MCC Assignment (2)

7/29/2019 MCC Assignment (2)

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Q.1- Explain the meaning of income and identify its features.

Answer: Income is the consumption and savings opportunity gained by an entity

within a specified timeframe, which is generally expressed in monetary terms.

However, for households and individuals, "income is the sum of all the wages,salaries, profits, interests payments, rents and other forms of earnings received... in agiven period of time."In the field of public economics, the term may refer to the accumulation of both

monetary and non-monetary consumption ability, with the former (monetary) being

used as a proxy for total income. Money or other forms of payment (received

periodically or regularly) from commerce, employment, endowment, investment,royalties, etc.

Features of Income: The following features of income can help person to understand

the concept of income:

1) Definite Source: Income has been compared with a fruit of tree or a crop fromthe field. Fruit comes from a tree and crop from field.

2) Income must come from outside: No one can earn income from himself. Therecan be no income from transactions between head office and branch office.

3) Tainted income: income earned legally or illegally remains income it will betaxed according to the provision of Act.

4) Diversion of income vs. application of income: Diversion of income meansthat a part of the income or whole of such income does not reach the assessee. It

is diverted to some other person due to some legal obligation.

5) Temporary or permanent: Whether the income is permanent or temporary, itis immaterial from the tax point of view.

6) Dispute regarding the title: In case a person is receiving some income but histitle to such receipts is dispute, it will not free him from tax liability.

7) Voluntary Receipts: The receipts which do not arise from the exercise of aprofession or business or do not amount to remuneration and are made for

reasons purely of personal nature are not included in the scope of total income.

8) Income in money or moneys worth: The income may be in cash or in kind. Itis taxable in both cases.

9) Income of an assessee: Priest, from offering made by the devotes from time totime has been held as income but any spontaneous offering made out of respect,

love and affection is of personal nature, hence not included in income.

10) Gifts to constitute income: An amount of gift received in cash or bycheque from a person or person other than a relative shall be deemed as income

from other sources.


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Q.2 - Explain how the residential status of Hindu Undivided Family (HUF), and

Firm or Association of Persons (AOP) is determined for the purpose of

calculating income .

Answer:RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILYAs per section 6(2), a Hindu undivided family (like an individual) is either resident in

India or non-resident in India. A resident Hindu undivided family is either ordinarily

resident or not ordinarily resident.

HUF- Resident or Non-ResidentA Hindu undivided family is said to be resident in India if control and management of

its affairs is wholly or partly situated in India. A Hindu undivided family is non-

resident in India if control and management of its affairs is wholly situated outside

India.

Control and management means de facto control and management and not merely the

right to control or manage. Control and management is situated at a place where the

head, the seat and the directing power are situated.

HUF- When ordinarily resident in IndiaA resident Hindu undivided family is an ordinarily resident in India if the karta or

manager of the family (including successive kartas) satisfies the following two

additional conditions as laid down by section 6(6)(b):

Additional condition(i) Karta has been resident in India in at least 2 out of 10 previous years

[according to the basic condition mentioned in Para 12.1-1] immediately

preceding the relevant previous year Additional condition

(ii) Karta has been present in India for a period of 730 days or more during 7years immediately preceding the previous Year If the karta or manager of a

resident Hindu undivided family does not satisfy the two additional

conditions, the family is treated as resident but not ordinarily resident in

India.

When a resident Hindu undivided family is ordinary resident or Not ordinary

resident:

A resident Hindu undivided family is an ordinary resident in India if Karta or

manager of the HUF satisfies the following two additional conditions

1. Karta has been resident in India at least 2 out of 10 previous years immediatelypreceding the relevant previous year

2. Karta has been present in India for 730 days or more during 7 yearsimmediately preceding the previous year


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If Karta of HUF does not satisfy the two additional conditions, the HUF is treated as

resident but not ordinary resident

RESIDENTIAL STATUS OF FIRM AND ASSOCIATION OF PERSONS

As per section 6(2), a partnership firm and an association of persons are said to beresident in India if control and management of their affairs are wholly or partly

situated within India during the relevant previous year. They are, however, treated as

non-resident in India if control and management of their affairs are situated wholly

outside India.

Q.3 - Explain the scope of salary.

Answer: Salary, in simple words, means remuneration of a person, which he hasreceived from his employer for rendering services to him. But receipts for all kinds ofservices rendered cannot be taxed as salary. The remuneration received by

professionals like doctors, architects, lawyers etc. cannot be covered under salary

since it is not received from their employers but from their clients. So, it is taxed under

business or profession head. In order to understand what is included in salary, let us

discuss few characteristics of salary.

Scope of Salary:-

1) The relationship of payer and payee must be of employer and employee for anincome to be categorized as salary income. For example: Salary income of a

Member of Parliament cannot be specified as salary, since it is received fromGovernment of India which is not his employer.

2) The Act makes no distinction between salary and wages, though generallysalary is paid for non-manual work and wages are paid for manual work.

3) Salary received from employer, whether one or more than one is included in thishead.

4) Salary is taxable either on due basis or receipt basis which ever matures earlier:a) Due basiswhen it is earned even if it is not received in the previous year.

b) Receipt basis when it is received even if it is not earned in the previousyear.

c) Arrears of salary- which were not due and received earlier are taxablewhendue or received, which ever is earlier.

5) Compulsory deduction from salary such as employees contribution toprovident fund, deduction on account of medical scheme or staff welfare

scheme etc. are examples of instances of application of income. In these cases,

for computing total income, these deductions have to be added back.


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INCOMES FORMING PART OF SALARY:Section 17 of the Act gives an inclusive definition of salary. Broadly, it includes:

1. Basic salary2. Fees, Commission and Bonus3. Taxable value of cash allowances4. Taxable value of perquisites5. Retirement Benefits

Although, all the components of salary income are included in salary, there are certain

incomes in each of these categories, which are either fully exempt or exempt upto a

certain limit. The aggregate of the above incomes, after the exemption(s) available, ifany, is known as Gross Salary.

From the Gross Salary, the following three deductions are allowed under Section 16

of the Act to arrive at the figure of Net Salary:

1) Standard deduction - Section 16 (i)2) Deduction for entertainment allowanceSection 16 (ii)3) Deduction on account of any sum paid towards tax on employmentSection

16(iii).

Q.4 - Explain ownership of property.

Answer : Ownership of Property

The assessee for taxation of income from house property must be the owner. An

'owner' of the property is one who can exercise the rights of the owner. The word

'owner' refers to the owner of the property and not to the owner of its annual value.

The definition of the term 'owner of house property' has been extended beyond mere

legal ownership to also cover the cases of deemed ownership.

A person is deemed as owner in following cases:-

As transferor of the property to spouse or minor child for inadequate or noconsideration

As holder of an impartibly estate or a property in part performance of a contractunder the Transfer of Property Act

As share holder of a co-operative society or a company, who entitles to hold anyproperty, etc.


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Types of property

Personal property

Personal property is a type of property.. In the civil law systems personal property is

often called movable property or movables - any property that can be moved from one

location or another. This term is used to distinguish property that different

from immovable property or immovables, such as land and buildings.

Land ownership

Real estate or immovable property is a legal term (in some jurisdictions) that

encompasses land along with anything permanently affixed to the land, such

as buildings. Real estate (immovable property) is often considered synonymous

with real property, in contrast from personal property (also sometimes

called chattel or personality).

Corporations and legal entities

An individual or group of individuals can own shares in corporations and other legal

entities, but do not necessarily own the entities themselves. A legal entity is

a legal construct through which the law allows a group of natural persons to act as if it

were an individual for certain purposes.

Intellectual property

Intellectual (IP) property refers to a legal entitlement which sometimes attaches to

the expressed form of an idea, or to some other intangible subject matter. This legal

entitlement generally enables its holder to exercise exclusive rights of use in relation

to the subject matter of the IP.

Chattel slavery

The living human body is, in most modern societies, considered something which

cannot be the property of anyone but the person whose body it is. This is in

contradistinction to chattel slavery. Chattel slavery is a type of slavery defined as the

absolute legal ownership of a person or persons, including the legal right to buy and

sell them.


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Q.5Discuss how agriculture income is exempted from income tax.

Answer : 1. Continuation of Exemption of Agricultural Income under the New

Code Section 10 read with Entry in Sl. No. 1 of the Sixth Schedule of the Direct

Taxes Code Bill, 2010 (hereinafter DTC) exempts Agricultural Income from Income

Tax. The Discussion Paper on the Direct Taxes Code explains the rationale for the

exemption and I quote, On account of the assignment of the taxing powers under the

Constitution to the States, agricultural income has been excluded from the scope of

this Code.

2. Benefits of Exemption Extended to Urban Agricultural Land.

Clause (12) of Section 284 of the DTC Bill, 2010 defines Agricultural Land as any

land situated in India which is used for agricultural purposes and,-

(a) is assessed to land revenue in India; or

(b) is subject to a local rate assessed and collected by officers of the Government as

such.

Under the Income Tax Act, 1961 Agricultural Land means any land situated in India

which is used for agricultural purposes and,-

(a) is assessed to land revenue in India; or

(b) is subject to a local rate assessed and collected by officers of the Government as

such but does not include:

(a) in any area which is comprised within the jurisdiction of a municipality (whetherknown as a municipality, municipal corporation, notified area committee, town area

committee, town committee, or by any other name) or a cantonment board and which

has a population of not less than ten thousand according to the last preceding census of

which the relevant figures have been published before the first day of the previous

year;

(b) in any area within such distance, not being more than eight kilometers, from the

local limits of any municipality or cantonment board referred to in item (a), as the


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Central Government may, having regard to the extent of, and scope for, urbanization

of that area and other relevant considerations, specify in this behalf by notification in

the Official Gazette.

3. Capital Gains on Agricultural Land

Clause 284(151) of DTC Bill, 2010 defines Investment Asset as any capital

asset which is not a business capital asset. Further, clause 284(46) of DTC Bill,

2010 defines Capital Asset as property of any kind held by the assessee which

is not a business trading asset.

4. Agricultural Income to be taken into Consideration for Rate purposes.

PART II of the First ScheduleRates of Income Tax under the DTC Bill, 2010

provide for aggregation of net agricultural income with total income from

ordinary sources for rate purposes. The proposed provisions are similar in

material respects to existing provisions under the Annual Finance Act.

Q.6 - Try to identify and explain the incomes chargeable to income tax underprofits and gains of business or profession.

Answer : Incomes Chargeable To Tax Under The Head Profits And Gains Of

Business Or Profession [Section 28]

1) Profits and gains of any business or profession carried on by assessee at anytime during previous year.

2) Compensation or other payment due to or received by any persona) Managing whole or substantially whole of affairs of an Indian company

or any other company in India at or in connection with the termination of

his management or modification of the terms and conditions relating

thereto;

b)On termination or modification of contract of his agency in India;c) For vesting the management of any property or business in Government

or any corporation owned or controlled by the Government.


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3) Income derived by trade, professional or other similar association from specificServices rendered to its members. This clause is an exception to general rule

that income from mutual activity is not chargeable to tax.

4) Profits on sale of import license; or Profits on transfer of Duty Entitlement PassBook (DEPB) or Duty Free Replenishment Certificate (DFRC) under EXIM

Policy;

5) Cash assistance against exports from Government of India and Duty Drawback;6) Value of any benefit or perquisite, whether convertible into money or not

arising from exercise of business or profession;

7) Interest, salary, bonus, commission or remuneration due to or received bypartner from the firm. Such income is taxable in hands of partners to the extent

it is allowed as deduction in hands of firm. Any amount not allowed as

deduction to firm under Section 40(b), is not taxable in the hands of partner.

8) Any sum received or receivable, in cash or in kind, under an agreement fora)Non-competition i.e. not carrying out any activity in relation to any

business; or

b)Exclusivity i.e. not sharing any know-how, patent, copyright, trademark,license, franchise or any other business or commercial right of similar

nature or information or technique likely to assist in the manufacture or

processing of goods or provision of services. Exceptions : However, sum

received for transfer of business, or transfer of right to manufacture,

produce or process any article/thing, which is chargeable under Capital

Gains is not taxable under this Section.

9) Any sum (including bonus) received under Key man Insurance Policy.

MCC Assignment (2)

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