Unit 10 Income-tax and Corporate Tax Planning PYQ’s 7th Dec 2023 Shift 1

The correct answer is Rs. 10 lakhs

Key Points

• Section 206C(1F) of the Income Tax Act, 1961, mandates the collection of tax at source (TCS) by the seller of a motor vehicle when the value of the motor vehicle exceeds INR 10 lakhs.
•  This provision applies to any person who is responsible for selling a motor vehicle. It is important to note that the obligation to collect tax at source falls on the seller.
• The requirement to collect tax at source is triggered when the value of the motor vehicle being sold exceeds INR 10 lakhs. If the sale consideration is INR 10 lakhs or less, there is no requirement to collect tax at source under this provision.
• The tax rate applicable for the purpose of TCS under Section 206C(1F) is 1% of the sale consideration. This means that the seller is required to collect 1% of the total sale consideration from the buyer as tax.
• The tax shall be collected at the time of receipt of the sale consideration from the buyer. This implies that the seller must ensure that the tax is collected from the buyer when the payment for the motor vehicle is received.

Additional Information

• It is the responsibility of the seller to collect the tax at source and remit it to the government within the stipulated time frame.
• The seller should ensure compliance with the provisions of Section 206C(1F) to avoid any penalties or consequences for non-compliance.

The correct answer is C and E Only

Key Points

• As a general rule as per Income Tax Act in India, only income earned by or on behalf of the minor child is to be clubbed in the income of the parent whose income (excluding the minor's income) is greater.
• According to income tax laws in many jurisdictions, income earned by minor children from assets gifted to them by relatives (like the uncle in this case) is clubbed with the income of the parent whose total income is greater. Therefore, this income (Minor son's earned interest on deposits of money gifted to him by his uncle, Rs. 15,000) is likely to be clubbed with Mr. Q's income.
• Similar to option C, income earned by minor children, including winnings from lotteries, is generally clubbed with the income of the parent whose total income is greater. Therefore, this income is likely to be clubbed with Mr. Q's income.

Additional Information

• The exceptions to this rule are when the minor child earns income through manual work or any activity involving his/her skill, talent, or specialized knowledge and experience. This exception applies to option D (minor daughter's earnings from sports) so it will not be clubbed with Mr. Q's income.
• Income from a spouse (A and B) is not clubbed with the income of the other spouse unless it falls under specific conditions like spouse's income generated from assets transferred without adequate consideration which is not the case in Options A and B.

The correct answers are B, C, and E.

Key Points Deemed Dividends under the Income Tax Act, 1961:

• Payment to shareholders on reduction of capital (B): Can be considered as deemed dividend to the extent of accumulated profits which are not utilized for the benefit of the business, akin to distribution of surplus.
• Distribution of debentures to shareholders (C): May be treated as a deemed dividend as per the Income Tax Act, 1961, when distribution to shareholders represents distribution out of accumulated profits.
• Loan granted to shareholders by a closely held company (E): Is considered as deemed dividend under Section 2(22)(e) of the Income Tax Act, 1961, specifically for loans or advances given by a closely held company to its shareholders.

 Additional Information

• Payment on buy-back of shares (A): Not classified as deemed dividend for the purpose of "Income from other sources" under the Income Tax Act, 1961, as Specific provisions like Section 115QA handle buy-back of share scenarios.
• Loan granted to shareholders in the ordinary course of business (D): Generally not deemed as a dividend under the Income Tax Act, 1961, as it falls outside the purview of dividends and is considered as a regular business transaction.

Hence, the options B. Payment to shareholders on reduction of capital, C. Distribution of debentures to shareholders, and E. Loan granted to shareholders by a closely held company, are deemed to be dividends for the purpose of computing income chargeable under the head, "Income from other sources", as per the Income Tax Act, 1961.

The correct answer is 24 months

Key Points 

• Subsection (8A) of Section 139 of the Income Tax Act pertains to the provision for filing a revised return of income, commonly known as an updated return.
• This provision allows individuals to correct any errors or omissions in the original return filed for a particular assessment year.
• A revised return is a modified version of the original return filed by a taxpayer for a specific assessment year. It is filed when the taxpayer realizes that there are mistakes or important information that was not included in the original return.
• The purpose of allowing revised returns is to provide taxpayers with the opportunity to rectify any errors or omissions in their original return. This ensures that the taxpayer's income is accurately reported, which in turn helps in computing the correct tax liability.

Additional Information 

• Taxpayers can file a revised return only if they have already filed the original return within the due date specified under Section 139(1) of the Income Tax Act.
• Additionally, the revised return can be filed multiple times before the end of the relevant assessment year or before completion of the assessment, whichever is earlier.
• To file a revised return, taxpayers need to use the same form that was used for filing the original return.
• They must mention that it is a revised return and provide details of the original acknowledgment number and date of filing.
• The revised return should include all corrections and amendments to the original return.

Key Points

• Entertainment allowance is taxable for both government and private sector employees. However, only the government employees are eligible for entertainment allowance deduction.
• Under Section 16(ii) of the Income Tax Act,1961, the amount of deduction allowed to the government employee for the entertainment allowance shall be lower of the following:

• Deduction is only allowed to Central or State government employees. Non government employees, employees of local authorities or statutory corporation are not eligible for deduction.
• Illustration for calculation of deduction allowed for entertainment allowance :

Important Points

• Entertainment allowance refers to the allowance provided by employers to employees for hosting entertainment events, meals, drinks or other similar activities related to business arrangements.
• The entertainment allowance is a taxable allowance. It is added to the gross salary of the taxpayer.
• The amount actually spent towards entertainment allowance is irrelevant for claiming deduction.

Key Points 

• Under Section 54 B, Capital gain exemptions are available to those individuals who reinvest their sale proceeds from their agricultural land into a new agricultural land. The capital gain exemption is limited to the amount of capital gain or the investment made, whichever is lower. Only individuals/ HUF who are Indian residents who sell agricultural land situated in an urban area can avail the benefits.
• Section 54 of the Income Tax Act, 1961 allows exemptions to those individuals who have earned Long term Capital Gain from the sale of a residential property and such proceeds must be invested in purchasing or constructing a residential house. The amount of exemption is lower of the amount of capital gain earned or the amount invested in the new residential property.
• Under Section 54 EC of the Income Tax Act exemptions are allowed to those individuals who have earned long term capital gain from the sale of an immovable asset ( land or building). The maximum amount of exemption allowed under this section is limited to Rs. 50 lakh per year and in subsequent financial years altogether.
• Section 54 D allows exemptions to those individuals who have earned capital gain on compulsory acquisition made by the government of Land and building forming part of an industrial undertaking. The sale proceeds should be utilised to purchase or construct any other land or building within 3 years from the date of transfer. The amount of exemption is limited to the capital gain on compulsory acquisition of land or building, or the amount of investment in purchasing new land or building.

Key Points

• Section 64(1)(ii) of income tax act 1961 related to the clubbing of income explain:
• If your spouse receives any remuneration irrespective of its nomenclature, such as Salary, commission, fees or any other form and by any mode, i.e., cash or in kind from any concern in which you have substantial interest then income shall be clubbed in the hands of the taxpayer or spouse, whose income is greater (before clubbing).
• An exception to clubbing: Clubbing is not allowable if spouse possesses technical or professional qualifications in relation to any income arising to the spouse, and such income is solely attributable to the application of his/her technical or professional knowledge and experience.
• According to the given information the income of the Mr. X will be as:
  • Income from other sources                  =    Rs. 6,00,000
  • Add income of Mrs. X from salary        =    Rs. 2,40,000
  •                    Total                                        Rs. 8,40,000
  • Less    Standard Deduction of salary         Rs.   50,000
  •    Mr. X salary                                            Rs. 7,90,000
  • Now calculate Mrs. X income that will be:
  •  Income from other sources              =     Rs. 3,00,000

 Additional Information

Section 16 of the Income-tax Act, 1961 allows for deductions from your salary income, which reduces your taxable income and in turn lowers your tax burden.

Section 16 offers three types of deductions:

1. Standard Deduction (Section 16(ia)): Employees in India are eligible for a standard deduction. This deduction is either Rs. 50,000 or their total salary, whichever amount is lower. It is a flat deduction that you can deduct from your salary. It is Rs. 50,000 for a financial year, so it does not depend on the number of jobs the employee changes during the year.
2. Entertainment Allowance (Section 16(ii)): Entertainment allowance received by an employee is fully taxable and is initially included in the salary.
3. Professional Tax (Section 16(iii)): Professional tax, a levy by your state government, can be deducted from your taxable income.