Unit 10 Income-tax and Corporate Tax Planning PYQ’s 3rd Sept 2024 Shift 1

The correct answer is 0.5

Key Points

• 0.5 per cent of income by way of interest received on compensation or on enhanced compensation is allowed as deduction:
  • According to the Income-tax Act, 1961, specifically under section 57(iv), 50% (or 0.5) of the income by way of interest received on compensation or on enhanced compensation is allowed as a deduction.
  • This provision aims to provide relief to taxpayers who receive interest on compensation awarded by courts or tribunals, ensuring that only half of the interest income is taxed.
  • This deduction helps to mitigate the tax burden on individuals who receive compensation for losses or damages, acknowledging that such interest income is somewhat compensatory in nature.

Additional Information

• 0.25 per cent:
  • This option is incorrect. The Income-tax Act does not provide for a 0.25% deduction on interest received on compensation or enhanced compensation.
• 0.75 per cent:
  • This is also incorrect. The law specifically allows a 50% deduction, not 75%.
• 1 per cent:
  • This is incorrect as well. The allowable deduction is set at 50% (or 0.5), not 1%.

The correct answer is C, D, B, A, E.

Key Points

• Determination whether the asset is a capital asset or not (C):
  • This is the initial step to ascertain whether the asset under consideration qualifies as a ‘capital asset’ under the Income Tax Act.
  • It is crucial because only capital assets are subject to capital gains tax.
• Determination whether the transaction is regarded as transfer or not (D):
  • After confirming the asset is a capital asset, the next step is to determine whether the transaction qualifies as a ‘transfer’.
  • Only transfers of capital assets result in capital gains or losses.
• Determination of full value of consideration (B):
  • Once the asset and transaction are verified, the full value of consideration received or accruing from the transfer needs to be determined.
  • This value forms the basis for computing capital gains.
• Deduction of indexed cost of acquisition (A):
  • In this step, the indexed cost of acquisition is deducted from the full value of consideration to compute the capital gains.
  • Indexation accounts for inflation and adjusts the cost of acquisition accordingly.
• Exemption under section 54EC in respect of investment in the long-term specified asset (E):
  • Finally, any applicable exemptions, such as those under section 54EC for investments in specified long-term assets, are considered.
  • This can reduce the taxable capital gains.

 The correct answer is A, C & D Only.

Key Points

• Transactional Net Margin Method (A):
  • This method compares the net profit margin relative to an appropriate base (e.g., sales, costs) that a taxpayer realizes from an international transaction with the net profit margins realized by comparable uncontrolled transactions.
  • It is one of the most commonly used methods for transfer pricing analysis as prescribed by the CBDT.
• Profit Split Method (C):
  • This method is used where transactions are highly integrated and it is difficult to apply traditional transactional methods.
  • It involves splitting the combined profits from the international transaction according to the relative value of each party’s contribution.
• Resale Price Method (D):
  • This method starts with the price at which a product is resold to an independent enterprise, and a resale price margin is subtracted to arrive at the Arm’s Length Price.
  • It is particularly useful in cases involving the distribution of goods purchased from related parties.

Additional Information

• The Central Board of Direct Taxes (CBDT) is responsible for formulating policies and laying down rules for the Income-tax Department in India.
• Chapter X of the Income-tax Act, 1961 deals with special provisions related to the computation of income from international transactions and specified domestic transactions to ensure that they are conducted at Arm’s Length Price.
• Other methods prescribed by the CBDT for determining the Arm’s Length Price include the Comparable Uncontrolled Price (CUP) Method and the Cost Plus Method.

 The correct answer is B, D & E Only.

Key Points

• Under section 206C of the Income-tax Act, 1961, certain sellers are required to collect tax at source (TCS) from the buyer:
  • Alcoholic liquor for human consumption: Sellers must collect TCS from buyers. This provision helps regulate the sale and taxation of alcohol, a significant revenue source for the government.
  • Timber obtained under a forest lease: TCS is applicable to timber sales under forest leases to ensure appropriate tax compliance and revenue collection from forestry products.
  • Minerals, being coal or lignite or iron ore: Sellers must collect TCS on the sale of these specific minerals, facilitating tax regulation and collection in the mining sector.

Additional Information

• Motor Vehicle of the value between ₹7,00,000 – ₹9,00,000:
  • Section 206C of the Income-tax Act specifies TCS for motor vehicles if the value exceeds ₹10,00,000.
  • Vehicles between ₹7,00,000 – ₹9,00,000 do not fall under this provision.
• Electronic items of the value between ₹10,00,000 – ₹15,00,000:
  • Electronic items are not included in Section 206C for TCS collection.
  • The provision targets specific goods and sectors like alcohol, timber, and certain minerals.

 The correct answer is ₹1,00,000.

Key Points

• As per the Income Tax Act, 1961, under section 36(1)(ix), expenditure incurred by a company for promoting family planning among its employees is deductible.
• The deduction is limited to 20% of the total expenditure in each assessment year.
• Therefore, for an expenditure of ₹5,00,000, X Ltd. can claim 20% of ₹5,00,000, which equals ₹1,00,000, as a deduction.
• The remaining expenditure can be carried forward and claimed in subsequent years.

 The correct answer is D, C, B, A, E.

Key Points

• Tax on employment (D):
  • This step is generally addressed first because it relates to professional income and is directly deductible from salary income under Section 16(iii) of the Income-tax Act.
  • Tax on employment is also known as Professional Tax and serves as a mandatory deduction for salaried individuals to reduce taxable income.
• Interest on capital borrowed for purchasing a self-occupied house property (C):
  • This deduction is applicable under Section 24(b) of the Income-tax Act, allowing individuals to claim a deduction on interest paid for loans used in the purchase of a self-occupied house property.
  • This interest deduction lowers the taxable income in the computation of income from house property, and it is a preliminary step before any capital gains-related investments.
• Investment in one residential house in India for exemption from capital gains (B):
  • Under Section 54, individuals investing capital gains from a property sale into a residential property in India are eligible for exemption, thereby reducing their capital gains tax liability.
  • This step in income computation typically follows other basic deductions as it directly impacts the capital gains component of total income.
• Investment in own public provident fund (A):
  • Investment in Public Provident Fund (PPF) qualifies for deduction under Section 80C, which covers various eligible deductions from total gross income.
  • After calculating exemptions from salary and house property, the PPF investment deduction is computed to further reduce the individual’s taxable income.
• Payment of Medical insurance premium on his own life (E):
  • Section 80D allows deductions on premiums paid for medical insurance. This deduction is calculated last as it specifically targets health insurance expenses rather than broad income deductions.
  • Medical insurance deductions are crucial for individuals aiming to reduce taxable income while securing health benefits for themselves and their families.

Additional Information

• Income-tax Act Deductions Ordering Importance:
  • The order of deductions is designed to maximize tax efficiency, starting with basic deductions (like employment tax) and moving toward specific exemptions like capital gains and medical insurance premiums.
  • This sequential approach helps individuals optimize tax savings by leveraging all possible deductions and exemptions available under the Income-tax Act, 1961.

The correct answer is ‘A-III, B-IV, C-I, D-II’.

Key Points

• Contribution to Agnipath Scheme (A) matches with Section 80CCH (III).
  • Section 80CCH of the Income-tax Act, 1961 provides for deductions related to contributions made towards the Agnipath Scheme.
  • This deduction aims to encourage contributions to the scheme and thus support the welfare of the armed forces.
• Profits and gains from business of collecting and processing of bio-degradable waste (B) matches with Section 80JJA (IV).
  • Section 80JJA provides deductions on profits and gains derived from the business of collecting and processing or treating bio-degradable waste.
  • This deduction encourages businesses to engage in environmentally sustainable practices by providing tax benefits.
• Interest on deposits in case of senior citizens (C) matches with Section 80TTB (I).
  • Section 80TTB allows for deductions on interest income earned by senior citizens from deposits with banks, post offices, or cooperative societies.
  • This provision is designed to provide financial relief to senior citizens by reducing their taxable income from interest.
• Contributions given by companies to political parties (D) matches with Section 80GGB (II).
  • Section 80GGB allows for deductions on contributions made by companies to political parties or electoral trusts.
  • This deduction promotes transparency in political funding and encourages corporate participation in the democratic process.

 The correct answer is His total income exceeds 10,00,000 during that previous year.

Key Points

• His total income exceeds 10,00,000 during that previous year:
  • This condition is not required for claiming unilateral relief under section 91(1) of the Income-tax Act, 1961. The total income threshold of 10,00,000 is not a criterion for eligibility.
  • Unilateral relief is granted to avoid double taxation on the same income, but it does not specify any minimum income threshold for this purpose.

Additional Information

• He must be resident in India in that previous year:
  • This condition is required. Only residents of India are eligible to claim unilateral relief under section 91(1) to avoid double taxation on income earned abroad.
• He has earned an income during that previous year from another country and that income has accrued or arose outside India:
  • This condition is essential. The individual must have income that accrued or arose outside India to claim relief for taxes paid in the foreign country.
• He has paid income-tax in that country on the income earned in that country and no Double Taxation Avoidance Agreement (DTAA) exists between India and that country:
  • This is also a necessary condition. Unilateral relief is provided in cases where there is no DTAA between India and the foreign country, and the individual has paid tax on the foreign income in that country.

 The correct answer is 10% per annum of the actual cost.

Key Points

• The value of perquisites for movable assets owned by the employer is calculated at 10% per annum of the actual cost:
  • This rate of 10% per annum is applied to the actual cost of movable assets, such as furniture, electronics, or vehicles, provided by an employer to an employee.
  • The perquisite valuation allows tax authorities to assess the additional benefit an employee receives for using assets owned by the employer.
  • Such a calculation is essential in determining the taxable income from employment, as the asset usage constitutes a non-cash benefit subject to taxation.
  • This 10% annual rate ensures a standardized calculation, simplifying both compliance for employees and enforcement for tax authorities.

Additional Information

• Purpose of Perquisite Valuation:
  • Perquisites represent non-monetary benefits provided by employers, such as housing, company vehicles, or club memberships, which are valued for tax purposes.
  • The Income-Tax Act, 1961, specifies various rates for different types of perquisites, including the 10% per annum rate for movable assets, ensuring fair taxation of these non-cash benefits.
  • Tax regulations set forth by the Income-Tax Act, 1961, help maintain transparency and uniformity in the valuation of employee benefits, supporting equitable tax collection across income groups.