INCOME TAX THEORY QUESTIONS & ANSWERS

       VIKAS DEGREE COLLEGE: NARASARAOPET         

                   Second B.Com Taxation Theory

1.       How do you compute Income from house property?

Annual value: According to section 23(1) of Income tax act the term annual value is the sum for which the property might reasonably be expected to let under given circumstances such as local conditions, the demand for house, municipal valuation, type and standard of constructions, rent for similar type of house in the similar type of locality etc., from the explanation it should be clearly understood that the annual value does not mean the rent derived.

The annual value of property is determined under different conditions below.

a.       House property is let out for full year and there is no vacancy or unrealized rent.

b.      House property is let out and there is a vacancy.

c.       House property is let out and there is unrealized rent.

d.      House property is let out, there is vacancy and there is unrealized rent.

Calculation of Net Annual Value:

a.       Select annual value as per above.

b.      Deduct amount of municipal taxes actually paid by the owner during the previous year.  No deduction for any amount of local or municipal taxes paid by the tenant.

2.       Write about the term ‘PERSON’ under section 2(31) of the Income Tax Act, 1961.

The term person includes the following types of assesses who are as follows:

a.       An individual who is assessed in respect of his personal income.

b.      Hindu Undivided family: A Hindu undivided family means a group of persons literally descened from a common ancestor. The head of the family is known as Karta. Karta is assessed for the income derived by the Joint Family. Of other member of the family is managing and controlling then he will be designated as manager and is liable to pay tax.

c.       Company; A company which is incorporated under the Companies Act, 1956.

d.      Firm: A partnership of two or more persons carrying on a business or profession under the Indian Partnership Act, 1932.

e.      An Association of persons or a body of individuals: For Eg., A group of persons formed for promoting a joint venture business or trustees of a trust etc.,

f.        A local authority: Eg., Municipalities, Local bodies etc.,

3.       Persons excluded from the charge of Wealth Tax.

A person by whom any tax or any other sum of money is payable under this act. Wealth tax is payable by three types of assesses.

1.       Individuals                                  2. Hindu Undivided family                            3. Companies

As per Section 45 of Wealth tax act, the following persons are excluded from the charge of wealth tax.

a.       Co-operative societies

b.      Social welfare clubs

c.       Mutual funds.

d.      Partnership firm (The share of firm of a person is taxable in the hand of partner as individual).

e.      Any political party

f.        Any company registered under section 25 of the companies act, 1956. These companies are formed for the object of promoting commerce, art, science, religion, charity or any useful object.

4.       What are the goods under Customs Act, 1962?

The customs act was passed in 1962 replacing sea Customs Act, 1878 while the customs tariff act was passed in 1975. Constitution provides that the proceeds from the customs duty are to be kept by union government only and are not to be shared between union and state governments.

                U/S 2(22) the word goods include vessels, aircrafts and vehicles, stores, baggage, currency and negotiable instruments and any other kind of movable property.

5.       What are the advantages of VAT (Value added Tax)?

Advantages:

1.       By eliminating cascading burden i.e., payment of tax on tax, the cost of goods can be reduced. This will make the traders to increase their profit.

2.       It reduces the possibility of tax evasion.

3.       VAT is a single tax and it replaces all other taxes like additional sales tax, turnover tax etc.

4.       For set-off of the tax there is no procedure to be followed.

5.       Assessment procedure is very simple because the assessee has to de self assessment.

6.       The Government can find increased revenues.

7.       In the VAT system transparency, mutual trust, simplicity and efficiency can be seen.

8.       In VAT system submission of invoice is a must for set-off of the tax paid. This will enable the tax departments to have across check on the declared sales and tax paid.

6.       What are the disadvantages of VAT (Value Added Tax)?

Disadvantages:

1.       If the benefit of tax credit is not passed on to the consumer the primary object of enrichment of VAT gets defeated.

2.       The cost of maintaining invoices and other records may be much more than the tax credit benefit and business may following the same old practice viz. Do the business, earn high profits and not to pay any taxes.

3.       Theoretically it appears attractive system but due to malpractices o businessman, Government may not have expected revenue.

4.       VAT is more suitable to manufacturing units than the trading business.

5.       The VAT benefit can be available if the turnover exceeds Rs. 40 lakhs it means this system will be benefit small traders and manufacturers.

7.       What are the different features of Service Tax.

Service tax in India is regulated and administered by the central excise commi9ssionerates who works directly under the department of revenue, ministry of finance, central board of excise and customs and the government of India.

Salient Features of Service Tax are:

a.       Service  tax essentially an indirect tax.

b.      Individuals are required to pay the service tax only once in a quarter.

c.       Companies can pay service tax per one month by the 25^th of the following month.

d.      The finance act of 2001 launched a self assessment for service tax returns so that assessee can be spared the inconvenience of regular security.

e.      Although legal penalties exist for failing to pay service tax, these penalties cannot be imposed if the assessee can prove that there was due cause for failure.

8.       Write about Assessment year.

Assessment year means the period of 12 months commencing on the 1^st day of April every year. As such it is the financial year of the Government. The income tax department has adopted same year for its assessment procedure.

The assessment year is the financial year of the government of India during which income of a person relating to the relevant previous year is assessed to tax.

9.       Write about Previous Year.

The term previous year is very important because it is the income earned during previous year which is to be assessed to tax in the assessment year. As the word previous means ‘coming before’. It can be simply said that previous year is the financial proceeding the assessment year.

Eg: For assessment year 2009-10 is the previous year should be the financial year ending on 31^st March, 2009.

For continuing business: It is the financial year proceeding the assessment year. As such for the assessment year 2009-10, the previous year for a continuing business is 2008-09 i.e., 1.4.08 to 31.3.09.For new set up business: The previous year in case of a newly started business shall be the period between commencement of business and 31^st March, next following.

10.   What are the deductions available under section 24 of Income Tax act?

Deductions from income from House Property under section 24:

a.       Self occupied house whose annul value has been taken as NIL: Only one deduction of interest on loan taken to purchase, repair, renovate or construct the house is allowed.

i.         Loan taken for repair or renovation of house: Actual interest paid or payable during the current previous year + 1/5^th of the pre construction interest or Rs. 30000 p.a. whichever is less is allowed as deduction.

ii. Loan taken for purchase (or) construction of a house: Actual interest paid (or) payable during the current previous year + 10/5^th of pre-construction interest (or) Rs. 150000 p.a., whichever is less is allowed as deduction.

b.      In case of all other house properties:

i.         Standard deduction: 30% of net annual value is allowed as deduction every year irrespective of any expenditure.

ii. Interest on loan: Loan must be taken to repair, construct, renovate or purchase the house. Actual interest paid or payable during the current previous year + 1/5^th of pre-construction interest shall be allowed as deduction is full.

11.   Explain the differences between ling term capital gain and short term capital gain.

Short term capital asset:

a.       Any asset hold for a period not exceeding 36 months is short term capital asset.

b.      In case of shares, units of UTI and mutual finds and debentures of a company which are listed in a stock exchange (or) government securities i.e., financial assets this period is only 12 months.

Long term capital asset:

a.       Any asset hold for a period exceeding 36 months.

b.      In case of financial assets, hold for more than 12 months is a long term capital asset.

Differences:

i.         Gain on transfer of short term capital asset is short term capital gain and gain on transfer of long term capital asset is long term capital gain.

ii.    Short term capital gains included in total income and taxed as scheduled rates where as flat rate 20% is charged on long term capital gain.

12.   Coverage of goods under VAT (Value Added Tax) and exempted goods from VAT.

Goods exempted from VAT:

                Capital goods

                Commercial goods

                Raw material

                Packing material and fuel.

                Other Products.

13.   What do you mean by Territorial waters?

Territorial waters means that portion of sea which adjacent to the shores of a country. On 22^nd March, 1956 president of India has issued a proclamation that territorial waters of India shall extend upto 6 natural miles from the base line. This was extended to 12 nautical miles. Later ‘Territorial waters’, continental shell, exclusive economic zone and other maritime zone act, 1976 was passed.

                ‘Exclusive economic zone’ extends to 200 nautical miles from the base line. In this zone, the coastal state has exclusive rights to explain it for economic purposes like constructing artificial islands, fishing, mineral resources and scientific research. However, other countries have right of navigation and over flight rights. Other countries can lay submarine cables and pipelines with consent of Indian Government. Such consent may be declined for protecting interest of India. Section 7 of territorial water act, 1976 gas made similar provisions and thus these provisions have been adopted in India too.

14.   Write about Importer.

U/S 2(26), in relating to any goods at anytime between their importation and the time when they are cleared for home consumption includes any owner or any person holding himself out to be the importer. Thus any person who files the bill of entry U/S 46 and pays duty there on shall be held to be the importer of the goods. Also, in case of high sea sales where by the original importer transfers the property in goods before the goods cross the customs frontiers and such buyers in high seas are required to file the bill of entry and clear the goods, such endorsees will also be treatment as importers.

15.   What are the differences between Excise duty and Customs duty?

EXCISE DUTY                                                                      CUSTOMS DUTY

1.       It is a tax on the goods manufactured or                       a. It is tax on import or import of the goods.

 produced in India.

2.       For most commodities central govt., will levy              b. It is imposed by Central govt., only and state

 duty, for few items only state governments                                    governments are not empowered to levy duty.

                      are empowered to levy tax.

3.       One of the objects of levying excise duty is either    c. One of the most important object of levying

encouraging or discouraging the consumption of            customs duty is prevention of smuggling goods.

goods with in the country.

4.       Taxable event in the case of excise duty is ‘Manu-      d. Taxable event arises when there is import of

facture or production of goods’.                                             goods into India or export of goods from India.

5.       Excise duty is charged on assessable value of              e. Customs duty is charged on the value of goods

Goods manufactured or produced.                                       Imported or exported.

6.       Excise duty is uniform throu8gh out the country.      f. Customs duty rates are also uniform.

7.       The duty is payable even if the produced goods        g. The duty is payable only when the goods are

are unsold.                                                                                     imported or exported.

16.   What is Baggage?

Baggage is an important aspect of customs. Belonging of a person who is on travel are known as ‘Baggage’. Every person going abroad or returning from abroad has to get custom clearance for his / her baggage. Baggage does not include motor cycles, fire arms and goods of a commercial nature or in commercial quantities. There is popular belief that baggage is not liable to duty.

17.   Write about ‘Foreign going vessel’ u/s 2(21) of Customs Act, 1962.

The vessel or ship which takes goods foreign countries or export goods is known as foreign going vessel. Customs act provides that stores imported by vessel may be consumed without the payment of duty, during the period such vessel is in India. This provision covers the situation of a foreign going, vessel from India. Any consumption during the period vessel is on the Indian box, is on the voyage and is back on the Indian port shall be made without the payment of duty.

18.   Write about Coastal Goods .

Coastal goods means goods transported in a vessel from one port in India to another. For example, if goods are loaded from Kakinada port and cleared at Mumbai port then such goods are called as Coastal goods. However, if goods are imported from London to be cleared in Mundra Port of Gujarat State in India and if it touches Chennai port then such goods are called as imported goods but not as coastal goods.

In Simple if goods are loaded and unloaded in India or in the journey if it touches any port in India such goods are known as coastal goods.

19.   Write in brief the treatment of interest of pre-construction period.

Interest for the period (no limit of time) prior to the completion of house is called Pre-Construction Interest. It is allowed to be deducted over a period of 5 years i.e., 1/5^th every year. No deduction after 5 years shall be allowed. In case interest is paid to a non-resident who does not pay tax in India, deduction regarding interest will not be allowed without TDS.

20.   Write any five items under section 80 C of Income Tax Act, 1961.

1.       Own contribution to provident fund.

a.       If SPF         -    Fully qualifies.

b.      If RPF         -    Fully qualifies.

c.       If PPF         -    Fully qualifies

d.      If URPF      - does not qualifies.

2.       Any amount contributed by employee towards approved super annotation fund – fully qualifies.

3.       LIC premium paid by employer or by employer to assure life of employees, his spouse or children shall quality up to actual premium paid or 20% of sum assured whichever is less is qualified.

4.       Any amount invested in NSC VIII issue fully qualifies.

5.       Any amount deposited under NS 1992 fully qualifies.

21.   Explain the term ‘factory’ under central excise Act, 1944.

U/S 2 (e) factory means any premises, including the precincts these of, wherein or in any part of which excisable goods other than salt are manufactured, or wherein or in any part of which any manufacturing process connected with production of these goods is being carried on or is ordinarily carried on.

22.   Explain the terms “Direct and Indirect taxes”.

Generally a tax is a compulsory contribution imposed by a public authority. Tax payer does not get any direct service in return for the payment, he is called upon to make by the public authority.

                Taxation is the main source of Income of the Government. Any how, various economists have made an attempt to classify the taxes from different angles taxes from different angles. Taxes can be classified on the basis of form, nature, aim and method of taxation.

                On the basis of form, taxes are classified into two types.

1. Direct taxes

2. Indirect taxes

Direct Taxes: Direct tax is really paid by a person on whom it is legally imposed. Direct tax cannot be shifted to others. In the case of direct taxes, the impact or the money burden and the incidence are on the one and the same person.

Indirect taxes: Indirect tax is imposed on one person but is paid either partly or wholly by another person. Thus, an indirect tax is conceived as one which can be shifted or passed on. In case of indirect taxes the impact and the incidence of tax are on different persons. A sales tax, a customs duty or an excise duty would be an indirect tax because its burden shifted forward by the trader or manufacturer on the consumers or buyers.

23.   What is surcharge?

Parliament can levy surcharge on any of the duties r taxes and proceeds of such surcharge shall go into consolidated fund of India. The surcharge is to be levied only if total income exceeds Rs.10, 00,000. The rate of surcharge is 10% of taxes after allowing rebate U/S 88E if any. The total amount of income exceeding Rs.10, 00,000 cannot exceed the amount payable as income tax on a total income of Rs. 10, 00,000 by more than the income that exceeds Rs. 10, 00,000.

24.   What do you mean by Single tax system?

Single tax system means one kind of tax in the country.

As the people are taxed with one type of tax, the tax payer knows his tax liability in terms of certainty. There will not be any confusion to the Government as well as the general public. Properly drawn provisions in the law and efficient administration in the tax collection can generate sufficient revenue for Government to meet its requirement. In the present socio-economic scenario existing in all the countries single tax system may not meet the growing needs of the government.

Merits:

1. The first and greatest merit of single tax is its simplicity.

2. Levy and collection of tax becomes easy job to the Government.

3. The tax payer never feels that tax is burden some.

4. The cost of collection will be minimum when compared to multiple tax system.

Demerits:

1. Single tax system is not flexible to cater to the need of Government desired revenues.

2. Increase in the rate of tax does not assure as increase in the revenue.

3. It is very expensive to collect small amount of tax.

                4. Single tax system may not be helpful in achieving social and economic objects.

     25.  What is Total income?

U/S2(45) total income means the total amount of income referred to the Sec.5 and computed in the manner laid down in this act. According to this act, the income of a person is computed in five parts and each part is known as head of income.

These heads are:

1.       Income under the head salaries.

2.       Income from house property.

3.       Income from the business of profession.

4.       Capital gains.

5.       Income from other sources.

Total of incomes computed under these heads is called gross total income and out of this deductions U/S 80 are allowed. The result figure is called total income on which rates of tax are applied.

26.      What is Return of income?

According to the IT Act 1961, all the assessee’s who have an income exceeding the basic exemption limit (i.e.Rs.1,50,000 ) shall have to submit the income tax returns while paying  the tax. This returns is in a prescribed form. The income under different heads, allowable deductions, tax liability, advance tax paid, the balance of tax payable/ paid or refund to be received etc. , are the details which the assessee has to furnish in the returns. Different assesses will have different due dates for submission of the returns. Income tax officer will verify the particulars with the evidences furnished and will finales tax liability of the assessee. If the tax paid is less than the tax paid is more than the liability a refund order will be sent to the assessee.

27.   What is Tax Deduction at Source?

The process of deducting tax before making the payment is known as “Tax deducted at source”. According to income tax act the payer of an income or revenue is having an obligation to deduct tax before making any payment and to remit the deducted amount to the income tax department with in the stipulated time. After finalizing the tax liability, the tax deducted at source is adjusted against the tax liability. If TDS is more than the tax liability, the excess will be refunded to the assessee. On the contrary if TDS is less than the tax liability, the assessee has to pay the difference amount along with interest. TDS is made in the following situations.

1.       Salary income.

2.       Income from interest on securities.

3.       Income from interest other than securities.

4.       Income from winning from lotteries and cross word puzzles.

5.       On payments to contracts.

28.   What is Advance payment of tax?

Advance payment of tax is one of the ,methods of collecting tax. This tax is in addition to the tax deducted at source. According to Sec.207 every assessee is required to pay tax during the course of earning income in the previous year and the income is assessable in the assessment year. Advance tax is computed based upon the estimated income of the assessee during the previous year and the actual income is assessed during the assessment year.

                Income earned during the previous year 2008-09 is assessable to tax during the assessment year 2009-10. But the assessee is required to pay advance tax in the previous year 2008-09.

                The estimated total income is known as “Current income”. Current income which includes all heads of incomes.

                While computing the advance tax income from agriculture is to be considered for determining the tax liability.

29.   What are Deemed assets?

The general guiding principle is that the assets which are owned and held by a person on the date of valuation are included in computing the net wealth. However in the following situations assets belonging to other persons and held by such persons on the date of valuation are to be included in the net wealth of the transferor and such assets are known as deemed assets.

1.       Asset transferred to spouse.

2.       Asset held by minor child.

3.       Asset transferred to a person or association of persons for the benefit of “Transferor” or his /her spouse.

4.       Asset transferred with revocable condition

5.       Asset transferred to daughter in law

6.       Asset transferred to a person or association of persons for the benefit of daughter in law

7.       Asset transferred by co-parcener / member of HUF to HUF.

8.       Holder of an importible estate.

9.       Share in a firm or association of persons.

10.   Building allotted by housing society.

30.   What is service Tax? Mention any 15 services which are subject to service tax.

Service means any work done in anticipation of valid consideration. Service tax means tax on service.

It is levied by an individual or a group of persons or an organization for the services rendered to their clients. It is one of the indirect taxes levied by the government. Service tax is payable by the person who is providing the service and can be collected from clients or customers.

Service tax is a tax on services. The service can be provided by a trader or professional person, while rendering the service some materials or goods and the services of skilled or unskilled labour or the service of professional personal may be used.

Services: 1. Cleaning services    2. Services given by clubs    3. Mailing services     4.  Packing services.

5.Beauty parlour services              6. Business auxiliary services         7. Franchise services     

8. Maintenance or repair services.  9. Sound recording services     10. Video tape production services

11. Outdoor caterer’s services        12. Intellectual property services     13. Recruitment agencies services

14. Survey, Map making services    15. Commercial or industrial constructive service.

16. Rail travel agent          17. Recovery agent     18. Photography      19. Life insurance   20. Cost accountant

31. What is Central Sales tax and write its objects?

                The Central sales Tax is a levy of tax on sales which are effected in course of interstate trade of commerce. The central sales tax is an indirect tax on the consumers. Actually, it is a tax on the goods. The goods are sold b the dealer or goods and purchased by the consumers. So the ultimate burden of payment of tax whether it is state sales tax or central sales tax falls on the consumer indirectly.

                Objects:

1.       To formulate principles for determining when a sale or purchase of goods takes place.

a.       In the course of inter – state trade or commerce.

b.      Outside a state and

c.       In the course of import or export.

2.       To provide for levy of sales tax.

3.       To provide for collection of sales tax.

4.       To provide for rates of sales tax.

5.       To lay down procedure for registration of dealers.

6.       To provide for imposition of penalties.

7.       To declare certain goods to be of special importance in inter state trade or commerce and specify the restrictions and conditions on state laws imposing taxes on such goods.

8.       To specify liability of companies in case of liquidation.

                                  WISH YOU ALL THE BEST