UNIT 2 & 3 QUESTION BANK

 

UNIT 2 & 3 QUESTION BANK

Course Code UCM23602J

Course Name INCOME TAX LAW AND PRACTICE– II                         Courser Teacher- G.VINCENT

QUESTION BANK –SHORTANSWER QUESTION TYPE

UNIT 2 INCOME FROM OTHER SOURCES

SHORT ANSWER QUESTIONS AND ANSWER

1. Give examples of “Income from Other Sources.”

Income from Other Sources is a residual head that includes all income not taxable under the other four heads (Salaries, House Property, Income from Business or Profession, and Capital Gains). It includes earnings from investments, gifts, and unexpected windfalls that are not part of a regular business.

  • Examples: 
  1. Dividends from shares,
  2. Interest on bank deposits,
  3. Family pension, and
  4. Winnings from lotteries.

2. What is casual income?

Casual income refers to any income that is non-recurring, unexpected, and arises from a source that is not a regular trade or profession. It is generally earned by chance or through an activity that does not have a formal contract of service.

  • Examples: 
  • Winning a prize in a crossword puzzle,
  • Winning from Horse Race  
  • Winning Card games, cross word puzzles etc.

3. Write a note on Tax-Free Commercial Securities.

These are securities issued by companies where the interest is paid to the holder without any tax burden on their part, as the issuer pays the tax. For the taxpayer, the "net" interest must be "grossed up" to represent the actual income earned before tax was paid.

  • Example: Tax-free debentures issued by a private company where the company pays the 10% TDS on behalf of the investor.

4. What is grossing up?

Grossing up is the process of calculating the total income earned before any tax was deducted at source (TDS) by the payer. Under Income Tax rules, a taxpayer must pay tax on the "Gross" amount rather than the "Net" amount actually received.

  • Example: If you receive ₹9,000 as interest after a 10% TDS, the grossed-up amount to be reported is ₹10,000.

5. What is meant by dividend?

A dividend is a portion of a company's profits distributed to its shareholders as a reward for their investment in the firm. It is taxable in the hands of the receiver under "Income from Other Sources" regardless of whether the company is Indian or foreign.

  • Examples: Final dividend declared at an AGM, interim dividend paid during the year, or deemed dividends under Section 2(22)(e).

6. How to “grossing up net winnings”?

Winnings from lotteries or horse races are grossed up by adding back the 30% tax that is deducted at source by the organizer. The formula used is: Net Winnings received multiplied by 100 and divided by 70 (100 - tax rate).

  • Example: If a person receives ₹70,000 as net lottery prize, the grossed-up winnings will be ₹1, 00,000 (70,000 × 100/70).

7. What is grossing up of interest and dividend?

This involves calculating the total interest or dividend earned by adding back the Tax Deducted at Source (TDS) to the net amount received. This ensures that the taxpayer is assessed on the full income they were entitled to receive from their investments.

  • Example: If FD interest received is ₹1,800 after 10% TDS, the gross interest is ₹2,000; for dividends, the gross amount is the total declared value.

8. What do you mean by securities?

Securities are financial instruments that represent a legal claim or a creditor relationship with a government, local authority, or a corporate entity. They are issued to raise capital and generally carry a fixed or floating rate of interest.

  • Examples: Government Bonds, Corporate Debentures, National Savings Certificates (NSC), and Treasury Bills.

9. Explain the rules for interest on securities.

Interest on securities is taxable on a "Due" or "Receipt" basis depending on the taxpayer's method of accounting. The taxpayer is allowed to deduct expenses like bank commissions and interest on loans taken to purchase the securities.

  • Examples: Interest on 10% State Government Bonds or interest on 8% Listed Debentures of a public company.

10. Write a note on “Bond washing” transactions.

A bond washing transaction involves an owner of securities selling them just before the interest becomes due and buying them back shortly after the interest is paid. This is done to shift the tax liability on the interest to another person who may be in a lower tax bracket.

  • Example: Selling high-interest bonds to a friend (who has no taxable income) two days before the interest date and repurchasing them a week later. 

UNIT 3 INCOME FROM OTHER SOURCES

SHORT ANSWER QUESTIONS AND ANSWER

1. Explain the term “clubbing of incomes.”

Clubbing of income refers to the legal provision where the income of another person (like a spouse or minor child) is included in the total income of the taxpayer. This is done under Sections 60 to 64 to prevent tax evasion by shifting income to family members in lower tax brackets.

  • Examples: Interest earned on a Fixed Deposit gifted to a spouse, or the income earned by a minor child from a savings account.

2. Write a note on revocable transfer.

A revocable transfer occurs when the owner of an asset transfers it but retains the power to take back the asset or the income generated from it at any time. Under Section 61, any income arising from such a transfer is taxed in the hands of the transferor (the giver) rather than the receiver.

  • Examples: Creating a trust where the creator has the power to cancel the trust, or a gift deed that allows the giver to reclaim the property.

3. Write a note on treatment of Minor’s Income.

Ø  Minor’s income will be clubbed with a father or mother whose income is higher.

Ø  If parents are separated , it will be clubbed with a parent who is taking care of the minor child or children,

Exceptions: For clubbing

Ø  If the child earns through manual work

Ø  or specialized talent, or

Ø   if the child has a disability

Exemptions:

Ø  An exemption of ₹1,500 per child.

4. Explain the provisions relating to transfer of income to spouse.

If an individual transfers an asset (other than house property) to their spouse without adequate payment, the income from that asset is clubbed with the transferor. Similarly, salary paid to a spouse from a concern where the individual has a substantial interest is clubbed unless the spouse has professional qualifications.

  • Examples: Mr. A transfers shares to Mrs. A for free; the dividends are taxed as Mr. A’s income. Salary paid to a non-qualified wife from her husband’s firm is clubbed with the husband.

5. Income of other persons is liable to be included in the total income of an individual.

This statement refers to the "Clubbing Provisions" which stipulate that under certain conditions, an individual must pay tax on income they did not personally earn. These rules apply to transfers made to spouses, minor children, and daughters-in-law to ensure the tax burden is not artificially reduced.

  • Examples: Income from assets transferred to a daughter-in-law without adequate consideration, or income from a revocable transfer of assets.

6. What do you mean by “set-off losses”?

Set-off of losses is the process of adjusting a loss incurred in one source or head of income against the profits earned in another source or head in the same year. This helps the taxpayer arrive at their actual net taxable income for the year.

  • Examples: Adjusting a loss from "House 1" against the rental income of "House 2," or a business loss against income from other sources.

7. What is carry forward and set off losses?

If a loss cannot be fully adjusted against other incomes in the current year, it is "carried forward" to future years to be set off against future profits. Most losses can be carried forward for 8 years, provided the tax return is filed on time.

  • Examples: Carrying forward an unadjusted business loss of ₹1 Lakh from 2024 to 2025 to reduce the taxable profit of 2025.

8. What is “Inter-source set Adjustment”?

Also known as Intra-head adjustment, this refers to setting off a loss from one source against income from another source under the same head of income. It is the first step in the set-off process before moving to adjustments between different heads.

  • Examples: Setting off a loss from a textile business against the profit of a stationery business, both falling under "Business Income."

9. How are speculation losses set off?

Speculation losses are highly restricted and can only be set off against profits earned from another speculation business in the same or future years. They cannot be adjusted against regular business income or any other head of income.

  • Examples: Loss incurred in day-trading of shares (without delivery) can only be adjusted against profits made in another day-trading activity.

10. How are long-term capital gain losses set off?

A Long-Term Capital Loss (LTCL) is restricted and can only be adjusted against Long-Term Capital Gains (LTCG). It cannot be set off against short-term capital gains or income from any other head like Salary or House Property.

  • Examples: A loss from the sale of a residential house held for 3 years can only be adjusted against the profit from the sale of land or gold held for over 2 years.

 

 

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