Conceptual objective questions and answers in Income tax


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Helps students and staff to understand concepts in Income tax. It is very much helpful to students who study for ICWA, CA, CS, CFA

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Conceptual objective questions and answers in Income tax

  1. 1. Conceptual Objective type questions:-Check the answers at the end after you answer all questions New: CA, ICWA,CS,CFA students have to read before Income tax examination Dedicated to ST. Joseph’s College of Commerce students, Bangalore 1.Residential status does not depend on citizenship of an individual. 2.If a person leaves India for good the previous year becomes assessment year. 3.Income includes loss 4.Assesse includes person who has to receive refund from income tax department. 5.Tax rates are fixed by the annual Finance Act and not by the Income tax Act. 6.IF on the first day of April of the assessment year, the new Finance Bill has not been placed on the statute book, the provisions in force in the preceding assessment year or provisions proposed in the Finance Bill before Parliament, whichever is more beneficial to the assessee, will apply until the new provisions become effective. 7.For arriving at the total income of the assessment year 2008-09 provisions of the Income tax Act as on April1, 2008 are applicable. Any
  2. 2. amendment made with effect from April 2, 2008 is wholly irrelevant. 8.For Each source of income different previous year can not be followed. 9. Income of non resident from shipping , income of bodies formed for short duration, income of a person trying to alienate his assets with a view to avoiding payment of tax, income of discontinued business are the exceptions the normal assessment year. 10.Income-tax is a direct tax. 11. The term income connotes a periodical monetary return coming in with some sort of regularity or expected regularity from definite sources. 12. If Income is received in kind, its valuation is made according to the rules prescribed in the Income Tax Rules. If , however, there is no prescribed rule, valuation thereof is made on the basis of market value. 13.Illegal income is taxable. 14 Expenditure to illegal income is not deductible. 15.If there is a dispute to the title to the income whoever claims will be taxed. 16.Mere relief or reimbursement of expenses is not treated as income. 17.Where by an obligation, income is diverted before it reaches the assessee it is diversion of income and not taxable.
  3. 3. 18.The income is required to be applied to discharge an obligation after such income reaches the assessee, the same is merely an “application of income” and income is chargeable to tax. 19.A surplus arising to a mutual concern cannot be regarded as income chargeable to tax. 20.All Gifts together if exceed Rs.50,000 in the previous year is taxable provided they are not paid by relatives or received at the time of marriage. 21.While income, profit and gains represent ‘plus income, losses represent “minus income”. 22.Income should be real and not fictional. Similarly income does not arise in a transaction between head office and branch office even if goods are invoiced at price higher than cost price. 23.Income do not accrue at the time of revaluation of assets because income should be real and not fictional. 24.Pin money received by wife or husband for personal expenses and small saving made by her/him for meeting household expenses is not an income. 25.A receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. 26. A receipt is in the nature of income, the burden of proving it is not taxable, because it falls
  4. 4. within an exemption provided by the Act, lies upon the assessee. 27.Capital receipts are exempted from tax unless they are expressly taxable. 28. Revenue receipts are taxable, unless they are expressly exempt from tax. 29.A receipt under a general insurance policy may be a capital receipt, if the policy relates to capital asset or may be a revenue receipt if the policy relates to circulating asset. 30.Payment made by insurance company to compensate for loss of use of any goods in which the assessee does not carry on any business by the assessee , but excess accrues due to fortuitous circumstances or is wind fall then the accrual would not be income arising from business and therefore, not taxable under the Act. 31. Method of accounting is relevant in case of profit and gains of business or profession and income from other sources. 32. Method of accounting is irrelevant in case of salaries, income from house property and capital gains. 33.Rounding –off of income is done to the nearest ten rupee. Rounding –off of tax to the ten rupee.- _________________________________________ _______
  5. 5. Chapter-2: Residential status: 1.Residential Status is not depending on the citizenship but depends on the number of days of stay in India. 2.Residential status differs from previous year to previous year. 3. A person can become a resident in two countries. 4.Resident is a person who fulfils any one of the basic conditions. Non-resident is a person who does not fulfil any one of the basic conditions. 5.A person is deemed to be an Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India. 6.Grand parents include both maternal and paternal grandparents. 7.Physical presents in India in respect of such broken period should be made on an hourly basis. 8.If hours of stay is not available then the day on which he enters India as well as the day on which he leaves India shall be taken into account as stay of the individual in India. 9.A stay by an individual on a yacht moored in the territorial waters of India would be treated as presence in India for the purpose of this section. 10.Even a little bit control and management of its affairs is in India (either by Kartha or manager) such HUF becomes Resident.
  6. 6. 11. If affairs of HUF are completely from outside India then such HUF is a non-resident. 12.In case of nonresident who purchases goods for the purpose of export or collection of news and views or shooting of cinematography films in India, there shall be no income shall be deemed to accrue or arise in India (section 9(1)). 13.Any allowance paid by Government of India outside India such allowance to government servant is fully exempted. 14. Any dividend paid by Indian company outside India is deemed to accrue or arise in India. 15.Other than an Indian company, dividend shall be deemed to accrue or arise at a place where the register of members is kept.(Kusumben D.Mahadevia v/s CIT. 16.Interest payable by the Central Government or any State Government or by any Resident is taxable in the hands of the recipient except such money borrowed or debt incurred used by the company outside India for business or any other purposes to earn such income. 17.Interest payable by a non resident shall be deemed to accrue /arise in India in the hands of recipient if it is in respect of any debt incurred or money borrowed and used for purposes of a business or profession carried on by him in India. 18. Royalty payable by a resident except where the payment is relatable to a business or profession
  7. 7. carried on by him outside India or any other source of his income outside India. 19.Royalth payable by a Non resident if the payment is relatable to a business carried on by him in India or any other source of his income in India. 20.Merely because income is included in a balance sheet in India income need not accrue or arise in India. 21.It is not essential to stay in the same place. 22.A stay in a yacht moored in the territorial waters of India would be treated as presence in India. 23.Maintaining dwelling house is irrelevant, but physical presence in India is important. Income from house property(section 22to 27) 1.It is the annual value of the property( not the actual rent received or receivable ) considered for income from house property. 2.Rent from vacant land does not attract under the head . 3.House property used for OWN BUSINESS is not considered under this head. *4.He/she should be the OWNER of the property.(need not be the owner of the land) eg.Owner of appartment.
  8. 8. *5.House property either rented to someone for commercial (including business) or for residential or for self occupation. 6.There must be a building. Building includes a large stadium with or without roof, rent from swimming pool, rent from godown,music hall, dance hall lecture hall, other public auditorium *7. Residential building normally have roof. Non residential building need not have roof. 8. Building area includes adjacent area like approach roads, garage, garden, cattle shed etc. *9.If property is transferred for inadequate consideration either to spouse or minor children the income from house property is calculated in the hands of the transferee(wife or minor children) but will be included in the hands of transferor under section 64(1). 10. If part payment is made after making a contract for sale for immovable property ,and such house is occupied by the buyer it amounts to transfer even though the property is not registered (section 53A of the Transfer of property act). 11.If house property is rented to own employees where renting is not their business such income is under business ,not under house property. 12.If house property is rented to non employees or activity which is not subservient and incidental to one’s own business then such income is from house property.
  9. 9. 13.Rent from bank ,postoffice, police station, central excise office, railway staff quarters which is for carrying on its business efficiently and smoothly, such income comes under income from business. 14.If house property is foreign country, annual property will be computed as if property is situated in India. Therefore municipal tax paid during the previous year in foreign country is also deductible. 15. Municipal taxes paid in the previous year and interest payable are deductible. 16. Interest payable outside India without deducting tax at source is not deductible. 17. Pre construction period means interest payable up to 31st March preceding to the year of completion. 18.Pre-construction period interest is deductible only in the first five installments starting from 1st April of the year of completion. INCOME FROM CAPITAL GAIN: Section 45 to 54F 1.Gain on transfer of capital asset during previous year comes under this section.
  10. 10. 2.Capital asset excludes the following: stock in trade, personal effect, agricultural land in India, gold bonds 1977 and 1980,national defense bonds 1980,Special bearer bonds, gold deposit bonds 1999. 3.Sale of personal computer, car, airplane, personal furniture do not attract capital gain and also not taxable under any other head. 4. Sale of agricultural land also does not attract capital gain and also from any other head since it is capital profit. 5.Agricultural land in India that is situated in an area other than rural area or outside India attracts capital gain if sold during the previous year. 6.Longterm capital asset is an asset which is held by the assessee (previous owner in case of gift or will) more than 36 months. Incase of equity or preference shares, UTI, mutual funds (ALL quoted or not), Securities like debentures, government securities (LISTED) held more than 12 months is considered as long term capital asset. Otherwise it is short-term. 7.Debentures and government securities (UNLISTED) held more than 36 months are considered as long term. 8.Incase of shares or securities purchase or sale date of purchase by broker or date of broker note
  11. 11. respectively is considered. Date of registration is not important. 9.Tranfer includes sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. 10.Registration of immovable property is not important but part payment and possession of the immovable property is enough. 11. Transfer takes place when movable property is delivered pursuant to a contract to sell. 12.Amalgamation, absorption, internal reconstruction, external reconstruction, merger, demerger the resulting company should be an Indian company. In the above situations transfer should be in the forma of kind and no cash should be transferred. 13.Index is used if it is a long term capital asset. But if the asset is short term or **debenture/bond or depreciated asset whether longterm or short term index cannot be used. *14.Cost of improvement means any improvement after 31st March 1981 only. *15. Index is used incase of will or gift property only from the date of the current owner’s acquisition of the property. But to decide whether such asset is long term or short term it depends on the previous original owner.
  12. 12. 16.Distribution of capital asset at the time of partial or complete partition shall not amount to transfer hence not covered under capital gain. 17.Cost of acquisition before 1st April 1981 or market value as on 1st April 1981 which ever is beneficial to the assessee is considered. *18.If Capital asset is converted into business asset(stock in trade), the difference between market value and cost of acquisition is computed in the year of sale but taxed in the year of sale. The difference between sale value of such stock in trade and market value on the date of such conversion is treated as business profit in the year of sale.Index also only unto the date of conversion. All the answers are true It is your free web. Study well. We work for you and you work for yourself.