Taxmann's Students' Guide to Income Tax including GST | Problems & Solutions

Legal position as amended up to November 10, 2021 is given. Practical income-tax problems are solved as per law applicable for the assessment year 2022-23. GST problems are solved as per law amended up to November 10, 2021

About the Authors

Dr. Vinod K. Singhania got his Ph.D. from the Delhi School of Economics in 1976. His fields of special interest include all facets of corporate legislation and corporate economics especially the tax laws. Associated in different capacities with several professional institutes and business houses in India and abroad, Dr. Singhania is author of many popular books and software published by Taxmann. He has to his credit more than 300 research articles which have appeared in leading journals. He has been a resource person in over 800 seminars in India and abroad. He can be reached at vks@taxmann.com Dr. Monica Singhania is Professor, Faculty of Management Studies, University of Delhi. She is a post-graduate from Delhi School of Economics and a Fellow Member of the Institute of Chartered Accountants of India. She has the distinction of being placed in the merit list of the examinations conducted by both the University as well as the Institute.

She has been awarded Ph.D. in the area of corporate taxation from the University of Delhi. She is the author of 7 books on direct tax laws and several research papers which have been published in leading journals. She can be reached at monica@fms.edu

I-5

Preface

Students Guide to Income-tax, as the readers are aware, contains (besides illustrations and solved problems) unsolved exercises. Over the years, faced with difficulties in solving these exercises, readers have often approached us for assistance. In attempting to solve these exercises as a response to readers queries, we could get a first-hand idea of the exact nature and dimension of the challenges/issues confronting them. We ourselves could solve several exercises with great effort only. Sometimes we found that a particular exercise required several attempts before it could be worked out correctly. The dilemma that these unsolved exercises presented, prompted and motivated us to come up with the present book providing a guided approach to problem-solving.

Each chapter of the present book is structured into three sections SECTION ONE covers the provisions relating to income-tax law (as also GST) in brief. This section will serve as a guide to the readers to refresh and update their knowledge.

SECTION TWO covers solved problems which are meant especially to illustrate practically the typical contemporary issues of law in recent years. These new problems have hitherto neither come in any examination paper nor are these to be found in print anywhere.

SECTION THREE covers solutions to problems similar to the unsolved exercises given in the Students Guide to Income-tax. The idea is to induce the students to solve the unsolved exercises on their own while they have a working model before them showing the right approach.

We hope that this book will make the learning process more interesting and meaningful and generate the required confidence amongst students to face examination.

Feedback is solicited and welcome so that further student-friendly features may be introduced in the book from time to time.

22 Deepali, Pitampura, Delhi - 110034.

Email : vks@taxmann.com Phone : 27016686, 9810008160

VKS

I-7

Contents

PAGE

About the authors

I-5

Preface

I-7

1 BASIC

CONCEPTS THAT ONE MUST KNOW

➢ Provisions in brief

1

➢ Solved problems

3

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

5

2 RESIDENTIAL

STATUS AND ITS EFFECT ON TAX INCIDENCE

➢ Provisions in brief

8

➢ Solved problems

12

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

25

3 INCOME

THAT IS EXEMPT FROM TAX

➢ Provisions in brief

29

➢ Solved problems

35

4 INCOME

UNDER THE HEAD

SALARIES

AND ITS COMPUTATION

➢ Provisions in brief

41

➢ Solved problems

48

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

72

I-9

Contents

I-10 PAGE

5 INCOME

UNDER THE HEAD

INCOME

FROM HOUSE PROPERTY

➢ Provisions in brief

94

➢ Solved problems

96

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

112

6 INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AND ITS COMPUTATION

➢ Provisions in brief

121

➢ Solved problems

134

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

161

7 INCOME

UNDER THE HEAD

CAPITAL

GAINS AND ITS COMPUTATION

➢ Provisions in brief

180

➢ Solved problems

192

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

215

8 INCOME

UNDER THE HEAD

INCOME

FROM OTHER SOURCES AND ITS COMPUTATION

➢ Provisions in brief

224

➢ Solved problems

228

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

234

9 CLUBBING

OF INCOME

➢ Provisions in brief

237

➢ Solved problems

238

10 SET

OFF AND CARRIED FORWARD OF LOSSES

➢ Provisions in brief

243

➢ Solved problems

245

➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

251

I-11

Contents PAGE

11 PERMISSIBLE

DEDUCTION FROM GROSS TOTAL INCOME

➢ Provisions in brief ➢ Solved problems ➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

256 273 278

12 MEANING

OF AGRICULTURAL INCOME AND ITS TAX TREATMENT

➢ Provisions in brief ➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

288 289

13 INDIVIDUAL - COMPUTATION

OF TAXABLE INCOME

➢ Provisions in brief ➢ Solved problems ➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

292 295 318

14 HINDU

UNDIVIDED FAMILIES

➢ Provisions in brief ➢ Solved problems ➢ Problem based upon similar unsolved exercise given in Students Guide to Income-tax

327 328 330

15 FIRMS

AND AOP

➢ Provisions in brief ➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

331 334

16 RETURN

OF INCOME

➢ Provisions in brief ➢ Solved problems

341 351

17 ADVANCE

PAYMENT OF TAX

➢ Provisions in brief ➢ Solved problems ➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

354 354 356

Contents

I-12 PAGE

18 TAX

DEDUCTION AND COLLECTION AT SOURCE

➢ Provisions in brief ➢ Solved problems

358 366

19 INTEREST

PAYABLE

➢ Provisions in brief ➢ Solved problems ➢ Problems based upon similar unsolved exercises given in Students Guide to Income-tax

372 375 377

20 GST ➢ Provisions in brief ➢ Solved problems

382 499

APPENDIX ➢ Tax rates

564

CHAPTER 5

Income under the head Income from house property PROVISIONS IN BRIEF

Basis of charge

Computation of income of let out house property

Gross annual value

Municipal taxes

Income is taxable under the head Income from house property only when the following three conditions are satisfied 1. The property should consist of any buildings or lands appurtenant thereto.

2. The assessee should be owner of the property.

3. The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income tax.

Income from let out house property is computed as under: Rs. Gross annual value xxxx Less: Municipal taxes xxxx Net annual value xxxx Less: Deduction under section 24 - Standard deduction xxxx - Interest on borrowed capital xxxx Income from house property xxxx p Gross annual value† will be calculated as follows Step I : Find out reasonable expected rent of the property Step II : Find out rent actually received or receivable after excluding unrealized rent but before deducting loss due to vacancy Step III : Find out which one is higher amount computed in Step I or Step II. Step IV : Find out loss because of vacancy Step V : Step III minus Step IV is gross annual value p Reasonable expected rent - The higher of municipal valuation (MV) and fair rent (FR), subject to maximum of standard rent (SR) (i.e., rent as per the Rent Control Act), is reasonable expected rent. p Rent actually received or receivable - It shall be calculated as follows Rent of the previous year (or that part of the previous year) for which the property is available for letting out xxxx Less: Unrealized rent if a few conditions are satisfied xxxx Rent received/receivable before deducting loss due to vacancy xxxx p Loss due of vacancy - It is separately deducted under Step IV. Not to be deducted under Step II from actually received or receivable Deductible only if (a) these taxes are borne by the owner, and (b) are actually paid by him during the previous year.

† Where the house property is held as stock-in-trade and it is not let during the whole or any part of the previous year, the annual value of such property (or part thereof) shall be taken as nil. However, this concession is available only for a limited period up to 2 year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority.

94

95

Provisions in brief

Deduction under section 24

Two deductions are available under section 24 - (a) standard deduction; and (b) interest on borrowed capital. The list of allowance of section 24 is exhaustive. In other words, no other deduction can be claimed under section 24. p Standard deduction - 30% of net annual value is deductible irrespective of any expenditure incurred by the taxpayer. p Interest on borrowed capital - Deductible, if capital is borrowed for the purpose of purchase, construction, repair, renewal or reconstruction of the property.

Interest of pre-construction period is deductible in 5 years in 5 equal instalments.

The first instalment is deductible in the year in which construction of property is completed or in which property is acquired. For this purpose pre-construction period means the period commencing on the date of borrowing and ending on (a) March 31 immediately prior to the date of completion of construction/date of acquisition or (b) date of repayment of loan, whichever is earlier.

Computation of income If a property is occupied for own business, nothing is taxable under the head from one or two self Income from house property . If one house property or two house properties are occupied properties occupied for own residential purposes by an individual or by a Hindu undivided family (for residence of members), gross annual value of such property is nil.

Municipal tax is not deductible. However, aggregate interest on borrowed capital is deductible up to a maximum ceiling of Rs. 30,000 (Rs. 2,00,000 in a few cases ).

If three or more properties are occupied for own residential purposes, only two properties can be treated as self-occupied properties and other remaining property or properties shall be deemed to be let out property .

How to compute gross Gross annual value (GAV) of one or two self-occupied properties shall be annual value of calculated under different situations as follows two self-occupied properties If such property is used throughout the previous GAV is nil year for own residential purposes, it is not let out or put to any other use If such property could not be occupied through GAV is nil out the previous year because employment, business or profession of the owner is situated at some other place (it is not let out or put to any other use) When a part of the property (being independent GAV of the unit which residential unit) is self-occupied and the other is self-occupied, is nil. part is let out GAV of the unit which is let out is calculated as if the unit is let out When such property has only one residential unit GAV shall be calculated which is self-occupied for a part of the year and as if the property is let let out for the other part of the year out When interest is Interest is deductible up to Rs. 2,00,000 in the case of two self-occupied properties deductible up to if the following conditions are satisfied Rs. 2,00,000 1. Capital is borrowed on or after April 1, 1999 for acquiring or constructing a property.

2. The acquisition or construction should be completed within 5 years from the end of financial year in which the capital was borrowed.

3. The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition or construction of the house or as refinance of the principal amount outstanding under an earlier loan taken for such acquisition or construction.

If capital is borrowed for any other purpose (e.g., if capital is borrowed for reconstruction, repairs or renewals of a house property), then the maximum amount of deduction on account of interest is Rs. 30,000 (and not Rs. 2,00,000).

If an individual/HUF opts for the alternative tax regime under section 115BAC, deduction of interest liability (pertaining to one or two selfoccupied properties) is not available [see Chapter 13].

Problem P5.1

Income under the head “Income from house property”

96

When unrealized rent is Where an assessee could not realize rent from a property let to a tenant and, realized subsequently subsequently, the assessee has realized any amount in respect of such rent, the amount so realized, shall be deemed to be income chargeable under the head Income from house property . It will be chargeable to tax in the previous year in which such unrealized rent is collected. Standard deduction to the extent of 30 per cent is available (apart from this no other deduction can be claimed). It will be taxable even if the assessee is not owner of the property in the previous year in which such rent is collected.

When arrears of rent pertaining to earlier years is collected in a subsequent year

The relevant provisions are given below 1. The taxpayer is (or was) the owner of any property which has been let out to a tenant.

2. He has received any amount, by way of arrears of rent from such property, not charged to income tax for any earlier previous year.

3. The amount so received (after deducting a sum equal to 30 per cent of such amount) shall be deemed to be the income chargeable under the head Income from house property .

4. It is taxable in the previous year in which it is received.

5. It is taxable even if the assessee is not the owner of that property in the year in which he has received arrears of rent.

SOLVED PROBLEMS P5.1 X (44 years) owns a residential property in Ranchi. Municipal valuation of the property is Rs. 8,00,000. Rent of similar property in the same locality of Ranchi is Rs. 12,00,000. Standard rent of the property under the relevant Rent Control Act is Rs. 10,00,000. It is let out to A Inc. (a foreign company) on monthly rent of US $ 3,100 (amount is deposited in New York branch of Citibank, with prior permission of RBI). There is no unrealized rent. However, property remains vacant for one month commencing from March 16, 2022 when A Inc. has vacated the property. With effect from April 15, 2022, the same property is let out to B Ltd., an Indian company.

The following expenses are incurred by X during the previous year 2021-22 Municipal tax : Rs. 1,70,000 (actually paid).

Collection charges : Rs. 10,000 Interest on borrowed capital : Rs. 3,00,000 (actual amount paid is Rs. 2,30,000).

Fire insurance premium : Rs. 30,000.

Income of X from other sources is Rs. 12,45,000. Amount deposited in New York branch of Citibank is yet to be remitted to India. X has repaid Rs. 90,000 to the bank from whom loan was taken for purchasing the aforesaid property. Besides, he deposits Rs. 40,000 in the provident fund account of Mrs. X. Find out the net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡. For conversion of rent into Indian currency, the following telegraphic transfer buying/selling rates of US $ adopted by SBI are given Buying (1 US $) Selling (1 US $) Rs. Rs. On April 1, 2021 47 49 On March 31, 2022 45 46 Solution : For converting rental income received in foreign currency into Indian currency, the telegraphic transfer buying rate offered by SBI on the last date of the previous year shall be adopted. This rule is applicable if rent is not remitted up to March 31 of the previous year.

Rs. Computation of gross annual value Municipal value (MV) 8,00,000 Fair rent (FR) 12,00,000 Standard rent (SR) 10,00,000 Annual rent (US $ 3,100 × 12 × Rs. 45) 16,74,000 Unrealized rent Nil Loss due to vacancy (US $ 3,100 × Rs. 45 × ½) 69,750 Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] 10,00,000 ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

97

Solved problems

Problem P5.2 Rs.

Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy Step III - Amount computed in Step I or Step II, whichever is higher Step IV - Loss due to vacancy Step V - Gross annual value is Step III minus Step IV Less: Municipal tax Net annual value Less: Deductions under section 24 Standard deduction @ 30% Interest on borrowed capital Income Computation of income and tax liability Income from house property Income from other sources Gross total income Less: Deduction under section 80C (Rs. 90,000 + Rs. 40,000, subject to a maximum of Rs. 1,50,000) Net income (rounded off) Tax on net income Income-tax† Add: Health and education cess Tax liability (rounded off)

16,74,000 16,74,000 69,750 16,04,250 1,70,000 14,34,250 4,30,275 3,00,000 7,03,975 7,03,975 12,45,000 19,48,975 1,30,000 18,18,980 3,58,194 14,328 3,72,520

P5.2 Mrs. X (57 years) owns a commercial property in Chennai. Municipal value of the property is Rs. 9,00,000. Market rent of a similar property in the same locality is Rs. 10,00,000. However, market rent of a similar property in a different locality in Chennai is Rs. 12,00,000. Standard rent of the property owned by Mrs. X is Rs. 12,50,000. This property is let out to a departmental store with effect from May 15, 2021 on monthly rent of Rs. 70,000. During March 10, 2021 and May 14, 2021, the property remains vacant as suitable tenant is not available. Mrs. X could not realize 3 months rent from the tenant during the previous year 2021-22. Most probably the tenant will pay rent before September 2022.

Mrs. X makes the following expenditures in respect of the house property Municipal tax at the rate of 15 per cent (amount actually paid by the tenant during the previous year 2021-22 is Rs. 80,000); repairs (incurred by the tenant) : Rs. 75,000; fire insurance premium (paid by Mrs. X) : Rs. 30,000. A loan of Rs. 40,00,000 was taken on April 1, 2013 at the rate of 9 per cent per annum from PNB for construction of the commercial property which was completed on March 1, 2017. Nothing is repaid up to March 31, 2020. During the previous year 2020-21, Mrs. X has repaid Rs. 10,00,000. Further, on March 31, 2022, she pays a sum of Rs. 5,00,000 to PNB on account of housing loan (this repayment of loan according to Mrs. X is qualified for deduction under section 80C). Income of Mrs. X from other sources is Rs. 9,14,000. She deposits Rs. 1,50,000 in public provident fund in November 2021. She has taken medi-claim insurance premium on the life of her mother for which she pays Rs. 34,000 every year.

Find out net income and tax liability of Mrs. X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Rs. Computation of gross annual value Municipal value (MV) 9,00,000 Fair rent (FR) 10,00,000 Standard rent (SR) 12,50,000 Annual rent (Rs.70,000 × 12) 8,40,000 Unrealized rent (unrealized rent is not deductible, as there is a possibility of recovering the amount) Nil Loss due to vacancy (Rs. 70,000 × 1.5) 1,05,000 Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] 10,00,000 Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy 8,40,000 Step III - Amount computed in Step I or Step II, whichever is higher 10,00,000 Step IV - Loss due to vacancy 1,05,000 Step V - Gross annual value is Step III minus Step IV 8,95,000 Less: Municipal tax Nil †Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh. ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

Problem P5.3

Income under the head “Income from house property”

Net annual value Less: Deductions under section 24 Standard deduction @ 30% Interest from borrowed capital (9% of Rs. 30,00,000) Income Computation of income and tax liability Income from house property Income from other sources Gross total income Less: Deductions Under section 80C (repayment of loan taken for acquiring a commercial property is not eligible for deduction under section 80C) Under section 80D (mother of Mrs. X is a senior citizen) Net income (rounded off) Tax on net income Income-tax† Add: Health and education cess Tax liability (rounded off)

98 Rs. 8,95,000 2,68,500 2,70,000 3,56,500 3,56,500 9,14,000 12,70,500

1,50,000 34,000 10,86,500 1,38,450 5,538 1,43,990

Note - Interest of pre-construction period is deductible in 5 years in 5 equal instalments. First instalment is deductible in the year in which construction is completed. In this case, first instalment is deductible in the previous year 2016-17. The fifth instalment is deductible in the previous year 2020-21. Nothing is, therefore, deductible on account of pre-construction period s interest of the previous year 2021-22.

P5.3 X is a doctor. He owns a property in a posh colony in Cochin. The property has four units of equal size. Unit 1 on the ground floor is used by X for his medical profession. Unit 2 on the first floor is let out to a non-resident on monthly rent of Rs. 80,000 with effect from July 1, 2021. This unit remains vacant during May and June 2021 as suitable tenant is not available. The old tenant has occupied Unit 2 since 1986 and after a Court verdict he vacates it on April 30, 2021 without paying rent of 6 months (monthly rent being Rs. 10,000).

Unit 3 on the second floor and Unit 4 on the third floor are converted into one residential unit and is occupied by X for his residential purposes.

Municipal valuation of the entire property is Rs. 3,00,000. Market rent of a similar property is Rs. 7,00,000. Standard rent is Rs. 6,50,000. Municipal tax is levied at the rate of 15 per cent. Entire municipal tax is payable by X. Municipal tax of previous year 2021-22 is paid in two instalments - Rs. 28,000 on March 31, 2022 and Rs. 17,000 on June 1, 2022.

X has taken a loan of Rs. 20 lakh from SBI at the rate of 9 per cent per annum for renovation of second and third floor. This loan was taken in 2020 and nothing is repaid up to March 31, 2022. On March 31, 2022, he repays Rs. 15,00,000. Interest on loan is not paid although it has become due for payment.

Income of X from medical profession is Rs. 33,10,000 (without deducting depreciation of Unit 1 which comes to Rs. 32,000 and municipal tax). X annually pays life insurance premium of Rs. 50,000 on the life of his dependent mother (64 years) and Rs. 1,20,000 in public provident fund. He wants to claim deduction under section 80C in respect of repayment of loan taken from SBI. Determine the amount of net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Computation of income of Unit 2 which is let out Rs. Computation of gross annual value Municipal value of Unit 2 (Rs. 3,00,000 ÷ 4) (MV) 75,000 Fair rent Unit 2 (Rs. 7,00,000 ÷ 4) (FR) 1,75,000 Standard rent Unit 2 (Rs. 6,50,000 ÷ 4) (SR) 1,62,500 Annual rent Unit 2 (Rs.10,000 × 1 + Rs. 80,000 × 11) 8,90,000 Unrealized rent Unit 2 10,000 Loss due to vacancy (Rs. 80,000 × 2) 1,60,000 Step I - Reasonable expected rent of Unit 2 [MV or FR, whichever is higher, but subject to maximum of SR] 1,62,500 Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy (Rs. 8,90,000 Rs. 10,000) 8,80,000 Step III - Amount computed in Step I or Step II, whichever is higher 8,80,000 Step IV - Loss due to vacancy 1,60,000 †Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh. ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

99

Solved problems

Step V - Gross annual value is Step III minus Step IV Less: Municipal tax of Unit 2 (Rs. 28,000 ÷ 4) Net annual value Less: Deductions under section 24 Standard deduction @ 30% Interest on borrowed capital Income from Unit 2

Problem P5.4 Rs. 7,20,000 7,000 7,13,000 2,13,900 Nil 4,99,100

Computation of income of Units 3 and 4 - These two units are used as one residential unit. Gross annual value is nil. Municipal tax is not deductible. Interest on borrowed capital is deductible up to Rs. 30,000. Higher deduction up to Rs. 2,00,000 is applicable only in the case when loan is taken for purchase or construction of a residential purposes. Since loan is taken for renovation of Units 3 and 4, the higher amount of Rs. 2,00,000 is not deductible. Interest of the previous year 2021-22 comes to Rs. 1,80,000. However, amount deductible is only Rs. 30,000. Interest on borrowed capital is deductible on accrual basis.

In other words, Rs. 30,000 is deductible even if interest is not actually paid. Income from Units 3 and 4 will be ( ) Rs. 30,000.

Computation of income from medical profession Rs. Income 33,10,000 Less: Depreciation 32,000 Less: Municipal tax [(Rs. 28,000 + Rs. 17,000) ÷ 4, municipal tax paid up to due date of submission of return of income is deductible for the previous year 2021-22 under section 43B] 11,250 Income from profession 32,66,750 Computation of income and tax liability Income from house property [Unit 1 : Nil, as it is occupied for own business/profession + Unit 2 : Rs. 4,99,100 + Units 3 and 4 : ( ) Rs. 30,000] 4,69,100 Income from profession 32,66,750 Gross total income 37,35,850 Less: Deductions under section 80C (deposit of Rs. 1,20,000 in public provident fund, insurance premium on mother s life is not eligible, repayment of loan is deductible only when it is taken for acquiring or purchasing a property) 1,20,000 Net income (rounded off) 36,15,850 Tax on net income Income-tax† 8,97,255 Add: Health and education cess 35,890 Tax liability (rounded off) 9,33,150 P5.4 X owns House A (75, Nikolson Road, Chennai). Y owns House B (76, Nikolson Road, Chennai). These two Houses A and B, are identical in size and were constructed in 2019. X and Y are employees of A Ltd. (salary being Rs. 1,85,000 per month in each case). Besides, X and Y get Rs. 80,000 per month as house rent allowance and Rs. 30,000 per month as commission. On April 1, 2021, X and Y reside in a rented accommodation at Chennai for which each pays Rs. 60,000 per month as rent.

House A and House B are given on rent. The following information is available about these houses House A House B Rs. Rs. Municipal valuation (MV) 8,00,000 8,00,000 Fair rent (FR) 10,50,000 10,50,000 Rent (Rs. 70,000 per month) Standard rent (SR) 9,00,000 9,00,000 Municipal tax paid in May 2021 by landlords for 2021-22 80,000 80,000 Arrears of municipal tax paid in May 2021 by landlords for 2020-21 12,000 12,000 Interest on capital borrowed for acquisition of these properties 3,30,000 3,30,000 On June 20, 2021, the above properties have been vacated by the tenants. On July 1, 2021, House A is given on rent to A Ltd. for which the company will pay Rs. 80,000 per month. The same house is given as a rent-free perquisite to X for his residence. House rent allowance has been discontinued. On the same day, Y has shifted in his house but he continues to get house rent allowance from the employer.

On March 31, 2022, A Ltd. has given advance rent of 6 months to X (i.e., Rs. 4,80,000). On the same day, A Ltd. has given Rs. 4,80,000 as advance salary to Y.

†Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh.

Problem P5.4

Income under the head “Income from house property”

100

Employer and employees contribute 15 per cent of salary towards recognized provident fund. Income from other sources of X is Rs. 2,50,000 (FD interest) and Y is Rs. 2,50,000 (from coaching). Find out net income and tax liability of X and Y for the assessment year 2022-23 (X and Y are resident in India and born in 1989). Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Computation of income from house properties

Rent of House A (Rs. 70,000 × 3 + Rs. 80,000 × 9) Rent of House B (Rs. 70,000 × 3) Step I - Reasonable expected rent [MV or FR, whichever is higher, but subject to maximum of SR] Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy Step III - Amount computed in Step I or Step II, whichever is higher Step IV - Loss due to vacancy Step V - Gross annual value is Step III minus Step IV Less: Municipal tax (Rs. 80,000 + Rs. 12,000) Net annual value Less: Deductions under section 24 Standard deduction @ 30% Interest on borrowed capital Income Computation of tax and income of X and Y

House A Rs.

House B Rs.

9,30,000

2,10,000

9,00,000

9,00,000

9,30,000 9,30,000 Nil 9,30,000 92,000 8,38,000

2,10,000 9,00,000 Nil 9,00,000 92,000 8,08,000

2,51,400 3,30,000 2,56,600

2,42,400 3,30,000 2,35,600

X Rs.

Y Rs.

Salary (Rs. 1,85,000 × 12) 22,20,000 22,20,000 House rent allowance [see Notes 1 and 3] 1,15,500 8,35,500 Commission (Rs. 30,000 × 12) 3,60,000 3,60,000 Rent-free house 2,90,250

PF contribution of employer in excess of 12% of salary 66,600 66,600 Advance salary

4,80,000 Gross salary 30,52,350 39,62,100 Less: Standard deduction 50,000 50,000 Salary income 30,02,350 39,02,100 Income from house property 2,56,600 2,35,600 Income from other sources 2,50,000 2,50,000 Gross total income 35,08,950 43,97,700 Less: Deduction under section 80C (15% of Rs. 1,85,000 × 12, but subject to maximum of Rs. 1,50,000) 1,50,000 1,50,000 Net income 33,58,950 42,47,700 Tax on net income Income-tax† 8,20,185 10,86,810 Add: Health and education cess 32,807 43,472 Tax liability (rounded off) 8,52,990 11,30,280 Notes 1. House rent allowance taxable in the case of X - X gets house rent allowance at the rate of Rs. 80,000 per month for 3 months.

The exempt portion of house rent allowance will be determined as follows a. Rs. 92,500 per month (being 50% of Rs. 1,85,000); b. Rs. 80,000 per month (being house rent allowance); c. Rs. 41,500 per month (being the excess of rent paid of Rs. 60,000 per month over 10% of Rs. 1,85,000).

Rs. 41,500 (being least of the above) is exempt from tax. Rs, 38,500 (i.e., Rs. 80,000 Rs. 41,500) per month for 3 months is chargeable to tax (amount taxable being Rs. 1,15,500).

2. Perquisite in respect of rent-free house given to X - With effect from July 1, 2021, the company has taken House A on lease and the same house is given as a perquisite to X. Salary for this purpose is Rs. 2,15,000 (Rs. 1,85,000 + Rs. 30,000) per month. 15% Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh. ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

101

Solved problems

Problem P5.5

of salary (i.e., Rs. 32,250 per month) or lease rent of Rs. 80,000 per month, whichever is lower is taxable value of the perquisite.

For the year ending March 31, 2022, the amount taxable is Rs. 2,90,250 (Rs. 32,250 × 9).

3. House rent allowance taxable in the case of Y - Y gets house rent allowance at the rate of Rs. 80,000 per month for 12 months.

He resides in a rented accommodation up to June 30, 2021. From July 1, 2021 onwards, he uses his own house for residence for which he does not pay any rent. Exemption will be available from house rent allowance only up to June 30, 2021 as follows a. Rs. 92,500 per month (being 50% of Rs. 1,85,000); b. Rs. 80,000 per month (being house rent allowance); c. Rs. 41,500 per month (being the excess of rent paid of Rs. 60,000 per month over 10% of Rs. 1,85,000).

Rs. 41,500 (being least of the above) is exempt from tax for 3 months. Total exemption is Rs. 1,24,500. Amount taxable is Rs. 8,35,500 (i.e., Rs. 80,000 × 12 Rs. 1,24,500).

4. Advance rent of 9 months received by X will be taxable as income from house property in the next year. However, advance salary received by Y is taxable during the current year.

P5.5 X (40 years) owns a commercial property in Bangalore. It is let out to different tenants. Municipal valuation of the property is Rs. 25,00,000. Market rent of a similar property is Rs. 32,00,000. Annual rent (if there is no vacancy and no unrealized rent) is Rs.40,00,000.

Standard rent is not applicable. Unrealized rent is Rs. 3,20,000 [there are two tenants who have defaulted A : Rs. 1,20,000 and B : Rs. 2,00,000]. It is not possible to realize anything from A and B. B has also occupied a property owned by Mrs. X. One flat in the property (annual rent being Rs. 60,000) remains vacant for 4 months during the previous year. Another flat (annual rent being Rs. 90,000) remains vacant for 8 months during the previous year.

Annual rent of Rs. 40,00,000 includes Rs. 10,00,000 pertaining to different amenities provided in the building. Rs. 30,00,000 is rent of building and Rs. 10,00,000 is for different amenities which is calculated as follows 1. Lift maintenance charges : Rs. 3,50,000.

2. Electricity charges : Rs. 2,00,000.

3. Air-conditioning charges : Rs. 3,50,000.

4. Security guard charges : Rs. 1,00,000.

X has incurred following expenses in respect of the aforesaid property 1. Advocate fees and court charges for drafting lease agreements with tenants : Rs. 75,000.

2. Municipal tax of 2021-22 : Rs. 4,70,000 (however, 10 per cent rebate is obtained for payment before due date).

3. Arrears of municipal tax of 2020-21 paid during the current year : Rs. 1,20,000 (it includes interest on arrears of Rs. 15,000).

4. Expenditure on lift maintenance : Rs. 2,10,000 (a payment of Rs. 30,000 is made in cash).

5. Electricity bill : Rs. 2,40,000.

6. Air-conditioner maintenance : Rs. 80,000 (an amount of Rs. 40,000 is paid to B Ltd. in which X is a director holding 15 per cent share capital, similar services can be obtained from any other person for Rs. 18,000).

7. Salary to security guard : Rs. 1,25,000.

8. Salary of staff for supervising lift maintenance and air-conditioner services : Rs. 2,40,000.

9. Salary of staff for collecting rent and other charges : Rs. 90,000.

10. Insurance of building : Rs. 1,17,000.

11. General repair of building : Rs. 80,000.

12. Interest on loan taken from a foreign company payable outside India for construction of the property : Rs. 7,50,000 (tax is not deducted

by X under section 195).

13. Interest on the same loan for the previous year 2020-21 : Rs. 2,00,000 (paid during the current year after deducting tax at source).

Besides, the above expenses, X can claim depreciation on lift and air-conditioning system which comes to Rs. 5,07,500.

Assuming that income of X from business is Rs. 9,70,000 and he annually contributes Rs. 1,20,000 in public provident fund, find out net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Annual rent is Rs. 40,00,000. Out of which annual rent of the property is Rs. 30,00,000 and charges for different amenities (like lift, air-conditioning, electricity, security guard) are Rs. 10,00,000. In other words, 75% of the annual rent pertains to rent of building and 25% of rent pertains to charges for different amenities. From the data given in the problem, the following calculation can be made Total

Rs. Annual rent if there is no vacancy and no unrealized rent Less: Unrealised rent (Rs. 1,20,000 + Rs. 2,00,000) Rent after deducting unrealized rent Less: Loss due to vacancy [(Rs. 60,000 × 4 ÷ 12) + (Rs. 90,000 × 8 ÷ 12)] Balance

Rent of building (75% of total) Rs.

Charges for different amenities (25% of total) Rs.

40,00,000 3,20,000 36,80,000

30,00,000 2,40,000 27,60,000

10,00,000 80,000 9,20,000

80,000 36,00,000

60,000 27,00,000

20,000 9,00,000

‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

Problem P5.6

Income under the head “Income from house property”

102 Rs.

Computation of gross annual value Municipal value (MV) Fair rent (FR) Standard rent (SR) Annual rent Unrealized rent Loss due to vacancy Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy Step III - Amount computed in Step I or Step II, whichever is higher Step IV - Loss due to vacancy Step V - Gross annual value is Step III minus Step IV Less: Municipal tax [(90% of Rs. 4,70,000) + (Rs. 1,20,000 Rs. 15,000) Net annual value Less: Deductions under section 24 Standard deduction @ 30% Interest on borrowed capital Income

25,00,000 32,00,000 NA 30,00,000 2,40,000 60,000 32,00,000 27,60,000 32,00,000 60,000 31,40,000 5,28,000 26,12,000 7,83,600 Nil 18,28,400

Note - Interest payable outside India is not deductible if proper tax has not been deducted by the taxpayer. Interest of last year (in respect of which tax is deducted during the current year) is not deductible during the current year.

Computation of income from other sources Rs. Amount collected for different amenities (after excluding vacancy and unrealized amount, as calculated above) (Rs. 9,20,000 Rs. 20,000) 9,00,000 Less: Expenses and depreciation Legal expenses for drafting agreements (25% of Rs. 75,000) 18,750 Lift maintenance expenditure (Rs. 2,10,000 cash payment of Rs. 30,000 to be disallowed) 1,80,000 Electricity 2,40,000 Air-conditioner maintenance (Rs. 80,000 excess payment to B Ltd., i.e., Rs. 22,000) 58,000 Security guard 1,25,000 Supervisor salary 2,40,000 Salary of staff for collecting rent and other charges (25% of Rs. 90,000) 22,500 Depreciation 5,07,500 Income from other sources ( ) 4,91,750 Computation of income and tax liability Income from house property 18,28,400 Business income 9,70,000 Income from other sources ( ) 4,91,750 Gross total income 23,06,650 Less: Deduction under section 80C 1,20,000 Net income 21,86,650 Tax on net income Income-tax† 4,68,495 Add: Health and education cess 18,740 Tax liability (rounded off) 4,87,230 P5.6 X (66 years) is the owner of a residential house whose construction was completed on July 31, 2014. It has been let out for residential purposes from October 1, 2014. The following information is available from the records supplied by X

†Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh.

103

Solved problems

Problem P5.6

Rs. Municipal tax (levied by Pune Municipal Corporation @ 17.5 per cent) 1,70,000 Market rent of a similar property in Mumbai 26,00,000 Market rent of a similar property in Pune 8,00,000 Annual rent (if there is no vacancy or unrealized rent) 11,75,000 Standard rent under the Pune Rent Control Act 10,50,000 Unrealized rent due from the new tenant (the defaulting new tenant has still occupied the property and no action has been taken to compel him to vacate the property) 1,00,000 Loss due to vacancy (the old tenant has vacated the property on February 1, 2021 and the current tenant has occupied it with effect from April 11, 2021) Loss for 2021-22 31,507 Loss for 2020-21 1,90,000 Municipal taxes paid during 2021-22 (including Rs. 70,000 paid by the tenant and Rs. 20,000 paid by X as penalty for giving incorrect information pertaining to municipal tax to municipal authorities) 1,90,000 Interest on loan taken for the construction of the house. Interest is paid to B Ltd., an Indian company, without deducting tax at source 4,00,000 Arrears of rent pertaining to 2019-20 recovered on May 10, 2022 80,000 Legal expenditure for recovering arrears of rent 32,000 Taking into consideration the following information, find out net income and tax liability of X for the assessment year 2022-23 (ignore section 115BAC pertaining to alternative tax regime‡) 1. The tenant has deducted a sum of Rs. 25,000 from the rent payable to X for the year 2021-22 on account of poor maintenance of building.

2. For the previous year 2020-21, X has not claimed deduction of Rs. 50,000 paid by him on March 31, 2020 on account of municipal tax. He wants to claim deduction of the from the income of 2021-22.

3. During the previous year 2021-22, X has paid arrears of interest of Rs. 30,000. This interest pertains to housing loan which he has taken from B Ltd. 4. Income of X from other sources is Rs. 16,07,000.

5. He wants to claim deduction of Rs. 1,40,000 on account of payment of life insurance premium (sum assured is Rs. 70,00,000) (policy was taken in 2009-10).

Solution : Computation of gross annual value Rs. Municipal value (Rs. 1,70,000 ÷ 17.5 × 100) (MV) 9,71,429 Fair rent (FR) 8,00,000 Standard rent (SR) 10,50,000 Annual rent (Rs. 11,75,000 Rs. 25,000) 11,50,000 Unrealized rent (not to be considered as the tenant has not been asked to vacate the property) Nil Loss of 2021-22 due to vacancy 31,507 Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] 9,71,429 Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy 11,50,000 Step III - Amount computed in Step I or Step II, whichever is higher 11,50,000 Step IV - Loss due to vacancy 31,507 Step V - Gross annual value is Step III minus Step IV 11,18,493 Less: Municipal tax (Rs. 1,90,000 Rs. 70,000 Rs. 20,000) 1,00,000 Net annual value 10,18,493 Less: Deductions under section 24 Standard deduction @ 30% 3,05,548 Interest on borrowed capital 4,00,000 Income 3,12,945 Computation of income and tax liability Income from house property 3,12,945 Income from other sources 16,07,000 Gross total income 19,19,945 Less: Deduction under section 80C 1,40,000 Net income (rounded off) 17,79,950

‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

Problem P5.7

Income under the head “Income from house property”

104

Rs. Tax on net income Income-tax† 3,43,985 Add: Health and education cess 13,759 Tax liability (rounded off) 3,57,740 Notes 1. Municipal tax is always deductible on payment basis. Municipal tax paid on March 31, 2021 is deductible from the gross annual value of the previous year 2020-21. It cannot be claimed as deduction from the gross annual value of the previous year 2021-22.

2. Interest on borrowed capital is deductible under section 24(b) on accrual basis. In other words, amount pertaining to arrears of interest of an earlier year, cannot be claimed as deduction during the current year, even if it is paid in the current year.

P5.7 X (29 years) owns a property in Trivandrum. The property has two units Unit A and Unit B and both are of identical size.

Municipal valuation of the entire property is Rs. 6,10,000. Market rent is Rs. 7,20,000. Standard rent is Rs. 9,00,000. Unit A is let out throughout the year on monthly rent of Rs. 47,000. Unit B is self-occupied up to May 31, 2021. X has vacated Unit B on May 31, 2021, as he has got a rent-free furnished house from his employer A Ltd. Unit B is let out on August 15, 2021 on monthly rent of Rs. 49,000.

Taking into consideration the following information, find out net income of X and tax liability thereon (after deducting TDS) for the assessment year 2022-23 (ignore section 115BAC pertaining to alternative tax regime‡) 1. Unit A is let out to DEF Ltd. DEF Ltd. pays Rs. 42,300 (i.e., Rs. 47,000 10 per cent TDS under section 194-I). DEF Ltd. has given an interest-free refundable deposit of Rs. 10,00,000. It is deposited in fixed deposit with SBI, Chennai and X gets annual interest of Rs. 1,29,500.

2. X is employed by A Ltd. on salary of Rs. 85,000 per month. Besides, he gets special allowance of Rs. 10,000 per month. With effect from June 1, 2021, he has been allotted a rent-free furnished house at Chennai by A Ltd. House is owned by subsidiary company of A Ltd. for which A Ltd. has to pay a nominal rent of Rs. 10,000 per month (rent of 2021-22 is not paid so far). Furniture in the house is owned by A Ltd. (it was purchased in 1998 for Rs. 30,000).

3. Municipal tax of the property owned by X is Rs. 82,000 for the previous year 2021-22. It is, however, paid by the employer company, A Ltd. 4. X has a brought forward house property loss of Rs. 75,000. This loss pertains to the previous year 2018-19 of the property mentioned above. It was possible to set off this loss during 2018-19 against salary income. However, X has not claimed the adjustment in 2018-19.

He wants to claim deduction of Rs. 75,000 from the property income of the previous year 2021-22.

5. X pays life insurance premium of Rs. 40,000 on an insurance policy taken by Mrs. X on her life. Sum assured of the policy taken in 2009 is Rs. 3,60,000. Till the previous year 2020-21, Mrs. X has paid insurance premium and availed deduction under section 80C. He also pays Rs. 72,000 as tuition fee of his daughter s school.

6. Tax deducted by A Ltd. on salary income under section 192 is Rs. 2,95,000.

7. X Ltd. maintains unrecognized provident fund.

Solution : Computation of income from house property

Municipal value (MV) Fair rent (FR) Standard rent (SR) Annual rent (*Rs. 47,000 × 12, **Rs. 49,000 × 10, as Unit B is available for letting out from June 1, 2021) Unrealized rent Loss due to vacancy (Rs. 49,000 × 2.5 months, i.e., from June 1, 2021 to August 15, 2021) Municipal tax Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy Step III - Amount computed in Step I or Step II, whichever is higher Step IV - Loss due to vacancy Step V - Gross annual value is Step III minus Step IV Less: Municipal tax

Unit A Rs. 3,05,000 3,60,000 4,50,000

Unit B Rs. 3,05,000 3,60,000 4,50,000

5,64,000* Nil

4,90,000** Nil

Nil 41,000

1,22,500 41,000

3,60,000

3,60,000

5,64,000 5,64,000 Nil 5,64,000 41,000

4,90,000 4,90,000 1,22,500 3,67,500 41,000

†Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh. ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

105

Solved problems

Problem P5.8 Unit A Rs.

Unit B Rs.

Net annual value 5,23,000 3,26,500 Less: Deductions under section 24 Standard deduction @ 30% 1,56,900 97,950 Interest on borrowed capital Nil Nil Income 3,66,100 2,28,550 Computation of salary income Basic salary (Rs. 85,000 × 12) 10,20,000 Special allowance (Rs. 10,000 × 12) 1,20,000 Rent-free furnished house [see Note 3] 1,02,500 Municipal tax paid by employer (being an obligation of employee met by employer) 82,000 Standard deduction ( )50,000 Salary income 12,74,500 Computation of net income and tax Salary 12,74,500 Income from house property (Rs. 3,66,100 + Rs. 2,28,550) 5,94,650 Income from other sources (being bank interest) 1,29,500 Gross total income 19,98,650 Less: Deduction under section 80C 1,12,000 Net income 18,86,650 Tax on net income Income-tax† 3,78,495 Add: Health and education cess 15,140 Tax liability 3,93,635 Less: Prepaid tax Tax deducted by employer under section 192 2,95,000 Tax deducted by DEF Ltd., tenant, under section 194-I (10% of Rs. 47,000 × 12) 56,400 Net tax liability (rounded off) 42,230 Notes 1. Refundable deposit - Refundable deposit is not taken into consideration to find out gross annual value.

2. Municipal tax - Municipal tax paid by employer, is taxable in the hands of X as a perquisite. At the same time, municipal tax paid (which is included as perquisite) is taken as payment by X and, consequently, it is deductible.

3. Perquisite in respect of rent-free house - Rent-free house is provided with effect from June 1, 2021. During the previous year 2021-22, the perquisite is provided for 10 months. Salary of X from June 1, 2021 to March 31, 2022 is Rs. 9,50,000 [i.e., (Rs. 85,000 + Rs. 10,000) × 10]. 15% of Rs. 9,50,000 is Rs. 1,42,500. Actual rent paid/payable by employer for 10 months is Rs. 1,00,000. Value of unfurnished house is Rs. 1,00,000 (i.e., 15% of salary or actual rent, whichever is lower). Value of furniture for 10 months is Rs. 2,500 (i.e., 10% of Rs. 30,000 × 10 ÷ 12). The aggregate amount is Rs. 1,02,500.

4. Brought forward loss - Loss from house property for the year 2018-19 can be set off against any income including salary income of the previous year 2018-19. There is no option available to the taxpayer in respect of this rule. If salary or any other income is sufficient to adjust loss from house property, then it cannot be carried forward and adjusted against income of any other year.

P5.8 X (40 years) is an Indian but now he is a citizen of USA. During the previous year 2021-22, he is in India for 300 days. During April 1, 2011 and March 31, 2020, he is in India for 600 days. He is resident in India for the previous years 2018-19 and 2019-20.

He has two businesses Business A (chemical manufacturing business) and Business B (business of letting out of properties on rent in India and outside India). From Business, A he has generated income of Rs. 7,00,000 in India and Rs. 5,00,000 outside India. The following information is available from the records of X pertaining to Business B (All figures in INR)

Number of properties Gross annual value of these properties Municipal tax actually paid in 2021-22

House properties in India 6 46,72,000 6,00,000

House properties outside India 9 83,70,000 12,50,000

†Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh.

Problem P5.8

Income under the head “Income from house property”

106 (All figures in INR)

House properties in India Repair expenses Insurance Interest on capital borrowed for repairing properties Charges for lift, electricity, air-conditioning and security services collected (in addition to rent) from tenants (a) Amount actually spent for this purpose (b) Depreciation admissible in respect of lift and air-conditioning system (c)

House properties outside India

14,000 80,000 50,000

15,90,000 4,15,000 60,000

25,12,972 15,00,000 7,10,000

37,65,000 22,00,000 12,80,000

Business A and Business B are controlled partly from India and partly from outside India. Rent of 9 properties situated outside India is received outside India. Later on approximately 30 per cent rent is remitted to India. X is employed by a foreign company. During the previous year 2021-22, he has received salary of Rs. 36,00,000 out of which Rs. 10,00,000 pertains to services rendered in India. As per agreement with the employer Rs. 10,00,000 is accrued outside India and paid outside India. X pays insurance premium of Rs. 20,000 in India (sum assured : Rs. 2,00,000) and Rs. 2,50,000 outside India (sum assured : Rs. 30 lakh).

Find out net income and tax liability of X in India for the assessment year 2022-23. Ignore double taxation relief available under section 90. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : During the previous year 2021-22, X is in India for 300 days. During last 7 years he is not in India for at least 730 days. Consequently, X is resident but not ordinarily resident in India for the assessment year 2022-23.

Indian income is chargeable to tax in India. Foreign income is taxable if it is a business income and arises from a business which is controlled wholly or partly from India. Business A is controlled from India as well as from outside India. Even income generated and received outside India pertaining to Business A is taxable in India.

Business B consists of letting out of properties in India and outside India. It also includes the business of providing services (like lift, electricity, air-conditioning, security, etc.) to tenants. Income from letting out of properties cannot be taken as business income, as it is taxable under the head, Income from house property . However, income from the incidental business of providing different services to the tenants can be taken as business income.

Computation of income of Business A and Business B Indian income Rs. Computation of business income Business A Business B (the activity of providing incidental services to tenants) [(a) (b) (c)] Total Computation of house property income Gross annual value Less: Municipal tax Net annual value Less: Deductions Standard deduction Interest on borrowed capital Income Salary (for rendering service in India) (after standard deduction) House property income Business income (Rs. 10,02,972 + Rs. 7,85,000) Gross total income Less: Deduction under section 80C Net income (rounded off) Tax on net income Income-tax† Add: Surcharge @10% Tax and surcharge Add: Health and education cess Tax liability (rounded off) †Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

Foreign income Rs.

7,00,000

5,00,000

3,02,972 10,02,972

2,85,000 7,85,000

46,72,000 6,00,000 40,72,000

83,70,000 12,50,000 71,20,000

12,21,600 50,000 28,00,400

21,36,000 60,000 49,24,000 9,50,000 28,00,400 17,87,972 55,38,372 1,50,000 53,88,370 14,29,011 1,42,901 15,71,912 62,876 16,34,790

107

Solved problems

Problem P5.9

P5.9 X (53 years) owns a house property. It is situated at Nariman Point, Mumbai. The following information is available Rs. Municipal valuation 33,20,000 Market rent of a similar property at Nariman Point, Mumbai 60,00,000 Market rent of a similar property at Andheri (East), Mumbai 38,00,000 Standard rent 57,00,000 Municipal tax of 2021-22 4,50,000 Municipal tax of 2021-22 paid in 2021-22 3,92,000 Municipal tax of 2020-21 paid in 2021-22 3,00,000 Advance municipal tax for next 5 years paid in 2021-22 18,00,000 Repair expenses (10 per cent is borne by tenant) 90,000 Insurance 80,000 The above property is let out on monthly rent of Rs. 5,70,000 up to June 30, 2021. Tenant has vacated the property on June 30, 2021 without paying one month rent. The property is lying vacant during July and August 2021 as no suitable tenant is available. X occupies the property for his own residence from September 1, 2021. Till September 1, 2021, he resides in a rented accommodation for which he pays rent of Rs. 80,000 per month. Construction of the property was completed in April 2020. A loan of Rs. 90,00,000 was taken to finance construction of the property. This loan was taken from an Indian private limited company.

Interest liability pertaining to the period ending March 31, 2020 is Rs. 24,80,000. Interest liability for the previous year 2021-22 is Rs. 11,50,000. Every year interest is paid on due dates. However, tax is not deducted under section 194A. X is a businessman (turnover : above Rs. 5 crore). His business income for the previous year 2021-22 is Rs. 77,90,000 (an interest liability of Rs. 2,00,000 is paid to A Ltd. without deducting tax at source under section 194A). X deposits Rs. 2,00,000 in a fixed deposit account with SBI, Nariman Point, Mumbai for the purpose of claiming deduction under section 80C. After litigation with the tenant, X recovers on March 20, 2022, one month s unrecovered rent from the tenant with interest of Rs. 24,000 (total amount recovered is Rs. 5,94,000).

Litigation expenditure is Rs. 12,500.

Find out the net income and tax liability of X for the assessment year 2022-23. Ignore section 115BAC pertaining to alternative tax regime‡.

Solution : Computation of income of X Rs. Computation of gross annual value Municipal value (MV) 33,20,000 Fair rent (FR) 60,00,000 Standard rent (SR) 57,00,000 Rent of the property from April 1, 2021 to August 31, 2021 (i.e., the period for which the property is available for letting out during the previous year 2021-22) (Rs. 5,70,000 × 5) 28,50,000 Unrealized rent (rent is ultimately recovered during the previous year) Nil Loss due to vacancy (Rs. 5,70,000 × 2) 11,40,000 Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] 57,00,000 Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy 28,50,000 Step III - Amount computed in Step I or Step II, whichever is higher 57,00,000 Step IV - Loss due to vacancy 11,40,000 Step V - Gross annual value is Step III minus Step IV 45,60,000 Less: Municipal tax (Rs. 3,92,000 + Rs. 3,00,000 + Rs. 18,00,000) 24,92,000 Net annual value 20,68,000 Less: Deductions under section 24 Standard deduction @ 30% 6,20,400 Interest on borrowed capital (1/5 of Rs. 24,80,000 + Rs. 11,50,000) 16,46,000 Income ( )1,98,400 Computation of income and tax liability Income from house property ( )1,98,400 Business income [Rs. 77,90,000 + disallowance of 30% of Rs. 2,00,000 under section 40(a)(ia) on account of non-deduction of tax under section 194A] 78,50,000 Income from other sources Interest recovered : Rs. 24,000 Less: Proportionate legal expenditure : Rs. 505 (i.e., Rs. 12,500 × Rs. 24,000 ÷ Rs. 5,94,000) 23,495 Gross total income 76,75,095 Less: Deduction under section 80C 1,50,000 ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

Problem P5.10

Income under the head “Income from house property”

108 Rs.

Net income (rounded off) Tax on net income Income-tax† Add: Surcharge @10% Tax and surcharge Add: Health and education cess Tax liability (rounded off)

75,25,100 20,70,030 2,07,030 22,77,033 91,081 23,68,110

Note - Disallowance under section 40(a)(ia) is applicable only in the case of business income. If interest, pertaining to house property, is paid without deduction of tax at source, disallowance provisions of section 40(a)(ia) are not applicable.

P5.10 X (63 years) is a joint finance officer in A Ltd., Mumbai. He gets Rs. 70,000 per month as salary. He owns two houses, one of which is let out to the employer-company which in turn provided the same to X as rent-free accommodation. X contributes 10 per cent of his salary towards recognized provident fund. The following information is available from the records of X House I Rs. Fair rent (FR) 4,00,000 Annual rent 4,12,000 Municipal valuation (MV) 3,70,000 Standard rent (SR) 3,50,000 Municipal taxes paid 41,000 Repairs 6,000 Insurance, land revenue, ground rent, etc.

20,000 Interest on capital borrowed by mortgaging House I (funds are used for construction of House II) 48,000 Unrealised rent of the previous year 2019-20

Unrealised rent of 2020-21

Nature of occupation Let out to A Ltd.

House II Rs. 16,00,000 20,70,000 14,00,000 15,50,000 1,60,000 12,000 40,000

1,70,000 65,000 Let out to Y for business Date of completion of construction March 2003 April 2005 Determine the net income of X for the assessment year 2022-23. Also find out net tax liability after deducting the amount of tax deducted at source. Ignore section 115BAC pertaining to alternative tax regime‡. The following additional information is available 1. On December 15, 2021, X takes a loan of Rs. 50,000 from a bank to pay municipal tax of financial year 2021-22 pertaining to House II. Interest of this loan of Rs. 3,000 for the period ending March 31, 2022 is paid on March 31, 2022.

2. On April 1, 2020, he took a similar loan of Rs. 40,000 from another bank to pay municipal tax of financial year 2020-21 of House II. This loan is repaid on April 30, 2021. X wants to claim deduction under section 80C. 3. Rent of House I paid by A Ltd. for the financial year 2021-22 is Rs. 4,12,000. However, amount actually received by X is Rs. 3,70,800 (i.e., Rs. 4,12,000 10 per cent TDS under section 194-I).

4. House II is a commercial property. Annual rent of House II given above is inclusive of service tax/GST of Rs. 2,70,000. However, service tax/GST collected by X during 2021-22 is not paid till date. Tax is not deducted at source by the tenant of House II. 5. A Ltd. has deducted tax at source of Rs. 1,70,000 from salary under section 192.

6. Income of X from other sources is Rs. 6,08,000.

7. He deposits Rs. 70,000 to public provident fund account during the previous year.

Solution : Rs. Basic salary (i.e., Rs. 70,000 × 12) 8,40,000 Perquisite in respect of rent-free house [see Note 1 infra] 1,26,000 Gross salary 9,66,000 Less: Standard deduction 50,000 Salary 9,16,000 Property income - House I (let out for residence) Step I - Reasonable expected rent of the property [MV or FR, whichever is higher, but subject to maximum of SR] 3,50,000 Step II - Rent received/receivable after deducting unrealized rent but before adjusting loss due to vacancy 4,12,000 Step III - Amount computed in Step I or Step II, whichever is higher 4,12,000 †Rebate under section 87A is not available as income of the assessee is more than Rs. 5,00,000. Surcharge on income-tax is not applicable as income of the assessee does not exceed Rs. 50 lakh. ‡ Alternative tax regime provisions of section 115BAC are discussed in this book in Chapter 13.

Students Guide To Income Tax Including GST Problems & Solutions

AUTHOR : VINOD K. SINGHANIA, MONICA SINGHANIA PUBLISHER : TAXMANN DATE OF PUBLICATION : DECEMBER 2021 EDITION : 24TH EDITION ISBN NO : 9789393656018 NO. OF PAGES : 592 BINDING TYPE : PAPERBACK

Rs. 1195 | USD 53

Description Taxmann’s flagship publication for Students’ on Income Tax & GST Laws with a specific focus on New Problems & Different Solutions. Besides illustrations & solved problems, it contains unsolved exercises based on the readers’ queries received by the authors over the years.

This book is an authentic, up to date & amended textbook on Income Tax problems & solutions for students of CA Intermediate (May/Nov. 22), CS Executive (June/Dec. 22), CMA (June/Dec. 22), B.Com., M.Com., MBA, and other Professional Examinations.

The Present Publication is the 24th Edition, authored by Dr Vinod K. Singhania & Dr Monica Singhania.

The legal position as amended up to 10th November 2021 is given. Practical income-tax problems are solved as per the law applicable for the assessment year 2022-23. GST problems are solved as per law amended up to 10th November 2021.

The coverage of the book is as follows: u

[Provisions

of Income Tax & GST along with a Guide] Section One covers provisions of Income Tax & GST along with a guide for students to update and refresh their knowledge

u

[Solved

u

[Solutions to the Problems showing the Right Approach] Section Three covers solutions to problems, similar

Problems on Typical Contemporary Issues of Law] Section Two covers solved problems, with a ‘specific emphasis on typical contemporary issues of the law in the recent years. These set of problems are unique as they have not been covered in any examination paper, nor these are found in similar print books to the unsolved exercises given in ‘[66th Edition] of Taxmann’s Students’ Guide to Income-tax including GST’. The idea behind this is to induce the students to solve the unsolved exercises on their own while they have a working model before them showing the right approach

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