1.

The provisions in Chapter VIA are in the form of deductions (80C to 80U) from the total income.
Explain the general rules for claiming deductions and after this explain each major spheres
deductions under sections (80C to 80U)
Ans:

Deductions from Gross Total Income

The provisions in Chapter VIA are in the form of deductions (80C to 80U) from the total income.
The following are the general rules for claiming deductions:
The total of all deductions must be limited to the amount of the total income of the
assessee.
The deductions allowed cannot result in a negative income.
There must be no double-claiming of a deduction. This can happen when an individual
files a tax return separately, while the Association of Persons (AOP) to which he belongs is also
liable to file a return. In such cases, the deduction can be claimed by one of the two, and not by
both.
Deductions have to be specifically claimed by the assessee, and the Assessing Officer
is not bound to allow an unclaimed deduction. However, the taxpayer can claim and use the
deduction if the return goes to the appellate stage. For some deductions the taxpayer has to file
returns on or before the due date. If this is not done, the claim will be denied.
The assessee must place all relevant material before the Assessing Officer and
convince him that he is entitled to the deductions claimed.
The following are the major spheres in which deductions are given under Chapter VIA (Sections
80C to 80U):
Individual savings and investments
Health
Education
Donation
Expenses incurred for specified purposes
Certain industry classifications
Environmental protection

For a rapidly developing economy like India, these are relevant. Therefore, the Act provides
incentives for initiatives taken by individuals and companies in these domains.
For any previous year (PY), the deductions can be sourced from the Finance Act of the relevant
year. The following list is relevant for incomes earned during PY12-13 or assessment year (AY)
2013-14.
Deductions under Sections 80C to 80U
Individual savings and investments: When individuals in receipt of salary income save
money in the form of the following, the total of such savings, investments and pay-outs is
allowed as deduction:
by the Government of India

This is subject to a maximum of ` 20,000 for investment in infrastructure bonds, and ` 1,00,000
for all other savings or investments. (Section 80C, 80CC, etc.)

2.
Write short notes on:
a) Profit in Lieu of salary-Sec 17(3)
b) Tax planning avenues for salary income

Ans:

a)
Profit in Lieu of Salary
Section 17(3) defines profit in lieu of salary to include:
1. The amount of compensation due to or received by an assessee from his employer or former
employer at or in connection with
a) Termination of employment or
b) Modification of the terms and conditions of employment.
2. Any payment due to or received by the assessee from his employer or former employer or
from provident or any other fund or any sum received under a key man insurance policy
including the sum allocated by way of bonus on such policy. (It does not include exempt
payments from superannuation fund, gratuity, commuted pension, retrenchment compensation,
house rent allowance, employees contribution to PF and interest thereon).
3. Any amount due to or received whether in lumpsum or otherwise, by any assessee from any
person before his joining any employment with that person or after cessation of his employment
with that person.

b) Tax Planning Avenues for Salary Income

The following ideas are considered for effective tax planning under the head Salaries:
For employees in high tax brackets it is important to structure the salary into different
taxable and non-taxable components, to make it more tax-friendly. For employees with a total
salary in excess of ` 10 lakh, it would be a good idea for the employee to discuss with the
person in charge of payroll and tax deduction and devise a salary structure to provide the lowest
tax incidence.
nclude medical reimbursement, conveyance, leave
travel concession, telephone expenses, education and food expenses as items forming part of
salary that are exempt from tax. To the extent feasible and proper, these should be used.
oyees wrongly believe that allowances paid in cash
separately and which do not form part of the monthly salary will escape the tax net. This is tax
evasion and is illegal. Similarly, some companies have components like attire allowance as part
of their pay structure claiming these to be non-taxable. This is also wrong.
should be taken from the landlord, and the landlords PAN should be known.
nd DA is crucial for HRA, provident fund and gratuity. This
should be remembered when structuring the salary components.
Gestetner Duplicators (P) Ltd. vs. CIT [1979]1
Taxman 1/117 ITR 1) that commission payable as per terms of contract of employment at a
fixed percentage of turnover achieved by an employee falls within the definition of salary.

exempt from tax for non-government employees who can claim relief under Section 89. It may,
therefore, be sensible to get pension commuted.
up to 12% of the salary (defined as basic salary plus DA). But, the Act provides that for salaries
above ` 6,500, the amount of provident fund can be capped at 12% of ` 6,500. That is, if an
employees
salary (basic + DA) is, say, ` 12,000, he can contribute only ` 780 to PF, which is 12% of
` 6,500, and not 12% on the full amount of ` 12,000.
company contributes an equal amount. This is a good tax planning device. It needs balancing
among cash need, saving potential and tax incidence.
allowance is taxable. But, medical reimbursement against actual bills is taxfree upto ` 15,000 per annum. Medical facilities used by the employee are not taxable provided
certain conditions are satisfied.
-resident assessee from abroad is taxable in India.
If, however, such pension is first received by or on behalf of the employee in a foreign country
and later on remitted to India, it will be exempt from tax.
rent free house, the term salary
includes basic salary, bonus commission and all other taxable allowances. It is beneficial if an
employee selects perquisites rather than taxable allowances. This may reduce valuation of rent
free house and exempt employees from falling within the purview of specified employee
u/s17(2)(iii).
requirements of each employee taking into consideration the present take home pay and future
benefits of different items in the salary structure.
3. There certain important things to know under Section 54ED. Explain all the important
conditions in Section 54ED in Capital Gain.
Mr. A acquired a plot of land on 15th June,1993 for Rs. 10,00,000 and sold it on 5th
Jan,2010 for Rs.41,00,000. The expenses of transfer were Rs.1,00,000.
Mr.A made the following investments on 4th Feb,2010 from the proceeds of the plot.
a) Bonds of Rural Electrification Corporation redeemable after a period of three
years Rs. 12,00,000.
b) Deposits under Capital Gain Scheme for purchase of a residence house
Rs.8,00,000 (he does not won any house).
Compute the capital gain chargeable to tax for the AY 2010-11

Ans.
Section 54ED:
Capital gain on transfer of a long-term asset in the nature of a share or a security is exempt
subject to the following conditions:
1. A long-term capital asset is transferred by an assessee.
2. The long-term capital asset is (a) a security listed in any recognized stock exchange in India
(b) a unit of UTI or a mutual fund (whether listed or not).
Securities mean (i) shares, scripts, stocks, bonds, debenture, debenture stocks or other
marketable securities of a like nature in or of any incorporated company or other corporate. (ii)

Government securities, (iii) such other instruments as may be declared by the central
government, (iv) rights of interest in securities.
3. Within six months from the date of transfer of the asset, the assessee should invest the
capital gains in specified equity shares.
4. If the cost of the specified equity shares is not less the whole capital gains will be exempt
from tax. If however, the amount invested in the specified equity shares in less the capital gains,
then the amount of exemption is equal to the amount in specified equity shares.
5. If the specified equity shares are sold or otherwise transferred within one year from the date
of acquisition. The amount of capital gains arising from transfer of original assets which was not
charged to tax will be deemed to be income by way of long term capital gain of previous year in
which specified equity shares transferred.
6. The cost of specified equity shares which is considered for the purpose of Section 54ED shall
not be eligible for tax rebate u/s 88 for any assessment year before 1st April, 2006and under
Section 80C for assessment year starting after 1st April, 2006.
Solution:
Assessment Year 2010-11

Total consideration
Less: i) Expenses on transfer
ii) Indexed cost of acquisition 10,00,000 551/244
Long-term capital gain
Less: Exemption u/s 54EC
Exemption u/s 54F (17,41,803 8,00,000/40,00,000)
Taxable long-term capital gain

41,00,000
1,00,000
22,58,197
12,00,000
3,48,361

23,58,197
17,41,803
15,48,361
1,93,442

4.
Elaborate and write on the administrative mechanism envisaged in the DTC in Tax
Management and also write on the assessment procedure.

Ans.
Tax Management
Tax Administration
Authorities
There shall be the following classes of income-tax authorities for the purposes of this Code,
namely:
a) the Central Board of Direct Taxes constituted under the Central Boards of Revenue
Act, 1963
b) Chief Commissioners of Income-tax or Director-Generals of Income-tax
c) Commissioners of Income-tax or Directors of Income-tax or Commissioners of
Income-tax (Appeals)
d) Additional Commissioners of Income-tax or Additional Directors of Income-tax
e) Joint Commissioners of Income-tax or Joint Directors of Income-tax
f) Deputy Commissioners of Income-tax or Deputy Directors of Income-tax

g) Assistant Commissioners of Income-tax or Assistant Directors of Income-tax

h) Income-tax Officers
i) Tax Recovery Officers
j) Inspectors of Income-tax
Appeals and Revision
The CIT (A) and the Income Tax Appellate Tribunal cannot condone delay in filing of an appeal
if delay exceeds a period of one year from the date specified.
The Income Tax Appellate Tribunal may now suo moto amend any order passed by it, at any
time within a period of four years from the date of the order with a view to rectifying any mistake
apparent from the face of the record.
Concept of National Tax Tribunal is absent. Appeals against the order of the Income-tax
Appellate Tribunal will lie before the High Court and not the National Tax Tribunal as envisaged
earlier. Appeals against order of CIT, CIT(A) or an AO in pursuance of the directions of the DRP
will lie before Authority for Advance Rulings in case of Public Sector Companies.
Revision of orders by CIT
Circumstances have been specified where the CIT can exercise revisionary powers. CIT cannot
cancel an assessment and direct a fresh assessment during revisionary proceedings. An appeal
against the order passed by the CIT of Income-tax revising an assessment order prejudicial to
Revenue will lie before the Income tax Appellate Tribunal. Powers are given to CIT to revise
orders where the revision is not prejudicial to the assessee.
Penalties and Prosecution
Maximum penalty reduced to two times of the tax sought to be evaded. In case of individuals
and cooperative societies, penalty will be based on applicable marginal rates. Penalty orders
can also be passed by CIT and CIT(A). CIT's power to reduce or waive penalty and grant
immunity from penalty and prosecution removed. Every offence under the DTC is punishable
with both imprisonment and fines apart from monetary penalties.
Assessment Procedure
Return of income and assessment
The due date for filing the return of income for non-corporate taxpayers is 30 June of the year
following the financial year and for other assesses is 31 August. Belated/revised return can be
filed within 24 months from the end of the financial year. In the draft DTC released in 2009, the
due date for belated / revised returns was 21 months from the end of the financial year. Time
period for furnishing a return in response to a notice pursuant to non-filing of a return reduced to
14 days. An acknowledgement will be issued on receipt of each return of tax bases and initial
processing completed within 12 months from the month in which the return is filed.
Reference to procedure for selection of cases for scrutiny assessments in line with risk
management strategy as proposed in the draft DTC released in 2009 has been dropped in the
revised DTC. Time limit for making an application for rectification of mistake in an order /
intimation has been increased to four years from the end of the financial year in which the
order/intimation is passed.

5.
Service tax is a tax levied on services. List down the registration under service tax rules.
Write down the procedure for registration and payment of service tax.
Compute the taxable turnover and service tax liability for the year 2 of a new company in
each of the following situations:
Particulars

Situation 1

Situation 2

Situation 3

Year 1
Year 2

800000
800000

800000
1100000

1100000
800000

Ans.

Service Tax
Service tax is a tax levied on services. There is no separate legislation for levy of service tax.
The provisions of service tax are contained in Chapter V of the Finance Act, 1994. Service tax is
administered by the Central Excise department.
Service tax provisions are not applicable to the following:

Registration under service tax rules

Service tax registration is required if:
ious year exceeds the
prescribed amount (for financial year 2012-13 the limit is Rs. 9 lakh).
The service tax provider is acting as an input service distributor irrespective of the
turnover.
ipient of service under
reverse charge.
Procedure for registration
The following steps must be performed in order to obtain a registration.
Step 1: Apply for registration in Form ST-1 to the Superintendent of Central Excise.
Step 2: Submit the required documents like PAN, Affidavit, Resident Proof, Partnership Deed in
case of a firm, Memorandum and Articles of Association in case of a company.
Step 3: The Superintendent of Central Excise will grant a certificate of registration in Form ST-2
within 7 days.
In case of providing multiple services, only one application is enough and it has to be mentioned
in Form ST-1.
Taxable services
Service tax is levied on all services which are specified in the Finance Act, 1994 from time to
time.
Service tax liability arises only after the service tax provider has registered himself/herself either
compulsorily or voluntarily. All persons who are registered under the service tax law are liable
to pay service tax. Liability to pay service tax may not arise even if the person is required by law
to register.
Payment of service tax
the service provider.
quarter on or before 5th of
the month following the quarter ended June, September, and December every year; and for
March, it has to be paid on or before 31st March.
th of

the following month and for March they have to pay on 31st March.
Service tax rate for financial year 2012-13 is 12% plus 3% cess i.e. 12.36%.
-payment of service tax meaning payment online - is mandatory in case of all
assessee who have paid ` 50 lakh or more in the preceding or current financial year. Due date
in case of e-payment for the month is 6th of the following month and 31st March for the month of
March. Service tax shall be paid through GAR-7 Challan.

ax attracts interest @ 13% p.a.

Assessment and Returns
himself/herself and then pay the tax. This process is known as self-assessment.
-yearly in Form ST-3. The half yearly due dates are:
o 25th October for the half year ending 30th September
o 25th April for the half year ending 31st March

Solution:
Particulars
Year 1
Year 2

Situation 1
800000
800000

Situation 2
800000
1100000

Situation 3
1100000
800000

Service tax computation:

Situation

1.

Applicability

Liability

Remarks

Not
applicable

Nil

Since taxable
turnover is less
than ` 10 lakh
service tax is not
applicable.

2.

Applicable

1,00,000*12.36%= `
10.300 less credits

Even though the

taxable turnover is
less than ` 10 lakh
in year 1, service
tax is payable in
year 2 on the
excess turnover of `
1 lakh

3.

Applicable

8,00,000*12.36% =

Since the turnover in

` 98,880 less

year1 has exceeded ` 10

lakh limit, service tax is
payable in year 2 on the

credits

entire turnover of ` 8
lakh.

6.
Capital structure is said to be optimum when the firm has selected a combination of
equity and debt that minimizes the cost of capital.
What are the major considerations in capital structure planning? Write about the
dividend policy and factors affecting dividend decisions.

Ans.
Major considerations in capital structure planning
Broadly, the following factors would be worth considering, while planning the capital structure.
1. Risk of two kinds, that is, financial risk and business risk: In the context of capital
structure planning, financial risk is more relevant. Financial risk is of two types:
(a) Risk of cash illiquidity: As a firm raises more debt, its risk of cash illiquidity increases. This is
for two reasons. First, higher proportion of debt in the capital structure increases the
commitments of the company with regard to fixed charges that is, interest on borrowed capital
and instalments in which it has to be repaid. If the cash is not enough to meet these
commitments the company will be in a liquidity crunch.
(b) Risk of variation in the earnings to equity shareholders in relation to expectation: In case a
firm has higher debt content in capital structure, the risk of variations in expected earnings
available to equity shareholders will be higher. When there is a liquidity issue this will be
adversely affected and the share prices of the company could take a beating.
2. Cost of capital: Cost of capital is an important consideration in capital structure decisions. It
is obvious that a business should be at least capable of earning enough revenue to meet its
cost of capital and finance its growth.
3. Control: Along with cost and risk factors, the control aspect is also an important
consideration in planning the capital structure. When a company issues fresh equity, for
example, it may dilute the controlling interest of the present owners.
4. Trading on equity: A company may raise funds either by issue of shares or by borrowing.
Borrowings entail interest cost, which is payable irrespective of whether there is profit or not.
Returns to shareholders on the contrary arise only when the company makes profits, but the
return expected by them is much higher since they bring in risk capital. A company is said to
trade on equity when it brings in funds by borrowing at lower cost and thereby enhances the
return to shareholders. This is also called Capital Gearing. Capitalisation of a company is highly
geared when the proportion of equity to total capitalisation is small and it is low-geared when the
equity capital dominates the capital structure.
5. Tax consideration: While dividend on shares is declared and paid out of profit after tax,
interest paid on borrowed capital is allowed as deduction for computing taxable income. Cost of
raising finance through borrowing is deductible in the year in which it is incurred. Thus, if interest
is 12 per cent and the tax rate is 30 per cent, the companys effective cost of interest is only 8.4
per cent (12%*[1-30%]). This important distinction between the tax treatments of the two
financing methods should play an important role in determining the sources of funds.
6. Government monetary and fiscal policy: The annual review by Reserve Bank of India, the
nations central bank, gives shape to the monetary policy for the subsequent 12 months, which
takes into account issues such as inflation, economic growth and sectoral aspects. This should
be factored into a companys capital structure decisions. Similarly, rule changes by the
Securities and Exchange Board of India (SEBI) impact the share market and companies can
take cues from these changes on when to raise equity capital and when not to.

Dividend Policy
Two approaches need to be considered simultaneously in dividend decisions:
1. Retention as a long-term financing decision: Payment of cash dividends reduces funds
available to finance growth and either restricts growth or forces the firm to find other financing
sources. So a company might decide to retain earnings if:
a) Profitable projects are available and need finance and
b) Capital structure needs infusion of equity funds, and a fresh issue of equity is not advisable.
With either of the guidelines, cash dividends are viewed as a remainder.
2. Dividend payment as an aid to maximisation of wealth: In this approach, a company
recognises that favourable impact of dividend payment on the market price of the share.
Factors affecting dividend decisions:
The two types of return from the purchase of common shares are:
1. Capital appreciation: The investor expects an increase in the market value of the common
shares over time. For example, if the stock is purchased at ` 40 and sold for ` 60, the investor
realises a capital gain of ` 20.
2. Dividends: The investor expects at regular intervals distribution of the firms earnings.