Sunday, February 01, 2015

IGNOU SOLVED ASSIGNMENT: ECO - 11 (2015 - 2016)

Answer of Q.N.1.
Residential Status of an Individual
Residential status of an assessee is important in determining the scope of income on which income tax has to be paid in India. Broadly, an assessee may be resident or non-resident in India in a given previous year. An individual or HUF assessee who is resident in India may be further classified into
a)      Resident and ordinarily resident and
b)      Resident but not ordinarily resident.
Under the Income Tax Act, the incidence of tax is highest on a resident and ordinarily resident and lowest on a non-resident. Therefore, it is in the assessee advantage that he claims nonresident status if he satisfies the conditions for becoming a non-resident.
Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies any one of the following basic conditions:-
a)      He is in India in the previous year for a period of at least 182 days or,
b)      He is in India for a period of at least 60 days during the relevant previous year and at least 365 days during the four years preceding that previous year. The aforesaid rule of residence is subject to the following exceptions:-
Where an individual, who is a citizen of India, leaves India in any year for the purpose of employment (or where an individual, who is a citizen of India, leaves India as a member of the crew of an Indian ship), he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.

Where an Indian citizen or a person of Indian Origin, who has settled abroad, comes on a visit to India in the previous year, he is not to be treated as resident in India in that year unless he has been in India in that year for at least 182 Days.
A resident individual may either be an “Ordinarily Resident” OR “Not Ordinarily Resident” in India for a given previous year. In order to determine whether a resident individual is ordinarily resident (ROR) or not ordinarily resident (RNOR), the tests laid down under section 6(6) have to be applied. A resident individual is treated as ROR in India in a given previous year if he satisfies the following additional conditions:-
a)      He has been resident in India in at least 2 out of 10 previous years (according to basic conditions noted above) preceding the relevant previous year; and
b)      He has been in India for a period of at least 730 days during 7 years preceeding the relevant previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of basic conditions and both the two additional conditions. An individual who is resident in India but does not satisfy both the additional conditions is RNOR for that previous year.

The following points are very important in determining the residential status of an assessee:-
a)      The residential status may change from year to year depending on whether the condition for residency is satisfied in that year or not.
b)      The residential status under the Income Tax Act, 1961 have no connection with the provisions for residency under the Foreign Exchange Regulation Act or any other law in India. A person may be resident under FERA and yet be nonresident under the Income Tax Act and vice versa.
c)       Residential status must not be confused with the nationality or citizenship of the assessee. These are entirely different concepts.

Residential Status of a Hindu Undivided Family (HUF)
The status of HUF depends upon the manager i.e. Karta. Since Karta is an Individual Same conditions as mentioned above for individual is applied.
Residential Status of company, AOP, Firm
The status of all the above categories of Person is determined on the basis of Control & management of the affairs of the organization. It can be explained as under:
Control & Management
Firm/AOP/BOI [Sec-6(2)]
Indian Company [Sec-6(3)]
Foreign Company  [Sec-6(3)]
Wholly in India
Resident
Resident
Resident
Wholly Outside
NRI
Resident
NRI
Partly in & Outside
Resident
Resident
NRI

Residential Status of Other Person:
[Sec-6(4)] Every other person i.e. BOI, Local authority & Artificial Juridical Person is said to Resident in India in P.Y., where the control & Management of its situated wholly or partly in India.

SCOPE OF TOTAL INCOME/ INCIDENCE OF TAX
                The residential status of an assessee determines the scope of total income. The total income liable to tax vary according to the residential status The incidence of tax is highest on resident, a little lower on not ordinarily resident and lowest on nonresident assessee.
Income
Whether taxable or not
O.R
N.O.R
N.R
Income received or deemed to be received in India in  the PY
Taxable
Taxable
Taxable
Income which arises or accrues or is deemed to accrue or  arise to the assessee in India in the PY
Taxable
Taxable
Taxable
Income received  outside India from a business or profession controlled from India
Taxable
Taxable
Taxable
Income received  outside India from a business or profession controlled from outside India
Taxable
Not
Taxable
Not Taxable
Income received  outside India from any other source apart from business
Taxable
Not Taxable
Not Taxable
Past untaxed profit brought into India
Not
Taxable
Not
Taxable
Not
Taxable
Income earned outside India in earlier years but later on remitted to India
Not
Taxable
Not
Taxable
Not
Taxable
salary drawn outside India from an Indian company
Taxable
Taxable
Not
Taxable
salary drawn outside India from an Indian company for service rendered within India
Taxable
Taxable
Taxable

Answer of Q.N.2.
Computation of Income from Salary of Shri A.K. Rana for the assessment year 2014-15 (previous year 2013-14)

Particulars
Amount
Amount
Basic Salary (5000 p.m. for 9 months)
Dearness Allowance (500 p.m. for 9 months)
Pension (800 p.m. for 3 months)
Amount received from unrecognised provident fund
(since contribution are equal, only 50% is taxable)

45000
4500
2400
25000
House Rent Allowance (1000 p.m. for 9 months)
Less: Exempted upto least of the following
a) Actual HRA Received                                                                                          = 9000
b) Rent paid in excess of 10% of Salary {(1500 * 9) – 10% (45000 + 4500)}  =  8550
c) 50% of Salary 50% (45000 + 4500)                                                                   =24750
9000



8550




450
Gratuity
Less: Exempted upto minimum of the following
a) Notified limit (as per  AY 2011 – 2012, Presently 10lacs)                        = 10,00,000
b) ½ x 5500 x 20                                                                                                  = 55000
c) Actual Gratuity received                                                                               = 6000
6000



6000




Nil
Income under the head salary

77350


Answer of Q.N.3.
Annual Value (Section 23)
The Annual Value of a house property is the inherent capacity of the property to earn income and  it has been defined as the amount for which the property may reasonably be expected to be let out from year to year. It is not necessary that the property should actually be let out. It is also not necessary that the reasonable return from property should be equal to the actual rent realized when the property is, in fact, let out.
The following four factors have to be taken into consideration while determining the Gross Annual Value of the property:
1. Rent payable by the tenant (actual rent)
2. Municipal valuation of the property.
3. Fair rental value (market value of a similar property in the same area).
4. Standard rent payable under the Rent Control Act.
The Annual Rental Value is the municipal value, the actual rent (whether received or receivable) or the fair rental value, whichever is highest. If, however, the Rent Control Act applies to the property, the gross annual value cannot exceed the standard rent under the Rent Control Act, or the actual rent, whichever is higher.

Steps for determination of Annual rental Value or Gross annual value: -
Municipal valuation or fair market value. ‘Which ever is higher’, subject to standard rent. If,
i)        Actual rent received / receivable is more than option (a) then select option (b) (i).
ii)       (Actual rent received / receivable- unrealized rent) is less (due any reason other than vacancy) than option (a) then select option (b)-which ever is high
iii)     (Actual rent received / receivable-unrealized rent-vacancy) is less (due to reason of vacancy) than option the select option (iii)-which ever is less.
iv)     (AR-UR-V) is less (due to partly reason of vacancy) then [option (a) - vacancy]

Deduction of Municipal Taxes from Annual Value
From the annual value municipal taxes are to be deducted if the following conditions are fulfilled:-
(a)    The property is let out during the whole or any part of the previous year,
(b)   The Municipal taxes must be borne by the landlord. If the Municipal taxes or any part thereof are borne by the tenant, it will not be allowed.
(c)    The Municipal taxes must be paid during the year. Where the municipal taxes become due but have not been actually paid, it will not be allowed.

Deductions allowable under section 24 of the income tax act
Following two deductions will be allowable from the net annual value to arrive at the taxable income under the head ‘income from house property’:-
(a)    Statutory deduction: 30 per cent of the net annual value will be allowed as a deduction towards repairs and collection of rent for the property, irrespective of the actual expenditure incurred.
(b)   Interest on borrowed capital: The interest on borrowed capital will be allowable as a deduction on an accrual basis if the money has been borrowed to buy or construct the house. It is immaterial whether the interest has actually been paid during the year or not. If money is borrowed for some other purpose, interest payable thereon cannot be claimed as deduction.
Conditions for deduction:-
i)        Interest on borrowed capital for Construction, repair, renewal, re-construction.
ii)       Interest certificate is required to be furnished along with the return to avail the deduction.
iii)     The construction must be completed within 3 years from end of financial year in which the capital is borrowed.
iv)     If fresh loan has been raised for repayment of old loan then interest on such loan is also deductible.

Limit of deduction u/s 24(b)
There is no limit in case of Let-out or Deemed to be let-out house property. The limit for self-occupied is determine on basis of date of borrowing which is as under:-
For self occupied, the interest limit is Rs. 30000 if, the borrowed amount is before 1st Apr. 99.
For self occupied, the interest limit is Rs. 150000, if the amount borrowed after 1st Apr. 99 and the acquisition or construction completed within 3 years.

Calculation of Interest:
1.  The interest consists of two parts.  Interest = Current Year + Pre-Construction period
2.  Pre-construction period means the period when the property is not owned by the assessee as it is under construction. But though property is not owned, the interest is charged from the date of borrowing. So the benefit of the interest of this pre-construction period is available in after the assessee is owner of the property.
3.  Calculation of Pre-construction Period & deduction of interest available
Pre construction period = Date of borrowing to. 31st march preceding the date of completion or acquisition, which ever is earlier OR Date of repayment which ever is earlier.
Calculate the total pre construction interest with monthly or daily basis: - From the date of borrowing to the date [(a) or (b)] which is earlier.
Pre construction period Interest deduction
Pre construction period interest = Total pre-construction Interest
                                                                                                5 Years.
If the house property is sold out only interest is allowed as a deduction u/s-24(b).
Sec-25: - Interest on loan payable outside India is disallowed if tax on it is not deducted.


Answer of Q.N.4.
Computation of Income from other sources’ of Dr. Ashish Agrawal for the assessment year 2014-15 (previous year 2013-14)
Particulars
Amount
General Income 56 (1)
Income From Royalty
Remuneration received an examiner.
Remuneration received for articles written for magazines.
Income from agricultural law in Kathmandu (Nepal)
Income from fisheries
Amount rent of law received
Interest received on bank deposit
Specific Incomes 56(2)
Winnings from lottery
Winnings from horse race
Income From card games
Cash Found lying on road
Dividend received Rs. 3000 on shares of Indian company (it is exempted from tax)


6000
4000
1000
11000
3000
4000
1500

2000
1500
2000
10000
Nil

Income From Other Sources
46000


Answer of Q.N.5.

(a) Exempted Incomes
Exempt income refers to income which is not to be added to the total income of the assessee for a particular assessment year. Even though the income is earned and received during the year, it is not liable to tax and is not considered a part of the total income. Section 10 of the income tax act, 1961 contains provision regarding exempted incomes.
Section-wise summary of some exempted incomes: -
Section 10
Particulars
Sec-10 (1)
Agriculture Income
Sec-10 (2)   
Share in HUF as member
Sec-10 (2A)
Share in Firm as a Partner
Sec-10(10D)
Lump sum receipt from Life insurance Policy
Sec-10 (15)
Interest on certain investments
Sec-10 (16)
Scholarship
Sec-10 (17A)
Awards
Sec-10 (32) 
Minor Income
Sec-10 (33)
Capital Gain on transfer of US64
Sec-10 (34)
Dividend on share of Indian co.
Sec-10 (35)   
Dividend on units of UTI or MFs
Sec-10 (36)
LTCG on eligible equity


(b) Perquisite
The term perquisite is defined to signify some benefit in addition to the amount that may be legally due by way of contract of services rendered. Section 17(2) gives an inclusive definition of perquisites. As per the Terms of Section 17(2), Perquisites Includes:
    The value of rent free accommodation provided to the assessee by his employer
     The value of concession in matter of rent respecting any accommodation provided to assessee by his employer
     The value of any benefit or amenity granted or provided free of cost or at concessional rate to the employee -directors and specified employees, with some exceptions
     Sums paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee
     Sums payable by the employer to effect an assurance on the life of the assessee-employee or to effect a contract for an annuity
     Value of any fringe benefit or amenity (excluding the fringe benefits chargeable to tax in the hands of the employer, known as ‘Fringe Benefit Tax) as may be prescribed

What do you mean by Benefits and Amenity?
     Benefits: It can be taken as profit, advantage, reward, or subsidy. For example - provision of personal car, etc.
     Amenity: It covers any personal conveniences or facilities granted or provided to the employee by an employer. For example - provision of domestic servants. 

(c) Exempted Capital Gains
                Exemption of capital gains on compensation received on compulsory acquisition of agricultural land situated within specified urban limits [Section 10(37)]: The capital gains arising to an individual or a Hindu undivided family from transfer of urban agricultural land shall be exempt if  —
a)      such land has been used for agricultural purposes during the preceding two years by such individual or a parent of his or by such HUF.
b)      Transfer is by way of compulsory acquisition under any law.
c)       Compensation or enhanced compensation should be received on or after 1-4-2004.
d)      Exemption of long-term capital gain arising from sale of shares and units [Section 10(38)]
Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund shall be exempt provided—
a)      such equity shares are sold through recognised stock exchange,
b)      whereas units of equity oriented fund may either be sold though the recognised stock exchange or may be sold to the mutual fund.

(d) Deduction of interest on loan taken for higher education (80E)
Eligible Assessee: Individual
Eligible investment or contribution:  Any amount paid towards interest on loan borrowed from below entity for pursuing higher education shall be allowed as a deduction
a)      financial institution
b)      Approved charitable institution

The higher education shall be pursued either by the assessee or any relative of his family. The amount shall be actually paid out of income chargeable to tax during the previous year.
Period of deduction: Interest shall be allowed as deduction during the initial year and immediately succeeding 7 year
or
Until the interest is repaid by the assessee in full Whichever is earlier.
Meaning of Higher education
Higher education means any of the study course persuaded:
a)      After passing the senior secondary or its equivalent from any school
b)      Board or university recognised by the Central Government, state Government or local authority or any other recognised authorities.

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