Introduction to Income Tax Short Answer Type Questions

Question 1.
Define Income under IT Act 1961. OR What is income u/s 2(24) Of the IT Act 1961?
Answer:
Income includes [Sec. 2(24)]:

  • Profits or gains of business or profession
  • Dividend
  • Voluntary Contributions received by a charitable or religious trust or institution
  • The value of perquisite or profit in lieu of salary taxable u/s 17 and special allowance or benefit specifically granted either to meet personal expenses or for the performance of duties of an office or an employment of profit.
  • Export incentives, like Duty, Drawback, Cash Compensatory Support, Sale of licences etc.
  • Interest, salary, bonus, commission or remuneration earned by a partner of a firm from such firm.
  • Capital Gains chargeable U/s 45.
  • Winnings from lotteries, crossword puzzies, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever.
  • Deemed income U/s 41 or 59.
  • Sums received by an assessee from his employees towards welfare fund contributions such as provident fund, superannuation fund etc.
  • Amount received under Keyman Insurance Policy including bonus thereon.
  • Amount received under agreement for
    → not carrying out activity in relation to any business or
    → not sharing any know-how, patent, copyright etc.
  • Benefit or perquisite received from a Company, by a director or a person holding substantial interest or relative of the Director or such person.

Question 2.
What are the Cannons of Taxation? Explain in brief.
Answer:
Cannons of taxation refer to the principles or rules laid down by economists and statesmen for guiding the taxing authority.
They are:

  • Cannon of ability or equity: According to this cannon, the tax imposed on the tax payers must be proportional to the ability to pay tax.
  • Cannon of economy: This cannon implies that the cost of collecting taxes must be minimum, so that the net tax revenue will be higher.
  • Canon of convenience: This canon signifies that the tax payer must be permitted to pay the tax at times convenient to them.
  • Canon of certainty: This canon implies that the tax payer must be certain about the taxes to be paid and also the mode of payment.
  • Cannon of productivity: According to this concept, the taxes imposed must not affect production and distribution of the counting adversely.
  • Canon of elasticity: This cannon means that the taxes must be elastic i.e. slight changes in the rates of tax must lead to more increase in the amount of tax revenues.
  • Canon of flexibility: This- canon signifies that the taxes should be capable of being adjusted according to situation.
  • Canon of diversity: This canon means that the tax structure must be broad based.
  • Canon of simplicity: This canon signifies that the tax rules and procedure must be so simple that the tax payer will be able to understand the details of taxes easily.

Question 3.
State the situations where the income of a previous year is taxed in the same previous year.
Answer:
Previous year is the financial immediately of preceding the assessment year The previous year for the assessment year 2020-2021 is 2019-2020.

Exceptions to the General Rule Previous Year:
Normally all the incomes of the P.Y are assessed to tax in the A.Y. But there are certain exception to this rule. They are:

  • Sec. 172 – Income of non-resident from shipping business
  • Sec. 174 – Income of persons leaving India either permanently or for a long period of times;
  • Sec. 174 (A) – Income of bodies formed for short duration.
  • Sec. 175 – Income of a person trying to transfer his / her assets to avoid the payment of tax; and
  • Sec. 176 – Income of a discontinued business.

Question 4.
Determine the Income-tax status of the following assessee.
Answer:

  • Bangalore Tennis Club
  • Papu Dry Cleaners, Karma is its proprietor.
  • Prakash Book House with Viswa, Eswara, Shiva as partners carrying on business under partnership deed.
  • Mangalore University
  • Baruka Steels Limited
  • Mysore Municipal Corporation
  • MM Hills – Mahadeswara Devasthanam
  • Hoysala Cultural Association.

Solution:

  • Association of person
  • Individual
  • A Firm
  • An artificial juridical person
  • A Company
  • A local authority
  • Artificial juridical person
  • Association of person.

Question 5.
State whether the following incomes are agricultural or non agricultural incomes:

  • Income from growing flowers and creepers.
  • Dividend received from a company engaged in agricultural operations.
  • Interest on loan given to a farmer.
  • Income from agricultural activities in Srilanka.
  • Income from conversion of sugarcane info jaggary by the farmer himself.

Answer:

  • Agricuitural income
  • Agricuitural income
  • Non-agricuttural income
  • Non-agricuitural income
  • Non-agricuitural income

Question 6.
State whether the following incomes are agricultural or non agricultural incomes.

  • Dividend from a company engaged in agriculture
  • Lease rent received from lands given to tenants for agricultural operations.
  • Salary received as a partner from a tea manufacturing firm
  • Sale of plants from nursery
  • Income from self-grown grass and frees.

Answer:

  • Non agricultural income
  • Agricultural income
  • Non agricultural income
  • Agricultural income
  • Non agricultural income

Question 7.
Discuss whether the following are agricultural income:

  • Compensation received for acquisition of agricultural land for military purposes.
  • Income from sale of forest trees of spontaneous growth
  • Income from interest on simple mortgage of land used for agricultural purposes.
  • Income derived from land used as stone quarries
  • Rent from house property situated in a village.

Answer:

  • Agricultual Income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income

Question 8.
Discuss whether the following are agricultural income.

  • Sale of plants from nursery
  • Income derived from land used as stone quarries
  • Income from sale of forest trees of spontaneous growth
  • Dividend from a company engaged in agriculture
  • Income from interest on simple mortgage of land used for agricultural purpose.

Answer:

  • Agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income

Question 9.
State whether following is agricultural or non agricultural income.

  • Income from interest on arrears of rent payable in respect of land used for agricultural purpose.
  • Income from agricultural land situated in Australia.
  • Income from sale of forest trees of spontaneous growth.
  • Income from lease of land for grazing of cattle required for agricultural pursuits.
  • Income from interest on simple mortgage of land used for agriculture.
  • Rent received from house property situated in a village
  • Remuneration received as manager of an agricultural farm house.
  • Income from dairy farm, poultry farming etc.

Answer:

  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income

Question 10.
State whether the following are agricultural or non-agricultural Income.

  • Income from agricultural land situated in Australia.
  • Income derived from sale of seeds.
  • Income from sale of forest trees of spontaneous growth.
  • Lease rent received from land given to tenants for agricultural operations.
  • Income derived from land used as stone quarries.
  • Income from sale of plants from nursery.

Answer:

  • Non-agricultural income
  • Agricultural Income
  • Non-agricultural income
  • Agricultural income
  • Non-agricultural income
  • Agricultural income

Question 11.
State whether the following are agricultural or non-agricultural income.

  • Compensation received for acquisition of agricultural land for military purposes.
  • Income from sale of forest trees of spontaneous growth
  • Income from interest on simple mortgage of land used for agricultural purposes.
  • Income derived from land used as stone quarries.
  • Rent from house property situated in a village.
  • Income from agricultural land situated in Africa

Answer:

  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Non-agricultural income

Question 12.
State whether the following incomes are

  • Sale of plants from nursery
  • Interest on loan given to a farmer
  • Income from agricultural activities in Srilanka
  • Lease rent received from lands given to tenants for agricultural purpose
  • Income from sale of forest trees of spontaneous growth

Answer:

  • Agricultural income
  • Non-agricultural income
  • Non-agricultural income
  • Agricultural income
  • Non-agricultural income

Question 13.
State whether the following are agricultural income or not.

  • Income from sale of flowers and creepers.
  • Income from Agricultural land situated in Punjab.
  • Income from self grown grass.
  • Interest received on loan given to farmer.
  • Income from Dairy Products
  • Dividend received from Company engaged in agricultural activities.

Solution:

  • Income from sale of flowers and creepers – Agricultural Income
  • Income from Agricultural land situated in Punjab. – Agricultural Income
  • Income from self grown grass – Non-Agricultural Income
  • Interest received on loan given to farmer – Non-Agricultural Income
  • Income from Dairy Products – Non-Agricultural Income
  • Dividend received from Company engaged in agricultural activities – Non-Agricultural Income

Question 14.
Distinguish between Capital Receipts and Revenue receipts.
Answer:
The differences between capital receipts and revenue receipts are as follows:

Capital receipts Revenue receipts
1. It is an amount received on account of fixed capital 1. It is an amount received on account of circulating capital
2. It is a receipt in substitution of source of income 2. It is a receipt in substitution of an income.
3. It is an amount received under an agreement as compensation for surrendering certain rights 3. It is an amount received under an agreement as compensation for loss of future profits.
4. It is the sale proceeds of fixed assets. 4. It is the sale proceeds of trading assets.
5. Subsidies or grants received from govt. for specific capital purpose are capital receipts 5. Subsidies or grants received from the the govt. for meeting foreign competition is a revenue receipt.

Question 15.
Distinguish between capital expenditure and revenue expenditure.
Answer:
The differences between capital expenditure and revenue expenditure are as follows:

Capital Expenditure Revenue Expenditure
1. It is the cost of acquisition and installation of fixed asset. 1. It is purchase price of goods bought for resale.
2. It is an expenditure incurred by a person to free himself from the capital liability. 2. It is an expenditure incurred by a person to free himself from the revenue liability.
3. It is an expenditure incurred for acquiring the source of an income. 3. It is in expenditure incurred for earning income.
4. It is an expenditure incurred for increasing earning capacity of a business by improving its fixed assets. 4. It is an expenditure incurred for maintaining fixed assets in good condition.
5. It is an expenditure incurred for issuing shares. 5. It is an expenditure incurred in raising loans by issuing debentures or by other means
6. It is non recurring in nature. 6. It is recurring in nature.

Question 16.
Distinguish between capital loss and Revenue loss.
Answer:
The between capital loss and Revenue loss are:

Capital Loss Revenue Loss
1. It is of capital nature 1. It is of revenue nature
2. It is not incurred in the course of business and may not be incidental 2. It is incurred in the course of  business and incidental to business
3. It is a loss of capital 3. It is a loss of revenue
4. It is a loss of capital assets 4. It is a loss of revenue assets
5. It is the loss on the sale of a capital assets 5. It is the loss on the sale of trading assets

Question 17.
Give examples of capital receipts and revenue receipts.
Answer:
The examples from capital receipts are as follows:

  • Sale proceeds of capital assets
  • Compensation received on the loss of fixed assets
  • Compensation recovered for nationalisation
  • Compensation received for compulsory valuation of a place of business
  • Premium on the issue of shares and debentures received by a company.
  • Premium recovered on the redemption of debentures.
  • Compensation received by a person from the railways for permanent disablement caused by a railway accident.
  • Gifts and corpus donations received
  • Salami or Nararana received for grant of permanent lease.
  • Payment received by an employee in lieu of notice.
  • Damages received for permanent disablement.

The examples of revenue receipts are:

  • Lump sum received for waiver of royalty
  • Sale proceeds of goods
  • Annuities received periodically
  • Reward received by an employee from his employer in appreciation of his goods and services.
  • Subsidies or grants recovered from the Govt, for meeting foreign competition.
  • Interest on income tax refund.
  • Compensation received for loss and profit.
  • Receipt from sale of import entitlements.
  • Amounts received as lumpsum in computation of pension.
  • Insurance money received for the loss of stock in trade.
  • Pension received periodically
  • Sale proceeds of technical know how

Question 18.
Give examples of capital expenditure. State the examples of revenue expenditure.
Answer:
Some of the examples of capital expenditure are:

  • Cost of acquisition of a fixed assets
  • Cost of installation of fixed assets
  • Payment for the acquisition of goodwill of any business.
  • Expenditure incurred to increase the revenue earning capacity of the business.
  • Expenditure incurred on acquiring source of income.
  • Payment made for obtaining a licence.
  • Expenditure incurred for erecting temporary structures.
  • Payment made for the purchase of mining rights
  • Payment made for obtaining monopoly rights
  • Payment for purchase of copy rights.

Some of the examples of revenue expenditure are:

  • Cost of goods bought for resale
  • Expenses connected with purchase of goods
  • Expenditure incurred for maintaining fixed assets used in a business.
  • Expenses incurred for protection of capital assets.
  • Expenditure incurred in earning revenue
  • Amount spent on purchasing of know how relating to an existing line of business.
  • Expenses incurred in finding out customers
  • Expenditure incurred in training apprentices
  • Legal expenses incurred in maintaining the ownership or title to the assets.
  • Amount paid as fees for renewal of trade marks, licences etc.
  • Expenditure incurred by a person to free himself from a revenue liability.

Question 19.
Give any five examples of capital losses. State the examples of Revenue Losses.
Answer:
Some of the examples of capital losses are:

  • Loss sustained by a person by being a surety for another person.
  • Loss on sale of capital assets ( Fixed assets)
  • Loss on sale of investment
  • Loss of a fixed assets by fire etc.
  • Loss of security deposit made by a dealer with a manufacturing company for obtaining an agency of the manufacturing company.

Some of the examples of revenue losses are:

  • Loss suffered by a business on account of embezzlement by employees.
  • Loss of stock in trade by fire, theft, etc
  • Loss on sale of goods of the business.
  • Lose of cash by theft committed by an employee or an outsider during business hours.
  • Cash lost by an employee of the business, carrying it to the bank for deposits into bank a/c of the business.
  • Loss of stock in trade caused by enemy action.

Question 20.
Who are the Income Tax Authorieis under the Income Tax Act?
Answer:
Under Sec. 116 the Income Tax Authorieis are:

  • Central Board of Direct Taxes (CBDT)
  • Director-General of Income Tax (DGIT) or Chief Commissioner of Income Tax (CCIT)
  • Directors of Income Tax (DIT) or Commissioners of Income Tax (CIT) or Commissioner of Income Tax (Appeals)
  • Additional Directors of Income-tax (ADIT) or Additional Commissioners of Income Tax (ACIT)
  • Joint Directors of Income tax (JDIT) or Joint Commissioners of Income- Tax (JCIT)
  • Deputy Directors of Income Tax (DDIT) or Deputy Commissioner of Income Tax (DCIT)
  • Assistant Directors of Income tax (ADIT) or Assistant Commissioners of Income-tax (ACIT)
  • Income-tax Officers (ITO)
  • Inspectors of Income Tax.

Question 21.
What are the powers of Director General/Director of Income Tax?
Answer:

Section Powers
117 Appoint IT authority below the rank of AC/DC.
120 Direct the JC to function and assume powers of A.O.
127 Transfer cases from one or more A.O. subordinate to him to any other A.O. who is subordinate to him.
131(1A) Enquire, if there exists any reasons to suspect concealment of income.
132(1) Authorse any JD/JC/DD/DC/AD/AC/AO to conduct search and seizure.
132A Requisition of books of accounts etc.
133A Power of survey and collect useful and relevant information.
135 Make enquiry.

Question 22.
Briefly explain the powers of Commissioner of Income Tax.
Answer:
The powers of Commissioner of Income Tax are as follows:
(i) Under the direction of the Board, a commissioner may exercise the powers of an Assessing Officer.

(ii) A commissioner has the power to transfer any case from one or more Assessing Officers subordinate to him to any other Assessing Officers or officers also subordinate to him. He can do so only after giving the assessee an opportunity of being heard and after recording the reasons for doing so.

(iii) The Commissioner has been empowered to grant approval for an order issued by the Assessing Officer asking a non-company assessee to get its accounts audited from a Chartered Accountant (Sec 142 (2A))

(iv) The prior approval of the Commissioner is required for reopening of an assessment (Section 147) beyond the time limit of four years.

(v) The Commissioner has the power to revise an order passed by Assessing Officer, if in his opinion it is erroneous or prejudicial to the interests of the revenue. He can do so only after giving the assessee an opportunity of being heard. (Section 263)

(vi) The Commissioner has the power to revise any other order issued by Income Tax Officer and not covered under Section 263, either on his own motion or on application by the assessee for such revision (Section 264)

(vii) The Commissioner may direct the Assessing Officer to appeal to appellate tribunal against the order passed by Commissioner (Appeals) (Section 253 (2).

Question 23.
Discuss the jurisdiction of Income Tax Authorities.
Answer:
(i) Direction by CBDT: Income Tax authorities are required to exercise their power and perform their functions in accordance with directions given by the Board.

(ii) The above directions include direction to authorise any income tax authority to issue instructions to their subordinates.

(iii) Criteria to be adopted for issue of instructions: In issuing instruction or orders, the Board or the Income tax authority may adopt any one or more of the following criteria:

  • Territorial area
  • Person or classes of person
  • Incomes or classes of incomes
  • Cases or classes of cases.

(iv) Other powers of the Board: The Board can authorise any Director General or Director to perform such functions of any other income tax authority as may be assigned to him.

(v) The board can also authorise Director General or Chief Commissioner or Commissioner to issue orders in writing to the effect that the functions conferred or assigned to the Assessing Officer in respect of the above four criteria shall be exercised or performed by Joint Commissioner or Joint Director.

Question 24.
Discuss the powers of the Income Tax Authorities to transfer cases.
Answer:
Transfer to another subordinate officer:
(i) The Director General Chief Commissioner or Commissioner have power to transfer cases with or without concurrent jurisdiction from one or more subordinate Assessing Officer to other Assessing Officers.

(ii) Before transferring the case, the assessee shall be given an opportunity of being heard.

(iii) The above authorities shall record the reasons in writing for doing so.

(iv) Where the Assessing Officer from whom the case is transferred and the transferee Assessing Officer do not fall under the control of the same Director General Chief Commissioner, Commissioner, then both the jurisdiction officers mutually decide and pass necessary order.

(v) If both the jurisdiction Commissioners are not in agreement, then the matter shall be decided by the Board or any authority authorised by the Board.

(vi) Transfer within local area: It is not necessary to give an opportunity to the assessee if the case is transferred between Assessing Officers within the same city, locality or place.

(vii) The transfer of case may be made any stage of the proceedings.

(viii) Any Fresh notice not required: It is not necessary to reissue any notice by the transferee Assessing Officer, which is already issued by the previous Assessing Officers.