Direct Taxes Exercise Solutions | KalviGavani

I. Choose the Correct Answer (MCQ)

Q1. Income Tax is

(a) a business tax   (b) a direct tax ✓   (c) an indirect tax   (d) none of these

Q2. Period of assessment year is

(a) 1st April to 31st March ✓   (b) 1st March to 28th Feb   (c) 1st July to 30th June   (d) 1st Jan. to 31st Dec

Q3. The year in which income is earned is known as

(a) Assessment Year   (b) Previous Year ✓   (c) Light Year   (d) Calendar Year

Q4. The aggregate income under five heads is termed as

(a) Gross Total Income   (b) Total Income ✓   (c) Salary Income   (d) Business Income

Q5. Agricultural income earned in India is

(a) Fully Taxable   (b) Fully Exempted ✓   (c) Not Considered for Income   (d) None of the above

Q6. How many heads of income are there to compute Gross total income?

(a) Six   (b) Five ✓   (c) Four   (d) Three

Q7. Income Tax Act came into force on

(a) 1.4.1932   (b) 1.4.1962 ✓   (c) 1.4.1947   (d) 1.4.1954

Q8. The compensation received for loss of trading asset is a

(a) Capital receipt ✓   (b) Revenue receipt   (c) A casual receipt   (d) None of the above

Q9. The legislative powers of the Union Government and the State Governments are given in the

(a) Article 246 (VII schedule) ✓   (b) Article 246 (VI schedule)   (c) Article 264 (VII schedule)   (d) Article 446 (VII schedule)

Q10. Tax charged on Long Term Capital Gain is

(a) 20% ✓   (b) 15%   (c) 25%   (d) 30%

II. Very Short Answer Questions

Q1. What is Income tax?

Income tax is a direct tax under which tax is calculated on the income, gains, or profits earned by a person such as individuals and other artificial entities (partnership firm, company, etc.). It is levied by the Central Government on all incomes other than agricultural income.

Q2. What is meant by the previous year?

The year in which income is earned is called the previous year. It is also referred to as the financial year. The previous year normally consists of a period of 12 months commencing on 1st April every year and ending on 31st March of the following year.

Q3. Define the term person.

The term 'person' includes:

1. Individual 2. Hindu Undivided Family (HUF) 3. Firm 4. Company 5. Local authority 6. Association of Person (AOP) or Body of Individual (BOI) 7. Any other artificial juridical persons

Q4. Define the term assessee.

Per Section 2(7) of the Income Tax Act, 1961, the term "assessee" means a person by whom any tax or any other sum of money is payable under this Act. It includes:

1. Individual 2. Hindu Undivided Family (HUF) 3. Firm 4. Company 5. Local authority 6. Association of Person (AOP) or Body of Individual (BOI) 7. Any other artificial juridical persons

Every assessee is a person, but every person need not be an assessee.

Q5. What is an assessment year?

Per Section 2(9), the year in which tax is paid is called the assessment year. It normally consists of a period of 12 months commencing on 1st April every year and ending on 31st March of the following year. The assessment year always follows the previous year.

Q6. What do you mean by Tax?

Tax is a compulsory contribution to state revenue by the Government, levied on the income or profits from the business of individuals and institutions. It is a financial charge imposed by the government on its citizens to fund public expenditure.

Q7. What is the reason for collecting tax?

The revenue earned through tax is utilized for the expenses of civil administration, internal and external security, building infrastructure, providing public services such as education, health care, and social welfare programmes, and for the general development of the nation.

III. Short Answer Questions

Q1. What is Gross Total Income?

Per Section 80B(5), income computed under the five heads shall be aggregated after adjusting past and present losses, and the total so arrived is known as 'Gross Total Income'. The five heads are:

1. Income from Salaries 2. Income from House Property 3. Income from Business or Profession 4. Income from Capital Gains 5. Income from Other Sources

Gross Total Income is the starting point for computing Total Income.

Q2. List out the five heads of Income.

1. Income from 'Salaries' [Sections 15–17] 2. Income from 'House Property' [Sections 22–27] 3. Income from 'Profits and Gains of Business or Profession' [Sections 28–44] 4. Income from 'Capital Gains' [Sections 45–55] 5. Income from 'Other Sources' [Sections 56–59]

Q3. Write a note on Agricultural Income.

Per Section 2(1A) of the Income Tax Act 1961, Agricultural Income includes "Any rent or revenue derived from land which is situated in India and is used for agriculture purposes." It also includes income from the processing of agricultural produce and income from a farm building. Agricultural income is fully exempted from income tax under Section 10(1). However, it is included in total income for rate purposes (partial integration).

Q4. What do you mean by Total Income?

Out of Gross Total Income, the Income Tax Act 1961 allows certain deductions under Section 80. After allowing these deductions, the figure arrived at is called 'Total Income' and on this figure tax liability is computed at the prescribed rates.

Total Income is the income on which tax is actually calculated. It is always equal to or less than Gross Total Income.

Q5. Write short notes on:

(a) Direct Tax:

If a tax levied on the income or wealth of a person and is paid by that person (or his office) directly to the Government, it is called direct tax. In direct tax, both the incidence and impact fall on the same person. Examples: Income-Tax, Wealth Tax, Capital Gains Tax, Securities Transaction Tax, etc. All direct taxes are levied and administered by the Central Board of Direct Taxes (CBDT).

(b) Indirect Tax:

If tax is levied on the goods or services of a person (seller), collected from the buyers and paid by the seller to the Government, it is called indirect tax. In indirect tax, the incidence falls on one person and the impact falls on another person. Example: GST (Goods and Services Tax), which replaced multiple indirect taxes.

Q6. Why is income tax treated as annual tax?

Income tax is an annual tax because it is the income of a particular year which is chargeable to tax. The tax liability is determined on the basis of income earned during the previous year, and the tax is paid during the assessment year. The income tax law treats the income of each financial year separately.

Q7. What are the tax rates prescribed for LTCG, STCG, and lottery income?

• Tax on Long Term Capital Gain (LTCG): 20% (Section 112)
• Tax on Short Term Capital Gain (STCG) on shares covered under STT: 15% (Section 111A)
• Tax on Lottery Income: 30% (Section 115BB)

Q8. What do you mean by the previous year?

Per Section 3 of the Income Tax Act 1961, the year in which income is earned is called the previous year. It normally consists of a period of 12 months commencing on 1st April every year and ending on 31st March of the following year. It is also called the financial year immediately following the assessment year. The income earned during the previous year is taxed in the immediately succeeding assessment year.

IV. Long Answer Questions

Q1. Elucidate any five features of Income Tax.

1. Levied as Per the Constitution: Income tax is levied in accordance with the provisions of the Indian Constitution. The authority to levy income tax is derived from Entry 82 of the Union List in the Seventh Schedule.

2. Levied by Central Government: Income tax is levied by the Central Government on all incomes other than agricultural income (which falls under the State Government's domain).

3. Direct Tax: Income tax is a direct tax — the burden of the tax cannot be shifted to another person. Both the incidence and impact of the tax fall on the same person who earns the income.

4. Annual Tax: Income tax is an annual tax. It is charged on the income earned during a particular previous year. The tax liability is determined every year based on the income earned.

5. Tax on Person: Income tax is levied on the total income of a person. The term 'person' includes individual, HUF, firm, company, local authority, AOP, BOI, and any other artificial juridical person.

Q2. Define Tax. Explain the term direct tax and indirect tax with an example.

Tax is a compulsory contribution imposed by the Government on individuals and institutions to fund public expenditure. It is a financial charge that cannot be avoided and is used for civil administration, security, infrastructure, and public welfare.

Direct Tax:

A direct tax is one in which the burden cannot be shifted to another person. The person on whom the tax is levied bears the entire burden. Both the incidence and impact fall on the same person.

Examples:

• Income Tax — levied on the income of individuals, firms, and companies
• Wealth Tax — levied on the net wealth of individuals
• Capital Gains Tax — levied on gains from the sale of capital assets
• Securities Transaction Tax — levied on transactions in securities

All direct taxes are administered by the Central Board of Direct Taxes (CBDT).

Indirect Tax:

An indirect tax is one in which the burden can be shifted to another person. The seller collects the tax from the buyer and pays it to the Government. The incidence falls on the buyer while the impact falls on the seller.

Example:

• GST (Goods and Services Tax) — levied on the supply of goods and services, collected by the seller from the buyer, and deposited with the Government.

Q3. List out any ten kinds of incomes chargeable under the head income tax.

The following are ten kinds of incomes chargeable under the Income Tax Act:

1. Income from Salaries — including basic salary, allowances, perquisites, and profit in lieu of salary 2. Income from House Property — rental income from let-out property and notional rent from self-occupied property 3. Profits and Gains of Business or Profession — income from any business or professional activity carried on by the assessee 4. Income from Capital Gains — gains arising from the transfer of capital assets (both short-term and long-term) 5. Income from Other Sources — dividends, lottery winnings, interest on securities, rental income from machinery, etc. 6. Dividend Income — dividends received from companies 7. Interest Income — interest on bank deposits, bonds, debentures, and securities 8. Lottery and Gambling Winnings — winnings from lotteries, crossword puzzles, races, card games, and other gambling activities 9. Rental Income — income from letting out machinery, plant, or furniture 10. Royalty Income — income from patents, copyrights, and mineral extraction rights

Q4. Discuss the various kinds of assessees.

1. Individual: A natural person — male or female, resident or non-resident — who is liable to pay income tax on his/her total income.

2. Partnership Firm: A firm is a separate assessee under the Income Tax Act. It is taxed as a distinct entity, separate from its partners. The firm's income is taxed at a flat rate, and the partners are then taxed on their share of profit.

3. Hindu Undivided Family (HUF): A HUF is treated as a separate entity for tax purposes. It consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. The income of the HUF is assessed separately from the income of its individual members.

4. Companies: A company is an artificial juridical person incorporated under the Companies Act. It is treated as a separate assessee and is taxed at the rates applicable to companies (domestic or foreign).

5. Association of Persons (AOP) / Body of Individuals (BOI): An AOP is an entity where two or more persons join together for a common purpose. A BOI consists of individuals only (no HUF, firm, or company as members). Both are assessed as separate entities.

Additional Q1. Write a note on the structure of the Indian Taxation system.

The Indian taxation system is one of the largest in the world. The authority to levy tax is derived from the Indian Constitution. Article 246 (Seventh Schedule) contains the legislative powers (including taxation) of the Union government and the State Governments. The Seventh Schedule contains three lists:

• Union List — taxes levied by the Central Government (Income Tax, Customs Duty, GST on inter-state trade, etc.)
• State List — taxes levied by State Governments (State GST on intra-state trade, Stamp Duty, Land Revenue, etc.)
• Concurrent List — taxes where both Centre and States can legislate (with Central law prevailing in case of conflict)

Direct taxes are administered by the Central Board of Direct Taxes (CBDT), and indirect taxes (post-GST) are administered by the GST Council and the Central Board of Indirect Taxes and Customs (CBIC).

Additional Q2. Write a note on Heads of Income under Income Tax Act.

Section 14 of the Income Tax Act provides for the computation of total income under five heads:

1. Income from Salaries [Sections 15–17]: Includes salary, wages, pension, gratuity, leave salary, allowances, perquisites, and profit in lieu of salary.

2. Income from House Property [Sections 22–27]: Covers rental income from let-out property, notional rent from self-occupied property, and annual value of property.

3. Profits and Gains of Business or Profession [Sections 28–44]: Includes income from business, profession, or vocation carried on by the assessee.

4. Income from Capital Gains [Sections 45–55]: Covers gains arising from the transfer of capital assets, classified as short-term capital gains (STCG) and long-term capital gains (LTCG).

5. Income from Other Sources [Sections 56–59]: A residuary head that includes all income not chargeable under any of the other four heads — dividends, lottery winnings, interest on securities, etc.

Additional Q3. Write a note on slab rate of Income-tax charged on Individual.

Per Assessment Year 2018–2019, the income tax slab rates for individuals are:

Additional points:

• Surcharge is levied on income above Rs. 50 lakhs at prescribed rates
• Health and Education Cess of 4% is levied on the total income tax and surcharge
• Rebate under Section 87A is available for individuals with total income up to Rs. 3,50,000

Common Mistakes

1. Previous Year = income earned; Assessment Year = tax paid — do not confuse them. The previous year is when income is earned; the assessment year is when tax is assessed and paid on that income. 2. Agricultural income is FULLY EXEMPTED, not "fully taxable" or "partially exempted" — it is completely exempt under Section 10(1), though it is included for rate purposes. 3. Total Income = Gross Total Income minus deductions (Sec. 80C to 80U) — it is NOT the same as Gross Total Income. Gross Total Income comes first, then deductions are subtracted. 4. Income Tax Act came into force on 1.4.1962, NOT 1872 (that is the Indian Contract Act). Do not mix up the dates. 5. Direct tax incidence and impact fall on the SAME person; Indirect tax incidence and impact fall on DIFFERENT persons — in direct tax, the person who pays bears the burden; in indirect tax, the burden shifts to the consumer. 6. LTCG tax rate is 20%, STCG on shares is 15%, Lottery income is 30% — know the distinction between these three special rates and do not confuse them.

Exam Checklist

• [ ] Can define income tax and list 5 features
• [ ] Know the difference between previous year and assessment year
• [ ] Can list 5 heads of income with section numbers
• [ ] Know Gross Total Income vs Total Income formula
• [ ] Can define person and assessee under Income Tax Act
• [ ] Know agricultural income is fully exempted
• [ ] Can distinguish direct tax vs indirect tax with examples
• [ ] Know income tax slab rates for individuals