DSE - 3

✅ PART – I (1 × 12 = 12 Marks)
Fill in the blanks

(a) Tax evasion is an illegal method of tax, which makes a person liable to penalise.

(b) CBDT stands for Central Board of Direct Taxes.

(c) MAT stands for Minimum Alternate Tax.

(d) No loss can be set off against casual incomes.

(e) Long term capital loss can be adjusted only against long term capital gains.

(f) Any capital expenditure incurred on purchase of assets for scientific research is allowed
100% of the amount as deduction.

(g) Short term capital gain is taxed at normal rates.

(h) CII stands for Cost Inflation Index.

(i) Capital gain arises on the transfer of any capital asset.

(j) ITR-1 is also known as SAHAJ.

(k) PAN consists of 10 alpha numeric digits.

(l) DTAA stands for Double Taxation Avoidance Agreement.

✅ PART – II (2 Marks each)

(2–3 points each, very crisp)

(a) Tax Avoidance

Reduction of tax liability by legal means

Uses loopholes in law
Not punishable but ethically questionable

(b) SEZ

Special area for promoting exports

Enjoys tax incentives and exemptions
Helps in economic growth
(c) Corporate Taxation

Tax levied on company’s income

Includes profits, capital gains, etc.
Governed by Income Tax Act, 1961

(d) Previous Year

Year in which income is earned

Runs from 1 April to 31 March
Precedes the Assessment Year

(e) Unabsorbed Depreciation

Depreciation not set off due to low profits

Can be carried forward indefinitely
Set off against any income (except salary)

(f) Speculation Losses

Arise from speculative transactions

Can be set off only against speculation gains
Carry forward allowed for 4 years

(g) Block of Assets

Group of assets with same depreciation rate

Depreciation calculated on entire block
Simplifies tax computation

(h) Scientific Assets

Used for scientific research

Eligible for 100% deduction
Encourages innovation

(i) Tea Development Account

Deduction u/s 33AB

Deposit required in specified account
For development of tea industry

(j) Indexation

Adjusts cost using CII

Accounts for inflation
Reduces taxable capital gain
✅ PART – III (3 Marks each)
(6–7 bullet points = scoring answer)

(a) Tax Planning vs Tax Management

Tax Planning:

Focuses on minimizing tax liability

Done before earning income
Strategic and long-term
Uses deductions, exemptions

Tax Management:

Focuses on compliance
Includes filing returns, record keeping
Administrative in nature
Ensures timely payment of tax

(b) MAT Credit Utilisation

Arises when tax paid under MAT > normal tax

Credit = difference amount
Can be carried forward up to 15 years
Set off when normal tax > MAT
Reduces future tax liability
Cannot be refunded

(c) Intra-head vs Inter-head Set Off

Intra-head:

Adjustment within same head

Example: Business loss vs business income

Inter-head:

Adjustment between different heads

Example: House property loss vs salary
Restricted for capital losses

(d) Short-term vs Long-term Capital Asset

Short-term:

Held for ≤ 36 months (generally)

Taxed at normal rates
No indexation
Long-term:

Held for > 36 months

Taxed at lower rates
Indexation benefit available

(e) Conditions for Depreciation

Asset must be owned (wholly/partly)

Used for business/profession
Must be part of block of assets
Used during previous year
Both tangible & intangible assets allowed

(f) Withdrawal of Exemption u/s 54

If new house sold within 3 years

Earlier exemption becomes taxable
Added to capital gains of that year
Applies to transfer of new asset

(g) Cost of Acquisition of Goodwill

Purchased goodwill → Actual cost

Self-generated goodwill → Nil
Important for capital gain computation
Affects taxable gain

(h) Self Assessment

Taxpayer computes own tax liability

Pays tax before filing return
Done u/s 140A
Ensures voluntary compliance

(i) SUGAM

ITR-4 form
For presumptive income scheme
Applicable u/s 44AD, 44ADA, 44AE
Simplified return filing

(j) Penal Provision

Imposed for non-compliance

Includes late filing, concealment
Monetary penalties
Ensures discipline
✅ PART – IV (7 Marks Answers)
Q4. Previous Year & Assessment Year
Previous Year (PY)

Year in which income is earned

1 April to 31 March

Assessment Year (AY)

Year in which income is assessed

Immediately follows PY

General Rule

Income of PY taxed in AY

Exceptions (Same Year Taxation)

Non-resident shipping business

Person leaving India permanently
AOP formed for specific event
Discontinued business
Transfer to avoid tax

OR – What is residential status? Discuss the conditions of

Residential status of a company.
What Is Residential Status?

Residential status determines a taxpayer’s liability to pay tax in India. It defines whether
income earned globally or only within India is taxable. The classification is based on the
entity's presence and control in India during the financial year.

Residential Status of a Company

Under the Income Tax Act, 1961, a company can be:

 Type of Company Residential Status Criteria

Indian Company Always Resident in India, regardless of

place of control or management.

Foreign Company Resident in India only if its Place of

Effective Management (POEM) is in India.

What Is POEM?

Place of Effective Management (POEM) refers to the place where key management and
commercial decisions necessary for the conduct of the business are made. It’s a test to
determine if a foreign company is effectively controlled from India.

Summary of Conditions

Indian company → Always resident.

Foreign company → Resident only if POEM is in India.
If POEM is outside India → Foreign company is non-resident.

Q5. Computation (Point-wise Steps)

Step 1: Capital Loss Adjustment

LTCL set off only against LTCG

No LTCG → Carry forward ₹85,000

Step 2: Inter-head Adjustment

STCG = 95,000
Other sources = 18,000
Less: House property loss = (8,000)

👉 Total = ₹1,05,000

Step 3: Unabsorbed Depreciation

Set off = 35,000

👉 Final Total Income = ₹70,000

OR - Losses can be carried forward only by the person who

has incurred the loss. Discuss.
📉 Losses Can Be Carried Forward Only by the Person Who Has Incurred the
Loss

This principle is based on Section 78(2) of the Income Tax Act, 1961. It ensures that tax
benefits from losses are retained only by the person who actually suffered them.

✅ Key Conditions for Carry Forward of Losses

Condition Explanation

Same Assessee Losses can be carried forward only by the

person who incurred them. They cannot
be transferred to another person, even if
the business is sold or inherited.

Continuity of Ownership If a company undergoes substantial

change in shareholding (more than 51%
change), unabsorbed losses (except
unabsorbed depreciation) may not be
allowed to be carried forward (Section 79).

Filing of Return Losses must be declared in the return filed

within due date under Section 139(1). Late
filing disqualifies carry forward (except for
unabsorbed depreciation and house
property loss).

Business Continuity Not Required For most losses (except

speculative/business losses), the business
need not continue in the next year.

Unabsorbed Depreciation Exception This can be carried forward indefinitely

and even by successor entities. It’s not
restricted by change in ownership or filing
deadlines.

🚫 Not Transferable Scenarios

If Mr. A sells his business to Mr. B, Mr. B cannot claim Mr. A’s past losses.
If a partnership firm is reconstituted, only the continuing partners can carry forward
their share of loss.
Q6. Depreciation (Steps)
Opening WDV = 4,00,000
Additions = 60,000 → Total = 4,60,000
Less: Sale = 20,000

👉 Balance = 4,40,000

Depreciation @15% = 66,000

👉 Closing WDV = ₹3,74,000

OR - Define Capital Gain. Discuss the procedure for

computation of CG as prescribed by IT act, 1961.
💰 What Is Capital Gain?

Capital Gain refers to the profit earned from the sale or transfer of a capital asset. It is the
difference between the sale consideration and the cost of acquisition/improvement of the
asset.

Capital assets include property, shares, bonds, jewellery, etc.

Gains are taxable in the year in which the transfer takes place.

🧮 Procedure for Computation of Capital Gain

The computation depends on whether the gain is Short-Term or Long-Term.

🔹 General Formula:

Capital Gain = Full Value of Consideration - Cost of Acquisition + Cost of Improvement +

Expenses on Transfer

📊 Classification of Capital Gains

Type of Gain Holding Period Indexation Benefit Tax Rate

Short-Term (STCG) ≤ 36 months (12 ❌ Not allowed Normal slab or 15%

months for listed (for shares)
shares)

Long-Term (LTCG) > 36 months (12 ✅ Allowed 20% (with

months for listed indexation) or 10%
shares) (without indexation
for certain assets)
🧾 Step-by-Step Computation

1. Determine Full Value of Consideration

Sale price or fair market value (if under Section 50C or 50CA).

2. Deduct Expenses on Transfer

Brokerage, legal fees, stamp duty, etc.

3. Deduct Cost of Acquisition

For LTCG, use Indexed Cost: Indexed Cost = Original Cost X CII of Sale Year / CII of
Purchase Year

4. Deduct Cost of Improvement

Improvements made to the asset (also indexed for LTCG).

5. Apply Exemptions (if any)

Under Sections 54, 54EC, 54F, etc.

🧠 Example (LTCG on Property)

Sale Price: ₹50,00,000

Indexed Cost of Acquisition: ₹30,00,000
Indexed Cost of Improvement: ₹5,00,000
Transfer Expenses: ₹2,00,000

Capital Gain = ₹50,00,000 – (₹30,00,000 + ₹5,00,000 + ₹2,00,000) = ₹13,00,000

Q7. Penalty Provisions (TDS/TCS)

Failure to deduct TDS → Penalty equal to amount
Failure to deposit → Interest + penalty
Late return filing → Fee u/s 234E
Incorrect details → Penalty u/s 271H
Ensures proper tax compliance

TDS

Section Nature of Default Penalty / Consequence

201(1A) Late deduction or deposit Interest:

of TDS
TCS

Section Nature of Default Penalty / Consequence

206C(7) Late collection or deposit Interest @ 1% per month

of TCS

234E Late filing of TCS return ₹200 per day (Max = TCS
(Form 27EQ) amount)

271CA Failure to collect TCS Penalty = Amount of TCS

not collected

272A(2)(k) Failure to file TCS ₹100 per day (Max = TCS

statements amount)

273B Reasonable cause defense No penalty if valid reason

is proven

OR
(a) Effects of DTAA

Avoids double taxation

Promotes foreign investment
Provides tax clarity
Prevents tax evasion

(b) Unilateral Relief

Given when no DTAA exists

Foreign tax deducted from Indian tax
Reduces double taxation burden