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GNDU Question Paper-2024
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. Discuss in detail the nature and scope of Income Tax Act, 1961
2. A is a foreign citizen. His father was born in Delhi in 1953 and his mother was born in
England in 1954. His grandfather was born in Pakistan in 1918. He comes to attend his
friends' marriage on 9th December, 2019 and stays in India for 261 days thereafter.
Determine his residential status.
SECTION-B
3. Anirudh has a property whose municipal valuation is Rs. 1,30,000 p.a. The fair rent is Rs.
1,10,000 p.a. and the standard rent fixed by the Rent Control Act is Rs. 1,20,000 p.a. The
property was let out for a rent of Rs. 11,000 p.m. throughout the previous year.
Unrealised rent was Rs. 11,000 and all conditions prescribed by Rule 4 are satisfied. He
paid municipal taxes @ 10% of municipal valuation. Interest on borrowed capital was Rs.
40,000 for the year. Compute the income from house property of Anirudh for A.Y. 2020-
4. Discuss the provisions relating to Business and Profession in detail.
SECTION-C
5. What are the conditions for the taxability of income under the head Capital Gains?
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6. Mr. X has one factory building along with machines and furniture in Mumbai which has
been let out @ Rs. 50,000 p.m. Repair charges of the building is Rs. 7,000 and that of
furniture fixtures are Rs. 4,000, insurance premium paid Rs. 3,000 and
depreciation is Rs. 27,000.
SECTION-D
7. Write short notes on:
(a) Deduction under Section 80RRB in respect of royalty from patents.
(b) Deduction under Section 80GGB and Section 80GGC in respect of contribution to political
parties.
8. 8. Following are the particulars of income of Mr. Ram, who is 70 years old resident in
India, for the assessment year 2020-21: Gross Total Income Rs. 8,12,000 which includes
Long-term capital gain of Rs. 2,55,000, Short-term capital gain of Rs. 88,000, Interest
income of Rs. 12,000 from Savings bank deposits with banks and Rs. 30,000 from bank FD.
Mr. Ram invested in PPF Rs. 1,40,000 and also incurred medical expenditure (no medical
insurance) Rs. 61,000. Compute the total income of Mr. Ram.
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GNDU Answer Paper-2024
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. Discuss in detail the nature and scope of Income Tax Act, 1961
Ans: Imagine India as a bustling city, filled with people working in different professions,
running businesses, earning money from various sources, and contributing to the economy
in their own way. Now, consider the government as the caretaker of this city, responsible
for building roads, schools, hospitals, and public facilities that keep the city alive and
running smoothly. To do this, the government needs funds. Where do these funds come
from? A major portion comes from taxes, and one of the most important taxes is Income
Tax.
Income Tax is like a friendly reminder that as citizens and businesses earn income, they
must contribute a part of it for the welfare of society. To ensure that this process is
systematic, transparent, and fair, India has a law called the Income Tax Act, 1961. This law is
not just a set of rules written in a dusty book; it is like the backbone of the nation’s financial
system, guiding who pays how much, under what conditions, and with what responsibilities.
The Nature of the Income Tax Act, 1961
To understand the nature of the Income Tax Act, imagine it as a guiding compass that
directs the government and taxpayers alike. The word “nature” here refers to its
characteristics, purpose, and legal essence.
1. Legal Framework:
The Income Tax Act, 1961, is a statutory law. This means it is a law passed by the
Indian Parliament and has full legal authority. It governs the way income tax is
levied, collected, and managed in India. Like the rules of a game, the law ensures
that everyone plays fairly.
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2. Compulsory Contribution:
Income tax is not voluntary. Once a person earns above a certain threshold, the law
requires them to pay tax. This compulsory nature ensures that everyone who earns
contributes to national development. Think of it as each citizen bringing a small brick
to build a massive bridge—small contributions together create something
monumental.
3. Direct Tax:
The Income Tax Act deals with direct taxes, meaning taxes directly levied on a
person’s or entity’s income. Unlike indirect taxes (like GST, which is on goods and
services), income tax is directly linked to the taxpayer’s earnings. If you earn, you
pay; if you don’t earn, you don’t. This makes it progressive and fair.
4. Regulatory in Nature:
Beyond raising revenue, the Income Tax Act also acts as a regulatory tool. For
example, by giving tax benefits for investments in savings schemes or encouraging
certain business sectors through deductions, it guides people’s economic behavior.
In essence, it subtly nudges citizens and businesses to make decisions beneficial for
the economy.
5. Dynamic and Evolving:
One striking feature of the Income Tax Act is that it is dynamic. The government
frequently amends it through Finance Acts every year to respond to changing
economic conditions, social priorities, and international developments. Think of it
like a living organism that evolves to meet the needs of its environment.
6. Comprehensive Coverage:
The Act is highly comprehensive. It doesn’t just talk about individuals; it covers
companies, firms, Hindu Undivided Families (HUFs), trusts, cooperative societies, and
even associations of persons. Each category of taxpayer has specific provisions,
making the law detailed and inclusive.
The Scope of the Income Tax Act, 1961
Now that we understand its nature, let’s explore its scope, which is like the range or extent
of its application. The scope tells us how far and wide the law reaches in regulating income
and taxation.
1. Who is Covered – The Taxpayers:
The Act applies to a wide variety of entities. This includes:
o Individuals: Salaried, self-employed, or those earning income from
investments.
o Hindu Undivided Families (HUFs): Unique to India, where a family collectively
earns income.
o Companies: Both private and public, domestic and foreign.
o Firms and LLPs: Partnerships are also taxed on their profits.
o Associations and Trusts: Especially charitable and religious trusts that earn
income.
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This shows the law’s broad scope in encompassing almost every source of income.
2. Types of Income Taxed:
The Act categorizes income into five major heads:
o Income from Salary – Like wages, bonuses, allowances.
o Income from House Property – Rental income from owning property.
o Profits and Gains of Business or Profession – Income earned through trade
or profession.
o Capital Gains – Profit from selling property, shares, or investments.
o Income from Other Sources – Interest, dividends, lottery winnings, etc.
By defining these heads, the Act ensures no stream of income goes untaxed,
expanding its practical scope.
3. Residential Status and Scope:
The Act also defines residential status, which determines how income is taxed.
Residents are taxed on global income, whereas non-residents are taxed only on
income earned in India. This allows the Act to extend its influence even to
international earnings, in some cases.
4. Tax Planning and Compliance:
The Income Tax Act not only collects taxes but also encourages tax planning within
legal limits. Through exemptions, deductions, rebates, and incentives, it gives
taxpayers options to reduce their liability legally. For example, investing in a
provident fund or insurance saves tax. This promotes financial planning among
citizens.
5. Collection and Administration:
The scope also includes how taxes are collected and administered. Authorities like
the Income Tax Department ensure compliance, assess returns, conduct
investigations, and enforce laws. This administrative framework is crucial for
practical application.
6. Penalties and Legal Consequences:
The Act defines penalties for non-compliance, evasion, or concealment of income.
This legal authority ensures the law is respected and followed, further extending its
scope beyond mere advisory guidelines.
The Importance of Understanding Its Nature and Scope
Understanding the nature and scope of the Income Tax Act is not just an academic exercise;
it is essential for students, professionals, and businesses because:
• It clarifies legal obligations for taxpayers.
• It helps in financial planning, reducing unnecessary penalties.
• It guides government policies for economic growth and development.
• It strengthens the concept of equity and fairness, ensuring everyone pays their
share.
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Imagine a city without rules. Chaos would prevail. Similarly, without a law like the Income
Tax Act, taxation would be arbitrary, unpredictable, and unfair. The Act ensures a structured
system where everyone knows their responsibilities and the government can function
effectively.
A Story to Summarize
Let’s conclude with a story. Think of India’s economy as a giant river flowing through the
country, nourishing lands, cities, and villages. Every individual, business, and organization
contributes small streams into this river through income tax. The Income Tax Act, 1961, is
the riverbank, guiding the flow, ensuring it doesn’t overflow in one place or dry up in
another. It channels resources efficiently, supports development, and protects citizens’
rights. Its nature is legal, compulsory, direct, regulatory, and evolving; its scope covers every
taxpayer, every form of income, and every possible scenario where the government can
rightfully collect revenue. Without this law, the river would lose direction, and the country’s
development would be at risk.
Conclusion
In simple terms, the Income Tax Act, 1961, is the legal framework that binds India’s taxation
system. Its nature reflects its role as a legal, compulsory, regulatory, and evolving law. Its
scope stretches across individuals, organizations, various income streams, and even
international earnings, providing mechanisms for compliance, collection, and enforcement.
Together, the nature and scope of this Act ensure fairness, efficiency, and sustainability in
funding the nation’s progress.
By understanding this, students not only learn about taxation but also appreciate how a
structured law can maintain order, fairness, and growth in a complex society like India.
2. A is a foreign citizen. His father was born in Delhi in 1953 and his mother was born in
England in 1954. His grandfather was born in Pakistan in 1918. He comes to attend his
friends' marriage on 9th December, 2019 and stays in India for 261 days thereafter.
Determine his residential status.
Ans: Picture this: A young man named A, a foreign citizen, arrives in India on 9th December
2019. He has come for a joyous occasion—his friend’s wedding. What was meant to be a
short visit turns into a long stay, and before he knows it, he has spent 261 days in India.
Now, the Income Tax Department doesn’t care about the wedding or the fun he had—it
cares about one thing: his residential status.
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Why? Because under the Indian Income Tax Act, residential status determines the scope of
income taxable in India. A person may be a foreign citizen, but if he satisfies certain
conditions, he can still be treated as a resident for tax purposes. Citizenship and residential
status are two different worlds.
Let’s unravel this puzzle step by step, like a detective story, and determine whether A is a
Resident, Resident but Not Ordinarily Resident (RNOR), or a Non-Resident for the financial
year 2019–20.
Step 1: The Law Behind Residential Status
Residential status is governed by Section 6 of the Income Tax Act, 1961.
An individual is said to be a Resident in India if he satisfies any one of the following two
basic conditions:
1. Condition 1: He is in India for 182 days or more during the relevant previous year.
2. Condition 2: He is in India for 60 days or more during the relevant previous year and
for 365 days or more during the 4 years immediately preceding that year.
However, there are exceptions for certain categories of people:
• An Indian citizen leaving India for employment abroad, or
• An Indian citizen or a Person of Indian Origin (PIO) who comes on a visit to India,
For them, the 60-day condition is replaced by 182 days.
So, for such individuals, they will be treated as residents only if they stay in India for 182
days or more in that year.
Step 2: Who is a Person of Indian Origin (PIO)?
The Act defines a Person of Indian Origin (PIO) as someone who, or whose parents or
grandparents, were born in undivided India.
• A’s father was born in Delhi in 1953. Delhi was part of undivided India.
• Therefore, A qualifies as a Person of Indian Origin (PIO).
This means, when A visits India, the special concession applies: instead of the 60-day
condition, the 182-day condition will be used.
Step 3: Applying the Conditions to A’s Case
• A comes to India on 9th December 2019.
• He stays for 261 days thereafter.
• The relevant previous year is 2019–20 (1st April 2019 to 31st March 2020).
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Now, check the conditions:
• Condition 1 (182 days or more): A stayed for 261 days, which is greater than 182
days. Condition satisfied.
Therefore, A is a Resident in India for the financial year 2019–20.
Step 4: Resident and Ordinarily Resident (ROR) vs Resident but Not Ordinarily
Resident (RNOR)
Being a resident is not the end of the story. We must now check whether A is:
• Resident and Ordinarily Resident (ROR), or
• Resident but Not Ordinarily Resident (RNOR).
For this, two additional conditions are tested:
1. The individual has been a resident in India for at least 2 out of the 10 preceding
years.
2. The individual has been in India for at least 730 days in the 7 preceding years.
If both are satisfied → ROR. If not satisfied → RNOR.
Now, in A’s case:
• He is a foreign citizen who came to India only in December 2019.
• He has no prior stay in India in the preceding years.
Therefore:
• He has not been a resident in 2 out of 10 preceding years.
• He has not stayed for 730 days in the last 7 years.
Both conditions fail.
Thus, A is a Resident but Not Ordinarily Resident (RNOR).
Step 5: The Final Answer
• Residential Status of A for FY 2019–20: Resident but Not Ordinarily Resident
(RNOR).
Step 6: Why This Matters
The residential status determines taxability of income:
1. Resident and Ordinarily Resident (ROR):
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o Taxable on global income (income earned in India + abroad).
2. Resident but Not Ordinarily Resident (RNOR):
o Taxable on:
▪ Income earned in India, and
▪ Income from business/profession controlled from India.
o Not taxable on foreign income earned outside India.
3. Non-Resident (NR):
o Taxable only on income earned in India.
Since A is RNOR, his foreign income (say, salary abroad, investments abroad) will not be
taxed in India. Only his Indian income will be taxable.
Step 7: Storytelling Illustration
Think of it like this:
• Resident and Ordinarily Resident (ROR): Like a permanent family member of India’s
tax system. Wherever you earn, India wants a share.
• Resident but Not Ordinarily Resident (RNOR): Like a guest who stayed long enough
to be considered part of the family, but not long enough to be treated as a
permanent member. India taxes only what you earn here, not what you earn abroad.
• Non-Resident (NR): Like a visitor who just came for a short trip. India only taxes
what you earn while you’re here.
A, in our story, is the guest who stayed long enough (261 days) to be considered a resident,
but since he has no long history of residence in India, he is treated as RNOR.
Step 8: Mathematical Verification
• Days stayed in India = 261 days (>182 days) → Resident.
• Preceding 10 years: never resident → fails condition.
• Preceding 7 years: not 730 days → fails condition.
• Therefore, classification = RNOR.
Step 9: Examiner-Friendly Summary
• A is a foreign citizen.
• His father was born in Delhi → A is a Person of Indian Origin (PIO).
• He visited India on 9th December 2019 and stayed for 261 days.
• As a PIO visiting India, the 182-day condition applies. He satisfies it.
• Hence, he is a Resident.
• But since he does not satisfy the additional conditions of long-term stay, he is
Resident but Not Ordinarily Resident (RNOR).
Conclusion
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The story of A shows how residential status is not about citizenship but about presence
and history of stay in India. Even though A is a foreign citizen, his long stay of 261 days in
2019–20 makes him a Resident. But because he has no prior history of residence, he is
classified as Resident but Not Ordinarily Resident (RNOR).
Final Answer: A is Resident but Not Ordinarily Resident (RNOR) for FY 2019–20.
SECTION-B
3. Anirudh has a property whose municipal valuation is Rs. 1,30,000 p.a. The fair rent is Rs.
1,10,000 p.a. and the standard rent fixed by the Rent Control Act is Rs. 1,20,000 p.a. The
property was let out for a rent of Rs. 11,000 p.m. throughout the previous year.
Unrealised rent was Rs. 11,000 and all conditions prescribed by Rule 4 are satisfied. He
paid municipal taxes @ 10% of municipal valuation. Interest on borrowed capital was Rs.
40,000 for the year. Compute the income from house property of Anirudh for A.Y. 2020-
Ans: Imagine Anirudh, a thoughtful property owner, sitting at his desk one evening, sipping
chai, looking over his property details. He owns a charming house in the city, and he wants
to understand how much income from this house property will be taxable for the
Assessment Year 2020-21. He knows that calculating “income from house property” in India
involves understanding a few key elements: Municipal Valuation, Fair Rent, Standard Rent,
Rent Received, Unrealized Rent, Municipal Taxes Paid, and Interest on Borrowed Capital.
Let’s walk through these step by step in a story-like way.
Step 1: Understanding the Nature of the Income
Anirudh’s property is let out, which means it generates rental income. Income from house
property under the Income Tax Act is primarily based on the concept of annual value of the
property. The annual value can be thought of as the potential rent the property could fetch
in a year. The law gives us three measures for annual value:
1. Municipal Valuation (MV) – the value determined by local authorities for municipal
purposes.
2. Fair Rent (FR) – what a similar property in similar circumstances would fetch in the
open market.
3. Standard Rent (SR) – the rent fixed by the Rent Control Act if the property is
governed under such law.
The Income Tax Act prescribes that the Gross Annual Value (GAV) of a property is the
minimum of the three limits (subject to some adjustments). But it cannot be less than the
actual rent received or receivable.
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Step 2: Gathering Anirudh’s Property Numbers
Here’s what Anirudh has:
• Municipal valuation (MV): Rs. 1,30,000 per annum
• Fair Rent (FR): Rs. 1,10,000 per annum
• Standard Rent (SR): Rs. 1,20,000 per annum
• Actual rent received (Rs. 11,000 per month): Rs. 11,000 × 12 = Rs. 1,32,000 per
annum
• Unrealized rent (not received but considered for calculation): Rs. 11,000
• Municipal taxes paid: 10% of MV = 10% of 1,30,000 = Rs. 13,000
• Interest on borrowed capital: Rs. 40,000
Step 3: Determining the Annual Value
Now, we need to determine the Annual Value of the property, which is essentially the
potential earning from the house property.
1. First, we compare Municipal Valuation (MV), Fair Rent (FR), and Standard Rent
(SR):
o MV = Rs. 1,30,000
o FR = Rs. 1,10,000
o SR = Rs. 1,20,000
Step to find annual value as per Section 23 of IT Act:
o Take higher of FR and MV, but capped at SR. In simple terms:
▪ Check which is higher between FR and MV: Max(FR, MV) =
Max(1,10,000, 1,30,000) = 1,30,000
▪ Now compare with Standard Rent (SR): The annual value cannot
exceed SR, so Annual Value = Min(1,30,000, 1,20,000) = 1,20,000
2. Now, check the actual rent received: Rs. 1,32,000
Important Rule: The Gross Annual Value (GAV) is the higher of Annual Value and
Rent Received, if all conditions under Rule 4 are satisfied (like tenant is reliable, rent
is actually due, etc.). Here, the problem mentions “all conditions prescribed by Rule
4 are satisfied,” which means unrealized rent is considered.
o Rent received = 1,32,000
o Unrealized rent = 11,000
According to the Income Tax Act, if some rent is unrealized but is considered in
computation due to Rule 4 (like tenant defaults), it can be deducted from GAV later.
Hence, Gross Annual Value (GAV) = Actual Rent Received = Rs. 1,32,000
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Step 4: Deduct Municipal Taxes
Now, Anirudh paid municipal taxes. Under Section 24(a) of the IT Act, municipal taxes paid
by the owner are allowed as a deduction.
• Municipal taxes paid = 10% of MV = 10% × 1,30,000 = Rs. 13,000
Hence, Net Annual Value (NAV) = GAV − Municipal Taxes = 1,32,000 − 13,000 = Rs. 1,19,000
Step 5: Deduct Interest on Borrowed Capital
Section 24(b) allows deduction for interest on borrowed capital if the loan was taken for
purchasing, constructing, repairing, renewing, or reconstructing the property.
• Interest paid = Rs. 40,000
So, Income from House Property = NAV − Interest = 1,19,000 − 40,000 = Rs. 79,000
Step 6: Breaking Down the Concept Like a Story
Think of it this way:
1. Municipal Valuation (MV) is like the government saying: “This is how much your
house is worth for taxes.”
2. Fair Rent (FR) is the market whispering: “If you rent it in the market, this is what you
could get.”
3. Standard Rent (SR) is the law saying: “Hey! You cannot charge more than this under
Rent Control.”
So, the law makes sure that your house income is neither too low (underestimation) nor too
high (overestimation) by taking a careful balance of these three.
Then comes the actual rent received — that’s like the real world, sometimes better,
sometimes worse. And if some rent is unrealized (like your tenant didn’t pay), there are
rules to adjust that without penalizing the owner unnecessarily.
Municipal taxes are a responsibility we pay to the city, and the Income Tax Act kindly says:
“Don’t worry, we’ll let you subtract it from your income.”
Finally, the interest on borrowed capital is like renting money to earn rent, and Section
24(b) acknowledges this by allowing deduction of interest — a thoughtful provision for
people who take loans for property purposes.
Step 7: Summary Table for Clarity
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Particulars
Amount (Rs.)
Municipal Value (MV)
1,30,000
Fair Rent (FR)
1,10,000
Standard Rent (SR)
1,20,000
Rent Received (Actual)
1,32,000
Unrealised Rent
11,000
Gross Annual Value (GAV)
1,32,000
Less: Municipal Taxes (10% of MV)
13,000
Net Annual Value (NAV)
1,19,000
Less: Interest on Borrowed Capital
40,000
Income from House Property
79,000
Step 8: Conclusion – Humanized Take
In the end, Anirudh learned that the government looks at house property income carefully.
It takes into account:
• What your house could realistically earn (fair rent)
• What the law allows (standard rent)
• What the authorities think it’s worth (municipal valuation)
And then, after deducting legitimate expenses like municipal taxes and interest on loans,
the taxable income emerges.
For Anirudh, after paying taxes to the city and accounting for the loan interest, he ends up
with an income from house property of Rs. 79,000. This amount will be shown under the
head “Income from House Property” in his income tax return for the Assessment Year 2020-
21.
Step 9: Important Learning Nuggets
1. Always compute the potential income first (Annual Value) before considering actual
rent.
2. Deductible expenses are primarily municipal taxes and interest on loans.
3. Unrealized rent can be deducted if it satisfies Rule 4 conditions.
4. The process ensures fairness to both the taxpayer and the revenue.
Think of it as a story where numbers talk, rules guide, and the law ensures fairness — and
at the end, you get a clean figure ready to report in your tax return.
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So, through this story, we not only calculated the exact income but also understood the
logic behind each step, making it easier for a student like you to remember and apply for
any similar house property problem.
Answer (Income from House Property for A.Y. 2020-21): Rs. 79,000
4. Discuss the provisions relating to Business and Profession in detail.
Ans: The Story of Business and Profession under Income Tax Law
Imagine a bustling town marketplace. In one corner, a shopkeeper sells spices; in another, a
doctor runs a clinic; nearby, an architect designs houses; and across the street, a lawyer
argues cases. All of them are earning money—but not in the same way. The shopkeeper
buys and sells goods, the doctor provides medical services, the architect creates designs,
and the lawyer offers legal expertise.
Now, the Income Tax Act of India looks at all these activities and says: “Wait a minute!
These are not salaries, not house rents, not capital gains. These are incomes from Business
and Profession. And we need special rules to calculate how much tax they should pay.”
That’s where the provisions relating to Business and Profession come in. They form one of
the most detailed and practical parts of tax law, because they deal with the everyday
earnings of millions of traders, professionals, and entrepreneurs.
Let’s walk through this story step by step, like a guided tour of the marketplace of tax law.
1. Meaning of Business and Profession
• Business: The law defines it broadly. It includes trade, commerce, manufacturing, or
any adventure in the nature of trade. So whether you run a shop, a factory, or even a
one-time deal that looks like a commercial venture, it counts as business.
• Profession: This refers to activities that require intellectual or specialized skills—like
doctors, lawyers, engineers, architects, accountants, artists, and consultants.
In short:
• Selling goods = Business
• Selling skills/knowledge = Profession
2. Scope of Income from Business and Profession
The Income Tax Act says: income is taxable if it arises from any business or profession
carried on by the assessee at any time during the previous year.
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This means:
• Even if you shut down your shop mid-year, the income earned till then is taxable.
• Even if you do a one-off commercial deal, it can still be taxed as business income.
3. Computation of Income: The Golden Formula
The law doesn’t just tax gross receipts. It allows deductions for expenses, because income
means profit, not turnover.
The formula is:
Profits and Gains of Business or Profession = Gross Receipts – Allowable Expenses
This is where the real story begins—because deciding what counts as an “allowable
expense” is the heart of the provisions.
4. Incomes Specifically Included
Certain incomes are always treated as business/professional income, even if they look
unusual:
• Profit on sale of a business asset.
• Compensation for termination of a business contract.
• Export incentives, duty drawbacks, subsidies.
• Value of any benefit or perquisite arising from business.
• Interest, salary, bonus, or commission received by a partner from the firm.
5. Deductions: The Hero of the Story
The Income Tax Act is generous in allowing deductions—but only if they are wholly and
exclusively for the purpose of business or profession.
General Deductions (Sec. 37)
Any expense not specifically disallowed, if incurred for business, is deductible. For example:
• Advertising expenses
• Legal fees
• Audit charges
• Office rent
Specific Deductions
• Rent, rates, taxes, repairs of business premises.
• Depreciation on assets used for business.
• Insurance premium for stock or assets.
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• Bad debts written off.
• Employer’s contribution to provident fund.
• Expenditure on scientific research.
Depreciation (Sec. 32)
This is a big one. Since assets wear out, the law allows deduction for depreciation at
prescribed rates. For example:
• Buildings, machinery, furniture, vehicles—all get depreciation.
• Intangible assets like patents, copyrights, trademarks also qualify.
6. Expenses Not Allowed (The Villains)
The law also lists expenses that cannot be claimed, no matter what:
• Personal expenses of the assessee.
• Income tax paid.
• Penalties or fines for breaking the law.
• Expenses for illegal activities (like bribes).
• Cash payments above ₹10,000 (with some exceptions).
This ensures that only genuine business expenses reduce taxable income.
7. Special Provisions for Certain Businesses
The Act recognizes that some businesses are unique, so it creates special rules:
• Insurance business: Profits are computed as per special regulations.
• Banking and financial institutions: Special treatment for bad debts.
• Export businesses: Eligible for deductions and incentives.
• Speculative business: Losses can only be set off against speculative profits.
• Specified professions (like doctors, lawyers, engineers, accountants, architects, film
artists): They must maintain detailed books of accounts.
8. Maintenance of Books of Accounts
The law requires certain businesses and professionals to maintain books of accounts if their
income or turnover exceeds specified limits.
For example:
• Professionals (like doctors, lawyers, accountants) must maintain cash book, journal,
ledger, copies of bills, etc.
• Businesses must maintain purchase/sales registers, stock records, etc.
This ensures transparency and proper assessment.
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9. Presumptive Taxation Schemes
To reduce compliance burden for small taxpayers, the law offers presumptive taxation:
• Section 44AD: For small businesses with turnover up to ₹2 crore. Income is
presumed at 8% (6% for digital receipts).
• Section 44ADA: For professionals with receipts up to ₹50 lakh. Income is presumed
at 50% of gross receipts.
• Section 44AE: For transporters owning up to 10 goods vehicles. Income is presumed
at fixed rates per vehicle.
This way, small shopkeepers, freelancers, and transporters don’t need to maintain detailed
accounts.
10. Set-off and Carry Forward of Losses
Business is not always profit-making. Sometimes there are losses. The law allows:
• Set-off: Adjusting current year’s business loss against other incomes (except salary).
• Carry forward: If not fully set off, business loss can be carried forward for 8 years to
adjust against future business income.
This gives relief to entrepreneurs facing tough years.
11. Tax Audit (Sec. 44AB)
If turnover exceeds prescribed limits (₹1 crore for business, ₹50 lakh for profession), the
assessee must get accounts audited by a Chartered Accountant.
This ensures accuracy and prevents tax evasion.
12. Practical Examples
• A shopkeeper earns ₹40 lakh turnover. He spends ₹30 lakh on purchases, rent,
salaries, etc. His profit = ₹10 lakh. Taxable as business income.
• A doctor earns ₹60 lakh in consultation fees. After deducting clinic rent, staff
salaries, medicines, depreciation on equipment, his net profit is taxable as
professional income.
• A transporter with 5 trucks opts for presumptive taxation under Sec. 44AE. His
income is calculated at fixed rates per truck, regardless of actual expenses.
13. Why These Provisions Matter
These rules are not just about collecting tax. They:
• Encourage entrepreneurship by allowing genuine expenses.
• Ensure fairness by disallowing personal/illegal expenses.
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• Simplify compliance for small taxpayers.
• Provide transparency through audits and books of accounts.
Conclusion: The Marketplace Revisited
Let’s return to our town marketplace. The shopkeeper, the doctor, the architect, and the
lawyer—all are part of the same story. The Income Tax Act doesn’t treat them unfairly; it
simply says:
• “Show me your earnings.”
• “Deduct your genuine expenses.”
• “Pay tax on the real profit.”
Through its detailed provisions, the law balances encouragement for business with
responsibility towards the nation.
So, the provisions relating to Business and Profession are like the rules of a fair game: they
let you play freely, but ensure that everyone contributes their share to the common pool.
SECTION-C
5. What are the conditions for the taxability of income under the head Capital Gains?
Ans: Imagine this: You inherit a beautiful painting from your grandmother. She bought it
decades ago for a mere Rs. 10,000, but today it’s worth Rs. 5,00,000. You decide to sell it at
this new price. Suddenly, you hear a tiny voice whisper, “Hey, that profit you made… the
government might want a piece of it!” This “piece” of your profit is what we call capital
gains tax.
Yes, income from selling or transferring certain assets is not free from taxation—it falls
under a separate category called “Income under the head Capital Gains” in the Income Tax
Act. But not every gain is taxed. There are some specific conditions that must be fulfilled for
this income to be taxable. Let’s journey through this concept step by step, exploring every
nook and cranny.
1. What is Capital Gain?
Before we dive into conditions, let’s understand what “capital gain” really means. A capital
gain arises when you transfer a capital asset for a consideration (money or kind) and get
more than the cost at which you acquired it. In simpler terms:
Capital Gain = Sale Price – Cost of Acquisition – Expenses incurred for transfer
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For example, if you bought land for Rs. 1,00,000 and sold it for Rs. 3,00,000 after paying Rs.
20,000 in brokerage and legal fees, your capital gain is:
3,00,000 – 1,00,000 – 20,000 = Rs. 1,80,000
2. Condition 1: There must be a Capital Asset
Not everything you own qualifies as a capital asset. The first condition is:
a) Ownership of a Capital Asset:
A capital asset includes things like:
• Land, building, or property
• Shares and securities
• Jewellery, artworks, antiques
• Debentures, mutual funds, etc.
But it excludes some items:
• Stock-in-trade of a business (if you sell goods in ordinary course of business)
• Personal assets like furniture, clothes, or vehicles (unless sold for profit in a business
context)
• Agricultural land in rural areas
So, if you sell a bike you bought for personal use, that gain isn’t taxable as capital gain, but
if you are a dealer selling bikes regularly, it will be treated as business income.
In short: You need a capital asset, not a regular personal item, for capital gains tax to
apply.
3. Condition 2: There must be a Transfer
Owning an asset is not enough; there must be a transfer. A transfer can take several forms:
• Sale: Selling property or shares for money.
• Exchange: Swapping one asset for another. For example, exchanging land for a flat.
• Redemption: Selling mutual funds or bonds before maturity.
• Relinquishment: Giving up rights, like leaving a partnership or surrendering a lease.
• Compulsory acquisition: Government acquisition of your land.
Simply keeping an asset, or gifting it without consideration in some cases, does not count as
a transfer. The law defines “transfer” carefully, because this is the point where tax liability is
triggered.
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4. Condition 3: Transfer must be for a Consideration
The next condition is that the asset must be transferred for consideration, meaning the
transfer brings some economic benefit. Consideration doesn’t always have to be cash; it can
be:
• Money
• Other assets (like exchanging land for another property)
• Debts or services
For example, if you gift property to a friend without expecting anything, generally it’s not
taxable under capital gains—unless it’s a related party or certain special exemptions are
violated.
5. Condition 4: There must be a Gain or Profit
Here’s the heart of it: tax is levied only on the gain, not the total sale price.
Gain arises when:
Consideration received > Cost of Acquisition + Transfer Expenses
If your cost is higher than the selling price, you don’t have a gain—you have a loss. And
guess what? Losses on capital assets are also considered under the law and can be set off
against capital gains in other transactions, but more on that later.
So the third condition is: There must be a positive difference between the selling price and
the purchase price after adjusting expenses.
6. Condition 5: Timing Matters – Short-term vs. Long-term
Even if all the above conditions are met, the tax rate depends on how long you held the
asset. The law divides assets into short-term and long-term:
• Short-term capital assets: Held for a short duration (e.g., less than 36 months for
land, 12 months for listed shares)
• Long-term capital assets: Held longer than the prescribed duration
Why does this matter? Because tax rates differ:
• Short-term capital gains are taxed at normal slab rates or 15% in some cases
• Long-term capital gains get concessional rates (like 10% or 20%) and may have
exemptions if reinvested in specified assets
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This distinction ensures fairness—the government encourages long-term investments by
taxing them less.
7. Condition 6: Proper Valuation and Documentation
The taxman is friendly, but he loves clarity. To claim or pay capital gains tax, valuation and
proof of cost are crucial:
• Cost of acquisition: Original purchase price, adjusted for inflation (for long-term
assets)
• Cost of improvement: Any renovations or enhancements made
• Transfer expenses: Brokerage, legal fees, registration fees, etc.
Without proper bills, receipts, or legal documents, you can’t justify your claim. So, good
record-keeping is not optional—it’s mandatory.
8. Special Cases and Exceptions
The Income Tax Act provides special conditions for certain assets:
• Agricultural land: Only taxable if located in urban areas
• Compulsory acquisition by government: Gains are often eligible for deferral
• Gifts or inheritance: Usually exempt until transferred by the receiver
• Specified bonds, residential property reinvestment: Exemptions available under
sections 54, 54F, etc.
So the law is nuanced—it’s not just “sell and pay.” Sometimes, your gain can be partially or
fully exempted if you comply with specific conditions.
9. Human Angle – Why These Conditions Exist
Now, let’s pause and think about why all these rules exist. Imagine the government as a chef
cooking a meal. Taxing every gain without conditions would be like adding too much salt—
too harsh, unfair. By defining:
• Capital asset
• Transfer
• Consideration
• Gain
• Short-term vs. long-term
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…the law ensures that only real profits from meaningful investments are taxed, and people
are not punished for everyday transactions. It balances fairness with revenue generation.
10. Story Summary
So, if we tell this as a little story:
1. You own a capital asset—a painting.
2. You transfer it—sell or exchange it.
3. You receive consideration—cash or property.
4. You make a gain—sale price minus purchase price and expenses.
5. You held it for some time, determining tax rates.
6. You maintain documents proving costs and transfer.
If all these conditions align, congratulations! The law says: “Yes, you owe capital gains tax.”
Miss one, or if there’s a valid exemption, the government politely waves you through.
11. Practical Tips for Students & Taxpayers
• Always keep purchase bills and transfer receipts.
• Understand if your asset is short-term or long-term.
• Don’t forget transfer-related costs—they reduce taxable gain.
• Check for exemptions before paying tax. Sections like 54, 54F, 54EC can save you
money.
• Remember: gains from personal items like jewelry or second-hand cars are
sometimes exempt; business assets follow business tax rules.
Conclusion
Capital gains taxation is not a punishment—it’s a system designed to tax wealth creation
while rewarding long-term investment. The law looks at:
1. What you own (capital asset)
2. Whether you transferred it (transfer condition)
3. What you received (consideration)
4. Whether you actually profited (gain)
5. How long you held it (timing and rates)
6. Proper documentation and records
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When all these stars align, the government asks for its share. If not, you’re safe. The
conditions for taxability under capital gains are like a checklist, ensuring fairness, clarity,
and encouragement for smart investment decisions.
6. Mr. X has one factory building along with machines and furniture in Mumbai which has
been let out @ Rs. 50,000 p.m. Repair charges of the building is Rs. 7,000 and that of
furniture fixtures are Rs. 4,000, insurance premium paid Rs. 3,000 and
depreciation is Rs. 27,000.
Ans: The Tale of Mr. X’s Factory in Mumbai
Once upon a time in the bustling city of Mumbai, there stood a factory building. It wasn’t
just a building—it had machines humming inside and sturdy furniture fixtures supporting
the work. But Mr. X, the owner, decided not to run the factory himself. Instead, he thought,
“Why not let it out and earn rent?”
So, he leased the entire setup—building, machines, and furniture—for ₹50,000 per month.
That meant ₹6,00,000 per year in rental income.
Now, here comes the twist: how should this income be taxed? Should it be treated as
Income from House Property (since it’s a building)? Or as Income from Other Sources? Or
perhaps as Profits and Gains of Business or Profession?
This is where the Income Tax Act steps in with its wisdom.
Step 1: Understanding the Nature of Income
The law says:
• If you let out only a building, the rent is taxed under Income from House Property.
• If you let out only machinery, plant, or furniture, the rent is taxed under Income
from Other Sources (unless it’s your business).
• But if you let out a building along with machinery, plant, or furniture as a single
package, then the income is taxable under Income from Other Sources, unless it’s
part of your regular business.
In Mr. X’s case, he let out the factory building + machines + furniture together. This is a
composite letting. Therefore, the rent of ₹6,00,000 will be taxed under Income from Other
Sources.
Step 2: Gross Income
Mr. X’s gross receipts = ₹50,000 × 12 = ₹6,00,000.
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This is the starting point. But the law is fair—it allows deductions for expenses incurred to
earn this income.
Step 3: Allowable Deductions
Under Income from Other Sources, the following are deductible:
1. Repairs and insurance of building (if let out with machinery/furniture).
2. Repairs of plant, machinery, and furniture.
3. Depreciation on building, machinery, and furniture.
4. Any other expenditure incurred wholly and exclusively for earning such income.
Now let’s apply this to Mr. X’s case.
• Repairs of building = ₹7,000
• Repairs of furniture = ₹4,000
• Insurance premium = ₹3,000
• Depreciation = ₹27,000
Total deductions = ₹41,000
Step 4: Net Taxable Income
So, the computation looks like this:
Particulars
Amount (₹)
Gross rent received
6,00,000
Less: Repairs of building
7,000
Less: Repairs of furniture
4,000
Less: Insurance premium
3,000
Less: Depreciation
27,000
Net Income (Taxable)
5,59,000
Thus, Mr. X’s taxable income from this letting = ₹5,59,000.
The Story Behind the Provisions
Now that we’ve solved the numerical part, let’s step back and understand the philosophy
behind these provisions—because that’s what makes an answer examiner-friendly.
Why Not “Income from House Property”?
If Mr. X had let out only the factory building, the income would fall under “House
Property.” But here, the tenant is not just renting walls and a roof—they’re renting a
functional factory setup. The building, machines, and furniture are inseparable in this deal.
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The law recognizes this and says: “This is not just rent of property; it’s rent of a business-like
setup. So, we’ll tax it under Other Sources.”
Why Allow Repairs, Insurance, and Depreciation?
Think of it this way:
• If Mr. X earns ₹6,00,000 but spends money to keep the building and furniture in
usable condition, it’s unfair to tax him on the full amount.
• Repairs and insurance are necessary to maintain the asset.
• Depreciation acknowledges that assets lose value over time.
So, the law allows these deductions to ensure that only the real income—the profit after
expenses—is taxed.
The Broader Concept of “Composite Letting”
This case is a classic example of composite letting. Let’s break it down with a few scenarios:
Scenario
Tax Head
Only building let out
Income from House Property
Only machinery/furniture let out
Income from Other Sources
Building + machinery/furniture let out together
Income from Other Sources (unless
business)
Building + machinery let out separately
(independent contracts)
Building = House Property; Machinery
= Other Sources
Mr. X’s case falls in the third category.
Practical Analogy
Imagine you rent a furnished apartment. You’re not just paying for the walls—you’re paying
for the sofa, the fridge, the washing machine, and the convenience of a ready-to-use home.
That’s why the law treats it differently from renting an empty house.
Similarly, Mr. X’s tenant is paying for a ready-to-use factory.
Examiner-Friendly Insights
To make the answer shine in an exam, it’s not enough to just compute. You need to show
understanding. Here are some points that make the answer stand out:
• Quote the principle: “Composite letting of building with machinery, plant, or
furniture is taxable under Income from Other Sources.”
• Show the computation clearly in tabular form.
• Add reasoning for why deductions are allowed.
• End with a crisp conclusion.
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Final Answer (Narrative Style)
Mr. X’s story is a perfect illustration of how the Income Tax Act balances fairness with logic.
He earns ₹6,00,000 by letting out his factory setup. But since this is a composite letting, the
income is taxed under Income from Other Sources.
After deducting genuine expenses—repairs, insurance, and depreciation—the taxable
income comes to ₹5,59,000.
Thus, the law ensures that Mr. X pays tax not on his gross receipts, but on his true income.
Conclusion
The provisions relating to composite letting are like the referee in a game: they ensure fair
play. If you rent out just a building, it’s one thing. If you rent out a whole setup—building,
machines, furniture—it’s another.
By allowing deductions for repairs, insurance, and depreciation, the law acknowledges the
reality of business: assets need care, and income should be measured after expenses.
So, the story of Mr. X’s factory in Mumbai is not just about numbers—it’s about how tax law
adapts to real-life situations, ensuring justice and clarity.
SECTION-D
7. Write short notes on:
(a) Deduction under Section 80RRB in respect of royalty from patents.
(b) Deduction under Section 80GGB and Section 80GGC in respect of contribution to political
parties.
Ans: Imagine a small inventor named Arjun. Arjun has spent years in his garage creating a
revolutionary gadget. After months of trial and error, he finally patents his invention. Thanks
to this patent, a company approaches him and offers to pay him royalties for using his
technology. Arjun is thrilled—not only does he earn money, but he also contributes to the
advancement of technology. Now, when tax season comes, Arjun wonders: “Can I save on
my taxes because of my hard-earned invention?”
This is where Section 80RRB of the Income Tax Act comes into the picture.
(a) Deduction under Section 80RRB in respect of royalty from patents
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What is Section 80RRB?
Section 80RRB is like a reward system from the government for inventors like Arjun. It
allows an individual taxpayer to claim a deduction on income earned as royalty from
patents registered in India. Essentially, it encourages innovation by reducing the tax burden
on inventors who monetize their creativity.
Who is eligible?
• The taxpayer must be an individual.
• The patent must be registered in India under the Patents Act, 1970.
• The royalty must come from using or selling the patented invention.
It’s important to note that companies, firms, and other entities cannot claim this
deduction—it is exclusively for individuals.
What counts as “royalty” here?
The royalty includes any payment received for licensing the patent, or from earning from
the patented product, but it does not include any other income like salary, business profits,
or capital gains.
How much deduction can be claimed?
• The maximum deduction allowed under Section 80RRB is Rs. 3,00,000 per year.
• If Arjun earns Rs. 5,00,000 in royalties from his patent, he can deduct Rs. 3,00,000
from his taxable income, and only pay tax on Rs. 2,00,000.
Practical example:
Let’s imagine Arjun earns ₹2,50,000 from royalties. According to Section 80RRB:
• Deductible amount = ₹2,50,000 (because it is less than the maximum of ₹3,00,000)
• If Arjun’s total taxable income is ₹10,00,000, after deduction it becomes ₹7,50,000.
This is direct encouragement for inventors to keep innovating and monetizing their patents
without worrying too much about taxes.
Conditions and caveats:
• Deduction is available only to the individual who is the patentee.
• If the patent income is received after the death of the patentee, Section 80RRB is
not applicable.
• Income earned before the patent registration or from unregistered patents is also
not eligible.
In short, Section 80RRB is a win-win. Arjun gets rewarded for his hard work, and the country
benefits from more patents and innovations.
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Now, let’s switch gears and meet Priya, a socially conscious entrepreneur. Priya is deeply
involved in the democratic process and believes in supporting political parties she trusts.
During the election season, she makes financial contributions to her preferred political
party. She wonders: “Can I save some tax by supporting democracy?”
This is where Sections 80GGB and 80GGC step in.
(b) Deduction under Section 80GGB and Section 80GGC in respect of contribution to
political parties
What are Sections 80GGB and 80GGC?
Think of these as tax incentives for citizens who actively support political parties. India
recognizes that political parties need funding to function, and it also wants citizens to
participate in democracy. So, these sections allow taxpayers to claim deductions on
donations made to eligible political parties.
Section 80GGB:
• Applicable to domestic companies.
• Allows the company to deduct donations made to any political party registered
under Section 29A of the Representation of People Act, 1951.
• Deduction is allowed in full, meaning 100% of the contribution is deductible.
Example:
Suppose a company called Techno Solutions Pvt. Ltd. donates ₹50,000 to a registered
political party. If its taxable income is ₹10,00,000, the company can deduct the entire
₹50,000, reducing taxable income to ₹9,50,000.
Section 80GGC:
• Applicable to individuals and Hindu Undivided Families (HUFs).
• Individuals can claim full deduction for donations made to registered political
parties.
• Donations must be made by any mode other than cash (i.e., by cheque, digital
transfer, or online payment). Cash donations are not eligible.
Example:
Priya donates ₹20,000 to a political party through online transfer. She earns ₹12,00,000 per
year. After claiming the deduction under Section 80GGC, her taxable income becomes
₹11,80,000.
Important conditions:
1. Eligible political parties: Only parties registered under Section 29A of the
Representation of People Act, 1951 can receive tax-deductible donations.
2. Mode of payment:
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o Companies: Can donate in any mode (cash, cheque, digital).
o Individuals/HUFs: Must avoid cash; only cheque/digital transfer is allowed.
3. Timing: Deduction is claimed in the same financial year in which the donation is
made.
Bringing it all together
If we put Arjun and Priya’s stories side by side, we see a fascinating pattern:
1. Section 80RRB rewards innovation and intellectual property. It is all about creating
value through technology and patents. The government encourages people to
invent more by reducing tax on royalty income.
2. Sections 80GGB & 80GGC encourage active civic participation. They motivate both
companies and individuals to fund the political process legally, thus strengthening
democracy.
Both sets of sections are examples of how tax laws are not just about collecting revenue—
they are tools to shape society. Section 80RRB pushes India towards technological progress,
while Sections 80GGB & 80GGC encourage responsible citizen behavior.
Why examiners love such answers
If you present this explanation in an exam:
• Start with real-life examples (like Arjun and Priya).
• Highlight eligibility criteria, limits, and conditions clearly.
• Explain purpose and practical impact (why the law exists).
• Conclude with comparisons and societal benefits.
This approach makes the answer engaging, structured, and memorable, which often scores
high marks.
Key Takeaways in Simple Points
Section 80RRB
• Deduction for royalty from patents.
• Maximum Rs. 3,00,000 per year.
• Only for individuals.
• Patents must be registered in India.
Section 80GGB (Companies)
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• Donations to political parties are 100% deductible.
• Any mode of payment allowed.
Section 80GGC (Individuals/HUFs)
• Donations to political parties are 100% deductible.
• Payment must be non-cash.
In conclusion, both sections are tax incentives with a purpose. One promotes creativity and
innovation, the other encourages civic engagement. Through these laws, India rewards
those who invent, innovate, and participate in the democratic process. Arjun and Priya’s
stories make it easy to remember: work hard, innovate, contribute, and pay less tax
legally!
8. Following are the particulars of income of Mr. Ram, who is 70 years old resident in
India, for the assessment year 2020-21: Gross Total Income Rs. 8,12,000 which includes
Long-term capital gain of Rs. 2,55,000, Short-term capital gain of Rs. 88,000, Interest
income of Rs. 12,000 from Savings bank deposits with banks and Rs. 30,000 from bank FD.
Mr. Ram invested in PPF Rs. 1,40,000 and also incurred medical expenditure (no medical
insurance) Rs. 61,000. Compute the total income of Mr. Ram.
Ans: The Story of Mr. Ram’s Income and Tax Journey
In a quiet neighborhood of India lives Mr. Ram, a 70-year-old gentleman. He has lived a
disciplined life, saving diligently, investing wisely, and now enjoying the fruits of his labor.
But like every citizen, he has a duty: to compute his income and pay taxes fairly.
The Income Tax Act, like a wise old judge, looks at Mr. Ram’s earnings and says: “Tell me,
Mr. Ram, what did you earn this year? And what expenses or investments should I allow you
to deduct before I decide your taxable income?”
So, let’s walk through Mr. Ram’s financial year step by step, as though we’re narrating his
story to the examiner.
Step 1: Understanding Mr. Ram’s Income Sources
Mr. Ram’s Gross Total Income (GTI) is given as ₹8,12,000. But this figure is not just one
lump sum—it’s made up of different streams of income, each with its own rules.
Here’s the breakdown:
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• Long-Term Capital Gain (LTCG) = ₹2,55,000
• Short-Term Capital Gain (STCG) = ₹88,000
• Interest from Savings Bank = ₹12,000
• Interest from Bank FD = ₹30,000
So, his income is a mix of capital gains and interest income.
Step 2: The Special Nature of Capital Gains
Capital gains are like special guests at a party—they don’t follow the same rules as everyone
else.
• Long-Term Capital Gains (LTCG): Taxed at a special rate (usually 20% with indexation
or 10% without, depending on the asset). They are not eligible for deductions under
Chapter VI-A (like PPF or medical expenses).
• Short-Term Capital Gains (STCG): If they arise from shares covered under Section
111A, they are taxed at 15%. Like LTCG, they are also not reduced by deductions
under Chapter VI-A.
This means: while Mr. Ram can claim deductions for his interest income, his capital gains
will remain untouched by those deductions.
Step 3: Normal Income vs. Special Income
Let’s separate Mr. Ram’s income into two baskets:
Type of Income
Amount
(₹)
Treatment
Normal Income (Interest from
savings + FD)
42,000
Eligible for deductions
Special Income (LTCG + STCG)
3,43,000
Taxed at special rates, no deductions
allowed
So, out of ₹8,12,000, only ₹42,000 is “normal income” that can be reduced by deductions.
Step 4: Deductions Available to Mr. Ram
Now comes the part where the law shows its compassionate side. Mr. Ram, being a senior
citizen, gets certain benefits. Let’s see what deductions he can claim.
Deduction under Section 80C (Investments)
Mr. Ram invested ₹1,40,000 in PPF.
• Maximum limit under 80C = ₹1,50,000.
• So, full ₹1,40,000 is allowed.
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Deduction under Section 80D (Medical Expenditure)
Mr. Ram is 70 years old, so he qualifies as a senior citizen.
• For senior citizens, if no medical insurance is taken, actual medical expenditure up to
₹50,000 is allowed.
• He spent ₹61,000, but deduction is capped at ₹50,000.
Deduction under Section 80TTA/80TTB (Interest on Savings)
• For senior citizens, Section 80TTB applies.
• It allows deduction up to ₹50,000 on interest from savings and fixed deposits.
• Mr. Ram’s total interest = ₹42,000 (12,000 + 30,000).
• Since it is less than ₹50,000, the entire ₹42,000 is deductible.
Step 5: Applying Deductions
Now, let’s apply these deductions to Mr. Ram’s normal income.
• Normal income = ₹42,000
• Less: 80C (PPF) = ₹1,40,000
• Less: 80D (Medical) = ₹50,000
• Less: 80TTB (Interest) = ₹42,000
But wait—deductions cannot exceed the income they apply to. Since Mr. Ram’s normal
income is only ₹42,000, the maximum deduction he can actually use is ₹42,000.
This means his normal income becomes NIL after deductions.
Step 6: Adding Back Special Income
Now, we bring back the special guests—capital gains.
• LTCG = ₹2,55,000
• STCG = ₹88,000
Since deductions don’t apply to these, they remain fully taxable.
So, Mr. Ram’s Total Income = 2,55,000 + 88,000 = ₹3,43,000.
Step 7: Tax Computation (for completeness)
Although the question only asks for total income, let’s also peek at how tax would be
computed—it makes the answer richer and examiner-friendly.
• LTCG of ₹2,55,000:
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o Exemption: Every individual gets a basic exemption limit (₹3,00,000 for senior
citizens).
o Since his normal income is NIL, this limit can be adjusted against LTCG.
o So, out of ₹2,55,000, ₹45,000 is tax-free.
o Taxable LTCG = ₹2,10,000.
o Tax @ 20% = ₹42,000.
• STCG of ₹88,000:
o Taxed @ 15% = ₹13,200.
• Total Tax = 42,000 + 13,200 = ₹55,200 (plus cess).
The Narrative Angle
Now let’s retell this in a way that makes the examiner smile.
Mr. Ram’s financial year is like a banquet table. At the head of the table sit the capital
gains—distinguished guests who don’t like to share their food with anyone else. They eat
what they bring, untouched by deductions.
At the other end sit the humble interest incomes—small but eligible for relief. Mr. Ram tries
to feed them with his investments (PPF), his medical bills, and the special senior citizen
benefit (80TTB). But since their plate is only ₹42,000 big, they can only eat that much. The
rest of the deductions go unused.
In the end, the capital gains remain the main course. They decide Mr. Ram’s taxable income:
₹3,43,000.
Final Computation Table
Particulars
Amount (₹)
Gross Total Income
8,12,000
Less: Deductions (restricted to normal income)
42,000
Total Income
3,43,000
Conclusion
The story of Mr. Ram shows how the Income Tax Act balances compassion with discipline. It
gives him deductions for his savings, his medical expenses, and his senior citizen status—but
it also reminds him that capital gains are special and must be taxed separately.
Thus, Mr. Ram’s Total Income for AY 2020-21 = ₹3,43,000.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
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