Basic Concepts – CA Inter Tax Question Bank | Taxation for CA Intermediate PDF Download

Basic Concepts – CA Inter Tax Question Bank

• Explanation of Marginal Relief under the Income-tax Act, 1961:
  • Situation 1 for Individual / HUF / AOP / BOI / AJP:
  • Marginal relief is calculated for those with total income exceeding 50 lakhs but up to 1 crore.
  • Calculation Steps:
    1. Tax on total income plus surcharge @ 10% as total income
    2. Difference between tax on total income of ₹50 lakhs and (Total Income – ₹50 lakhs)
    3. Marginal Relief = Step 1 - Step 2 (if positive)
  • Outcome: The aggregate of income tax and surcharge payable after marginal relief is the result of Step 2 only.
• Example:
  • If an individual's total income is ₹70 lakhs, the marginal relief calculation will apply.
• Situation 2 for Individual / HUF / AOP / BOI / AJP:
  • Marginal relief is computed for those with total income exceeding 100 lakhs but up to 2 crores.
  • Calculation Steps:
    1. Tax on total income plus surcharge @ 15% as total income
    2. Difference between tax on total income of ₹1 crore including surcharge 10% and (Total Income – ₹1 crore)
    3. Marginal Relief = Step 1 - Step 2 (if positive)
  • Outcome: The aggregate of income tax and surcharge payable after marginal relief is the result of Step 2 only.
• Example:
  • If an individual's total income is ₹150 lakhs, the marginal relief calculation will be applied accordingly.

Situation 3

• Tax calculation method for individuals/HUFs/AOPs/BOIs/AJPs with income over 2 crore but up to 5 crore:
• Calculate tax on total income plus 25% surcharge.
• Determine the tax on total income of ₹2 crore including a 15% surcharge. Deduct this from total income above ₹2 crores.
• Subtract the result of step 2 from step 1 to find Marginal Relief, if positive.

Situation 4

• Procedure for individuals/HUFs/AOPs/BOIs/AJPs with income exceeding 5 crore:
• Compute tax on total income plus a 37% surcharge.
• Find the tax on total income of ₹5 crore with a 25% surcharge. Subtract this from total income exceeding ₹5 crores.
• Deduct the result of step 2 from step 1 to obtain Marginal Relief, if positive.

Important Note

• Special surcharge rates for individuals/HUFs/AJPs with specific types of income.
• Elimination of enhanced surcharge rates from certain taxable incomes under the Finance Act, 2019.
• Marginal relief applicable only in specific cases outlined in situations 1 and 2.

Situation 5: Marginal Relief for Firms, LLPs, Cooperative Societies, and Local Authorities

• Tax on total income plus surcharge at 12% for total income
• Difference between tax on total income of ₹1 crore and (Total Income - ₹1 crore)
• If positive, Marginal Relief is calculated as Step 1 minus Step 2

Explanation:

For firms, LLPs, cooperative societies, and local authorities with total income surpassing ₹1 crore, the marginal relief is determined by:

• Calculating tax on the total income along with a 12% surcharge.
• Establishing the variance between the tax on ₹1 crore and the difference between the total income and ₹1 crore.
• If the result is positive, the Marginal Relief is computed by deducting Step 2 from Step 1.

It implies that the sum of income tax and surcharge payable after marginal relief is solely Step 2.

Situation 6: Marginal Relief for Companies

• Marginal relief application for companies with total income exceeding ₹1 crore

Case 1: Domestic Companies (Total Income > ₹1 crore but ≤ ₹10 crores)

• Tax on total income plus surcharge at 7% for total income up to ₹10 crores
• Difference between tax on ₹1 crore and (Total Income - ₹1 crore)
• If positive, Marginal Relief is calculated as Step 1 minus Step 2

Case 2: Domestic Companies (Total Income > ₹10 crores)

• Tax on total income plus surcharge at 12% for total income exceeding ₹10 crores
• Difference between tax on ₹10 crores (including 7% surcharge) and (Total Income - ₹10 crores)
• If positive, Marginal Relief is calculated as Step 1 minus Step 2

Explanation:

For companies with total income surpassing ₹1 crore, marginal relief is applicable. For domestic companies:

• In Case 1, with total income exceeding ₹1 crore but not surpassing ₹10 crores, the marginal relief process involves...
• In Case 2, with total income exceeding ₹10 crores, the marginal relief process involves...

Case 3 and Case 4 Foreign Company

• Calculation of Marginal relief for foreign company with total income between ₹1 crores and ₹10 crores:
  1. Tax on total income plus surcharge @ 2% for total income up to ₹10 crores
  2. [(Tax on total income of ₹1 crores) - (Total Income - ₹1 crores)]
  3. If positive, Marginal Relief = 1 - 2. The aggregate of income tax and surcharge payable after marginal relief is step 2 only.
• Calculation of Marginal relief for foreign company with total income exceeding ₹10 crores:
  1. Tax on total income plus surcharge @ 5% for total income over ₹10 crores
  2. [(Tax on total income of ₹10 crores including surcharge @2%) - (Total Income - ₹10 crores)]
  3. If positive, Marginal Relief = 1 - 2. The aggregate of income tax and surcharge payable after marginal relief is step 2 only.

Provisions of the Income-tax Act, 1961

Explanation of "Previous year" for undisclosed sources of Income

There are instances when the Assessing Officer identifies cash credits, unexplained investments, or expenditures with unsatisfactory explanations from the assessee. The Act outlines specific provisions for such cases:

• Cash Credit [Sec. 68]:
  1. If any sum is credited in the assessee's books for a previous year without a satisfactory explanation, it may be treated as the assessee's income for that year.

Key Sections of the Income Tax Act

• Unexplained Investments [Section 69]:
• Definition: This section pertains to situations where an individual makes investments not documented in their financial records.
• Consequences: If the nature and source of these undisclosed investments are not satisfactorily explained, the value of such investments is treated as the individual's income for that financial year.
• Example: If a taxpayer purchases stocks worth $10,000 outside of their recorded financial transactions and fails to provide a valid explanation for this discrepancy, the $10,000 may be considered as part of their taxable income.
• Unexplained Money, etc. [Section 69A]:
• Explanation: This section deals with scenarios where an individual is found to possess money, precious metals, jewelry, or other valuable items not accounted for in their financial records.
• Implications: Failure to provide a satisfactory explanation about the origin of these assets may lead to them being treated as the individual's income for that financial year.
• Illustration: Consider a situation where a taxpayer is in possession of undeclared jewelry valued at $5,000. If they cannot clarify how this jewelry was acquired, the $5,000 may be added to their taxable income.
• Amount of Investments, etc., not Fully Disclosed in Books of Account [Section 69B]:
• Overview: This section addresses instances where an individual's expenditures on investments or ownership of assets exceed the recorded amounts in their financial statements.
• Outcome: If the individual fails to justify the disparity in figures, the excess amount may be considered as part of their income for that financial year.
• Instance: Suppose a taxpayer spends $15,000 on undisclosed investments or assets beyond what is documented. If they are unable to provide a valid explanation for this inconsistency, the extra $5,000 may be treated as taxable income.

Unexplained Expenditure and Borrowings on Hundi

• Unexplained Expenditure [Sec. 69C]:
  • If an assessee cannot explain the source of certain expenditures or if the explanation provided is unsatisfactory, the Assessing Officer has the authority to consider such unexplained expenses as the assessee's income for that financial year.
  • This unexplained expenditure, once deemed as the assessee's income, cannot be claimed as a deduction under any category of income.
• Amount Borrowed or Repaid on Hundi [Sec. 69D]:
  • Borrowing or repaying any amount through a hundi without an account payee cheque leads to the amount being treated as the borrower's or repayer's income for that specific previous year.
  • If an amount borrowed on a hundi is considered as income, the individual will not be assessed again when repaying that amount. This repayment also includes any interest paid on the borrowed sum.

Definition of Infrastructure Capital Fund

An Infrastructure Capital Fund, as per Section 2(26B) of the Income-tax Act, 1961, refers to a fund operating under a registered trust deed. It is established by trustees to raise funds for investment purposes, such as acquiring shares or providing long-term finance to specific enterprises or undertakings.

Income Tax Act Concepts

• Undertaking wholly involved in activities specified in Section 80-IA(4).
• Undertaking wholly involved in activities specified in Section 80-IAB(1).
• Undertaking wholly involved in developing and constructing housing projects as per Section 80-IB(10).
• Undertaking wholly involved in constructing a three-star hotel as per Central Government classification.
• Undertaking wholly involved in constructing a hospital with a minimum of one hundred patient beds.

Definition of "Assessee" (Income Tax Act)

• According to section 2(7) of the Income Tax Act, "Assessee" refers to a person liable to pay tax or any other sum under the Act.
• Includes individuals under assessment for income, fringe benefits, assessable income of others, losses, or refunds.
• Also encompasses individuals deemed as assesses or assesses in default for non-compliance like TDS or advance tax.

Purpose of "PROVISO" and "EXPLANATION" in Income Tax Act

• Proviso: Added to sections to outline exceptions or modifications to the main provision. It specifies scenarios where the main provision does not apply or applies with alterations.
• Explanation: Included in sections to clarify provisions within. Typically, explanations serve to classify the nature of the provision in that section.

Infrastructure Capital Company

Infrastructure Capital Company is a specialized type of company defined under Section 2(26A) of the Income-tax Act, 1961. This type of company primarily invests in various projects and businesses that fall under specific categories outlined by the law. Here are the key criteria that define an Infrastructure Capital Company:

• An Infrastructure Capital Company engages in making investments by acquiring shares that provide long-term financial support to:
• Any enterprise or undertaking fully involved in businesses mentioned in Section 80-IA(4) or Section 80-IAB(1).
• An undertaking focused on developing and constructing housing projects as per Section 80-IB(10).
• A project aimed at building a hotel of minimum three-star category, as classified by the Central Government.
• A project intended for constructing a hospital with a minimum capacity of 100 beds for patients.

Instances of Immediate Tax Assessment

There are specific instances where the income of a previous year is subject to taxation in the same year it is earned, rather than in the subsequent assessment year. These exceptions are designed to ensure timely tax collection and protect the interests of revenue. Here are some scenarios where immediate tax assessment applies:

• When a non-resident-owned or chartered ship carries passengers, livestock, mail, or goods from an Indian port, 7.5% of the freight paid or payable is considered taxable income. This income is taxed in the year it is earned, ensuring the tax is collected promptly.

Key Provisions for Assessment under the Income-tax Act, 1961

• Where an individual is likely to leave India permanently, the income from the previous year until the expected departure date is taxable in the current assessment year.
• Assessment of income up to the date of dissolution is applicable for AOP/BOI if the officer anticipates dissolution within the current or next year.
• If an individual is suspected of disposing of assets to evade tax liability, the income from the previous year until the initiation of proceedings is taxable in the current assessment year.
• Income from the period between the end of the previous year and the discontinuation of a business or profession may be taxed in the assessment year if the Assessing Officer chooses to do so.

Explanation of Average Rate of Tax and Maximum Marginal Rate

As per Section 2(10), the "Average Rate of tax" is determined by dividing the income tax calculated on the total income by the total income itself. This provides an average percentage at which the income is taxed.

Section 2(29C) defines the "Maximum marginal rate" as the highest rate of income tax applicable to the top income bracket, including any surcharge, as specified in the Finance Act of the relevant year.

Examples:

• Average Rate of Tax: If an individual's total income is $100,000 and the income tax calculated is $20,000, then the average rate of tax would be 20% ($20,000 / $100,000).
• Maximum Marginal Rate: For an individual falling in the highest income slab specified by the Finance Act, the maximum marginal rate would be the highest applicable tax rate for that income bracket.

Question 20. Difference between Dayabaga and Mitakshara Schools of Hindu Law

• Dayabaga School of Hindu Law
  • Primarily followed in West Bengal and Assam.
  • No right or share in property is acquired by birth while the head of the family is alive.
  • Children do not inherit any share in the family property during their father's lifetime.
  • On the father's demise, children gain a share in the property.
  • Father and his brothers are considered coparceners of the Hindu Undivided Family (HUF).
• Mitakshara School of Hindu Law
  • Prevalent in the rest of India.
  • Every child born in the family automatically acquires a share in the family property.
  • Rights to family property are acquired by birth, not by succession.
  • Individuals gain rights regardless of the survival of their elders.

Question 21. Definition of India as per Income Tax Act, 1961

The term 'India' as defined in Section 2(25A) of the Income Tax Act, 1961 includes:

• The territory of India as specified in Article 1 of the Constitution.
• Territorial waters, seabed, and subsoil beneath such waters.
• Continental shelf.
• Exclusive economic zone.
• Any other specified maritime zone as per the Territorial Waters, Continental Shelf, Exclusive Economic Zone, and other Maritime Zones Act, 1976.
• The airspace above the territory and territorial waters of India.

Multiple Choice Question

Income Tax MCQs

• Question 1: What power does the Central Government hold regarding taxation according to the Constitution of India?
  • (a) 84
  • (b) 81
  • (c) 82
  • (d) 84
  • Answer: (c) 82
• Question 2: What does the term "as prescribed" signify within the Act?
  • (a) Regulations are to be framed in this respect.
  • (b) Rules have been framed in this respect.
  • (c) Regulations were earlier framed in this respect.
  • (d) Regulations are framed in this respect.
  • Answer: (b) Rules have been framed in this respect.
• Question 3: Which financial year does Part III of Schedule I of the Finance Act, 2020 pertain to in terms of advance tax rates and tax deduction for salary?
  • (a) 2017-18
  • (b) 2019-20
  • (c) 2020-21
  • (d) 2021-22
  • Answer: (c) 2020-21
• Question 4: Which section of the Income-tax Act, 1961 defines the term 'person'?
  • (a) 2(9)
  • (b) 3
  • (c) 2(31)
  • (d) 2(32)
  • Answer: (c) 2(31)
• Question 5: How does a person typically become a member of HUF?
  • (a) Contract
  • (b) Agreement
  • (c) Popularity
  • (d) Status
  • Answer: (d) Status
• Question 6: What percentage of freight paid or payable to the owner or charterer is considered as total income for non-residents in the shipping business?
  • (a) 5%
  • (b) 7.50%
  • (c) 10%
  • (d) 20%
  • Answer: (b) 7.50%
• Question 7: How is income defined according to Section 2(24)?
  • (a) Inclusive
  • (b) Exhaustive
  • (c) Exclusive
  • (d) Descriptive
  • Answer: (a) Inclusive
• Question 8: What is included in income as per Section 2(24) of the Income-tax Act, 1961?
  • The profits and gains of a banking business carried on by a co-operative society with its members.
  • Any advance money forfeited in the course of negotiation for the transfer of a capital asset.
  • Choose the correct option with reference to the above statement:
  • (a) Both (i) and (ii)
  • (b) Only (i)
  • (c) Only (ii)
  • (d) Neither (i) nor (ii)
  • Answer: (a) Both (i) and (ii)

Income-tax in India

• Income-tax rates are determined by the Finance Act of the respective assessment year.
• Legislated under the Income-tax Act, 1961.
• Controlled by the Central Board of Direct Taxes (CBDT).
• The applicable rate is specified in the Finance Act of the current assessment year.

Unexplained Cash Credits

• Unexplained cash credits are subject to a tax rate of 60%.
• Any undisclosed or unexplained cash deposits are taxed at this high rate.
• It is crucial to maintain proper documentation for all financial transactions to avoid such taxation.