurred. This form of organization is
suitable due to the following factors: — The decision making on important business
matter is quick as compared to a company form of organization because partners meet
frequently together. Therefore, decision on any important business matter cannot be
delayed. — The chance of getting involved in risky activities is very less because
every important decision is made with the concurrence of all the partners. — As
compared to sole proprietorship, the problem of raising additional resources is much
less.

18. What is Gross Total Income? State the procedures for calculation of Gross Total
Income. State four deductions allowable from Gross Total Income u/s 80C to 80U.

Ans. Gross Total Income is a cumulative income which is computed under the five
heads of income, i.e. salary, house property, business or profession, capital gain and
other sources. Gross total income is calculated after the clubbing provisions and
making adjustments of set-off and carry forward of losses. In this article, we look at
transactions covered under Section 68 to 69D of the Income Tax Act, 1961 which
must be included in Gross Total Income.

 Income from salary

 Income from house property
 Income from business or profession
 Capital gains
 Income from other sources.

Deductions under Section 80C to 80U:

1. Section 80C
Deductions on Investments
 You can claim a deduction of Rs 1.5 lakh your total income under section 80C. In
simple terms, you can reduce up to Rs 1,50,000 from your total taxable income,
and it is available for individuals and HUFs.

Filing your Income Tax Return. The Income Tax Department will refund the
excess money to your bank account.

2. Section 80E – Interest on Education Loan

Deduction for Interest on Education Loan for Higher Studies
A deduction is allowed to an individual for interest on loans taken for pursuing
higher education. This loan may have been taken for the taxpayer, spouse or
children or for a student for whom the taxpayer is a legal guardian.
80E deduction is available for a maximum of 8 years (beginning the year in which
the interest starts getting repaid) or till the entire interest is repaid, whichever is
earlier. There is no restriction on the amount that can be claimed.

3. Section 80D – Medical Insurance

Deduction for the premium paid for Medical Insurance
You (as an individual or HUF) can claim a deduction of Rs.25,000 under section
80D on insurance for self, spouse and dependent children. An additional
deduction for insurance of parents is available up to Rs 25,000, if they are less
than 60 years of age. If the parents are aged above 60, the deduction amount is Rs
50,000, which has been increased in Budget 2018 from Rs 30,000.
In case, both taxpayer and parent(s) are 60 years or above, the maximum
deduction available under this section is up to Rs.1 lakh.
Example: Rohan’s age is 65 and his father’s age is 90. In this case, the maximum
deduction Rohan can claim under section 80D is Rs. 100,000. From FY 2015-16 a
cumulative additional deduction of Rs. 5,000 is allowed for preventive health
check.

4. Section 80U – Physical Disability

Deduction for Person suffering from Physical Disability
A deduction of Rs.75,000 is available to a resident individual who suffers from a
physical disability (including blindness) or mental retardation. In case of severe
disability, one can claim a deduction of Rs 1,25,000.
From FY 2015-16 – Section 80U deduction limit of Rs 50,000 has been raised to
Rs 75,000 and Rs 1,00,000 has been raised to Rs 1,25,000.

5. Section 80G – Donations

Deduction for donations towards Social Causes
The various donations specified in u/s 80G are eligible for deduction up to either
100% or 50% with or without restriction. From FY 2017-18 any donations made
in cash exceeding Rs 2,000 will not be allowed as deduction. The donations above
Rs 2000 should be made in any mode other than cash to qualify for 80G
deduction.

19. Define the term “Block of Assets” under Income Tax Act, 1961.
Ans. Section 2(11) of Income Tax has defined ‘Block of Assets’ as a ‘group of assets’
falling within a ‘class of assets’ comprising-

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade-marks, licences,
franchises or any other business or commercial rights of similar nature,

in respect of which the same percentage of depreciation is prescribed.

The same rate of percentage of depreciation is prescribed. A block of assets includes

assets of all units of assessee having same rate of depreciation. A assessee may have
thirteen different blocks of assets.

Block 1: Buildings - Residential buildings other than hotels and boarding houses: 5%

Block 2: Buildings - Factory, Offices, godowns or buildings which are not mainly
used for residential purpose: 10%

Block 3: Building - the following buildings :

a) Buildings acquired on or after September 1st 2002 for installing machinery and
plant forming part of water supply project or water treatment system and which is put
to use for the purpose of business of providing infrastructure facilities

b) Temporary erections such a wooden structures: 100%

Block 4: Furniture - Any furniture/fitting including electrical fittings: 10%

Block 5: Plant and machinery - Any plant or machinery and motors cars acquired or
put to use on or after April 1st 1990: 15%

Block 6: Oceans - going ships, vessels ordinarily operating on inland waters including
speed boats: %20

Block 7: Plant and Machinery - Buses, lorries and taxies used in the business of
running them on hire, machinery used in semi conductor industry, moulds used in
rubber and plastic goods factories: 30%

Block 8: Plant and Machinery - Aeroplanes besides it includes commercial vehicle

which is acquired after September 30th 1998 but before April 1st 1999 and it is put to
use for any period prior to April 1st 1999 and life saving medical equipment: 40%

Block 9: Plant and Machinery - containers made of glass or plastic used as refills,
plant and machinery which satisfy condition

a) New commercial vehicle acquired during 2001-02 and put to use before March
31st 2002 for the purpose of business or profession
 b) Machinery or plant used in weaving, processing and garment sector of textile
industry which is purchased under Technology up gradation fund scheme during April
1st 2001

c) New commercial vehicle which is acquired during January 1st 2009 and
September 30th 2009 and is put to use before October 1st 2009 for the purpose of
business or profession: 50%

Block 10: Plant and machinery - Computers including computer software besides it
includes new commercial vehicle required in replacement of condemned vehicle of 15
years of age and put to use before April 1st 1990: 60%

Block 11: Plant and Machinery - Energy saving devices renewal energy devices wind
mills, electric generators or pumps running on wind energy, rollers in flour mills,
sugar works and steel industry: 80%

Block 12: Plant and machinery - Air pollution control equipment, water pollution
control equipment, solid waste control equipment, recycling and resource recovery
systems, machinery acquired and installed on or after September 1st 2002 in a water
supply project or water treatment system or for purpose of providing infrastructure
facility, wooden parts used in artificial silk manufacturing machinery: 100%

Block 13: Intangible assets like know how patents, copy rights, trade marks, license,
franchise and any other business rights: 25%

20. State five incomes taxable under the head income from other sources.

 Ans. Dividend: Dividend is chargeable at a rate of 10% if aggregate amount of

dividend during that year exceeds Rs. 10,00,000. This is applicable for
individuals/HUFs. If the dividend is received from a domestic company and it
is chargeable under dividend distribution tax, then it will be exempted.
 One-time income: Income from lotteries, crossword puzzles, horse races,
games, gambling or betting.
 Interest on securities if it is not taxable under “Profits and Gains of Business
or Profession”.
 Income from machinery, plant or furniture belonging to taxpayer and let on
hire. This is applicable if income is not chargeable to tax under the head
‘Profits and Gains of Business or Profession’.
 Composite rental income from letting of plant, machinery or furniture with
buildings, where such letting is inseparable. Again, this is applicable if this
income is not taxable under the head ‘Profits and Gains of Business or
Profession’.

21. What do you mean by annual value of house property?

Ans. Annual Value is the amount for which the property might be let out on a yearly
basis. You can also say that it is the estimated rent that you could get if the property
was rented out.
In order to calculate any income from house property, you need to know the annual
value of house property. As per Section 23(1)(a) of the Income Tax Act, Annual
Value of a home is the sum for which the property might reasonably be expected to be
let out from year to year. So it is the notional rent which could be got if the property
were to be rented.

How to calculate Annual Value of House Property?

To determine Annual Value of a house property you need to consider four factors
such as its Municipal Value, Fair Rental Value, Standard Rent and Actual Rent
Received or Receivable.

 Municipal Value: Normally municipal authorities use to charge house tax on

property based on various factors like type of residential, floor, facilities
available in the premises etc. This value of property considered by municipal
authority is relevant for deriving annual value of property.

 Fair Rental Value: The rent which a similar property in the same or similar
locality would have fetched is the fair rental value of the property. This is
nothing but notional rent a property can get if it has been let out for a year. e.g.
In case of apartment, one can assume approx rent of other similar flat which is
already let out with some addition or reduction in rent with reference to
facilities of both flats.

 Standard Rent: Where a rent is fixed under prevailing Rent Control Act, it
would be considered as standard rent and owner cannot expect to get higher
rent than fixed as per rent control act. Standard Rent is important factor in
deciding annual value.

 Actual Rent Received or Receivable: For any rent out property, Actual rent
received or receivable is important for annual value. Actual rent paid or
payable is always subject to agreement entered by owner and tenant or matter
of negotiable between them whereby if tenant agree to pay for municipal taxes
on behalf of owner then these taxes should be added in actual rent
receive/receivable to derive annual value. There could be vice versa case,
where owner has agreed to pay some obligation of tenant, in that case rent will
be reduced by that amount.

Calculation:

a) Fair Rent___________________________________________xxx
b) Municipal Value_____________________________________xxx
c) Higher of (a) and (b)__________________________________xxx
d) Standard Rent________________________________________xxx
e) Expected Rent (Lower of (c) and (d))_____________________xxx
f) Actual Rent__________________________________________xxx

Gross Annual Value (higher of (e) and (f))_________________XXX

Less: Municipal Taxes____________________________________xxx
 Net Annual Value______________________________________XXX
Less: Deduction under Section 24
Standard Deduction (30%) xxx
Interest on borrowed capital xxx

Income from House Property____________________________XXX

22. Explain the tax treatment of interest on loan taken for purchase or construction of a
house property.

Ans. Homeowners can claim a deduction of up to Rs.2 lakh (Rs 1.5 lakh if you are
filing returns for FY 2013-14) on their home loan interest, if the owner or his family
reside in the house property. The same treatment applies when the house is vacant. If
you have rented out the property, the entire interest on the home loan is allowed as a
deduction.

Your deduction on interest is limited to Rs.30,000 if you fail to meet any of the
conditions given below for the Rs.2 lakh rebate. -

i. The home loan must be for purchase and construction of a property;

ii. The loan must be taken on or after 1 April 1999;

iii. The purchase or construction must be completed within 5 years from the end of the
financial year in which the loan was taken.

23. Mention any five items of income which are fully exempted from tax.

Ans. (A) AGRICULTURAL INCOME

Under the provisions of Section 10(1) of the Income Tax Act, agricultural income is
frilly exempt from income tax. However, for individuals or HUFs when agricultural
income is in excess of 5,000, it is aggregated with the total income for the purposes of
computing tax on the total income in a manner which results into “no” tax on
agricultural income but an increased income tax on the other income.

“Agricultural income” as per Section 2(1 A) 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 i.e., by actual cultivation of land and
by means of certain basic operations in agriculture; or (ii) by the performance of some
agricultural process ordinarily employed by the cultivator, etc. to render the produce
fit to be taken to market; or (iii) by the sale of the produce in respect of which no
other process other than the one mentioned above has been employed; and (C) any
income derived from any building owned and occupied by the receiver of the rent or
revenue of any such land or kept by the cultivator or the receiver of rent-in-kind, of
any land in respect of which, any process as mentioned above is carried on, subject to
certain conditions about the building being on or in the vicinity of the land, etc.

(B) RECEIPTS FROM HUF

Any sum received by an individual as a member of a Hindu Undivided Family, where

the said sum has been paid out of the income of the family, or, in the case of an
impartible estate, where such sum has been paid out of the income of the estate
belonging to the family, is completely exempt from income tax in the hands of an
individual member of the family under Section 10(2).

(C) CERTAIN INCOMES OF NON-CITIZENS OF INDIA

In the case of an individual who is not a citizen of India, i.e. a foreigner, the passage
money or value of any free or concessional passage received by or due to such an
individual from his employer for himself, his spouse, or children, in connection with
his proceeding on home leave out of India or after retirement or termination of
service, is fully exempt from tax. Similarly, the remuneration received by a foreigner
as an official of an embassy, etc. or as a member of staff of the aforesaid office, etc.,
is completely exempt from tax u/s 10(6).

(D) GRATUITIES

Under the provisions of Section 10(10) of the IT Act, any deathcum-retirement

gratuity of a government servant is completely exempt from income tax. However, in
respect of private sector employees gratuity received on retirement or on becoming
incapacitated or on termination or any gratuity received by his widow, children or
dependants on his death is exempt subject to certain conditions.
The maximum amount of exemption is ` 10,00,000.

(E) LEAVE SALARY

Under Section 10(10AA) the maximum amount receivable by the employees of

Central Government as cash equivalent to the leave salary in respect of earned leave
at their credit upto 10 months’ leave at the time of their retirement, whether on
superannuation or otherwise, would be ` 3,00,000.

(F) SCHOLARSHIP AND AWARDS, ETC.

Any kind of scholarship granted to meet the cost of education is exempt from tax
under Section 10(16). Similarly, certain awards and rewards, etc. are completely
exempt from tax under Section 10(17A)

(G) CAPITAL GAINS FROM TRANSFER OF AGRICULTURAL LAND —

SECTION 10(37)

As per the Finance (No.2) Act, 2004 capital gains received on transfer of agricultural
land (used in the past 2 years for agricultural purposes) by way of compulsory
acquisition would be fully exempt from tax.
24. State the procedure for computation of long-term capital gain.

Ans. Terms You Need to Know:

Full value consideration: The consideration received or to be received by the seller as
a result of transfer of his capital assets. Capital gains are chargeable to tax in the year
of transfer, even if no consideration has been received.
Cost of acquisition: The value for which the capital asset was acquired by the seller.
Cost of improvement: Expenses of a capital nature incurred in making any additions
or alterations to the capital asset by the seller. Note that improvements made before
April 1, 2001, is never taken into consideration.

NOTE: In certain cases where the capital asset becomes the property of the taxpayer
otherwise than by an outright purchase by the taxpayer, the cost of acquisition and
cost of improvement incurred by the previous owner would also be included.

How to Calculate Long-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

Expenditure incurred wholly and exclusively in connection with such transfer

Indexed cost of acquisition
Indexed cost of improvement
Step 3: From this resulting number, deduct exemptions provided under sections 54,
54EC, 54F, and 54B

Long-term capital gain = Full value consideration

Less: Expenses incurred exclusively for such transfer
Less: Indexed cost of acquisition
Less: Indexed cost of improvement
Less: Expenses that can be deducted from full value for consideration*

How to Calculate Short-Term Capital Gains?

Step 1: Start with the full value of consideration

Step 2: Deduct the following:

Expenditure incurred wholly and exclusively in connection with such transfer

Cost of acquisition
Cost of improvement
Step 3: This amount is a short-term capital gain

Short term capital gain = Full value consideration Less expenses incurred exclusively
for such transfer Less cost of acquisition Less cost of improvement.

25. Mention five items of general incomes which are chargeable to tax under the head
“Income from other sources”.

Ans. 1. Savings Bank Account – Interest Income

Interest that gets accumulated in your savings bank account must be declared in your
tax return under income from other sources. Do note that bank does not deduct TDS
on savings bank interest.

Interest from both fixed deposit and recurring deposits is taxable while interest from
savings bank account and post office deposits are tax-deductible to a certain extent.
But they are shown under income from other sources.

Interest income from a savings bank account or a fixed deposit or from a post office
savings account are all shown under this head.

2. Deduction on Interest Income Under Section 80TTA

For a residential individual (age of 60 years or less) or HUF, interest earned upto Rs
10,000 in a financial year is exempt from tax. The deduction is allowed on interest
income earned from:

savings account with a bank;

savings account with a co-operative society carrying on the business of banking; or
savings account with a post office
Senior citizens are not entitled to benefits under section 80TTA.

3. Tax on Fixed Deposits

Fixed deposit interest that you receive is added along with other income that you have
such as salary or professional income, and you’ll have to pay tax on that income at a
tax rate that’s applicable to you. TDS is deducted on interest income when it is
earned, though it may not have been paid.

Example: The bank will deduct TDS on interest accrued each year on a FD for 5
years. Therefore, it is advisable to pay your taxes on an annual basis instead of doing
it only when the FD matures.

Senior citizens, with effect from 1 April 2018, will enjoy an income tax exemption
upto Rs 50,000 on the interest income they receive from fixed deposits with banks,
post offices etc under Section 80TTB.

4. Exempt Income
The PPF and EPF amount you withdraw after maturity is exempt from tax and must
be declared as exempt income from income from other sources.

Note that: The EPF is only tax exempt after five years of continuous service.

5. Family Pension
If you are collecting pension on behalf of someone who is deceased, then you must
show this income under income from other sources. There is a deduction of Rs 15,000
or one-third of the family pension received whichever is lower from the Family
Pension Income. This will be added to the taxpayer’s income and tax must be paid at
the tax rate that is applicable.

6. Taxation of Winnings from Lottery, Game Shows, Puzzles

 If you receive money from winning the lottery, Online/TV game shows etc., it will be
taxable under the head Income from other Sources. The income will be taxable at the
flat rate of 30% which after adding cess will amount to 31.2%

26. Give a brief account of the provisions of IT Act, 1961 regarding tax planning with
reference to setting up of a new business.

Ans. AREAS OF TAX PLANNING IN THE CONTEXT OF INCOME TAX ACT,

1961 Some of the important areas where planning can be attempted in an organized
manner are as under:
(a) Form of organization/ownership pattern;
(b) Location aspects;
(c) Nature of business.
(d) Tax planning in respect of corporate restructuring;
(e) Tax planning in respect of financial management;
(f) Tax planning in respect of employee’s remunerations;
(g) Tax planning in respect of specific managerial decisions;
(h) Tax planning in respect of Non-Residents.

FORMS OF ORGANIZATION
The selection of particular form of organisation depends not only on the magnitude of
financial requirements and owner’s liability, but also on the tax considerations. In the
case of a company the law interferes with the corporate planning process from the
moment it comes into existence. At times, tax laws affect even the periods prior to the
existence of a company and it can also extend upto the point of time when the
company ceases to exist.

A)Sole proprietorship:
The most common form of ownership found in the business world is sole
proprietorship. In this form of organization, the proprietor is the only owner of the
business assesed and he is solely responsible for the affairs of the business. — A sole
proprietorship is easy to establish because of little interference of government
regulations. — The cost of adopting this form of organization is small because of
there being no legal requirement. — All the profits of the business go in the hands of
proprietor himself.

(B)Undivided Family:
A joint Hindu family pays tax on its total income at prescribed rates on the basis of
slab system. The family can pay reasonable remuneration to the Karta and other
family members for their services to the business and it is allowed as a deduction in
computing the business income. However, interest on capital contributed by the
family for the business is not deductible in computing business income. The member
of the family, who has received the remuneration from the family will include it in his
income under the head Salaries.

(C) Partnership Firm:

A partnership form of organization is easy to establish. The only procedure for the
formation of partnership is to draw up a partnership deed and a nominal charge in
terms of cost of stamps for the deed is to be incurred. This form of organization is
suitable due to the following factors: — The decision making on important business
matter is quick as compared to a company form of organization because partners meet
frequently together. Therefore, decision on any important business matter cannot be
delayed. — The chance of getting involved in risky activities is very less because
every important decision is made with the concurrence of all the partners. — As
compared to sole proprietorship, the problem of raising additional resources is much
less.

LOCATION ASPECT

1. Sec. [ 10A] : Tax Holiday for newly established undertaking in Free Trade
Zone:
First 5 Years – 100 % of profits and gains is allowed as deduction

Next 2 Years : 50% of such Profit and Gains is deductible for further 2 assessment
years.

Next 3 Years : for the next three consecutive assessment years, so much of the
amount not exceeding 50% of the profit as is debited to the profit and loss account
year in respect of which the deduction is to be allowed and credited to a reserve
account (to be called the ''Special Economic Zone Re-investment Allowance Reserve
Account'') to be created and utilised for the purposes of the business of the assessee

2. Sec. [ 80IA] : an [undertaking] which,—

(a) is set up in any part of India for the generation or generation and distribution of
power if it begins to generate power at any time during the period beginning on the
1st day of April, 1993 and ending on the 31st day of March, 2010;

(b) starts transmission or distribution by laying a network of new transmission or

distribution lines at any time during the period beginning on the 1st day of April, 1999
and ending on the 31st day of March, 2010.

(c) undertakes substantial renovation and modernisation of the existing network of

transmission or distribution lines at any time during the period beginning on the 1st
day of April, 2004 and ending on the 31st day of March, 2010.

Deductions allowed is 100% or 30% of profits from such eligible business

3. Sec. [80IB] : Deduction in respect of Profits of Industrial Undertaking

located in backward State or District. Deduction allowed is either 100% and /or 30%
for 10 years depending upon case to case.

4. Sec. [80IB(11B)] : The amount of deduction in the case of an undertaking

deriving profits from the business of operating and maintaining a hospital in a rural
area shall be 100% of the profits and gains of such business for a period of five (5)
consecutive assessment years, beginning with the initial assessment year.

5. Sec. [ 80IC] : Profits from Industrial Undertaking located in the specified

States,. States are State of Jammu & Kashmir, Himachala Pradesh, Uuttaranchal and
North Eastern States. Deduction allowed is 100% of such profit.

6. Sec.[ 80 LA] : Where the gross total income of an assessee,— (i) being a
scheduled bank, or, any bank incorporated by or under the laws of a country outside
India; and having an Offshore Banking Unit in a Special Economic Zone; or (ii)
being a Unit of an International Financial Services Centre , there shall be allowed a
deduction from such income, of an amount equal to— 100% of such income for five
consecutive assessment years beginning with the assessment year.

NATURE OF BUSINESS

1. Sec. [ 10(1) ] : Agricultural Income– fully exempted (100%.

2. Sec. [10(23FB)] : Dividend or Long-Term Capital Gain ( LTCG) accruing to

Venture Capital or a Venture Company – 100% tax exempted.
3. Sec. [ 33 AB) ] : Tea Development Account, Coffee Development Account
and Rubber Development Account.
4. Sec. [ 35 D ] : Amortization of Certain Preliminary Expenses.
5. Sec. [ 35 E ] : Profits from Prospecting Certain Minerals.
6. Sec. [ 35 ABB ] : Expenditure for obtaining licence to operate
telecommunication services,
7. Sec. [ 36(1)(viii) ] : Special Reserve Created by Financial Corporation.
8. Sec. [ 42 ] : Special provision for deductions in the case of business for
prospecting, etc., for mineral oil
9. Sec. [ 44BB ] : Special provision for computing profits and gains in
connection with the business of exploration, etc., of mineral oils
10. Sec. [ 44 AD ] : Special provision for computing profits and gains of
business of civil construction, etc.
11. Sec. [ 44 AE ] : Special provision for computing profits and gains of
business of plying, hiring or leasing goods carriages.
12. Sec. [ 44 AF ] : Special provisions for computing profits and gains of retail
business.
13. Sec. [ 44B ] : Special provision for computing profits and gains of
shipping business in the case of non-residents.
14. Sec. [ 44 BBA ] : Special provision for computing profits and gains of the
business of operation of aircraft in the case of non-residents

TAX PLANNING IN RESPECT OF CORPORATE RESTRUCTURING

Tax planning with respect to amalgamation and mergers:

Under Income Tax Act, 1961 Section 2(1B) of Income Tax Act defines
„amalgamation‟ as
 merger of one or more companies with another company or merger of two or more
companies to from one company in such a manner that: -
1. All the property of the amalgamating company or companies immediately before
the amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.
2. All the liabilities of the amalgamating company or companies immediately before
the amalgamation becomes the liabilities of the amalgamated company by virtue of
the amalgamation
3. Shareholders holding at least three-fourths in value of the shares in the
amalgamating company or companies (other than shares already held therein
immediately before the amalgamated company or its nominee) becomes the
shareholders of the amalgamated company by virtue of the amalgamation. (Example:
Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediately before
the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentioned condition
will be satisfied if shareholders holding not less than 75% in the value of remaining
80% of shares in X Ltd i.e. 60% thereof, become shareholders in Y Ltd by virtue of
amalgamation)

TAX PLANNING IN RESPECT OF FINANCIAL MANAGEMENT

TAX PLANNING IN RESPECT OF EMPLOYEE’S REMUNERATIONS

Income taxes deducted from the salary of the employees, and you need to deduct the
TDS, professional tax and income tax from your employees.

But you need to deposit the income tax deducted from the employee’s salary in the
income tax department as TDS.

So that, your employees can file their personal income tax file and claim the deposited
tax on their PAN number.
TAX PLANNING IN RESPECT OF SPECIFIC MANAGERIAL DECISIONS

TAX PLANNING IN RESPECT OF NON-RESIDENTS

27. List the possible tax planning for a salaried individual:

Ans. They are as follows:

1. Making the most by investing in tax saving investments under Section 80C,
80CCC and 80CCD

One of the most important components of tax planning is availing the

investment benefits under Sec 80C of the income Tax Act. There is a huge list
of financial investments for all types to investors to choose from. Some of the
best investment options under Section 80C include
 PPF
 Equity Linked Savings Scheme
 Pension Plans
 Tax saving Fixed Deposits
 Life insurance policy
 Contributions made towards Employee Provident Funds
 National Savings Certificate, etc.
 Home Loan

Investments made in one or more of these financial avenues is exempt from

taxation up to the limit of Rs. 1,50,000. Since most people are aware of this
aspect of tax planning, it is usually taken into account. But, you need to look
beyond 80C.

2. Investments in NPS (National Pension Scheme)

The National Pension Scheme, managed by the Pension Fund Regulatory and
Development Authority (PFRDA) is a generic pension scheme for all such that
you have an option of investing in both equity and debt while building your
retirement corpus according to your current age. This also provides as
additional tax benefit of Rs 50,000 per year, over and above the Rs 1.5 lakhs
of 80C limit.

3. Tax Deductions for your Housing Loan

Repayment made towards the principal amount of your housing loan can be
claimed as deduction under Section 80C upto the maximum permissible limit
i.e. Rs 1,50,000. Additionally, you can claim a deduction of Rs. 2 lakh on the
interest component as well under Section 24(b).

4. Through your medical insurance policy premium

Given the rising healthcare costs it is extremely important to have medical

insurance. Premium paid towards medical insurance policies take for self and
family are allowed as deductions. The maximum deduction allowed under this
section is Rs 1,00,000 subject to various sub-limits.

5. Through your Education Loan under Section 80E

If you take an educational loan for yourself, spouse or children then under
Section 80E the interest paid on such education loan is exempt from tax and
can be claimed as deduction. There is no maximum limit on the amount that
can be claimed as deduction. However, the deduction is only for the interest
component and not the principal.

6. Through deduction under RGESS

 For taxpayers with an annual income of less than 12 lakhs, they can claim a
deduction under Section 80CCG for investments made in specific shares and
mutual funds.

7. I). Through donations made to charitable organizations: Claim deductions for

donations made by you to charitable trusts or relief funds. You can claim
deductions on the amount donated by you provided such donations are made
in cash/cheque and not kind.

II). Interest Income under Section 80TTA

Interest income upto Rs 10,000 for interest earned on your savings account is
exempt from tax under Section 80TTA.

8. By setting off Capital Gains

You are liable to pay capital gains tax on the capital gains made by you from
your investments. However, the Income Tax Department also allows you to
carry forward your capital losses for a period of 8 consecutive years. Such
losses can be set off against the capital gains made by you. However, long-
term capital losses can only be set off against long-term capital gains.

9. Investing the long-term capital gains from sale of property

You will be liable to pay taxes for any long-term capital gains arising from the
sale of property. However, if you invest such gains in specific instruments like
another property from the sale proceeds or 54EC Bonds then you will be able
to claim an exemption on your capital gain.

10. A). For Salaried Employees: By Restructuring your Salary

A higher CTC package does not always tantamount to a higher net take home
salary. How your salary is structured can play an important role in tax
planning. Salaried employees should make use of the various deductions and
exemptions available under the Income Tax Act, in order to make their salary
more tax efficient. Though under the new budget the government has taken
away the deductions for medical reimbursement and travel allowance and
introduced a standard deduction of Rs 40,000 per year there are still many
things you can do to make your salary more tax efficient such as:

Ask for employer’s to make contribution towards NPS: Under section

80CCD(2d), contributions upto 10% of the basic pay made by the employer
towards NPS fund is exempt from tax.
House rent allowance (HRA): If you stay in a rented apartment, you can claim
HRA buy submitting a copy of rent agreement and the rent receipt. The
amount exempt from tax is lower of

 Actual HRA received

 50% of basic pay (40% in case of a non metro) or
 Actual rent paid – 10% of basic salary.
 Include food meal coupons as Rs 50 per meal upto 2 meals per day is
tax exempt for total number of working days in the company.
  Include telephone reimbursements as expenses for phone bills and
internet connection can be claimed against actual.
 Include expenses for newspaper and periodicals as the same can be
claimed against actual expense incurred.
 Include leave travel allowance as employees can claim LTA once in
every 2 years in a block of 4 years.

B). For business people:

(i) Distribution of profits amongst the partners

All the partners can saves on taxes by distributing the profits of the
partnership firms amongst themselves. As the partnership firm already
pays taxes so the profit which is distributed will not be taxed in the hands
of the partner.

(ii) Claim deductions for travel and hotel expenses

As a businessman you can claim expenses for the amount spent by you on
travel for business purposes. Such expenses made from one’s own pocket
can be shown as expenses incurred on business and claimed for deduction
from the income.

(iii) Expenses incurred on food

A businessman meets a large number of people such as vendors,
customers, associates, etc. for carrying out his business. Expenses
incurred on food and outings on such meetings can be claimed as a
deduction from the income.

28. Calculation of Residential Status and Taxability.

Ans. RESIDENT
A taxpayer would qualify as a resident of India if he satisfies one of the following 2
conditions:

1. Stay in India for a year is 182 days or more or

2. Stay in India for the immediately 4 preceding years is 365 days or more and 60
days or more in the relevant financial year

In the event an individual leaves India for employment during an FY, he will qualify
as a resident of India only if he stays in India for 182 days or more. This otherwise
means, condition (b) above of 60 days would not apply to him

RESIDENT NOT ORDINARILY RESIDENT

If an individual qualifies as a resident, the next step is to determine if he/she is a
Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both
of the following conditions:
 1. Has been a resident of India in at least 2 out of 10 years immediately previous years
and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would
be an RNOR.

NON-RESIDENT
An individual satisfying neither of the conditions stated in (a) or (b) above would be
an NR for the year.

TAXABILITY
Resident: A resident will be charged to tax in India on his global income i.e. income
earned in India as well as income earned outside India.

NR and RNOR: Their tax liability in India is restricted to the income they earn in
India. They need not pay any tax in India on their foreign income.

Also note that in a case of double taxation of income where the same income is
getting taxed in India as well as abroad, one may resort to the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the other
country in order to eliminate the possibility of paying taxes twice.

29. State the deductions which are allowed from annual value while computing taxable
income from house property.

Ans. DEDUCTIONS UNDER HOUSE PROPERTY

a) Standard Deduction – Standard Deduction is 30% of the Net Annual
Value calculated above. This 30% deduction is allowed even when
your actual expenditure on the property is higher or lower.
Therefore, this deduction is irrespective of the actual expenditure you
may have incurred on insurance, repairs, electricity, water supply etc.

For a self occupied house property, since the Annual Value is Nil, the
standard deduction is also zero on such a property.

b) Deduction of Interest on Home Loan for the property –Homeowners

can claim a deduction of up to Rs.2 lakh (Rs 1.5 lakh if you are filing
returns for FY 2013-14) on their home loan interest, if the owner or his
family reside in the house property. The same treatment applies when
the house is vacant. If you have rented out the property, the entire
interest on the home loan is allowed as a deduction.

Your deduction on interest is limited to Rs.30,000 if you fail to meet

any of the conditions given below for the Rs.2 lakh rebate.-

i) The home loan must be for purchase and construction of a property;

 ii) The loan must be taken on or after 1 April 1999;

iii) The purchase or construction must be completed within 5 years from the end
of the financial year in which the loan was taken.

30. Describe the techniques of tax planning with respect to geographical location and
financial management decisions.

Ans. GEOGRAPHICAL LOCATION:

1. Sec. [ 10A] : Tax Holiday for newly established undertaking in Free Trade
Zone:
First 5 Years – 100 % of profits and gains is allowed as deduction

Next 2 Years : 50% of such Profit and Gains is deductible for further 2 assessment
years.

Next 3 Years : for the next three consecutive assessment years, so much of the
amount not exceeding 50% of the profit as is debited to the profit and loss account
year in respect of which the deduction is to be allowed and credited to a reserve
account (to be called the ''Special Economic Zone Re-investment Allowance Reserve
Account'') to be created and utilised for the purposes of the business of the assessee

2. Sec. [ 80IA] : an [undertaking] which,—

(a) is set up in any part of India for the generation or generation and distribution of
power if it begins to generate power at any time during the period beginning on the
1st day of April, 1993 and ending on the 31st day of March, 2010;

(b) starts transmission or distribution by laying a network of new transmission or

distribution lines at any time during the period beginning on the 1st day of April, 1999
and ending on the 31st day of March, 2010.

(c) undertakes substantial renovation and modernisation of the existing network of

transmission or distribution lines at any time during the period beginning on the 1st
day of April, 2004 and ending on the 31st day of March, 2010.

Deductions allowed is 100% or 30% of profits from such eligible business

3. Sec. [80IB] : Deduction in respect of Profits of Industrial Undertaking

located in backward State or District. Deduction allowed is either 100% and /or 30%
for 10 years depending upon case to case.

4. Sec. [80IB(11B)] : The amount of deduction in the case of an undertaking

deriving profits from the business of operating and maintaining a hospital in a rural
area shall be 100% of the profits and gains of such business for a period of five (5)
consecutive assessment years, beginning with the initial assessment year.
 5. Sec. [ 80IC] : Profits from Industrial Undertaking located in the specified
States,. States are State of Jammu & Kashmir, Himachala Pradesh, Uuttaranchal and
North Eastern States. Deduction allowed is 100% of such profit.

6. Sec.[ 80 LA] : Where the gross total income of an assessee,— (i) being a
scheduled bank, or, any bank incorporated by or under the laws of a country outside
India; and having an Offshore Banking Unit in a Special Economic Zone; or (ii)
being a Unit of an International Financial Services Centre , there shall be allowed a
deduction from such income, of an amount equal to— 100% of such income for five
consecutive assessment years beginning with the assessment year.

FINANCIAL MANAGEMENT DECISION:

31. Write a note on the deductions available under Section 80C of the Income Tax Act,
1961.

Ans. The following investments and payments are eligible for deduction under
Section 80C of the Income Tax Act, 1961:

LIFE INSURANCE: Premiums paid toward all life insurance policies are eligible for
tax benefits under Section 80C. This deduction can be claimed for premiums paid
towards insuring self, spouse, dependent children and any member of Hindu
Undivided Family. An important point to be noted is that if the policy is issued on or
prior to March 31, 2012, annual premium up to a maximum of 20% of the sum
assured becomes tax deductible. For insurance policies issued on or after April 1,
2012, annual premium up to a maximum of 10% of the sum assured is tax deductible.

SUKANYA SAMRIDDHI YOJANA: Investments made in Sukanya Samriddhi

Yojana, which is a saving scheme for the girl child, are eligible for tax deduction
under Section 80C of the Income Tax Act, 1961. A parent or legal guardian of a girl
child, who has not reached the age of 10 years, can open this account. Sukanya
Samriddhi Yojana account can be opened for two girl children (one account per girl
child) and can be extended to a third if twins are involved.

PUBLIC PROVIDENT FUND: Public Provident Fund (PPF) contributions are

eligible for tax deductions under Section 80C. PPF accounts have a maximum deposit
limit of Rs. 1,50,000 per year, therefore, all deposits made to your PPF account can be
claimed as deductions under Section 80C. The money that you put into a PPF account
will be locked-in for a period of 15 years. Partial withdrawals are permitted after 7
years.

EQUITY LINKED SAVING SCHEME: Investments in equity linked savings

scheme qualify for tax deduction under section 80C of the Income Tax Act. Now, an
essential point to be noted about equity linked savings scheme is that they have a
mandatory lock-in period of three years from the date of investment. If you are
considering investing in this scheme, make sure to invest for longer periods like five
to seven years as they are equity schemes. Equity schemes are an ideal option for
wealth creation over a long period.
FIVE YEAR BANK DEPOSIT: Most banking institutions offer tax saving fixed
deposits where deductions can be claimed under Section 80C of the Income Tax Act.
The condition associated with tax saver fixed deposits is that they come with a lock-in
period of 5 years. Premature withdrawal is not allowed under this investment. Interest
earned on tax saver fixed deposits, however, are taxable and will be deducted at
source.

STAMP DUTY AND REGISTRATION CHARGES: While buying a property, one

of the largest expenses you will have to bear is the stamp duty and registration
charges. To give taxpayers some relief, the government has included these expenses
under Section 80C of the Income Tax Act, 1961. The deduction can only be claimed
once the property construction is complete and you have legal possession of the
house.

SENIOR CITIZENS SAVINGS SCHEME: Investments in Senior Citizens Saving

Scheme, which as the name would suggest is suitable for senior citizens, qualify for
deduction under Section 80C of the Income Tax Act. This scheme has a tenure of 5
years. To participate in the Senior Citizens Saving Scheme, an individual has to be at
least 60 years of age. Those who have taken VRS (voluntary retirement scheme) can
opt for it after the age of 55.

NATIONAL SAVINGS CERTIFICATE: To encourage taxpayers to park their

money in National Savings Certificate scheme, the government has allowed tax
deductions to be claimed under Section 80C on the investments made in it. Interest
earned on National Savings Certificates are liable to tax. However, if this interest is
reinvested, it will be eligible for deduction under Section 80C. The interest rate on
this scheme is similar to that of tax savings fixed deposits, PPF and other fixed
income earning instruments.\

HOME LOAN PRINCIPAL REPAYMENT: The amount that goes into repaying
the principal on a home loan is eligible for deduction under Section 80C. To claim
this tax benefit, construction of the property should be complete. If you transfer the
property before the end of 5 years from the year you had taken its possession, no tax
benefits will be awarded. Additionally, the amount claimed as deduction in the earlier
years shall become taxable in the year that the property is transferred.