(Test Bank) DT QUESTION BANK BY CA AARISH KHAN MAY_NOV 2020

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PREFACE It gives me an immense pleasure to present this compilation of all ques tions of ICAI at one place for all my dearest students. I have done this just to ensure that a student’s time is not wasted in searching questions from the ICAI study material for their practice. It has all the questions along with the solutions of study material relevan t for May/ Nov 2020 attempt students of New Course as well as old course. The students do not have to refer any other material for their practice after doing this material. It is comprehensive in every sense. A student shall endeavour to read this booklet at least twice before exams to have firm grip on this mammoth subject. God Bless you all. CA Aarish Khan. INDEX CHAPTER NO CHAPTER NAME 1 Basic Concepts 2 Residence & Scope of Total Income 3 Income which do not Form Part of Total Income 4 Salaries 5 Income from House Property 6 Profits & Gains from Business or Profession 7 Capital Gains 8 Income from Other Sources 9 Clubbing 10 Set off & Carry Forward of Losses 11 Deductions under Chapter VIA 12 Assessment of Various Entities 13 Taxation of Trust 14 Tax Planning , Evasion & Avoidance 15 TDS, TCS & Advance Tax 16 Income Tax Authorities 17 Assessment procedure 18 Appeals & Revision 19 Settlement Commission 20 Penalties 21 Offences & Prosecution 22 Liability in Special Cases 23 Miscellaneous 24 Transfer Pricing 25 Non Resident Taxation 26 Double Taxation Relief 27 Advance Ruling 28 Equalisation Levy 29 Application & Interpretation of Tax Treaties 30 Fundamentals of Base Erosion & Profit Shifting 31 Overview of Model Tax Convention 32 Past Exam Revision Test Pape rs 33 Past New Course Suggested 34 Past Mock Test Paper CA AARISH KHAN. Basic Concepts AJ Education NeXt 1.1 CHAPTER 1 - BASIC CONCEPTS EXERCISE Question 1 Mr. Bhargava, a leading advocate on corporate law, decided to reduce his practice and to accept brie fs only for paying his taxes and making charities with the fees received on such briefs. In a particular case, he agreed to appear to defend one company in the Supreme Court on the condition that he would be provided with Rs. 5 lacs for a public charitable trust that he would create. He defended the company and was paid the sum by the company. He created a trust of that sum by executing a trust deed. Decide whether the amount received by Mr. Bhargava is assessable in his hands as income from profession. Answer In the instant case, the trust was created by Mr. Bhargava himself out of his professional income. The client did not create the trust. The client did not impose any obligation in the nature of a trust binding on Mr. Bhargava. Thus, there is no diversion of the money to the trust before it became professional income in the hands of Mr. Bhargava. This case is one of application of professional income and not of diversion of income by overriding title. Therefore, the amount received by Mr. Bhargava is chargeable to tax under the head “Profits and gains of business or profession”. Question 2 XYZ Ltd. took over the running business of a sole-proprietor by a sale deed. As per the sale deed, XYZ Ltd. undertook to pay overriding charges of Rs. 15,000 p.a. to the wife of the sole-proprietor in addition to the sale consideration. The sale deed also specifically mentioned that the amount was charged on the net profits of XYZ Ltd., who had accepted that obligation as a condition of purchase of the going concern. Is the payment of overriding charges by XYZ Ltd. to the wife of the sole-proprietor in the nature of diversion of income or application of income? Discuss. Answer This issue came up for consideration before the Allahabad High Court in Jit & Pal X-Rays (P.) Ltd. v. CIT (2004) 267 ITR 370 (All) . The Allahabad High Court observed that the overriding charge which had been created in favour of the wife of the sole-proprietor was an integral part of the sale deed by which the going concern was transferred to the assessee. The obligation, therefore, was attached to the very source of income i.e. the going concern transferred to the assessee by the sale deed. The sale deed also specifically mentioned that the amount in question was charged on the net profits of the assessee - company and the assessee -company had accepted that obligation as a condition of purchase of the going concern. Hence, it is clearly a case of diversion of income by an overriding charge and not a mere application of income. Question 3 MKG Agency is a partnership firm consisting of father and three major sons. The partnership deed provided that after the death of father, the business shall be continued by the sons, subject to the condition that the firm shall pay 20% of the profits to the mother. Father died in March, 2019. In the previous year 2019-20, the reconstituted firm paid Rs. 1 lakh (equivalent to 20% of the profits) to the mother and claimed the amount as deduction from its income. Examine the correctness of the claim of the firm. Basic Concepts AJ Education NeXt 1.2 Answer The issue raised in the problem is based on the concept of diversion of income by overriding title, which is well recognised in the income -tax law. In the instant case, the amount of Rs. 1 lakh, being 20% of profits of the firm, paid to the mother gets diverted at source by the charge created in her favour as per the terms of the partnership deed. Such income does not reach the assessee -firm. Rather, such income stands diverted to the other person as such other person has a better title on such income than the t itle of the assessee. The firm might have received the said amount but it so received for and on behalf of the mother, who possesses the overriding title. Therefore, the amount paid to the mother should be excluded from the income of the firm. This view has been confirmed in CIT vs. Nariman B. Bharucha & Sons (1981) 130 ITR 863 (Bom) . Question 4 Anand was the Karta of HUF. He died leaving behind his major son Prem, his widow, his grandmother and brother’s wife. Can the HUF retain its status as such or the s urviving persons would become co-owners? Answer In the case of Gowli Buddanna v. CIT (1966) 60 ITR 293 (SC) , the Supreme Court has made it clear that there need not be more than one male member to form a HUF as a taxable entity under the Income- tax Act, 1961. The expression “Hindu Undivided family” in the Act is used in the sense in which it is understood und er the personal law of the Hindus. Under the Hindu system of law, a joint family may consist of a single male member and the widows of the deceased male members and the Income- tax Act, 1961 does not mandate that it should consist of at least two male membe rs. Therefore, property of a joint Hindu family does not cease to belong to the family merely because the family is represented by a single co-parcener who possesses the right which an owner of property may posses. Therefore, the HUF would retain its statu s as such. Question 5 Mr. C borrowed on Hundi, a sum of Rs. 25,000 by way of bearer cheque on 11-09-2019 and repaid the same with interest amounting to Rs. 30,000 by account payee cheque on 12- 10-2019. The Assessing Officer (AO) wants to treat the amount borrowed as income during the previous year. Is the action of AO valid? Answer Section 69D provides that where any amount is borrowed on a hundi or any amount due thereon is repaid otherwise than by way of an account -payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying the amount for the previous year in which the amount was so borrowed or repaid, as the case may be. In this case, Mr. C has borrowed Rs. 25,000 on Hundi by way of bearer cheque. Therefore, it shall be deemed to be income of Mr. C for the previous year 2019-20. Since the repayment of the same along with interest was made by way of account payee cheque, the same would not be hit by the provisions of section 69D. Therefore, the action of the Assessing Officer treating the amount borrowed as income during the previous year is valid in law. Basic Concepts AJ Education NeXt 1.3 Question 6 The Assessing Officer found, during the course of assessment of a firm, that it had paid rent in respect of its business p remises amounting to Rs. 60,000, which was not debited in the books of account for the year ending 31.3.2020. The firm did not explain the source for payment of rent. The Assessing Officer proposes to make an addition of Rs. 60,000 in the hands of the firm for the assessment year 202-21. The firm claims that even if the addition is made, the sum of Rs. 60,000 should be allowed as deduction while computing its business income since it has been expended for purposes of its business. Examine the claim of the f irm. Answer The claim of the firm for deduction of the sum of Rs. 60,000 in computing its business income is not tenable. The action of the Assessing Officer in making the addition of Rs. 60,000, being the payment of rent not debited in the books of account (for which the firm failed to explain the source of payment) is correct in law since the same is an unexplained expenditure under section 69C. The proviso to section 69C states that such unexplained expenditure, which is deemed to be the income of the assessee, shall not be allowed as a deduction under any head of income. Therefore, the claim of the firm is not tenable. ADDITIONAL ILLUSTRATIONS FOR PRACTICE: Illustra tion 1 Mr. X has a total income of Rs. 12,00,000 comprising of his salary income and int erest on fixed deposit. Compute his tax liability. Solution Computation of Tax liability Tax liability = Rs. 1,12,500 + 30% of Rs. 2,00,000 = Rs. 1,72,500 Alternatively: Tax liability : First Rs. 2,50,000 - Nil Next Rs. 2,50,000 – Rs. 5,00,000 - @ 5% of Rs. 2,50,000 = Rs. 12,500 Next Rs. 5,00,000 – Rs. 10,00,000 - @ 20% of Rs. 5,00,000 = Rs. 1,00,000 Balance i.e. Rs. 12,00,000 minus Rs. 10,00,000 - @ 30% of Rs. 2,00,000 = Rs. 60,000 = Rs. 1,72,500 Illustra tion 2 Compute the tax liability of Mr. A (aged 42), having total income of Rs. 51 lakhs for the Assessment Year 2020 -21. Assume that his total income comprises of “Salary income”, “Income under the head house property” and “Interest from Saving Bank Account”. Basic Concepts AJ Education NeXt 1.4 Solution Computation of tax liabi lity of Mr. A for the A.Y. 2020 -21 (A) Tax payable including surcharge on total income of Rs. 51,00,000 Rs. 2,50,000 – Rs. 5,00,000 @ 5% Rs. 12,500 Rs. 5,00,000 – Rs. 10,00,000 @ 20% Rs. 1,00,000 Rs. 10,00,000 – Rs. 51,00,000 @30 % Rs. 12,30,000 Total Rs. 13,42,500 Add: Surcharge @ 10% Rs. 1,34,250 Rs. 14,76,750 (B) Tax Payable on total income of Rs. 50 lakhs (Rs. 12,500 plus Rs.1,00,000 plus Rs. 12,00,000) Rs. 13,12,500 (C) Excess tax payable (A)-(B) Rs. 1,64,250 (D) Margi nal Relief (Rs. 1,64,25 0 – Rs. 1,00,000, being the amount of income in excess of Rs. 50,00,000) Rs. 64,250 Tax payable (A)-(D) [Excluding cess] Rs. 14,12,500 Illustra tion 3 Compute the tax liability of Mr. A (aged 42), having total income of Rs. 1,01,00,000 for the Assessmen t Year 2020 -21. Assume that his total income comprises of “Salary income”, “Income under the head house property” and “Interest from fixed deposit Account”. Solution Computation of tax liability of Mr. A for the A.Y. 2020 -21 (A) Tax payable including surcharge on total income of Rs. 1,01,00,000 Rs. 2,50,000 – Rs. 5,00,000 @ 5% Rs. 12,500 Rs. 5,00,000 – Rs. 10,00,000 @ 20% Rs. 1,00,000 Rs. 10,00,000 – Rs. 1,01,00,000@30% Rs. 27,30,000 Total Rs. 28,42,500 Add: Surcharge @ 15% Rs. 4,26,375 Rs. 32,68,875 (B) Tax Payable on total income of Rs. 1 crore [(Rs. 12,500 plus Rs. 1,00,000 plus Rs. 27,00,000) plus surcharge@10%] Rs. 30,93,750 (C) Excess tax payable (A)-(B) Rs. 1,75,125 (D) Marginal Relief (Rs. 1,75,125 – Rs. 1,00,000, being the amount of income in excess of Rs. 1,00,00,000) Rs. 75,125 Tax payable (A)-(D) [Excluding Cess] Rs. 31,93,750 Basic Concepts AJ Education NeXt 1.5 Illustration 4 Compute the marginal relief available to X Ltd., a domestic company, assuming that the total income of X Ltd. is Rs. 1,01,00,000 for A.Y.2020-21 and the total income does not include any income in the nature of capital gains. [Note - The gross receipts of X Ltd. for the P.Y.201 7-18 is Rs. 402 crore] Solution The tax payable on total income of Rs. 1,01,00,000 of X Ltd. computed @32.1% (including surcharge @7%) is Rs. 32,42,100. However, the tax cannot exceed Rs. 31,00,000 (i.e., the tax of Rs. 30,00,000 payable on total income of Rs. 1 crore plus Rs. 1,00,000, being the amount of total income exceeding Rs. 1 crore). Therefore, the tax payable on Rs. 1,01,00,000 would be Rs. 31,00,000. The marginal relief is Rs. 1,42,100 (i.e., Rs. 32,42,100 - Rs. 31,00,000). Illustration 5 Compute the marginal relief available to Y Ltd., a domestic company, assuming that the total income of Y Ltd. for A.Y.20 20-21 is Rs. 10,01,00,000 and the total income does not include any income in the nature of capital gains. [Note - The gross receipts of Y Ltd. for the P.Y.201 7-18 is Rs. 410 crore] Solution The tax payable on total income of Rs. 10,01,00,000 of Y Ltd. computed@ 33.6% (including surcharge@12%) is Rs. 3,36,33,600. However, the tax cannot exceed Rs. 3,22,00,000 [i.e., the tax of Rs. 3,21,00,000 (32.1% of Rs. 10 crore) payable on total income of Rs. 10 crore plus Rs. 1,00,000, being the amount of total income exceeding Rs. 10 crore]. Therefore, the tax payable on Rs. 10,01,00,000 would be Rs. 3,22,00,000. The marginal relief is Rs. 14,33,600 (i.e., Rs. 3,36,33,600 - Rs. 3,22,00,000). ******************************************************************************* Residence and Scope o f Total Income AJ Education NeXt 2.1 CHAPTER 2 - RESIDENCE AND SCOPE O F TOTAL INCOME EXERCISE Question 1 The business of a HUF is transacted from Australia and all the policy decisions are taken there. Mr. E, the karta of the HUF, who was born in Kolkata, vis its India during the P.Y.201 9-20 after 15 years. He comes to India on 1.4.2019 and leaves for Australia on 1.12.2019. Determine the residential status of Mr. E and the HUF for A.Y. 2020-21. Answer (a) During the P.Y.2019-20, Mr. E has stayed in India for 245 days (i.e. 30+31+30+31+31+ 30+31+30+1 days). Therefore, he is a resident. However, since he has come to India after 15 years, he does not satisfy any of the conditions for being ordinarily resident. Therefore, the residential status of Mr. E for the P.Y.2019-20 is resident but not ordinarily resident. (b) Since the business of the HUF is transacted from Australia and nothing is mentioned regarding its control and management, it is assumed that the control and management is also wholly outside India. Therefore, the HUF is a non-resident for the P.Y.2019- 20. Question 2 From the following particulars of income furnished by Mr. Anirudh pertaining to the year ended 31.3.2020 , compute the total income for the assessment year 2020 -21, if he is: (i) Resident and ordinary resident; (ii) Resident but not ordinarily resident; (iii) Non-re sident Particulars Rs. (a) Short term capital gains on sale of shares in Indian Company received in 15,000 Germany (b) Dividend from a Japanese Company received in Japan 10,000 (c) Rent from property in Lond on deposited in a bank in London, later on remitted to India through approved banking channels 75,000 (d) Dividend from RP Ltd., an Indian Company 6,000 (e) Agricultural income from lands in Gujarat 25,000 Answer Computation of total income of Mr. Anirudh for the A.Y. 2020-21 Particulars Resident & ordinarily resident (Rs.) Resident but not ordinarily resident (Rs.) Non- Resident (Rs.) 1) Short term capital gains on sale of shares of an Indian company, received in Germany 15,000 15,000 15,000 2) Dividend from a Japanese company, received in Japan 10,000 - - 3) Rent from property in London deposited in a bank in London [See Note (i) below] 52,500 - - Residence and Scope o f Total Income AJ Education NeXt 2.2 4) Dividend from RP Ltd., an Indian Company [See Note (ii) below] - - - 5) Agricultural income from la nd in Gujarat [See Note (iii) below] - - - Total Income 77,500 15,000 15,000 Notes: (i) It has been assumed that the rental income is the gross annual value of the property. Therefore, deduction @30% under section 24, has been provided and the net income so computed is taken into account for determining the total income of a resident and ordinarily resident. Particulars Rs. Rent received (assumed as gross annual value) Less: Deduction under section 24 (30% of Rs.75,000) Income from house property 75,000 22,500 52,500 (ii) Dividend received from Indian company upto Rs. 10 lakh is exempt under section 10(34). (iii) Agricultural income is exempt under section 10(1). Question 3 Poulomi, a chartered accountant, is presently working in a firm in India. She has received an offer for the post of Chief Financial Officer from a company at Singapore. As per the offer letter, she should join the company at any time between 1st September, 2019 and 31st October, 2019. She approaches you for your advice on the following issues to mitigate her tax liability in India: (i) Date by which she should leave India to join the company; (ii) Direct credit of part of her salary to her bank account in Kolkata maintained jointly with her mother to meet requirement of her family (iii) Period for which she should stay in India when she comes on leave. Answer The following category of individuals will be treated as resident in India only if the period of their stay in India during the relevant previous y ear is 182 days or more :- (a) Indian citizens, who leave India in any previous year, inter alia, for purposes of employment outside India, or (b) Indian citizen or person of Indian origin engaged outside India, inter alia, in an employment, who comes on a visit to India in any previous year. (i) Since Poulomi is leaving India for the purpose of employment outside India, she will be treated as resident only if the period of her stay during the previous year amounts to 182 days or more. Therefore, Poulomi should leave India on or before 28th September, 2019, in which case, her stay in India during the previous year would be less than 182 days and she would become non-resident for the purpose of taxability in India. In such a case, only the income which accrues or arises in India or which is deemed to accrue or arise in India or received or deemed to be received in India shall be taxable. The income earned by her in Singapore would not be chargeable to tax in India for A.Y. 2020-21, if she leaves India on or before 28th September, 2019. (ii) If any part of Poulomi’s salary will be credited directly to her bank account in Kolkata then, that part of her salary would be considered as income received in Residence and Scope o f Total Income AJ Education NeXt 2.3 India during the previous year under section 5 and would be chargeable to tax under Income- tax Act, 1961, even if she is a non-resident. Therefore, Poulomi should receive her entire salary in Singapore and then remit the required amount to her bank account in Kolkata in which case, the salary earned by her in Singapore would not be subject to tax in India. (iii) In case Poulomi visits India after taking up employment outside India, she would be covered in the exception provided in (b) above and she will be treated as resident only if the period of her stay during the relevant previous year amounts to 182 days or more. Therefore, when Poulomi comes India on leave, she should stay in India for less than 182 days during the relevant previous year so that her status remains as a non- resident for the relevant previous year. Moreover, she should not visit India again during the current previous year i.e. P.Y. 2019-20. ADDITIONAL ILLUSTRATIONS FOR PRACTICE: Illustra tion 1 Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian ship engaged in carriage of passengers in international traffic departing from Chennai port on 6th June, 2019. From the following details for the P.Y. 2019-20, determine the residential status of Mr. Anand for A.Y. 2020 -21, assuming that his stay in India in the last 4 previous years (preceding P.Y. 2019-20) is 400 days and last seven previous years (preceding P.Y. 2019-20) is 750 days: Particula rs Date Date entered into the Continuous Discharge Certifi cate in respect of joining the ship by Mr. Anand 6th June, 2019 Date entered into the Continuous Discharge Certifi cate in respect of signing off the ship by Mr. Anand 9th Decembe r, 2019 Solution In this case, the voyage is undertaken by an Indian ship engaged in the carriage of passengers in international traffic, originating from a port in India (i.e., the Chennai port) and having its destination at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible voyage for the purposes of section 6(1). Therefore, the period beginning from 6th June, 2019 and ending on 9th December, 2019, being the dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from the ship by Mr. Anand, an Indian citizen who is a member of the crew of the ship, has to be excluded for computing the period of his stay in India. Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the P.Y.2019-20 would be 179 days [i.e., 366 days – 187 days]. Since his period of stay in India during the P.Y.2019-20 is less than 182 days, he is a non-resident for A.Y.2020-21. Note - Since the residential status of Mr. Anand is “non-resident” for A.Y.2020-21 consequent to his number of days of stay in P.Y.2019-20 being less than 182 days, his peri od of stay in the earlier previous years become irrelevant. Residence and Scope o f Total Income AJ Education NeXt 2.4 Illustra tion 2 Brett Lee, an Australian cricket player visits India for 100 days in every financial year. This has been his practice for the past 10 financial years. Find out his residential status for the assessment year 2020-21. Solution Determination of Residential Status of Mr. Brett Lee for the A.Y. 2020 -21:- Period of stay during previous year 2019-20 = 100 days Calculation of period of stay during 4 preceding previous years (100 ´ 4=400 days) 2018-19 100 days 2017-18 100 days 2016-17 100 days 2015-16 100 days Total 400 days Mr. Brett Lee has been in India for a period more than 60 days during previous year 2019- 20 and for a period of more than 365 days during the 4 immediately preceding previous years. Therefore, since he satisfies one of the basic conditions under section 6(1), he is a resident for the assessment year 2020-21. Computation of period of stay during 7 preceding previous years = 100 ´ 7=700 days 2018-19 100 days 2017-18 100 days 2016-17 100 days 2015-16 100 days 2014-15 100 days 2013-14 100 days 2012-13 100 days Total 700 days Since his period of stay in India during the past 7 previous years is less than 730 days, he is a not-ordinarily resident during the assessment year 2020-21. (See Note below) Therefore, Mr. Brett Lee is a resident but not ordinarily resident during the previous year 2018- 19 relevant to the assessment year 2020-21. Note: A not-ordinarily resident person is one who satisfies any one of the conditions specified under section 6(6), i.e., (i) If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or (ii) If such individual has during the 7 previous years preceding the relevant previous year been in India for a period of 729 days or less. In this case, since Mr. Brett Lee satisfies condition (ii), he is a not-ordinary resident for the A.Y. 2020-21. *************************************************************************** Income Which Do Not Form Part of Total Income AJ Education NeXt 3.1 CHAPTER 3 - INCOME WHICH DO NOT FORM PART OF TOTAL INCOME EXERCISE Question 1 Examine with reasons, based on the provisions of the Act, as to chargeability of the following receipts to tax in the assessment year 2020 -21: (i) Rent of Rs. 60,000 charged from tenants occupying houses constructed on the land situated in India and used for agricultural purposes. The tenants, working in the nearby industrial area, occupy these houses for their own residential purposes. (ii) Income of Rs. 75,000 derived by Anand Nursery from the sale of seedlings grown without carrying out all the basic operations on land. (ii) Mr. Gaitonde, born and brought up in the State of Sikkim, had a net profit of Rs. 2,25,000 from the business located in Sikkim and interest of Rs. 55,000 on the securities/ bonds issued by the Government of Rajasthan. Answer (i) As per section 10(1), agricultural income is exempt from tax. The meaning and scope of agricultural income is defined in section 2(1A). According to Explanation 2 to section 2(1A), any income deriv ed from any building from the use of such building for any purpose (including letting for residential purposes or for the purpose of any business or profession) other than agriculture shall not be agricultural income. It appears in this case that the house was occupied by tenants for residential purposes. Therefore, the rent of Rs. 60,000 from letting out of houses constructed on agricultural land for residential purposes shall not be treated as agricultural income by virtue of Explanation 2 to section 2(1A). Hence, such income would be chargeable to tax. (ii) Explanation 3 to section 2(1A) provides that the income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income, whether or not the basic operations were carried out on land. Accordingly, the income of Rs. 75,000 derived by Anand Nursery from the sale of seedlings grown without carrying out all the basic operations on land shall be treated as agricultural income and exempt from tax under section 10(1). (iii) Secti on 10(26AAA) exempts the income which accrues or arises to a Sikkimese individual from any source in the State of Sikkim and the income by way of dividend or interest on securities. Therefore, the income of Mr. Gaitonde from a business located in Sikkim and interest income on the securities/bonds of Government of Rajasthan shall not be subject to tax. Question 2 Rudra Ltd. has one unit at Special Economic Zone (SEZ) and other unit at Domestic Tariff Area (DTA). The company provides the following details for the previous year 2019- 20. Particulars Rudra Ltd. ( Rs.) Unit in DTA ( Rs.) Total Sales 6,00,00,000 2,00,00,000 Export Sales 4,60,00,000 1,60,00,000 Net Profit 80,00,000 20,00,000 Income Which Do Not Form Part of Total Income AJ Education NeXt 3.2 Calculate the eligible deduction under section 10AA of the Income -tax Act, 1961, for the Assessment Year 2020 -21, in the following situations: (i) If both the units were set up and start manufacturing from 22-05-2012. (ii) If both the units were set up and start manufacturing from 14-05-2016. Answer Computation of deduction under section 10AA of the Income-tax Act, 1961 As per section 10AA, in computing the total income of Rudra Ltd. from its unit located in a Special Economic Zone (SEZ), which begins to manufacture or produce articles or things or provide any services during the previous year relevant to the assessment year commencing on or after 01.04.2006 but before 1st April 2021, there shall be allowed a deduction of 100% of the profit and gains derived from export of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and 50% of such profits for further five assessment years subject to fulfillment of other conditions specified in section 10AA. Computation of eligible deduction under section 10AA [See Working Note below]: (i) If Unit in SEZ was set up and began manufacturing from 22-05-2012: Since A.Y. 2020-21 is the 8th assessment year from A.Y. 2013-14, relevant to the previous year 2012-13, in which the SEZ unit began manufacturing of articles or things, it shall be eligible for deduction of 50% of the profits derived from export of such arti cles or things, assuming all the other conditions specified in section 10AA are fulfilled. = Profits of Unit in SEZ ´ Export turnover of Unit in SEZ Total turnover of Unit in SEZ ´ 50% = Rs. 60 lakhs ´ ` 300 lakhs ` 400 lakhs ´ 50% = Rs. 22.50 lakhs (ii) If Unit in SEZ was set up and began manufacturing from 14-05-2016: Since A.Y.2020-21 is the 4th assessment year from A.Y. 2017-18, relevant to the previous year 2016-17, in which the SEZ unit began manufacturing of articles or things, it shall be eligible for deduction of 100% of the profits derived from export of such articles or things, assuming all the other conditions specified in section 10AA are fulfilled. = Profits of Unit in SEZ ´ Export turnover of Unit in SEZ Total turnover of Unit in SEZ ´ 100% = Rs. 60 lakhs ´ ` 300 lakhs ` 400 lakhs ´ 100% = Rs. 45 lakhs The unit set up in Domestic Tariff Area is not eligible for the benefit of deduction under section 10AA in respect of its export profits, in both the situations. Working Note: Computation of total sales, export sales and net profit of unit in SEZ Particulars Rudra Ltd. ( Rs.) Unit in DTA ( Rs.) Unit in SEZ ( Rs.) Total Sales 6,00,00,000 2,00,00,000 4,00,00,000 Export Sales 4,60,00,000 1,60,00,000 3,00,00,000 Net Profit 80,00,000 20,00,000 60,00,000 Income Which Do Not Form Part of Total Income AJ Education NeXt 3.3 ADDITIONAL ILLUSTRATIONS FOR PRACTICE: Illustra tion 1 Mr. C manufactures latex from the rubber plants grown by him in India. These are then sold in the market for Rs. 30 lacs. The cost of growing rubber plants is Rs. 10 lacs and that of manufacturing latex is Rs. 8 lacs. Compute his total income. Solution The total income of Mr. C comprises of agricultural income and business income. Total profits from the sale of latex = Rs. 30 lacs – Rs. 10 lacs – Rs. 8 lacs = Rs. 12 lacs. Agricultural income = 65% of Rs. 12 lacs. = Rs. 7.8 lacs Business income = 35% of Rs. 12 lacs. = Rs. 4.2 lacs Illustration 2 Ankur, the owner of a land situated in Kerala used for growing thereon different types of fruits, paddy, vegetables and flowers, received from Yahoo Movies Ltd., Chennai, Rs. 5 lacs as rent towards the use of this land for shooting of a film. The amount so received was accounted by him in the books as revenue derived from land and claimed to be exempt under section 10(1). He now wants to confirm from you whether the amount has been correctly treated by him as agricultural income. Solution The income received by Mr. Ankur from a filmmaker for allowing them to shoot a film in the agricultural land owned by him is not in the nature of agricultural income because it was neither received by him against the sale of agricultural produce obtained nor for carrying out the normal agricultural operations on the land. The amount paid was only for the purpose of shooting of a film on such land. To claim exem ption in respect of agricultural income under section 10(1), the conditions contained in section 2(1A)(a) to (c) have to be first complied with/ fulfilled by the assessee. The Madras High Court in the case of B. Nagi Reddi v. CIT (2002) 258 ITR 719, follow ing the judgment of Apex Court in the case of CIT v Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466, has held, on identical facts, that the income derived for allowing a shooting of film in the agricultural land cannot be treated as agricultural income, as it has no nexus with the land, except that it was carried out on agricultural land. Illustra tion 3 Mr. X, a resident, has provided the following particulars of his income for the P.Y. 2019-20. i. Income from salary (computed) - Rs. 1,80,000 ii. Income from house property (computed) - Rs. 2,00,000 iii. Agricultural income from a land in Jaipur - Rs. 2,80,000 iv. Expenses incurred for earning agricultural income - Rs. 1,70,000 Compute his tax liability assuming his age is - (a) 45 years (b) 70 years Solution Computation of total incom e of Mr. X for the A.Y.2019-20 (a) Computation of tax liability (age 45 years) For the purpose of partial integration of taxes, Mr. X has satisfied both the conditions i.e.