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GNDU Question Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
DIRECT TAX LAWS
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Define Income Tax as per Income Tax Act, 1961. Write a detailed note on the history of
Income Tax in India.
2. What is Agriculture Income? Explain provisions relating to Agriculture Income.in detail.
SECTION-B
3. Discuss major tax provisions related to profit in lieu of salary.
4. Discuss the basic principles for computing income taxable under the head 'Profit and
Gains of Business or Profession'.
SECTION-C
5. Mr. Janak is a salaried employee. In the month of January, 2016 he purchased 100
shares of X Ltd. @Rs. 1,400 per share from Bombay Stock Exchange. These shares were
sold through BSE in April, 2020 @Rs. 2,600 per share. The highest price of X Ltd. share
quoted on the stock exchange on January 31. 2019 was Rs. 1.800 per share. What will be
the nature of capital gain in this case? Discuss.
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6. In case of an individual how would you calculate the income from other sources ?
Elaborate with examples.
SECTION-D
7. How the Gross Total Income of an individual is calculated? Discuss with examples.
8. Write a detailed note on Tax Deduction at Source.
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GNDU Answer Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
DIRECT TAX LAWS
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Define Income Tax as per Income Tax Act, 1961. Write a detailed note on the history of
Income Tax in India.
Ans: Story of Income Tax in India
A Different Beginning
Imagine you’re walking into a big fair. There are hundreds of colorful stalls – food stalls,
game stalls, and shopping stalls. Everyone is enjoying themselves. But to keep the fair
running – lights, security, cleaning, water, and entertainment – the organizer needs money.
So, the organizer politely asks each visitor to contribute a small ticket fee. This fee is not
random; it depends on the type of stall you run or how many things you sell.
Now, replace the “fair” with our country India, the “organizer” with the Government of
India, and the “ticket fee” with Income Tax.
That’s exactly how income tax works: everyone who earns contributes a part of their
earnings to the government so that the nation can run smoothly – building roads, schools,
hospitals, defense, and much more.
What is Income Tax? (Definition as per Income Tax Act, 1961)
The Income Tax Act, 1961, is the law that governs the rules of taxation in India.
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Definition in simple words:
Income Tax is a direct tax that the government imposes on the income earned by
individuals, Hindu Undivided Families (HUFs), companies, firms, associations, or any other
body.
Definition in official sense:
Under the Income Tax Act, 1961, Income Tax is a tax levied on the total income of a person
earned in the previous year, according to the prescribed rates of the government, during an
assessment year.
In short: If you earn, you share a small part of it with the nation, and in return, you get
facilities like infrastructure, defense, healthcare, and education.
Why do we pay Income Tax?
1. To run the government machinery.
2. To build infrastructure like roads, airports, railways, and ports.
3. For defense and national security.
4. For public services like schools, hospitals, and social welfare schemes.
5. To reduce the gap between rich and poor through progressive taxation.
The Long Journey: History of Income Tax in India
Now, let’s take a time travel journey and see how income tax was born and evolved in
India.
1. The Ancient Roots
• Believe it or not, the concept of taxation is not new in India.
• In ancient texts like Manusmriti and Arthashastra, it is mentioned that kings
collected a part of agricultural produce and trade earnings as tax.
• Kautilya’s Arthashastra (written in 3rd century BC) even described progressive
taxation – the rich pay more, the poor pay less. Sounds familiar? That’s still how our
system works today!
2. Income Tax during British India
The modern story of income tax in India begins under the British rule.
• 1857 Revolt: After the great revolt, the British needed more funds to run
administration and control India.
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• 1860: Sir James Wilson introduced the first Income Tax Act in India.
o Purpose: To meet financial losses of the Government after the revolt.
o It imposed tax on income from property, professions, and trades.
• But people opposed it, and the system kept changing.
3. Income Tax Act of 1886
• The Income Tax Act of 1886 became a solid base for income tax in India.
• It classified income into categories and taxed accordingly.
• It remained in operation for many decades, though with amendments.
4. Income Tax Act of 1918 & 1922
• In 1918, a new act replaced the 1886 law.
• But soon it was found complicated, so in 1922, another Income Tax Act was passed.
• The 1922 Act was significant because:
o It introduced the concept of a centralized system of taxation.
o The Income Tax Department was given powers of assessment, collection,
and enforcement.
• This act worked well and continued even after India’s independence in 1947.
5. Income Tax Act, 1961 (The Current Law)
After independence, the government realized that the 1922 law was outdated. So, they
drafted a comprehensive new act.
• In 1961, the Income Tax Act, 1961 was enacted.
• It came into force on 1st April 1962.
• It is a comprehensive law that covers all aspects of income tax – who will pay, how
much to pay, exemptions, penalties, and administration.
• This law is still in force today, though it is amended every year through the Union
Budget.
Key Features of the Income Tax Act, 1961
1. Applies to the whole of India.
2. Divides taxpayers into categories (Individuals, HUFs, Firms, Companies, etc.).
3. Tax rates are revised every year in the Finance Act (Budget).
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4. Provides deductions and exemptions (like Section 80C for savings, 80D for medical
insurance, etc.).
5. Has provisions for penalties and prosecution for tax evasion.
Diagrammatic Representation
Here’s a simple diagram to visualize the journey of Income Tax in India:
Ancient Times → Kings collected share of produce & trade tax
↓
1860 → First Income Tax Act by Sir James Wilson (British Era)
↓
1886 → Income Tax Act (Systematic Classification of Income)
↓
1918 → New Act (short-lived)
↓
1922 → Income Tax Act (Centralized System, continued post-
independence)
↓
1961 → Comprehensive Income Tax Act, 1961 (In force today)
The Human Side of Income Tax
Think of income tax not as a burden but as a shared responsibility. Just like in a family,
everyone contributes to household expenses, in a country, every earning citizen contributes
to national expenses.
• When you pay tax, you’re actually helping a student get free education.
• When you pay tax, you’re supporting roads and metro projects you travel on daily.
• When you pay tax, you’re contributing to defense that keeps you safe.
So, taxation is not just a financial matter – it’s a way of being a responsible citizen.
Conclusion
The Income Tax Act, 1961 is not just a legal document – it’s the lifeline of our nation’s
financial system. From ancient times when kings collected grains to today’s digital tax
payments, the journey of income tax in India shows how important it is for governance and
development.
Yes, paying tax sometimes feels heavy, but remember – it’s like contributing your share of
the fair ticket to keep the “Indian fair” running for everyone’s joy and benefit.
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2. What is Agriculture Income? Explain provisions relating to Agriculture Income.in detail.
Ans: A Story about Agricultural Income
Imagine for a moment that you live in a small village. You wake up early in the morning,
hear the birds chirping, and see your father walking towards the green fields. He grows
wheat, sugarcane, and mangoes on his land. After months of hard work, he harvests the
crops, sells them in the market, and earns money.
Now, here’s the question: Is this money taxable under the Income Tax Act?
This is where the concept of Agricultural Income comes into play. Let’s unfold the entire
story in a way that even a non-commerce student can understand.
What is Agricultural Income?
In very simple words, Agricultural Income is the money you earn directly from agricultural
land situated in India.
The Income Tax Act, 1961 (Section 2(1A)) defines agricultural income as:
1. Rent or revenue received from land used for agriculture in India.
2. Income from agricultural operations – like ploughing, sowing, watering, and
harvesting.
3. Income from farm produce – when you sell crops, fruits, or vegetables grown on
your land.
4. Income from farmhouses – if the farmhouse is located on or near the agricultural
land and is used for agricultural purposes.
So basically, if the income is linked directly to the process of growing crops or using
agricultural land, it’s agricultural income.
Why is Agricultural Income Special?
Here comes the twist in the story:
Agricultural income is exempt from tax under Section 10(1) of the Income Tax Act.
But why?
The reason goes back to the Indian Constitution. Tax on agricultural income is a State
subject (List II of the Seventh Schedule). That means only State Governments have the
power to tax it, not the Central Government.
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So, farmers can happily sell their produce without worrying about Central income tax.
Different Forms of Agricultural Income
Let’s imagine three brothers working on the same farm, each earning income differently.
1. Brother 1: Rent collector
He gives the land to a tenant for farming and collects rent. This rent is agricultural
income.
2. Brother 2: Farmer
He grows sugarcane and sells it in the market. That’s also agricultural income.
3. Brother 3: Factory owner
He takes sugarcane and makes sugar in his factory. Now this is not agricultural
income (it becomes business income).
The moral: If the activity goes beyond agriculture (like processing or manufacturing),
then it usually becomes taxable as business income.
What is NOT Agricultural Income?
Students often get confused here, so let’s make it super clear:
Income from selling processed products (sugar, coffee, tea after manufacturing).
Income from breeding cattle, dairy farming, poultry, fisheries, or floriculture not linked
to land.
Income from renting land for non-agricultural purposes (like cinema halls, warehouses).
Dividends from agricultural companies.
Only direct connection with agricultural land and operations qualifies as agricultural
income.
Provisions Related to Agricultural Income
Now let’s understand the legal side in detail, but in a simple style.
1. Exemption under Section 10(1)
Agricultural income is fully exempt from income tax.
2. However… There’s a Catch (Partial Integration Rule)
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If a person has both agricultural income and non-agricultural income, then agricultural
income is considered for rate purposes.
Let me explain with an example:
Suppose Mr. Ramesh has –
• Agricultural Income: ₹3,00,000
• Non-Agricultural Income: ₹5,00,000
Agricultural income itself is exempt. But while calculating the tax rate on non-agricultural
income, his agricultural income will be added to his non-agricultural income to determine
the slab rate.
This is called Partial Integration of agricultural income.
Rule applies only if:
• Non-agricultural income > ₹2,50,000 (basic exemption limit).
• Agricultural income > ₹5,000.
Step-by-Step Process of Partial Integration
1. Add agricultural income to non-agricultural income.
2. Calculate tax on the combined income.
3. Add agricultural income to the basic exemption limit, calculate tax again.
4. Subtract the second tax from the first one.
5. That’s the actual tax payable.
This ensures that rich people with huge agricultural income cannot escape taxes completely.
Example of Farmhouse Income
Suppose a farmhouse is built on agricultural land. Income from that farmhouse is treated as
agricultural income if:
• It is within the vicinity of agricultural land.
• It is used as a dwelling house, storehouse, or for agricultural purposes.
But if the farmhouse is rented out as a guest house, then it is not agricultural income.
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Diagram for Better Understanding
Here’s a simple diagram:
Real-Life Illustration
Imagine Priya owns land where she grows rice.
• Income from selling rice → Agricultural income (exempt).
• If she sets up a rice mill and sells packed rice → Business income (taxable).
• If she rents her land for marriage functions → Not agricultural income.
This simple story makes it clear what is agricultural income and what is not.
Summary
• Definition (Sec 2(1A)) → Rent, revenue, agri operations, farmhouse.
• Exemption (Sec 10(1)) → Agricultural income is exempt from Central Income Tax.
• Partial Integration → Used for rate purposes if agricultural + non-agricultural income
both exist.
• Not Agricultural Income → Dairy, poultry, fisheries, manufacturing, renting for non-
agriculture.
• Farmhouse Rule → Exempt only if linked with agriculture.
Final Words
Agricultural income is like the beating heart of rural India. It’s kept tax-free to support
farmers, encourage agriculture, and respect the federal structure of our Constitution. But to
prevent misuse by wealthy people, the Income Tax Act uses partial integration rules.
So next time you see a lush green farm, remember – not only does it give us food, but it also
tells a beautiful story about how law and livelihood are connected.
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SECTION-B
3. Discuss major tax provisions related to profit in lieu of salary.
Ans: A Fresh Beginning: The Story of “Mr. Salary and His Cousin Profit in Lieu of Salary”
Imagine there’s a man named Mr. Salary. He’s famous in the world of income tax because
everyone who earns money from a job meets him. Whether you are a doctor working in a
hospital, a teacher in a school, or an engineer in a company, Mr. Salary is the one who
makes sure you get taxed properly.
But here’s the twist — Mr. Salary has a cousin named Profit in Lieu of Salary. This cousin
isn’t as well-known but is equally important. He quietly sneaks into people’s lives when they
get some extra money that is not exactly "salary" but still comes because of the job
relationship.
Now, our Income Tax Act of India says: “Hey, Profit in Lieu of Salary, you can’t hide. You are
also taxable just like Mr. Salary because you are nothing but his extended family.”
This is the starting point of our story. Now, let’s slowly unwrap who Profit in Lieu of Salary
really is, what forms he takes, and how the Income Tax law treats him.
Step 1: What Does “Profit in Lieu of Salary” Mean?
The term Profit in Lieu of Salary simply means any compensation, bonus, or benefit that
you receive:
• Because of your job (current employment)
• After leaving your job (past employment)
• Even when you are not joining the job you were supposed to (future employment)
In other words, if you get money directly linked to your employment relationship, even
if it’s not your fixed salary, it still falls under the head “Income from Salary.”
So, Mr. Profit in Lieu of Salary is like the add-on toppings you get on a pizza. The base pizza
(salary) is obvious, but the toppings (compensations, gratuities, buy-outs, etc.) are also part
of the full dish.
Step 2: The Legal Backdrop – Section 17(3) of Income Tax Act
The Income Tax Act (Section 17(3)) clearly says: Profit in lieu of salary includes:
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1. Compensation received from employer – for termination, modification of terms, or
any other reason.
2. Payments received before joining a job – like joining bonus or compensation for not
joining.
3. Payments received after leaving a job – like pension buy-outs, retrenchment
compensation, etc.
4. Any amount received from an employer or former employer which is not
specifically exempt under the law.
So, if money is flowing to you because of the job connection, the taxman will count it under
salary.
Step 3: Different Forms of Profit in Lieu of Salary (Explained Like Characters in a Play)
To make it easier, let’s meet some of Profit in Lieu of Salary’s avatars (forms):
1. Compensation on Termination (The Goodbye Gift)
Imagine you’re working at a company for 10 years, and suddenly they say, “Sorry, we are
shutting down your department.” To soften the blow, they give you ₹5 lakh as
compensation.
• This isn’t “salary” (since you’re not working anymore), but it’s still related to your
job.
• Tax law says: This is Profit in Lieu of Salary.
2. Compensation for Modification of Job Terms (The Adjustment Gift)
Suppose your employer tells you: “From next month, your role is being changed, and your
allowances will reduce. But to compensate, we’ll give you a one-time lump sum.”
• Again, this is not regular salary, but still taxable as Profit in Lieu of Salary.
3. Payments from Past Employer (The Long Goodbye)
You left a job last year, but your old company suddenly gives you a settlement, pension
commutation, or buyout amount.
• Since the money is because you once worked there, it is also treated as Profit in Lieu
of Salary.
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4. Payments for Not Taking a Job (The Missed Chance Bonus)
Suppose you had an offer letter from Company A, but they later said, “We don’t need you
now. Here’s ₹2 lakh as compensation.”
• Even though you never worked there, the payment still arises out of an employment
relationship — hence taxable.
5. Any Other Benefit (The “Catch-All” Category)
The law is very smart. It says: “If you get any other amount from an employer or ex-
employer, and it’s not specifically exempt, we’ll call it Profit in Lieu of Salary.”
• This avoids loopholes where employers might try to give payments in tricky forms to
avoid tax.
Step 4: Exemptions (The Reliefs)
Now, don’t get scared — not everything under Profit in Lieu of Salary is fully taxable. Some
items get exemptions:
• Retrenchment Compensation – exempt up to limits specified under Section 10(10B).
• Voluntary Retirement Compensation (VRS) – exempt up to ₹5 lakhs (Section
10(10C)).
• Death-cum-Retirement Gratuity – exempt up to specified limits (Section 10(10)).
• Pension Commutation – partly exempt under Section 10(10A).
So, the tax law shows a human side too. It knows that sometimes these payments are linked
to hardship (like losing a job), so it provides relief.
Step 5: Why Is This Important? (The Bigger Picture)
For students, it’s important to understand that “salary” in taxation is a wide umbrella. It
doesn’t only mean the monthly paycheck.
• It also covers bonuses, perquisites, and even these “extra” payments called Profit in
Lieu of Salary.
• This ensures fair taxation — otherwise, people could escape tax by calling a payment
“compensation” instead of salary.
So, by covering these provisions, the government plugs tax leaks and ensures everyone pays
their due share.
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Step 6: A Diagram for Easy Understanding
Here’s a simple diagram to remember:
INCOME FROM SALARY
|
---------------------------------
| |
Salary Profit in Lieu
(Basic, DA, Bonus, etc.) of Salary
|
------------------------------------------------------------
| | | | |
Termination Job Terms Past Employer Non-Joining Other
Compensation Compensation Payments Compensation Benefits
Step 7: Wrapping the Story
So, if Mr. Salary is the main hero, then Profit in Lieu of Salary is his cousin who appears in
special situations.
• He shows up when you leave a job, lose a job, change job terms, or even refuse a
job.
• The Income Tax Act says: “If the reason behind money is your employment, it must
be taxed under salary head.”
• But, like a kind judge, the law also gives relief in genuine hardship cases like
retrenchment or voluntary retirement.
Final Touch: Humanized Conclusion
Think of it this way: Your employment journey is like a movie. Salary is the main storyline —
your monthly scenes. But sometimes there are unexpected twists — like sudden exits, job
changes, or surprise compensations. These twists are what we call Profit in Lieu of Salary.
The tax law acts like a movie director ensuring no side character steals the show untaxed.
At the same time, it gives a soft corner (exemptions) when the twist is too harsh on the
employee.
And that’s why, understanding Profit in Lieu of Salary is like knowing the bonus chapters of
your job story — they may not come every day, but when they do, you must know how they
are treated.
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4. Discuss the basic principles for computing income taxable under the head 'Profit and
Gains of Business or Profession'.
Ans: A Story to Understand Taxable Business Income
Imagine a young entrepreneur named Aarav.
Aarav has just opened a small café called “The Coffee Story”. He is excited because
customers love his cappuccinos and sandwiches. But when tax season arrives, Aarav is
worried:
“How will I know what part of my café’s earnings the government considers as taxable
profit?”
This is exactly what the Income Tax Act, 1961 explains under the head “Profits and Gains of
Business or Profession (PGBP)”. Let’s walk with Aarav through this journey, like a guided
tour, and discover the basic principles step by step.
Step 1: The Big Idea – Why PGBP Exists?
The government says: “Aarav, you can earn from many sources – salary, house property,
capital gains, business, or other sources. But if your income comes from running a business
like your café, or from a profession like being a doctor, lawyer, or consultant, it must be
taxed under PGBP.”
So, PGBP covers all kinds of business and professional incomes.
It ensures fairness: everyone contributes taxes according to their true business profits, not
just gross sales.
Step 2: The Golden Rule – Real Profit, Not Imaginary
The law believes in taxing real profits, not artificial numbers.
For Aarav:
• Total Sales of Coffee = ₹10,00,000
• Expenses like milk, sugar, staff salary, rent = ₹7,00,000
• Real Profit = ₹3,00,000
The government will tax ₹3,00,000 (after adjustments).
Principle: Tax is on net profit (after expenses), not gross receipts.
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Step 3: The Backbone – How to Compute?
The Income Tax Act has a systematic formula:
**Business Income = Net Profit (as per books)
• Inadmissible Expenses added back
– Exempt Incomes reduced
• Disallowed Losses adjusted
= Taxable Business Income**
It’s like Aarav brewing coffee:
1. Start with raw coffee beans (Net Profit).
2. Remove impurities (inadmissible items).
3. Add missing ingredients (allowable deductions).
4. The final cup = taxable income.
Step 4: What Incomes Are Covered?
Not every rupee Aarav earns is “business income.” The Act clarifies:
Included as PGBP
• Profits from trade, commerce, or manufacture (Aarav’s café sales).
• Income from professional services (doctor, lawyer, architect).
• Benefits or perquisites from business (free goods, incentives).
• Compensation for termination of contracts.
• Income from exports, duty drawbacks, etc.
Excluded
• Salary (goes under Salary head).
• House rent (under House Property).
• Capital gains (under CG).
Only business/profession-related earnings fall under PGBP.
Step 5: Allowable Expenses (The Friendly Ones)
Aarav asks: “Can I subtract all my café expenses from income?”
The law replies: “Yes, but only genuine and reasonable expenses.”
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Allowed Deductions (Sec. 30-37):
• Rent, rates, taxes (shop rent, municipal tax).
• Repairs & insurance of premises.
• Depreciation on furniture, fridge, coffee machine.
• Employee salary & bonus.
• Raw materials cost (milk, coffee beans, bread).
• Interest on business loans.
• Advertising & marketing.
• Professional expenses (CA fees, legal charges).
Principle: Only expenses wholly and exclusively for business are allowed.
So, Aarav’s café staff salary is allowed, but his personal Netflix subscription is not!
Step 6: Non-Allowable Expenses (The Naughty Ones)
The law is strict about inadmissible expenses.
Disallowed:
• Personal expenses (family dinner at café).
• Income tax paid (you can’t deduct tax itself!).
• Penalties/fines for illegal acts.
• Charity beyond prescribed limits.
• Excessive payments to relatives.
This ensures Aarav doesn’t reduce his tax unfairly by mixing personal and business
expenses.
Step 7: Special Deductions (The Bonus Treats)
To encourage business growth, the Act gives some extra benefits:
• Scientific research expenses (for innovation).
• Expenditure on skill development projects.
• Amortization of preliminary expenses (cost of starting the café).
• Export incentives.
The government says: “If you help society or economy grow, we’ll reward you with tax
benefits.”
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Step 8: Method of Accounting – The Foundation
How Aarav records his café sales matters.
• Mercantile System (Compulsory for business): Record when income is earned, not
when cash is received.
• Cash System (Not allowed for business, only for professionals): Record when cash is
actually received.
Example: If Aarav sold coffee on credit in March but got payment in April, under
mercantile system, it’s March income.
Step 9: Set-Off and Carry Forward of Losses
Suppose Aarav’s café made a loss of ₹1,00,000 this year. Does it vanish? No!
The law allows him to carry forward this loss and set it off against future café profits (up
to 8 years).
This way, entrepreneurs are not punished in tough times.
Step 10: Final Taxable Income
At the end, after:
• Adding disallowed expenses
• Deducting eligible expenses
• Adjusting losses
Aarav arrives at his taxable business income, on which income tax is calculated as per slab
rates.
Diagram: Computation of Business Income
Gross Receipts (Sales, Services, etc.)
|
(-) Allowable Expenses
|
= Net Profit (as per books)
|
(+) Inadmissible Expenses added back
(-) Exempt Incomes deducted
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(+/-) Adjustments for special provisions
|
= Taxable Business Income
Conclusion – The Story’s Moral
Aarav finally smiles. Now he knows:
1. Real profit is taxed, not sales.
2. Only business-related expenses are allowed.
3. Personal or illegal expenses are disallowed.
4. Special deductions & loss adjustments reduce his burden.
5. Proper accounting methods are crucial.
In short, the principles of computing income under PGBP ensure fairness, accuracy, and
discipline.
And just like Aarav serves a perfect cup of coffee after filtering, the Income Tax Act filters
business accounts to arrive at the perfect taxable income.
SECTION-C
5. Mr. Janak is a salaried employee. In the month of January, 2016 he purchased 100
shares of X Ltd. @Rs. 1,400 per share from Bombay Stock Exchange. These shares were
sold through BSE in April, 2020 @Rs. 2,600 per share. The highest price of X Ltd. share
quoted on the stock exchange on January 31. 2019 was Rs. 1.800 per share. What will be
the nature of capital gain in this case? Discuss.
Ans: A Different Starting Point – Let’s Step Into a Story
Imagine you and your friend Mr. Janak are sitting in a small tea shop near the Bombay Stock
Exchange. The year is 2016. The market is buzzing, brokers are shouting, and everyone is
excited about the next big move in shares.
Now, Janak is a salaried person, not a professional investor. But like many of us, he wants to
try his luck in the stock market. He thinks, “Why not invest some of my hard-earned salary
into shares and see if I can create wealth for the future?”
So begins his financial journey with a company called X Ltd.
Step 1: The First Investment
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• Date of purchase: January 2016
• What he bought: 100 shares of X Ltd.
• Price per share: ₹1,400
• Total Investment = 100 × 1,400 = ₹1,40,000
So in simple terms, Janak spent ₹1.4 lakh in 2016 to buy these shares.
Step 2: The Sale After a Few Years
Time passed. Janak held on to the shares for more than four years. Finally, in April 2020, he
sold them.
• Selling Price per share: ₹2,600
• Total Sale Price = 100 × 2,600 = ₹2,60,000
That means Janak’s investment grew from ₹1.4 lakh to ₹2.6 lakh. On the surface, it looks
like he made a profit of ₹1.2 lakh.
But wait… tax laws don’t always see things so simply!
Step 3: The Big Twist – What Happened in 2018?
In February 2018, the government of India introduced a special rule regarding the taxation
of Long-Term Capital Gains (LTCG) on listed shares.
Before 2018, if you sold listed shares after 1 year of holding, the gains were exempt (no tax).
But from April 2018 onward, the government said:
• Long-term capital gains (more than ₹1 lakh) will be taxed at 10%.
• But to be fair, they introduced the Grandfathering Rule.
This is the heart of our question.
Step 4: Understanding the Grandfathering Rule (Like a Fairy Tale)
The word grandfathering may sound odd, but think of it like this:
Imagine the government as a teacher. One fine day, she announces:
"From tomorrow, if you are late to class, you will be fined ₹10. But if you were already in
class before today, don’t worry—you will be treated kindly.”
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That’s exactly what the government did with shares. They said:
"If you bought shares before 31st January 2018, we will protect the gains you made up to
that date. You won’t be taxed on those earlier profits. We’ll only tax the gains that happened
after 31st January 2018.”
This is why the Fair Market Value (FMV) on 31st January 2018 (or in our case, 31st January
2019 as mentioned) becomes very important.
Step 5: Applying the Grandfathering Rule to Janak’s Case
Now let’s bring Janak back into the story.
• His purchase price (2016) = ₹1,400
• His sale price (2020) = ₹2,600
• The highest quoted price on 31 Jan 2019 = ₹1,800
According to the rule, the cost of acquisition (for tax purposes) will not just be the original
₹1,400. Instead, it will be calculated as follows:
Cost of Acquisition (COA) = Higher of (Purchase Price OR FMV on 31st Jan 2018/2019),
but not more than Sale Price
So,
• Purchase Price = ₹1,400
• FMV = ₹1,800
• Sale Price = ₹2,600
Thus, COA = ₹1,800 (because it is higher than ₹1,400, and less than ₹2,600).
Step 6: Final Capital Gain Calculation
Now let’s find the taxable capital gain:
• Sale Price = ₹2,600
• Cost of Acquisition (as per rule) = ₹1,800
• Capital Gain per Share = ₹2,600 – ₹1,800 = ₹800
• For 100 shares = 100 × 800 = ₹80,000
So the taxable capital gain = ₹80,000.
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Step 7: Nature of the Gain
Now comes the real answer to the examiner’s question:
• Janak held the shares for more than 12 months (from 2016 to 2020).
• Therefore, it is a Long-Term Capital Gain (LTCG).
• Since the gain (₹80,000) is less than ₹1 lakh, it will be exempt from tax.
So, while Janak made a handsome profit, he doesn’t actually have to pay tax on it.
Step 8: Explaining With a Diagram
Here’s a simple diagram to visualize the whole journey:
Purchase (2016) FMV (31 Jan 2019) Sale
(2020)
₹1,400 ₹1,800 ₹2,600
| | |
| | |
|------ Protected by Rule -------| |
| |
|-------------------- Long-Term Capital Gain = ₹800/share -------|
Step 9: Making It Relatable
Think of it like Janak planting a mango tree in 2016. The tree grew slowly, and by 2018, it
already had a certain value (FMV). The government said: “We won’t tax you for the growth
of the tree before 2018. But if it grows further after 2018 and you sell its fruits, that growth
will be taxed.”
So, in 2020 when Janak sold the fruits (the shares), only the extra growth after 2018 was
considered for taxation.
Step 10: Wrapping It Up
• Nature of Capital Gain: Long-Term Capital Gain (LTCG)
• Amount: ₹80,000
• Taxability: Since it is below ₹1 lakh, exempt from tax.
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Final
In short, Janak’s journey is like many ordinary investors—he worked hard, saved, invested,
and finally earned a reward. The government, through its grandfathering rule, ensured he
was not unfairly taxed on the growth of his investment that happened before the new law
came in.
So the story ends on a happy note:
Janak not only doubled his money but also walked away without paying any tax on his long-
term capital gains.
6. In case of an individual how would you calculate the income from other sources ?
Elaborate with examples.
Ans: Income from Other Sources: A Story of Hidden Income Pockets
Imagine you are a traveller walking through a big marketplace called “Income World.” In
this market, you see different shops:
• Salary Shop – where all earnings from jobs are displayed.
• Business & Profession Shop – buzzing with entrepreneurs showing their profits.
• House Property Shop – full of landlords displaying rent collections.
• Capital Gains Shop – where people sell land, shares, and gold.
Now, as you walk further, you notice a fifth shop in the corner with a board that says:
“Income from Other Sources – All Unusual & Leftover Earnings Here!”
This shop exists because not every type of income fits neatly into the first four shops. So,
the government created this special category – Income from Other Sources (IFOS) – a
basket where we put incomes that don’t belong elsewhere.
Definition (Simple Style)
According to the Income Tax Act, if an income cannot be classified under Salary, House
Property, Business/Profession, or Capital Gains, it is taxed under Section 56: Income from
Other Sources.
In short:
“Whatever doesn’t fit in the other four heads, comes here.”
Types of Income Covered Under This Head
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Let’s look at the items you can find in this mysterious shop of “Other Sources.” Think of
them as different stalls in the shop.
1. Interest Income
• Savings account interest, fixed deposits (FD), recurring deposits (RD), bonds, or
debentures.
• Example: If you keep ₹1,00,000 in a bank FD and earn ₹7,000 interest, this interest
goes under “Other Sources.”
2. Dividend Income
• When you invest in shares and the company gives you a share of its profits, that
dividend is taxable here.
• Example: You buy Reliance shares, and they give ₹5,000 dividend → record it here.
3. Winning from Lotteries, Puzzles, Game Shows, or Gambling
• This is the “lucky corner” of the shop.
• Example: You buy a lottery ticket for ₹50 and win ₹1,00,000. This money will be
taxed under Other Sources (with a flat 30% tax).
4. Gifts Received
• If you receive money, property, or jewelry as a gift (above ₹50,000 from a non-
relative), it is taxed here.
• Example: Your friend gifts you ₹1,00,000 on your birthday → taxable here.
• But if your parents or siblings gift you, it is exempt.
5. Family Pension
• After the death of a government/organization employee, the pension given to their
family is taxable here (after some deductions).
6. Rental Income (if not from House Property)
• If you rent out machinery, furniture, or plant & equipment, and it is not part of your
business, it comes under this head.
7. Others (the leftovers)
• Income from sub-letting a property.
• Insurance commission.
• Director sitting fees.
• Any income not falling under other heads.
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How to Calculate Income from Other Sources?
Let’s break it like a step-by-step recipe.
Step 1: Identify the Income
Pick out all incomes that cannot be classified under Salary, House Property, Business, or
Capital Gains.
Step 2: Add Them Together
Interest + Dividends + Gifts + Lotteries + Family Pension + Rentals, etc.
Step 3: Deduct Expenses (if allowed)
The law allows certain deductions from these incomes, such as:
• Collection charges of dividends/interest.
• Repairs, insurance, and depreciation (if machinery/furniture rented).
• Deduction for family pension (1/3rd of pension or ₹15,000, whichever is lower).
Step 4: Arrive at “Income from Other Sources.”
This final amount is then added to your Gross Total Income and taxed as per your slab
(except special incomes like lottery winnings which are taxed at flat rates).
A Simple Example
Example 1: Normal Case
Rahul has the following incomes:
• Salary: ₹5,00,000
• FD Interest: ₹20,000
• Dividend: ₹10,000
• Lottery Winning: ₹1,00,000
Step 1: Salary = goes to “Salary Shop.”
Step 2: FD Interest + Dividend + Lottery = goes to “Other Sources Shop.”
So, his Income from Other Sources = 20,000 + 10,000 + 1,00,000 = ₹1,30,000.
This ₹1,30,000 will be taxed under this head, but note: Lottery winning will be taxed at flat
30% (not slab rates).
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Example 2: Family Pension with Deduction
Mrs. Sharma receives a family pension of ₹60,000 after her husband’s death.
Deduction allowed = 1/3rd of pension or ₹15,000 (whichever is lower).
1/3rd of 60,000 = ₹20,000 (greater than 15,000).
So, deduction = ₹15,000.
Taxable Income from Other Sources = ₹60,000 – ₹15,000 = ₹45,000.
Example 3: Gift Received
A student, Arjun, receives ₹70,000 from a family friend on his birthday.
• Since it is above ₹50,000 and not from a relative → whole amount ₹70,000 is
taxable.
• If it was from his father, it would be fully exempt.
Diagram for Better Understanding
+------------------------+
| Income of an Individual|
+------------------------+
|
---------------------------------------------------------
| | | | |
Salary House Property Business/Prof Capital Gains Other Sources
|
----------------------------------------------------------
--
| | | | | |
|
Interest Dividend Gifts Lottery Pension Rent
(furniture) Others
This diagram shows that “Other Sources” is like the fifth basket collecting all the leftover
incomes.
Why Is This Head Important?
1. Covers all unusual income: Without it, many incomes would escape taxation.
2. Fairness: Ensures everyone pays tax on not just main earnings but also side incomes.
3. Wide Scope: From interest to gambling, everything is included.
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Conclusion (Story Ending)
So, whenever you calculate the income of an individual, remember:
• First, check the four main shops – Salary, House Property, Business/Profession, and
Capital Gains.
• Whatever you cannot place there, take it to the fifth shop: Income from Other
Sources.
It is like the “Lost & Found Department” of Income Tax.
Nothing goes untaxed – whether it’s a gift from a friend, a lottery win, or the interest quietly
sitting in your bank account.
And just like in a market, if you forget to visit this shop, the tax inspector will gently (or
maybe strictly!) remind you that every rupee counts.
SECTION-D
7. How the Gross Total Income of an individual is calculated? Discuss with examples.
Ans: How the Gross Total Income of an Individual is Calculated?
Imagine this:
You and your friends are sitting in a park, and one of your friends, Rohan, has just received
his very first job offer. Everyone is excited for him. While talking, Rohan says, “I am earning
₹50,000 per month now, but my father says this is not my income for tax purposes. He says I
need to calculate something called Gross Total Income (GTI) before even thinking about tax.
What does that even mean?”
At first, it sounds confusing, right? But if we treat income tax like a story of a person’s
different money baskets, it becomes really easy to understand.
Let’s step into this story together.
The Five Baskets of Income
Think of your income as if you are carrying five different baskets. Each basket represents a
type of income defined under the Indian Income Tax Act. To calculate your Gross Total
Income, you need to check what’s inside each basket, add them up, and that’s it.
Here are the five baskets:
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1. Income from Salary
2. Income from House Property
3. Profits and Gains of Business or Profession
4. Capital Gains
5. Income from Other Sources
Now, let’s open each basket one by one.
1. Basket of Salary Income
This is the most common basket for most people. If you are working as an employee, your
salary income goes here. Salary does not just mean the fixed monthly amount you get. It
includes:
• Basic Pay
• Dearness Allowance (DA)
• House Rent Allowance (HRA)
• Leave Travel Allowance (LTA)
• Any bonus, commission, or allowances
But, before putting it in the basket, the law also allows some exemptions. For example:
• HRA exemption (if you live in a rented house)
• Leave Travel Concession (for travel within India)
• Standard Deduction (currently ₹50,000 for salaried individuals)
Example: Rohan earns ₹6,00,000 as salary in a year. He also receives ₹1,20,000 as HRA
but pays rent, so part of that is exempt. After subtracting exemptions and deductions, his
salary income for the basket becomes ₹5,50,000.
2. Basket of House Property Income
Now suppose Rohan’s father has a small house in his name that he rents out. The rent
received is income from house property.
The calculation is simple:
• Rent Received
• (–) Municipal Taxes paid
• (–) 30% Standard Deduction (given for repairs/maintenance, even if not spent)
• (–) Interest on Home Loan (if applicable)
Example: Rent received = ₹2,40,000 per year.
Municipal Taxes = ₹20,000.
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So, Net Annual Value = ₹2,20,000.
Less 30% = ₹66,000.
Final taxable = ₹1,54,000.
That’s the amount we put in the second basket.
3. Basket of Business or Profession Income
Now imagine Rohan’s friend Meera, who runs her own bakery. She doesn’t get a salary but
earns profits from her business. This income goes into the Business/Profession basket.
Formula:
• Revenue (sales)
• (–) Expenses (like rent, electricity, raw materials, salaries to staff, depreciation on
assets, etc.)
Example: Meera earns ₹10,00,000 in sales and spends ₹7,00,000 on expenses.
Her taxable business income = ₹3,00,000.
If Rohan later starts freelancing, even his freelance earnings will come into this basket.
4. Basket of Capital Gains
Now let’s say Rohan sells some old shares he had bought during college or maybe he sells a
plot of land. Any profit from selling capital assets goes here.
There are two types:
• Short-term Capital Gains (STCG): If the asset is held for a short period (less than 36
months for property, less than 12 months for shares).
• Long-term Capital Gains (LTCG): If the asset is held for a longer period.
Example: Rohan sells shares and makes a profit of ₹50,000 (STCG). He also sells a plot of
land with a long-term gain of ₹2,00,000.
So, total from this basket = ₹2,50,000.
5. Basket of Other Sources
This is like a miscellaneous basket. Anything that doesn’t fit into the first four comes here.
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Examples:
• Interest on savings account or fixed deposits
• Lottery winnings
• Gifts received (beyond certain limits)
• Dividends
Example: Rohan has ₹10,000 as bank interest and also received a gift of ₹60,000 from a
non-relative. (Since gifts above ₹50,000 are taxable, full ₹60,000 will be counted.)
So, total = ₹70,000.
Putting It All Together
Now, the magic step: Add up all the baskets.
Rohan’s Gross Total Income:
1. Salary Income = ₹5,50,000
2. House Property = ₹1,54,000
3. Business Income = ₹0 (since he doesn’t have a business yet)
4. Capital Gains = ₹2,50,000
5. Other Sources = ₹70,000
Gross Total Income = ₹10,24,000
This is the amount we call Gross Total Income (GTI).
Only after calculating GTI do we move to deductions under Chapter VI-A (like Section 80C
for investments, 80D for medical insurance, etc.) to arrive at the Total Taxable Income.
Diagram to Visualize
+-------------------+
| Salary Income |
+-------------------+
|
+-------------------+
| House Property |
+-------------------+
|
+-------------------+
| Business/Profession|
+-------------------+
|
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+-------------------+
| Capital Gains |
+-------------------+
|
+-------------------+
| Other Sources |
+-------------------+
|
------------------------
| Gross Total Income |
------------------------
Why is GTI Important?
Think of GTI as the foundation of a house. If your foundation is wrong, the whole building
(your tax calculation) will collapse. Only after correctly calculating GTI, we can move to:
• Applying deductions (80C, 80D, etc.)
• Checking slab rates
• Calculating tax payable
So, GTI is the very first and most essential step.
Engaging Closing Note
Coming back to the park, after understanding the five baskets, Rohan smiles and says, “So,
it’s like collecting fruits from five baskets and putting them into one big basket. That big
basket is my Gross Total Income.”
Everyone laughs, and Meera adds, “Yes, and then the government decides how many fruits
you can keep and how many you must share as tax.”
And just like that, what once sounded like a boring tax rule turned into an easy, everyday
life story.
8. Write a detailed note on Tax Deduction at Source.
Ans: ✦ Tax Deduction at Source (TDS) – A Story You’ll Never Forget
You are a farmer who grows delicious mangoes. Every year, you sell your mangoes in the
local market. But before you get your full payment from the shopkeeper, the shopkeeper
says:
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“I will keep aside a small portion of your money and directly give it to the government as
tax. You will still get credit for it, but instead of you paying the government later, I’m helping
you pay right now.”
This small portion taken away at the time of payment is nothing but TDS – Tax Deduction at
Source.
So, just like the shopkeeper deducts some money before giving you the rest, in real life,
employers, banks, and other institutions deduct a part of the payment you receive (salary,
rent, interest, etc.) and deposit it with the government.
This way, the government collects tax little by little, all through the year, instead of waiting
for people to pay it at the end.
✦ Why TDS Exists? (The Purpose)
Think about it: If the government waited for everyone to pay tax at the end of the year,
many people might forget, delay, or even avoid paying.
To solve this problem, the government invented TDS, where tax is collected at the source of
income itself.
✔ It ensures a regular inflow of money to the government.
✔ It reduces the chance of tax evasion.
✔ It makes taxpayers’ life a bit easier, since part of their tax is already prepaid.
So, in short:
Government is happy (steady revenue).
Citizens are safe (tax is already partly paid).
✦ How TDS Works? (The Process Like a Chain)
Let’s break it step by step:
1. Payment Originates → Suppose an employer wants to pay salary to an employee.
2. Deduction → Before paying, the employer checks the TDS rate (say 10%) and
deducts it.
3. Deposit to Government → The deducted amount is deposited directly with the
Income Tax Department.
4. Remaining Paid → The rest of the money is given to the employee.
5. Proof is Shared → The employer gives a certificate (Form 16, Form 16A, etc.) so that
the employee knows how much tax has already been paid on their behalf.
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6. Adjustment at Year-End → When the employee files their Income Tax Return (ITR),
this deducted amount is adjusted with their total tax liability.
✦ A Simple Example
Suppose you earn ₹50,000 salary per month.
• TDS rate applicable = 10%
• Deduction = ₹5,000 every month
• You receive = ₹45,000 in hand
• Government receives = ₹5,000 every month
At year-end, your ITR shows ₹60,000 (₹5,000 × 12) already paid. If your total tax liability is
₹70,000, you only need to pay ₹10,000 more.
✦ Diagram: The Flow of TDS
Income Payer (Employer/Bank/Etc.)
│
│ Deducts TDS
▼
--------------------------
| Government Treasury |
--------------------------
│
│ Issues Credit (Form 26AS/16)
▼
Income Receiver (Employee/You)
✦ Where Does TDS Apply?
TDS isn’t only on salaries. It applies in many situations:
1. Salary – Employers deduct based on your income slab.
2. Bank Interest – Banks deduct TDS if interest exceeds a certain limit.
3. Rent – If rent is above the prescribed limit, TDS is deducted by the payer.
4. Contract Payments – Contractors receive payment after TDS deduction.
5. Professional Fees – Doctors, lawyers, and other professionals face TDS.
6. Lottery/Winnings – Even lucky draws and game shows have TDS.
In short, wherever there is income, TDS can knock at your door!
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✦ Who is Responsible for Deducting TDS?
• Employers (for salaries).
• Banks (for fixed deposit interest).
• Tenants (for rent above the threshold).
• Companies/Institutions (for contractor or professional payments).
The person making the payment (called the Deductor) has the responsibility to deduct and
deposit TDS. The person receiving the income (called the Deductee) gets the credit for it.
✦ Benefits of TDS
✔ Steady Revenue for Government – No waiting till March, money flows monthly.
✔ Prevents Tax Evasion – Tax is collected at the source itself.
✔ Reduces Burden on Taxpayers – Instead of paying a big lump sum, tax is paid in small
parts.
✔ Promotes Discipline – Forces organizations and individuals to stay compliant.
✦ Challenges & Limitations of TDS
But just like every coin has two sides, TDS also has challenges:
• Sometimes, extra TDS is deducted (higher than required). In that case, taxpayers
must claim refunds.
• Complex Rules – Different rates for different payments confuse common people.
• Compliance Burden – Employers/companies need to maintain records, file returns,
and issue certificates.
• Cash Flow Issues – For individuals, receiving less money in hand each month can feel
heavy.
✦ Important Forms Related to TDS
• Form 16 – TDS certificate on salary.
• Form 16A – TDS certificate on non-salary income.
• Form 26AS – Consolidated statement showing all TDS deducted.
• Form 24Q / 26Q – Used by deductors while filing TDS returns.
✦ Real-Life Analogy
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Think of TDS like a train ticket. When you travel, you don’t pay the whole amount at the
destination. Instead, you pay before you even start the journey.
Similarly, in taxation, the government doesn’t wait until year-end. It collects tax in advance,
at the point where income is generated.
✦ Conclusion
TDS is one of the most efficient tools created by the government to ensure “pay as you
earn” taxation.
• It makes tax collection faster and smoother.
• It gives government a steady inflow of funds.
• It reduces the risk of tax evasion.
• It benefits taxpayers by spreading the burden throughout the year.
So, next time you see a cut in your salary slip or bank statement, remember: it’s not money
lost, but money already prepaid to the government on your behalf.
In the grand story of taxation, TDS is like a safety net — catching taxes at the very source,
ensuring no leakages, and keeping both government and citizens secure.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or have
suggestions, feel free to share your feedback.”
