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GNDU QUESTION PAPERS 2021
BBA 6
th
SEMESTER
Paper – BBA-603 : INCOME TAX
Time Allowed: 3 Hours Maximum Marks:
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
1.Define the following with the help of suitable examples:
(a) Person
(b) Types of Assessees
2.Mr. Pawan is engaged in export business and visits Germany very frequently. From the
particulars given below, determine his residential status for P.Y. 2020-21:
Previous Year
Stay in Germany
Previous Year
Stay in Germany
2013-14
187 days
2017-18
70 days
2014-15
140 days
2018-19
225 days
2015-16
305 days
2019-20
306 days
2016-17
65 days
2020-21
283 days
3.Discuss the concept of perquisites and illustrate how they are treated for Income Tax
purposes.
4.Mr. Muskan has prepared the following P & L A/c for the year ending March 31, 2021:
Particulars (Debit Side)
Particulars
Amount (Rs.)
Salaries
8,000
Advertisements
4,000
Sundry Expenses
4,500
Interest on Capital
2,000
Fire Insurance (Rs. 1,000 relates to House Property)
3,000
Income Tax & Wealth Tax
7,000
Household Expenses
2,500
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Bad Debts
1,000
Provision for Bad Debts
500
Repairs of House Property
1,000
Municipal Taxes of House Property
3,600
Insurance Premium on Own Life
6,000
Donation to P.M. Relief Fund
2,000
Depreciation (allowable)
3,700
Net Profit
26,000
Particulars (Credit Side)
Particulars
Amount (Rs.)
Gross Profit
30,800
Rental Income (50% portion)
18,000
Dividends from UTI
4,000
Winnings from Lottery (Gross)
20,000
Interest on Tax Free Govt. Securities
2,000
Total: 74,800 = 74,800
Additional Information:
She owns a house property which is being used by her for the following purposes:
(a) 25% of the carpet area for her own business purpose
(b) 25% of the carpet area for the purpose of residence
(c) 50% of the carpet area is let out for residential purposes
Compute the business income for A.Y. 2021-22.
5.Determine the taxable Capital Gains in the following cases separately:
(a)Ms. Sehajpreet purchased a house on 1-5-1995 for Rs. 4,60,000.
She sold the house on 10-6-2017 (CII: 272) for Rs. 20 lakhs.
On 14-7-2017, she purchased another house at Chandigarh for Rs. 4 lakhs.
She did not own any other house property.
(b) Mr. Kulbir sold a plot on July 10, 2017 (CII: 272) for Rs. 6,05,000.
Cost of acquisition on June 15, 2007 (CII: 129) was Rs. 1,50,000.
Selling expenses amounted to Rs. 5,000.
On August 10, 2017, he made the following investments:
• Purchase of bonds of NHAI notified u/s 54EC for Rs. 1,00,000
• Investment of Rs. 3,50,000 in a residential house at Delhi on July 10, 2017
He does not own any other residential house.
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6.Discuss the terms ‘Capital Asset’, ‘Capital Gain’ and ‘Cost of Acquisition’.
Also discuss the procedure of computation of Capital Gains as prescribed by IT Act, 1961.
7.Explain the various provisions regarding carry forward and set off of losses as provided
by IT Act, 1961.
8.Ms Ashmeet received the following incomes during F.Y. 2020-21:
(i)Insurance commission received from LIC → Rs. 10,656
(ii)Cloth business profits → Rs. 2,75,000
(iii) Payments made during the year:
1. Deposit in National Saving Scheme, 1992 → Rs. 10,000
2. Payment to Jeevan Dhara Policy → Rs. 500 p.m.
3. Investment in units of mutual funds (ELSS u/s 80C) → Rs. 10,000
(iv) Donations given to:
• National Children Welfare Fund → Rs. 2,500
• P.M. National Relief Fund → Rs. 5,000
• Gujarat Earthquake Relief Fund → Rs. 2,000
• P.M. Students Aid Fund → Rs. 2,000
• Punjab CM Earthquake Relief Fund → Rs. 2,000
• Local Authority to promote Family Planning → Rs. 2,000
• Approved Public Charitable Trust → Rs. 10,000
• National Fund for Control of Drug Abuse → Rs. 4,000
Also, she paid Rs. 6,000 by cheque to General Insurance Corporation under Mediclaim.
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GNDU Answer PAPERS 2021
BBA 6
th
SEMESTER
Paper – BBA-603 : INCOME TAX
Time Allowed: 3 Hours Maximum Marks:
Note: Aempt Five quesons in all, selecng at least One queson from each secon. The
Fih queson may be aempted from any secon. All quesons carry equal marks.
1.Define the following with the help of suitable examples:
(a) Person
(b) Types of Assessees
Ans: 1. What is a “Person” under Income Tax?
When we hear the word person, we usually think of a human being. But in Income Tax law,
the meaning is much broader.
Definition:
A Person means any individual or entity that is capable of earning income and paying tax
under the law.
So, it is not limited to just human beings. Even organizations and groups can be treated as a
“person” for tax purposes.
Different Categories Included in “Person”
Let’s understand each type with simple examples:
(1) Individual
This is the most common type.
Meaning: A single human being.
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Example:
Ravi is a shopkeeper earning ₹5 lakh per year. He is an individual person under Income Tax.
Even minors (children) and senior citizens are included.
(2) Hindu Undivided Family (HUF)
This is a special concept in India.
Meaning: A family consisting of members descended from a common ancestor,
including their wives and unmarried daughters.
Example:
The Sharma family runs a joint business and earns income together. They can file tax as an
HUF.
HUF has its own PAN card and is taxed separately.
(3) Company
Meaning: A company registered under the Companies Act.
Example:
Reliance Industries Ltd. earns profit from its business. It is treated as a person for tax
purposes.
Companies pay corporate tax.
(4) Firm
Meaning: A partnership firm formed by two or more persons.
Example:
A & B start a business together and share profits. Their partnership is treated as a firm.
The firm is taxed separately from partners.
(5) Association of Persons (AOP)
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Meaning: A group of people who come together for a common purpose to earn income.
Example:
Three friends jointly invest in property and earn rent. They form an AOP.
Members share income but the group is taxed as a unit.
(6) Body of Individuals (BOI)
Meaning: Similar to AOP, but generally consists only of individuals (not companies or
firms).
Example:
Two individuals jointly run a business without forming a firm. This is a BOI.
(7) Local Authority
Meaning: Government-related bodies like municipalities or panchayats.
Example:
Amritsar Municipal Corporation collects taxes and earns income. It is treated as a person.
(8) Artificial Juridical Person
Meaning: Entities that are not human but are recognized by law.
Example:
Temples, universities, or trusts.
Example: A temple receiving donations is treated as a person under tax law.
Summary of “Person”
So, in simple words:
A Person = Anyone or any entity that can earn income and pay tax
It includes:
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• Human beings
• Families
• Businesses
• Organizations
• Institutions
2. Types of Assessees
Now let’s move to the second part: Types of Assessees
What is an Assessee?
Definition:
An assessee is a person who is liable to pay tax or any other amount under the Income Tax
Act.
In simple words:
If you have to pay tax or deal with tax matters, you are an assessee.
Types of Assessees (with Examples)
There are different types of assessees based on their situation. Let’s understand them one
by one:
(1) Normal Assessee
Meaning: A person who is liable to pay tax on their income.
Example:
Neha earns ₹8 lakh per year and pays income tax. She is a normal assessee.
This is the most common type.
(2) Representative Assessee
Meaning: A person who pays tax on behalf of another person.
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Example:
• A guardian filing tax for a minor child
• A trustee paying tax for a trust
Example:
Ramesh manages income for his minor son and pays tax on it. Ramesh is a representative
assessee.
(3) Deemed Assessee
Meaning: A person who is treated as an assessee by law, even if the income is not
directly theirs.
Example:
If a person dies, their legal heir becomes responsible for paying pending taxes.
Example:
After Mr. Sharma’s death, his son pays his tax dues. The son is a deemed assessee.
(4) Assessee in Default
Meaning: A person who fails to fulfill tax obligations.
Example:
If a person does not pay tax or does not deduct TDS when required.
Example:
A company fails to deduct TDS from salary. It becomes an assessee in default.
Final Understanding
Let’s connect everything in a simple story:
Imagine a world where the government wants to collect tax fairly. For this, it first defines
who can be taxed — this is called a “Person.”
A person can be:
• An individual like you or me
• A family (HUF)
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• A company
• A group or institution
Then, among these persons, anyone who is involved in paying tax becomes an “Assessee.”
And depending on their role, they can be:
• Paying their own tax
• Paying for someone else
• Responsible due to law
• Or failing to pay tax
Conclusion
To sum up:
Person is a broad term that includes all individuals and entities capable of earning
income.
Assessee is a person who is involved in paying tax or handling tax responsibilities.
Understanding these concepts is very important because they form the foundation of
Income Tax law. Once you understand who is a “person” and who is an “assessee,” the rest
of taxation becomes much easier to learn.
2.Mr. Pawan is engaged in export business and visits Germany very frequently. From the
particulars given below, determine his residential status for P.Y. 2020-21:
Previous Year
Stay in Germany
Previous Year
Stay in Germany
2013-14
187 days
2017-18
70 days
2014-15
140 days
2018-19
225 days
2015-16
305 days
2019-20
306 days
2016-17
65 days
2020-21
283 days
Ans: Step 1: What is the question really asking?
We are given details about Mr. Pawan, who frequently travels to Germany for his export
business. The question asks:
What is his residential status for the Previous Year (P.Y.) 2020–21 under Income Tax law?
In Income Tax, a person can be:
• Resident
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• Resident but Not Ordinarily Resident (RNOR)
• Non-Resident (NR)
To find this, we must carefully analyze how many days he stayed outside India (Germany)
and indirectly how many days he stayed in India.
Step 2: Basic Rules of Residential Status
To determine residential status, we apply Section 6 of the Income Tax Act.
Basic Conditions (for Resident)
An individual is considered Resident in India if any one of the following is satisfied:
1. He stays in India for 182 days or more during the relevant previous year
OR
2. He stays in India for:
o 60 days or more in the current year AND
o 365 days or more in the last 4 preceding years
Important Special Rule (Very Important for this Question)
Since Mr. Pawan is going abroad for business, the 60 days condition becomes 182 days.
So effectively, he will be treated as Resident only if he stays in India for 182 days or
more in P.Y. 2020–21.
Otherwise → Non-Resident
Step 3: Convert Stay in Germany into Stay in India
We are given days spent in Germany, but we need days spent in India.
Total days in a year = 365 days
So:
Stay in India = 365 – Stay in Germany
Let’s calculate for each year:
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Previous Year
Stay in Germany
Stay in India
2013–14
187 days
178 days
2014–15
140 days
225 days
2015–16
305 days
60 days
2016–17
65 days
300 days
2017–18
70 days
295 days
2018–19
225 days
140 days
2019–20
306 days
59 days
2020–21
283 days
82 days
Step 4: Check Residential Status for P.Y. 2020–21
Now focus on P.Y. 2020–21:
• Stay in Germany = 283 days
• Stay in India = 365 – 283 = 82 days
Apply the rule:
Required stay in India = 182 days (because he is going abroad for business)
Actual stay in India = 82 days
Does he satisfy the condition?
• 82 days < 182 days
So, he does NOT satisfy the condition
Conclusion (First Level)
Mr. Pawan is NOT a Resident
Therefore, he is a Non-Resident (NR) for P.Y. 2020–21
Step 5: Do we need to check RNOR?
No.
Why?
Because:
• RNOR applies only if the person is Resident
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• Mr. Pawan is already Non-Resident
So, no need to check further conditions.
Final Answer
Mr. Pawan is a Non-Resident (NR) for the Previous Year 2020–21.
3.Discuss the concept of perquisites and illustrate how they are treated for Income Tax
purposes.
Ans: Concept of Perquisites (Perks) in Income Tax
Imagine you are working in a company. Your employer pays you a salary, but along with
that, they may also provide extra benefits—like a company car, rent-free accommodation,
free meals, or even reimbursement of bills. These extra benefits are called perquisites.
In simple words:
Perquisites are benefits or facilities given by an employer to an employee in addition to
salary or wages.
These are part of your income, and under the Income Tax Act (India), they are generally
taxable under the head “Salaries.”
Definition (Legal Meaning)
According to the Income Tax Act, perquisites include:
• Value of rent-free accommodation
• Any benefit or amenity provided free or at concessional rate
• Any sum paid by employer on behalf of employee
• Certain employer contributions exceeding limits
So, even if you don’t receive cash, the value of the benefit you enjoy is treated as income.
Types of Perquisites
To understand better, perquisites can be divided into three main categories:
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1. Taxable Perquisites (Fully Taxable)
These are perks that are always taxable, whether given to any employee.
Examples:
• Rent-free accommodation
• Company car for personal use
• Free electricity, gas, or water
• Free domestic servants (paid by employer)
• Interest-free or concessional loans
• Payment of personal bills (like school fees, club expenses)
Example:
If your employer provides a house and its taxable value is ₹1,50,000 per year, this amount
will be added to your salary income and taxed.
2. Perquisites Taxable Only for Specified Employees
Some perks are taxable only if given to specified employees.
Who is a Specified Employee?
An employee is considered “specified” if:
• He is a director in the company, OR
• He has substantial interest in the company (20% or more ownership), OR
• His salary exceeds ₹50,000 (excluding non-monetary benefits)
Examples:
• Free or concessional education
• Free domestic servants
• Use of company-owned assets
If a normal employee gets these benefits, they may not be taxable—but if a specified
employee gets them, they become taxable.
3. Tax-Free Perquisites (Exempt Perks)
These are benefits that are not taxed at all, either fully or up to a certain limit.
Examples:
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• Medical facilities in government hospitals
• Health insurance premium paid by employer
• Refreshments in office during working hours
• Laptop or computer provided for official use
• Leave travel concession (LTC) (subject to conditions)
• Employer’s contribution to provident fund (within limits)
These are provided to support employees and are not treated as taxable income.
How Perquisites Are Valued for Tax Purposes
Now comes the most important part—how to calculate their value.
Since perquisites are not always given in cash, the government has prescribed rules for their
valuation.
1. Rent-Free Accommodation (RFA)
Value depends on:
• City population
• Salary of employee
• Whether accommodation is owned or rented
General Rule:
• 7.5% to 15% of salary (if owned by employer)
• Actual rent paid or percentage of salary (whichever is lower) (if rented)
Example:
If salary = ₹10,00,000
Value of RFA (say 10%) = ₹1,00,000 → Taxable
2. Motor Car Facility
Depends on:
• Engine capacity
• Who bears expenses
• Whether used for personal or official purposes
Example:
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• If used for both official + personal use → Fixed taxable value (e.g., ₹1,800–₹2,400 per
month + driver charges)
3. Interest-Free or Concessional Loans
• Taxable value = Difference between
Interest charged by bank (SBI rate)
Interest paid by employee
Example:
Loan interest rate = 10%
Employee pays = 4%
Difference = 6% → Taxable benefit
4. Free or Concessional Education
• Value = Cost of education in similar institution
• Exemption: Up to ₹1,000 per month per child
5. Use of Assets (like laptop, furniture)
• Laptops/computers → Not taxable
• Other assets → 10% of cost per year (or actual rent if hired)
Tax Treatment of Perquisites
Now let’s understand how perquisites are taxed in practice.
1. Added to Salary Income
All taxable perquisites are:
Added to your salary
Taxed according to your income tax slab
2. TDS (Tax Deducted at Source)
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Employer calculates:
• Salary + Perquisites
• Deducts tax (TDS) accordingly
So, you usually don’t need to pay separately—it’s already deducted.
3. Monetary vs Non-Monetary Perquisites
Monetary Perquisites:
• Paid in cash (e.g., reimbursement of bills)
• Fully taxable
Non-Monetary Perquisites:
• Provided in kind (car, house, etc.)
• Taxable based on valuation rules
Sometimes, employer may choose to pay tax on non-monetary perks (called tax paid by
employer).
4. Perquisites in Form 16
All perquisites are clearly shown in:
Form 16 (Part B)
This helps employees understand:
• Total taxable income
• Value of perks
Illustration
Let’s take a practical example:
Mr. A’s Salary Details:
• Basic Salary = ₹6,00,000
• Rent-free accommodation = ₹1,00,000
• Car facility = ₹30,000
• Medical insurance = ₹20,000 (exempt)
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Taxable Income:
• Salary = ₹6,00,000
• Perquisites = ₹1,30,000
• Total = ₹7,30,000
Medical insurance is not included (exempt)
Why Perquisites Are Taxed
The government taxes perquisites because:
• They are economic benefits
• Employees enjoy them just like salary
• Without taxation, people could avoid tax by receiving benefits instead of salary
So, taxation ensures fairness and equality.
Important Points to Remember
• Perquisites are part of salary income
• Some are fully taxable, some partially taxable, and some exempt
• Valuation rules are prescribed under Income Tax Rules
• Employer usually deducts tax through TDS
• Always check Form 16 for correct reporting
Conclusion
Perquisites may look like small extra benefits, but in the eyes of income tax, they are an
important part of your earnings. Whether it is a company car, free house, or paid bills—
these perks increase your overall income and are taxed accordingly.
Understanding perquisites is essential because:
• It helps you calculate your real income
• It avoids tax mistakes or penalties
• It helps in better tax planning
In simple terms:
Salary is what you earn in cash, and perquisites are the hidden benefits you enjoy—but
both are important for taxation.
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4.Mr. Muskan has prepared the following P & L A/c for the year ending March 31, 2021:
Particulars (Debit Side)
Particulars
Amount (Rs.)
Salaries
8,000
Advertisements
4,000
Sundry Expenses
4,500
Interest on Capital
2,000
Fire Insurance (Rs. 1,000 relates to House Property)
3,000
Income Tax & Wealth Tax
7,000
Household Expenses
2,500
Bad Debts
1,000
Provision for Bad Debts
500
Repairs of House Property
1,000
Municipal Taxes of House Property
3,600
Insurance Premium on Own Life
6,000
Donation to P.M. Relief Fund
2,000
Depreciation (allowable)
3,700
Net Profit
26,000
Particulars (Credit Side)
Particulars
Amount (Rs.)
Gross Profit
30,800
Rental Income (50% portion)
18,000
Dividends from UTI
4,000
Winnings from Lottery (Gross)
20,000
Interest on Tax Free Govt. Securities
2,000
Total: 74,800 = 74,800
Additional Information:
She owns a house property which is being used by her for the following purposes:
(a) 25% of the carpet area for her own business purpose
(b) 25% of the carpet area for the purpose of residence
(c) 50% of the carpet area is let out for residential purposes
Compute the business income for A.Y. 2021-22.
Ans: Step 1: Understand the Objective
We are asked to compute Business Income of Mr. Muskan for A.Y. 2021–22.
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Important point:
The given Net Profit (₹26,000) is as per books, but for income tax purposes, we must:
✔ Add disallowed expenses
✔ Subtract non-business incomes
✔ Adjust allowed expenses properly
Step 2: Start with Net Profit
Net Profit as per P&L A/c = ₹26,000
Now we will adjust this figure.
Step 3: Add Back Disallowed Expenses
These are expenses debited in P&L but not allowed under Income Tax Act.
Let’s analyze each item carefully:
1. Interest on Capital (₹2,000)
Not allowed (personal appropriation of profit)
Add back = ₹2,000
2. Fire Insurance (₹3,000)
Out of this, ₹1,000 relates to house property
Not business expense
Add back = ₹1,000
3. Income Tax & Wealth Tax (₹7,000)
Never allowed as deduction
Add back = ₹7,000
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4. Household Expenses (₹2,500)
Personal expense
Add back = ₹2,500
5. Provision for Bad Debts (₹500)
Provision is not allowed (only actual bad debts allowed)
Add back = ₹500
6. Repairs of House Property (₹1,000)
Related to house property, not business
Add back = ₹1,000
7. Municipal Taxes of House Property (₹3,600)
Not business expense
Add back = ₹3,600
8. Insurance Premium on Own Life (₹6,000)
Personal expense
Add back = ₹6,000
9. Donation to PM Relief Fund (₹2,000)
Not allowed under business (deduction under Sec 80G separately)
Add back = ₹2,000
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Total Disallowed Additions
= 2,000
• 1,000
• 7,000
• 2,500
• 500
• 1,000
• 3,600
• 6,000
• 2,000
Total = ₹25,600
Step 4: Subtract Non-Business Incomes
These incomes are credited in P&L but do not belong to business income.
1. Rental Income (₹18,000)
Belongs to House Property Income
Less = ₹18,000
2. Dividends from UTI (₹4,000)
Taxable under Other Sources
Less = ₹4,000
3. Winnings from Lottery (₹20,000)
Taxable under Other Sources (special rate)
Less = ₹20,000
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4. Interest on Tax-Free Govt. Securities (₹2,000)
Exempt income
Less = ₹2,000
Total Deductions
= 18,000
• 4,000
• 20,000
• 2,000
Total = ₹44,000
Step 5: Special Adjustment for House Property Expenses
Now comes the most important conceptual part.
The house property is used as:
• 25% → Business
• 25% → Residence
• 50% → Let out
Only 25% (business use) expenses are allowed in business.
(a) Fire Insurance Adjustment
Total relating to house property = ₹1,000
Business portion = 25%
Allowed = ₹250
Already added full ₹1,000 earlier
So now:
Deduct allowed portion = ₹250
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(b) Repairs (₹1,000)
Business portion = 25%
Allowed = ₹250
(c) Municipal Taxes (₹3,600)
Business portion = 25%
Allowed = ₹900
Total Allowed Back
= 250 + 250 + 900
= ₹1,400
Step 6: Compute Final Business Income
Now apply formula:
Computation
Net Profit (P&L) = ₹26,000
Add: Disallowed Expenses = ₹25,600
Subtotal = ₹51,600
Less: Non-Business Income = ₹44,000
Subtotal = ₹7,600
Add: Allowed House Property Business Portion = ₹1,400
Final Business Income = ₹9,000
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Final Answer
Income from Business/Profession = ₹9,000
Explanation in Simple Words
Think of it like this:
• The P&L account includes everything (business + personal + other incomes)
• But Income Tax wants only pure business income
So we:
✔ Added back all wrong or personal expenses
✔ Removed all non-business incomes
✔ Allowed only correct business portion of mixed expenses
Conclusion
This question tests your understanding of:
• Difference between accounting profit vs taxable profit
• Proper classification of incomes
• Treatment of mixed-use assets (like house property)
Final takeaway:
Tax law only considers business-related items—everything else must be adjusted.
5.Determine the taxable Capital Gains in the following cases separately:
(a)Ms. Sehajpreet purchased a house on 1-5-1995 for Rs. 4,60,000.
She sold the house on 10-6-2017 (CII: 272) for Rs. 20 lakhs.
On 14-7-2017, she purchased another house at Chandigarh for Rs. 4 lakhs.
She did not own any other house property.
(b) Mr. Kulbir sold a plot on July 10, 2017 (CII: 272) for Rs. 6,05,000.
Cost of acquisition on June 15, 2007 (CII: 129) was Rs. 1,50,000.
Selling expenses amounted to Rs. 5,000.
On August 10, 2017, he made the following investments:
• Purchase of bonds of NHAI notified u/s 54EC for Rs. 1,00,000
• Investment of Rs. 3,50,000 in a residential house at Delhi on July 10, 2017
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He does not own any other residential house.
Ans: Basic Concept Before Solving
Whenever a capital asset is sold, we calculate:
Capital Gain = Sale Price – (Indexed Cost + Expenses on Transfer)
If the asset is held for more than 24 months (in case of house property/land), it is a Long-
Term Capital Asset, and indexation benefit is allowed.
Formula for Indexed Cost:
Indexed Cost = (Cost of Acquisition × CII of year of sale) / CII of year of purchase
CASE (a): Ms. Sehajpreet
Given Data
• Purchase Date: 1-5-1995
• Cost of Purchase = ₹4,60,000
• Sale Date: 10-6-2017
• Sale Price = ₹20,00,000
• CII (2017-18) = 272
• CII (1995-96) = 281 (Note: As per Income Tax rules, base year is 2001 now, but since
this question uses old CII, we follow given format)
• New House Purchased = ₹4,00,000
• She owns no other house
Step 1: Calculate Indexed Cost of Acquisition
𝐼𝑛𝑑𝑒𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 =
4,60,000 × 272
281
= 4,60,000 × 0.968 ≈ ₹4,45,280
Step 2: Calculate Long-Term Capital Gain (LTCG)
𝐿𝑇𝐶𝐺 = 𝑆𝑎𝑙𝑒𝑃𝑟𝑖𝑐𝑒–𝐼𝑛𝑑𝑒𝑥𝑒𝑑𝐶𝑜𝑠𝑡
= 20,00,000–4,45,280 = ₹15,54,720
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Step 3: Exemption under Section 54
Section 54 applies because:
• Asset sold = Residential House
• New house purchased within time
• Assessee owns only one house
Exemption = Lower of:
• Capital Gain = ₹15,54,720
• Investment in new house = ₹4,00,000
So,
𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛 = ₹4,00,000
Step 4: Taxable Capital Gain
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐿𝑇𝐶𝐺 = 15,54,720–4,00,000 = ₹11,54,720
Final Answer (a):
Taxable Long-Term Capital Gain = ₹11,54,720
CASE (b): Mr. Kulbir
Given Data
• Sale Price = ₹6,05,000
• Sale Date: 10-7-2017 (CII = 272)
• Purchase Cost = ₹1,50,000
• Purchase Date: 15-6-2007 (CII = 129)
• Selling Expenses = ₹5,000
Investments:
• NHAI Bonds (Sec 54EC) = ₹1,00,000
• Residential House = ₹3,50,000
• He owns no other house
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Step 1: Indexed Cost of Acquisition
𝐼𝑛𝑑𝑒𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 =
1,50,000 × 272
129
= 1,50,000 × 2.108 ≈ ₹3,16,200
Step 2: Calculate LTCG
𝐿𝑇𝐶𝐺 = 𝑆𝑎𝑙𝑒𝑃𝑟𝑖𝑐𝑒–𝐼𝑛𝑑𝑒𝑥𝑒𝑑𝐶𝑜𝑠𝑡–𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠
= 6,05,000–3,16,200–5,000
= ₹2,83,800
Step 3: Exemption under Section 54F
Section 54F applies because:
• Asset sold = Plot (not residential house)
• Investment made in residential house
• Assessee owns only one house
Formula:
𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛 = 𝐿𝑇𝐶𝐺 ×
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛
Net Sale Consideration:
= 𝑆𝑎𝑙𝑒𝑃𝑟𝑖𝑐𝑒–𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 6,05,000–5,000 = ₹6,00,000
Calculate Exemption:
𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛 = 2,83,800 ×
3,50,000
6,00,000
= 2,83,800 × 0.5833 ≈ ₹1,65,550
Step 4: Exemption under Section 54EC
• Investment in NHAI Bonds = ₹1,00,000
• Allowed up to ₹50 lakh (so fully eligible)
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Exemption = ₹1,00,000
Step 5: Total Exemption
𝑇𝑜𝑡𝑎𝑙 𝐸𝑥𝑒𝑚𝑝𝑡𝑖𝑜𝑛 = 1,65,550 + 1,00,000 = ₹2,65,550
Step 6: Taxable Capital Gain
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐿𝑇𝐶𝐺 = 2,83,800–2,65,550 = ₹18,250
Final Answer (b):
Taxable Long-Term Capital Gain = ₹18,250
Important Notes
1. Always check type of asset
o House → Section 54
o Other asset → Section 54F
2. Indexation is compulsory for long-term assets
3. Section 54F formula is proportional, not full exemption
4. Section 54EC is direct deduction (no proportion)
5. Always deduct transfer expenses first
Final Summary
Case
Capital Gain
Exemption
Taxable Gain
(a) Ms. Sehajpreet
₹15,54,720
₹4,00,000
₹11,54,720
(b) Mr. Kulbir
₹2,83,800
₹2,65,550
₹18,250
Conclusion
This question tests your understanding of:
• Indexation
• Section 54 vs 54F
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• Section 54EC
• Correct sequence of deductions
If you follow the steps carefully—calculate gain → apply correct section → compute
exemption → subtract—you can easily solve even complex capital gain problems.
6.Discuss the terms ‘Capital Asset’, ‘Capital Gain’ and ‘Cost of Acquisition’.
Also discuss the procedure of computation of Capital Gains as prescribed by IT Act, 1961.
Ans: Introduction
In everyday life, people buy property, shares, gold, or other valuable items not only for use
but also as an investment. When such assets are sold at a profit, that profit is called a
capital gain, and it is taxable under the head “Capital Gains” in the Income Tax Act, 1961.
To understand this concept properly, we must first clearly understand three key terms:
• Capital Asset
• Capital Gain
• Cost of Acquisition
1. Meaning of Capital Asset
A Capital Asset means any property of any kind held by a person, whether or not it is
connected with business or profession.
In simple words:
Anything valuable that you own can be a capital asset.
Examples of Capital Assets
• Land and buildings
• House property
• Shares and securities
• Mutual funds
• Gold, jewellery
• Vehicles (if held for investment)
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Assets NOT Considered Capital Assets
The Income Tax Act excludes certain items:
• Stock-in-trade (goods used in business)
• Personal effects (like clothes, furniture for personal use)
• Agricultural land in rural areas
• Certain government bonds (as specified)
Important Note:
Jewellery, archaeological collections, paintings, and sculptures are NOT treated as personal
effects, so they are taxable capital assets.
Types of Capital Assets
Capital assets are classified into:
1. Short-Term Capital Asset (STCA)
• Held for not more than 36 months
• For shares and securities → 12 months
2. Long-Term Capital Asset (LTCA)
• Held for more than 36 months
• For listed shares → more than 12 months
2. Meaning of Capital Gain
A Capital Gain is the profit or gain arising from the transfer of a capital asset.
In simple words:
If you sell an asset for more than its purchase price, the profit is called capital gain.
Formula for Capital Gain
Capital Gain = Sale Price – (Cost of Acquisition + Expenses on Transfer + Cost of
Improvement)
Types of Capital Gains
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1. Short-Term Capital Gain (STCG)
• Gain from sale of short-term asset
• Taxed at normal slab rates (or special rates for shares)
2. Long-Term Capital Gain (LTCG)
• Gain from long-term asset
• Taxed at concessional rates (e.g., 20% with indexation)
Example
• Purchase price of land = ₹5,00,000
• Sale price = ₹8,00,000
Capital Gain = ₹3,00,000
3. Meaning of Cost of Acquisition
Cost of Acquisition means the price at which the asset was originally purchased.
It is the most important element in calculating capital gains.
Includes
• Purchase price
• Stamp duty and registration charges
• Brokerage or commission
Special Situations
1. Inherited Property
• Cost = Cost to previous owner
2. Gifted Asset
• Cost = Cost of previous owner
3. Bonus Shares
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• Cost = Nil
4. Right Shares
• Cost = Amount actually paid
Indexed Cost of Acquisition (for LTCG)
For long-term assets, cost is adjusted using indexation to account for inflation.
Formula:
Indexed Cost =
(Cost of Acquisition × Cost Inflation Index of year of sale) ÷ CII of year of purchase
This reduces taxable gains.
4. Procedure for Computation of Capital Gains
Now let’s understand the step-by-step procedure prescribed by the Income Tax Act, 1961.
Step 1: Determine Full Value of Consideration
This is the sale price received or receivable.
Example:
If you sell property for ₹10,00,000 → this is your full value.
Step 2: Deduct Expenses on Transfer
These are expenses incurred for selling the asset:
• Brokerage
• Legal charges
• Advertisement expenses
Example: ₹50,000 brokerage
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Step 3: Deduct Cost of Acquisition
• For STCG → Actual cost
• For LTCG → Indexed cost
Step 4: Deduct Cost of Improvement
Expenses incurred to improve the asset:
• Renovation of house
• Construction
• Major repairs
Indexed for long-term assets
Step 5: Calculate Capital Gain
Formula:
Capital Gain =
Full Value of Consideration
– Expenses on Transfer
– Cost of Acquisition
– Cost of Improvement
Step 6: Apply Exemptions (if any)
Certain exemptions are allowed under sections:
• Section 54 (sale of house → purchase of another house)
• Section 54F (investment in residential property)
• Section 54EC (investment in bonds)
These reduce taxable capital gain.
5. Comprehensive Illustration
Let’s understand with a full example:
Case:
• Sale price of house = ₹20,00,000
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• Purchase price = ₹8,00,000
• CII (Purchase year) = 200
• CII (Sale year) = 300
• Brokerage = ₹50,000
• Improvement cost = ₹2,00,000
Step 1: Indexed Cost of Acquisition
= (8,00,000 × 300) ÷ 200
= ₹12,00,000
Step 2: Indexed Cost of Improvement
= (2,00,000 × 300) ÷ 200
= ₹3,00,000
Step 3: Compute Capital Gain
Sale Price = ₹20,00,000
Less: Brokerage = ₹50,000
Less: Indexed Cost = ₹12,00,000
Less: Improvement = ₹3,00,000
Capital Gain = ₹4,50,000
Conclusion
The concepts of Capital Asset, Capital Gain, and Cost of Acquisition form the backbone of
taxation under the head “Capital Gains.” Whenever a person transfers an asset, the law
ensures that any profit earned is properly calculated and taxed.
Understanding these concepts helps students and taxpayers:
• Accurately calculate taxable income
• Take advantage of exemptions
• Avoid legal mistakes
In simple words:
Capital asset is what you own, capital gain is what you earn from selling it, and cost of
acquisition is what you originally paid for it.
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By following the correct procedure given in the Income Tax Act, 1961, one can easily
compute capital gains in a logical and error-free manner.
7.Explain the various provisions regarding carry forward and set off of losses as provided
by IT Act, 1961.
Ans: Carry Forward and Set Off of Losses (Income Tax Act, 1961)
In real life, income is not always positive—sometimes a person or business may incur losses.
The Income Tax Act recognizes this situation and provides relief by allowing taxpayers to
adjust (set off) losses against income, either in the same year or in future years.
In simple words:
“Set off” means adjusting losses against income, and “carry forward” means taking
unadjusted losses to future years.
Types of Set Off of Losses
The Act provides two types of set-off:
1. Intra-Head Adjustment (Section 70)
This means:
Loss from one source can be adjusted against income from another source within the
same head of income.
Example:
• Loss from one business can be adjusted against profit from another business.
Important Point:
• Exception: Loss from speculative business cannot be set off against normal business
income.
2. Inter-Head Adjustment (Section 71)
If loss cannot be fully adjusted within the same head, it can be adjusted against income
under another head.
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Example:
• Business loss can be set off against salary or income from house property.
Restrictions:
• Business loss cannot be set off against salary income
• Capital loss cannot be set off against other heads (only against capital gains)
Carry Forward of Losses
If losses cannot be fully set off in the same year, they can be carried forward to future
years.
Conditions for Carry Forward
1. Loss must be declared in the return of income
2. Return must be filed on or before the due date (Section 139(1))
3. Losses can be carried forward only for a specified number of years
Provisions for Different Types of Losses
Let’s understand each type of loss separately:
1. Loss from House Property (Section 71B)
Set Off:
• Can be set off against any head of income (up to ₹2,00,000 in a year)
Carry Forward:
• Can be carried forward for 8 assessment years
• Can be set off only against income from house property
2. Business Loss (Non-Speculative) – Section 72
Set Off:
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• Can be set off against any income except salary
Carry Forward:
• Up to 8 assessment years
• Can be set off only against business income
3. Speculative Business Loss (Section 73)
Set Off:
• Can be set off only against speculative business income
Carry Forward:
• Up to 4 assessment years
4. Capital Losses (Section 74)
Capital losses are divided into:
(a) Short-Term Capital Loss (STCL)
• Can be set off against both STCG and LTCG
(b) Long-Term Capital Loss (LTCL)
• Can be set off only against LTCG
Carry Forward:
• Both STCL and LTCL can be carried forward for 8 assessment years
5. Loss from Owning and Maintaining Race Horses (Section 74A)
Set Off:
• Only against income from the same activity
Carry Forward:
• Up to 4 assessment years
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6. Unabsorbed Depreciation (Section 32(2))
This is a special type of loss.
Set Off:
• Can be set off against any head of income (except salary in some cases)
Carry Forward:
• Can be carried forward indefinitely (no time limit)
This is more flexible compared to other losses.
Order of Set Off
The Income Tax Act follows a specific order:
1. Current year depreciation
2. Current year business loss
3. Brought forward business loss
4. Unabsorbed depreciation
This order must be strictly followed.
Important Restrictions
1. Loss from illegal activities is not allowed
2. Losses must be genuine and properly documented
3. Carry forward is allowed only if return is filed on time (except house property loss)
4. Certain losses can be set off only against specific types of income
Illustration
Let’s take an example:
Mr. X has:
• Business Loss = ₹1,50,000
• Salary Income = ₹4,00,000
• Capital Gain = ₹50,000
Treatment:
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• Business loss cannot be set off against salary
• It can be set off against capital gain → ₹50,000 adjusted
• Remaining ₹1,00,000 → carried forward for 8 years
Why These Provisions Exist
These rules help taxpayers by:
• Reducing tax burden during bad financial periods
• Encouraging business activities
• Providing fairness in taxation
Without these provisions, a person would pay tax even after suffering losses.
Conclusion
The provisions of carry forward and set off of losses under the Income Tax Act, 1961
provide an important relief mechanism to taxpayers. They ensure that taxation is based on
real income over a period of time, not just a single year.
To summarize:
• Losses can be adjusted within the same head or across heads (with restrictions)
• Unadjusted losses can be carried forward for future years
• Each type of loss has specific rules and time limits
• Filing return on time is crucial for availing this benefit
In simple terms:
The law allows you to “balance your bad years with your good years,” ensuring fair
taxation.
8.Ms Ashmeet received the following incomes during F.Y. 2020-21:
(i)Insurance commission received from LIC → Rs. 10,656
(ii)Cloth business profits → Rs. 2,75,000
(iii) Payments made during the year:
4. Deposit in National Saving Scheme, 1992 → Rs. 10,000
5. Payment to Jeevan Dhara Policy → Rs. 500 p.m.
6. Investment in units of mutual funds (ELSS u/s 80C) → Rs. 10,000
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(iv) Donations given to:
• National Children Welfare Fund → Rs. 2,500
• P.M. National Relief Fund → Rs. 5,000
• Gujarat Earthquake Relief Fund → Rs. 2,000
• P.M. Students Aid Fund → Rs. 2,000
• Punjab CM Earthquake Relief Fund → Rs. 2,000
• Local Authority to promote Family Planning → Rs. 2,000
• Approved Public Charitable Trust → Rs. 10,000
• National Fund for Control of Drug Abuse → Rs. 4,000
Also, she paid Rs. 6,000 by cheque to General Insurance Corporation under Mediclaim.
Ans: Step 1: Understand the Question
We are required to compute the Total Income of Ms. Ashmeet for F.Y. 2020–21 (A.Y. 2021–
22) after considering:
• Income from different sources
• Deductions under Section 80C, 80D, and 80G
Step 2: Compute Gross Total Income (GTI)
Ms. Ashmeet has two sources of income:
1. Insurance Commission (Business Income)
= ₹10,656
2. Cloth Business Profit
= ₹2,75,000
Since both are business-related, they are taxed under “Profits and Gains of Business or
Profession.”
Gross Total Income (GTI)
𝐺𝑇𝐼 = 10,656 + 2,75,000 = ₹2,85,656
Step 3: Deductions under Section 80C
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Section 80C allows deduction up to ₹1,50,000, but only eligible investments are counted.
Eligible Investments:
1. Deposit in National Saving Scheme (NSS) = ₹10,000
2. Jeevan Dhara Policy = ₹500 × 12 = ₹6,000
3. ELSS Mutual Fund Investment = ₹10,000
Total Deduction under 80C:
10,000 + 6,000 + 10,000 = ₹26,000
Step 4: Deduction under Section 80D (Mediclaim)
• Payment to General Insurance Corporation = ₹6,000
• Paid by cheque → Eligible
Maximum limit (for individual) = ₹25,000
So, allowed deduction = ₹6,000
Step 5: Deduction under Section 80G (Donations)
This is the most technical part. Donations are divided into categories:
A. 100% Deduction (Without Limit)
These are fully deductible:
• P.M. National Relief Fund = ₹5,000
• National Children Welfare Fund = ₹2,500
• National Fund for Control of Drug Abuse = ₹4,000
Total = ₹11,500
B. 50% Deduction (Without Limit)
• Gujarat Earthquake Relief Fund = ₹2,000
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50% of ₹2,000 = ₹1,000
C. 100% Deduction (With Qualifying Limit)
• Local Authority for Family Planning = ₹2,000
100% allowed, but subject to limit
D. 50% Deduction (With Qualifying Limit)
• Approved Public Charitable Trust = ₹10,000
• Punjab CM Earthquake Relief Fund = ₹2,000
• P.M. Students Aid Fund = ₹2,000
Total = ₹14,000
50% = ₹7,000
Step 6: Apply Qualifying Limit (Important Step)
Qualifying limit = 10% of Adjusted GTI
Adjusted GTI Calculation
𝐺𝑇𝐼 = ₹2,85,656
Less:
• 80C = ₹26,000
• 80D = ₹6,000
𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐺𝑇𝐼 = 2,85,656 − 32,000 = ₹2,53,656
10% of Adjusted GTI
10% = ₹25,366
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Donations Subject to Limit:
• Local Authority (100%) = ₹2,000
• Remaining category = ₹14,000
Total = ₹16,000
Since ₹16,000 < ₹25,366 → Fully allowed
Final 80G Deduction:
• 100% without limit = ₹11,500
• 50% without limit = ₹1,000
• 100% with limit = ₹2,000
• 50% with limit = ₹7,000
𝑇𝑜𝑡𝑎𝑙 80𝐺 = 11,500 + 1,000 + 2,000 + 7,000 = ₹21,500
Step 7: Compute Total Deductions
Section
Amount
80C
₹26,000
80D
₹6,000
80G
₹21,500
Total
₹53,500
Step 8: Compute Total Income
𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 = 𝐺𝑇𝐼 − 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠
= 2,85,656 − 53,500 = ₹2,32,156
Final Answer
Total Income of Ms. Ashmeet = ₹2,32,156
Conclusion (Important for Exams)
This question tests three key concepts:
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1. Classification of income (business income)
2. Deductions under 80C and 80D (straightforward)
3. Section 80G (donations) – most important and tricky
Always remember:
• Check category of donation
• Apply percentage (100% / 50%)
• Apply qualifying limit (10%) carefully
“This paper has been carefully prepared for educaonal purposes. If you noce any
mistakes or have suggesons, feel free to share your feedback.”
