Unit 10 Income-tax and Corporate Tax Planning PYQ’s 25th Dec 2021 Shift 1

The correct answer is A, B, C only

Key Points  ITR-4

• The Indian government has seven different types of income tax returns for its citizens to choose from. The ITR-4 is one of them.
• Persons with a net income of less than 50 lakhs must file Form ITR-4, which is subject to certain requirements.
• The ITR-4 Sugam is one of the income tax returns forms. It is for those taxpayers who have opted for a presumptive income scheme.
• This scheme has been outlined in Section 44AD, Section 44AE, and Section 44ADA.
• However, that if the business’s turnover exceeds ₹2 crores, the taxpayer needs to file ITR-3.

Important Points Eligibility of ITR-4:

The ITR-4 is filed by individuals or Hindu Undivided Families who are RNOR (resident other than not ordinarily resident) or a firm which is not a Limited Liability Partnership but is a resident and has an income not exceeding ₹50 lakhs for the year 2020-21.

The correct answer is A, B, C only

Key Points Business Loss Setoff:

• Taxpayers’ previous year’s business losses can be offset against the current year’s taxable revenue.
• The Income Tax Act provides for such changes in accordance with natural justice principles.
• As a result, the Income Tax Act includes provisions for company losses.

Important Points Business Losses Deductible under Income Tax:

• The loss incurred as a result of an employee’s embezzlement is allowable as a deduction in the year in which the embezzlement is discovered.
• Stock-in-trade losses caused by fire or other natural disasters, as well as employee negligence, are deductible.
• Robbery or theft losses are deductible if they occur in the course of business and are incidental to the trade.
• Losses incurred as a result of exchange rate fluctuations while remitting funds for the acquisition of raw materials are deductible.
• Losses incurred as a result of non-recovery of advances given in the course of business are deductible under the Income Tax Act if they are trading losses.
• Loss incurred as a result of a violation of contract for the delivery of goods.

Business Loss Not Allowed under Income Tax:

• Losses sustained before the business is commenced
• Losses incurred in the closing down of a business.
• Losses incurred due to damage, destruction, etc., of capital assets.
• A loss that is not incurred as a result of the assessee’s business operations.
• The loss incurred as a result of the sale of securities held as investments will be a capital loss rather than a business loss.
• Loss resulting from the forfeiture of a loan for the purchase of capital assets.
• Violation of the law is not a common occurrence in business, and an expense incurred as a result of a penalty for breaking the law is not deductible as a business loss.
• In the usual course of business, there is a trading loss owing to the loss of products in transit.

The correct answer is (A) – (IV), (B) – (III), (C) – (II), (D) – (I)

The correct match is given below:

 Important Points 

Section 35 (2AA) – Payment made to a National Laboratory or a University or an Indian Institute of Technology

If an assessee pays a sum to a National Laboratory, a University, an Indian Institute of Technology, or a specific person with the intent that the money be used for scientific research under a programme approved by the prescribed authority, he is entitled to a deduction of 150 percent of the amount paid.

Section 35 (1) (ii a) – Payment made to a company to be used for scientific research.

Any sum paid to a company to be used by it for scientific research:

Provided that such company:

•  is registered in India,
• has as its main object the scientific research and development,
•  is, for the purposes of this clause, for the time being approved by the prescribed authority in the prescribed manner, and
• fulfils such other conditions as may be prescribed;

Section 35(1) (iii) – Payment made to certain institutions for research in social sciences.

any sum paid to a research association which has as its object the undertaking of research in social science or statistical research or to a university, college or other institution to be used for research in social science or statistical research.

Provided that such association, university, college or other institution for the purposes of this clause—

• is for the time being approved, in accordance with the guidelines, in the manner and subject to such conditions as may be prescribed; and
• such association, university, college or other institution is specified as such, by notification in the Official Gazette, by the Central Government.

The correct answer is 40% the income from such business

Key Points Partly Agricultural and Partly Non-agricultural Income:

• In some cases, revenue is made up of both agricultural and non-agricultural sources.
• Such a situation happens in certain “Agro-based industries,” where agricultural output is used as a raw material and is produced by the same person (i.e., industrialist) who manufactures industrial products utilising such raw material.
• These industries (i.e., individuals) make money by selling industrial products made from locally grown agricultural raw materials.

Important Points Rule 8 – Income from Growing and Manufacturing of Tea

• According to rule 8, if a person grows and manufactures tea, their income is combined, with business income accounting for 40% and agri-income accounting for the remaining 60%.
• It will not be considered agricultural income if someone sells forest produce such as trees.

Hence, 60% income will be considered as agriculture income and rest 40% will be considered as Non-agricultural Income

The correct answer is Non Corporate assessee

Key Points 

Alternate Minimum Tax:

• The Alternative Minimum Tax (AMT) is a different tax system that compels some taxpayers to compute their tax burden twice, once under standard income tax laws and then again under the AMT regulations, and pay the highest amount.
• The AMT differs from the regular system in that it has fewer preferences and various exemptions and rates.

Important Points 

Applicability of AMT:

MT provisions are applicable to the following taxpayers:

• All non-corporate taxpayers; and
• taxpayers who have claimed deduction under:
  • Chapter VI-A under the heading
  • Deduction under Section 35AD
  • Profit linked deduction under Section 10AA

Calculation of AMT:

The correct answer Recognised Provident Fund

Key Points Provident Fund:

A provident fund​ is an investment fund that is voluntarily established by Employer and employees to serve as long term savings to support an employee’s retirement.

• Employee’s contribution:  The amount deducted from the employee’s salary at a rate of 2% – 15%.
• Employer’s contribution: Besides the usual salary payment made to the employer, an employer will also pay 2% – 15% of employee’s salary into the fund. It is also considered a part of employment welfare.

Important Points Recognised Provident Fund:

• Any establishment which is recognised by the Commissioner of Income Tax is called as recognised provident fund.
• To be recognised, an organization of 20 or more members shall invest funds as per the guidelines of PF Act, 1952, and can get an approval from the PF Commissioner of Income-tax.

Additional Information 

Statutory Provident Fund (SPF):

• This Provident Fund is managed by local governments, government organisations, railways, universities, and other institutions.
• The Insurance Funds Act of 1925 is applicable to this lawsuit.
• Employer donations may be tax-free, whereas employee contributions are taxable under Section 80c.
• The interest provided has no tax implications because it is not considered part of the income.

Unrecognised Provident Fund –

If the commissioner of income tax does not approve the provident fund scheme created by the employer and employee (as mentioned above), then such scheme is an unrecognised provident fund scheme.

Public Provident Fund (PPF) –

The Public Provident Fund (PPF) is an Indian savings and tax-savings mechanism established in 1968 by the Ministry of Finance’s National Savings Institute. The scheme’s principal goal is to encourage people to save small amounts of money by providing a safe investment with tax benefits.

The correct answer is (C), (A), (D), (B), (E)

Key Points 

Income from house property:

The rent earned from the house property that is taxed is included in the income from house property. In the event that the property is not rented out, the owner may be required to pay tax on ‘deemed rent.’

The income from house property is added/ included in a person’s (the assessee)’ gross total income only if it satisfies three essential conditions:

• The assessee is the owner of that property.
• The property must consist of house, buildings and/or land.
• The property may be used for any purpose except used by the owner for the purpose of running his business or profession.

Important Points 

Gross Annual Value:

The gross annual value of a property is the amount for which it may be expected to be rented from year to year. It’s more like a deemed rent that could have been earned if the house had been rented out. The notional rent or considered rent receivable is taxable even if the property is not rented out.

Determine the Gross Annual Value:

Step 1 – Find out reasonable expected rent of the property

Step 2 – calculate the rent actually collected or receivable After deducting unrealized rent but before deducting vacancy loss.

Step 3 – Find out which one is higher—amount computed in Step-1 or Step-2.

Step 4 – Find out loss because of vacancy

Step 5 – Step-3 minus Step-4 is Gross Annual Value

The correct answer is Both Statement I and Statement II are true.

Important Points 

Statement I : Deferred Tax Liabilities (Net) is the amount of tax on the temporary difference between the accounting income and taxable income. It arises when the accounting income is more than the taxable income.

This statement is true because

• Deferred tax is the tax effect of timing differences.
• Timing differences are the differences between taxable income and
• accounting income for a period that originate in one period and are
• capable of reversal in one or more subsequent periods
• If accounting income is greater than taxable income, then it will result in deferred tax liability.

Statement II : Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries i.e. they are neither actual liability nor actual asset.

Additional Information 

A deferred tax asset (DTA) is an item on a company’s balance sheet that represents a potential future tax benefit. This benefit arises due to temporary differences between the way a company accounts for revenue and expenses for tax purposes and how it accounts for them under its chosen accounting standards (e.g., GAAP, IFRS).

This statement is true because:

• Deferred Tax Liabilities (Net) and Deferred Tax Assets (Net) are only book entries.
• They are just temporary differences between accounting income and taxable income.
• They do not represent actual assets or liability.

The correct answer is A is not correct but R is correct

Important Points 

Assertion A : ITR – 1 can be used by an individual whose total income does not exceed Rs. 1 Crore.

• The Assertion is incorrect as the ITR-1, commonly known as the Sahaj Form, is for individuals earning up to Rs.50 lakh.
• ITR-1 is the simplest income tax return form in India.
• The income must be from salary, one house property, family pension, and other sources, which include interest from savings accounts.

Reason R : ITR – 1 cannot be used by an individual who is a director in a company.

• Reason is true as an individual who is either a director of a company or has held any unlisted equity shares at any time during the financial year cannot file ITR – 1.
• If you are a director in a company, you will need to use a different income tax return form. The income tax return form that you need to use will depend on your specific circumstances.
• The following are some of the reasons why an individual who is a director in a company cannot use ITR-1:
  • Directors are considered to be in business, and ITR-1 is not designed for businesses.
  • Directors may have income from sources other than salary, house property, family pension, and other sources.
  • Directors may have deductions that are not available to individuals who are not directors.