USN:
/ PES INSTITUTE OF TECHNOLOGY – BANGALORE SOUTH CAMPUS
Hosur Road (1Km before Electronic City), Bangalore -560100
INTERNAL TEST # 3
TAX MANAGEMENT-12MBAFM428
Course: MBA Semester IV Time Allowed: 90 Minutes
Faculty: Divya Mathur Max. Marks: 50 (Fifty Marks)
Date: 3/6/15 Time: 11:30 AM – 1:00 AM
Note: Answer all the Questions.
1 (a) / What is Inter source (Intra head) and Inter head adjustment?
ANS- Adjusting loss from one head against any gain under the same head is called 'inter-source' adjustment. For example: You have two businesses 'A' & 'B'. Business 'A' is making a loss, while business 'B' is making profit. Then, the loss from business 'A' can be set-off against profit from business 'B'. Set-off means the process of reducing one’s income using losses under other heads or same head of income.
Similarly, if you have two house properties, one self occupied and the other on rent. Loss from the first property can be adjusted against the income from the second property.
If the losses cannot be set-off fully through inter-source adjustment, they can next be set-off against other heads of income. This is called “inter-head” adjustment.
Inter-source adjustment: Setting-off loss under the same head of income.
Inter-head adjustments: If the loss is still existing, loss can be set-off from other heads of income (subject to certain restrictions).
Carry forward of losses: If loss still persists, the same can be carried forward to the subsequent assessment years.
- / (3 marks)
(b) / i) X,who resides in Madras ,gets Rs.3,00,000 per annum as basic salary .He receives Rs 50,000 per annum as house rent allowance .Rent paid by him is Rs.40,000 per annum .Find out the amount of taxable house rent allowance for the assessment year 2015-16.
ANS=TAXABLE HRA=Rs.40000
ii) Mr. Vaibhav (Age 51 yrs) made following contributions during the previous year 2014-15.Find out the amount deductible u/s 80C.
Insurance premium on own life Rs.20000 (sum assured 1, 50,000) policy purchased on 10/4/2014.
Insurance premium on life of Mother Rs.3800.
Insurance premium on the life of his wife Rs.20000 (sum assured Rs.80, 000).
Contribution to public provident fund Rs.50, 000.
Tuition Fee of X’s son Rs.15000.
ANS-AMOUNT DEDUCTIBLE U/S 80 C=Rs.88000 / (7 marks)
(c) / Explain in brief set off and carry forward of losses.
ANS- The process of setting off of losses and their carry forward may be covered in the following Steps:
Step-1 : Inter-Source adjustment under the same head of income
Step-2 : Inter-head adjustment in the same assessment year and will be applied only if a loss cannot be set off under Step-1.
Step-3 : Carry Forward of Loss is applied only if a loss cannot be set off under Step-1 & Step-2
1. SET OFF OF LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THE SAME HEAD OF INCOME [Sec. 70 ]
If the net result for any assessment year in respect of any source falling under any head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
Exceptions :
Loss from speculation business ;
Long-Term Capital Loss ;
Loss from the activity of owning and maintaining race houses ;
Loss can not be set off against winnings from lotteries, crossword puzzles, etc. ;
Loss from sale of Securities.
2. SET OFF OF LOSS FROM ONE HEAD AGAINST INCOME FROM ANOTHER [Sec. 71]
If the Net Result of the computation under any head of income, other than “Capital gains”, is a loss , the same can be set off against the income from other heads subject to the following exceptions…
Loss from speculation business can not be set off against any other income
Long-Term Capital Loss ; which can only set off against “Capital Gain”.
Loss from the activity of owning and maintaining race houses ; which can not be set off against any other income.
Loss can not be set off against winnings from lotteries, crossword puzzles, etc. ;
Loss from sale of Securities.
Business Loss can not be set off against Salary Income.
3. CARRY FORWARD AND SET OFF OF LOSS UNDER THE HEAD “INCOME FROM HOUSE PROPERTY”. [ Sec. 71 B ]
Any Loss under the head “Income from house property” cannot be wholly set off against income from any other head. If such Loss can not be set off, then the whole loss shall be carried forward to the following assessment year and—
(i) be set off against the income from house property for that assessment year; and
(ii) the loss, if any, which has not been set off wholly shall be carried forward to the following assessment year not more than (8) eight assessment years immediately succeeding the assessment year for which the loss was first computed.
4. CARRY FORWARD AND SET OFF OF BUSINESS LOSSES. [ Sec. 72]
The right of carry forward and set off of loss arising in a business or profession is subject to the following restrictions :
1. Loss can be set off only against Business Income : A loss to the assessee under the head “Profits and gains of business or profession”, and such loss cannot be or is not wholly set off against income under any head of income and he has no income under any other head, the whole loss shall be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any business or profession carried on by him ;
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :
2. Loss can be carried forward for 8 Years : No loss shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed.
3. Return of Loss should be submitted in Time : A Loss can not be carried forward unless it is determined in pursuance of a Return Filed within the time allowed.
5. LOSSES IN SPECULATION BUSINESS [ Sec. 73]
1. Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains of another speculation business.
2. Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off, the whole loss where the assessee had no income from any other speculation business, shall be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains of any speculation business and
(ii) The loss which cannot be wholly so set off shall be carried forward to the following assessment year and so on.
3. No loss shall be carried forward under this section for more than 4 [four] assessment years immediately succeeding the assessment year for which the loss was first computed.
4.Return of Loss should be submitted in Time : A Loss can not be carried forward unless it is determined in pursuance of a Return Filed within the time allowed.
6. LOSSES UNDER THE HEAD “CAPITAL GAINS” [ Sec. 74 ]
1. In case of any Loss under the head “Capital gains”, the whole loss shall be carried forward to the following assessment year, and—
(a) Any loss relates to a short-term capital asset shall be set off against income, from “Capital gains”.
(b) Any loss relates to a long-term capital asset shall be set off against income from “Capital gains” assessable for that assessment year in respect of any other capital asset other than a short-term capital asset;
(c) if the loss cannot be wholly so set off shall be carried forward to the following assessment year and so on.]
2. No loss shall be carried forward for more than (8) eight assessment years immediately succeeding the assessment year for which the loss was first computed.
7. LOSSES FROM CERTAIN SPECIFIED SOURCES FALLING UNDER THE HEAD “INCOME FROM OTHER SOURCES” [ Sec. 74A ]
The amount of loss incurred by the assessee in the activity of owning and maintaining race horses in any assessment year shall not be set off against income from any source other than the activity of owning and maintaining race horses in that year and shall be carried forward to the following assessment year and—
(a) it shall be set off against the income from the activity of owning and maintaining race horses assessable for that assessment year :
(b) if the loss cannot be wholly so set off shall be carried forward to the following assessment year and so on; so, however, that no portion of the loss shall be carried forward for more than 4 assessment years immediately succeeding the assessment year. / (10 marks)
2 (a) / State the conditions laid down u/s 40 (b).
ANS- Section 40(b) deals with the amounts which are not deductible in case of a firm assessable as such. Therefore, deductions on account of interest and remuneration to the partners can be claimed under Sections 36 or 37, as the case may be, but it will be subject to the conditions prescribed by Section 40(b), which are as under:
(1) Payment of salary, bonus, commission or remuneration by whatever name called, to a non-working partner shall not be allowed as deduction.
(2) Payment of remuneration to working partners and interest to any partner will be allowed as deduction only when it is authorised by and is in accordance with partnership deed.
(3) Payment of remuneration/interest, although authorised by the partnership deed but which relates to a period prior to the date of such partnership deed, shall not be allowed.
(4) Interest payable to a partner, although authorised by the partnership deed shall be allowable as a deduction subject to a maximum of 12% (18% up to 31-5-2002) simple interest per annum. If the partnership deed provides for interest at less than 12% p.a., the deduction of interest shall be allowed to the extent provided by the partnership deed.
(5) The payment of remuneration to working partner, although relates to a period after the date of the partnership deed and authorised by the partnership deed, shall be allowed as a deduction only to the extent of the following limits: / (3 marks)
(b) / From the following Profit and Loss of ABC Firms, calculate Book Profit and the remuneration to be allowed to partners.
Dr. / Amount / Cr. / Amount
To ,Salaries to Partners / By,Gross Profit / 500000
A / 25000 / Rent from house property / 40000
B / 30000 / Profit on sale of short term asset / 10000
C / 40000
Interest on Capital @14%
A / 14000
B / 21000
C / 7000
Municipal Tax paid on House Property / 6000
Net profit / 4,07,000
5,05,000 / 5,05,000
ANS-BOOK PROFIT=464000,REMURATION TO BE ALLOWED TO PARTNERS=95000 / (7 marks)
(c) / X, purchased a house property for Rs.26000 on May 10, 1962. He gets the first floor of the house constructed in 1967-68 by spending Rs.40000.He dies on September 12, 1978. The property is transferred to Mrs. X by his will. Mrs. X spends Rs.30000 and Rs 26700 during 1979-80 and 1985-86 respectively for renewal /construction of the property. Mrs. X sells the house for Rs.21,50000 on March 15,2015(brokerage paid by Mrs. X is Rs.11500).The fair market value of the house on April 1,1981 is Rs ,1,60000.Find the capital gain or loss of the house property.(CII 1981-82=100,1985-86=133,2014-15=1024)
ANS-LTCG Rs.2,94,530 / (10 marks)
3 / X (Age 34 yrs) is a businessman in Mumbai. Determine his net income and tax liability on the basis of the following Profit and Loss account for the year ending March 31,2015.
PARTICULARS / AMOUNT / PARTICULARS / AMOUNT
Opening Stock / 104000 / Sales Agency Business / 92,51,000
Purchases / 80,08,750 / Closing Stock / 2,10,000
Salaries And Wages / 1,75,000
Rent And Rates / 1,31,000
Commission / 21,500
Household Expenses / 20000
Income Tax For 2013-14 / 36100
Advertisement / 5000
Postage And Telegraph / 4000
Interest On Own Capital / 84000
Reserve For Bad Debts / 3400
Depreciation On Furniture / 18000
Net Profit / 8,50,250
94,61,000 / 94,61,000
1.  Closing stock and opening stock valued at 10% below cost.
2.  Depreciation on furniture as per tax provisions Rs, 17,200.
3.  Amount of sales include a sum of Rs.41250 representing value of goods withdrawn for the use of x’s members. These goods were purchased at a cost of Rs.27,850.The market value of goods is Rs.45,240.
4.  Household expenses include a contribution of Rs. 1000 towards public provident fund.
5.  ON September 20, 2014 X has received a gift of Rs, 96000 from a friend settled in UK.
6.  X purchased notified bonds of an infrastructure company on April2, 2014 for Rs.1, 02,000.
Ans-GTI=1426038,TAXABLE INCOME=1323038,TAX LIABILITY=221910 / (10 marks)