10 Solved Problems (IRAC Method) — Law of Taxation

These ten problems are worked in the IRAC method — Issue, Rule, Analysis, Conclusion — the way a KSLU answer sheet expects; the full Question Bank has 40+ more.

Problem 1 — A foreign national (or a returning NRI) is appointed in /… (Unit 2)

Problem: A foreign national (or a returning NRI) is appointed in / returns to India and is present here for part of the year. Determine his residential status and what income is taxable.

I — Issue. What is the individual’s residential status for the previous year, and, once fixed, how much of his income — Indian and foreign — may India tax?

R — Rule. 1. Under s.6(1) an individual is resident if he is in India for 182 days or more in the previous year, or 60 days or more in the year and 365 days or more in the four preceding years; otherwise he is a non-resident. 2. Under s.6(6) a resident is RNOR if he was a non-resident in 9 of the last 10 years, or in India 729 days or less in the last 7 years; else he is ROR. 3. Under s.5, an ROR is taxed on world income, an RNOR on Indian income plus India-controlled business income, and an NR only on Indian-source income.

A — Analysis. - First count the days of physical presence in the previous year against the s.6(1) tests. - If the person is present 182 days or more (as a foreign employee working a full year in India generally is), he is a resident; a person newly arrived or long absent abroad who is here only briefly fails both limbs and is a non-resident. - If resident, test s.6(6): a foreign national in his first Indian years, or a returning NRI who was non-resident in 9 of 10 preceding years, is RNOR, so his ordinary foreign income escapes. - Fix the scope from status: a resident’s Indian salary and any world income (if ROR) is taxable; a non-resident’s foreign income is outside the charge.

C — Conclusion. The individual is resident only if the day-count is satisfied, and then ROR or RNOR on the 9-of-10 / 729-day tests; his Indian-source income is always taxable, while his foreign income is taxable only if he is ROR. Citizenship is irrelevant — the day-count alone decides.

Problem 2 — An Indian citizen leaves India for the first time during the… (Unit 2)

Problem: An Indian citizen leaves India for the first time during the previous year to settle permanently abroad. Determine his residential status and the taxability of his income.

I — Issue. Is an Indian citizen who leaves India mid-year to settle abroad a resident or a non-resident for that previous year, and is his post-departure foreign income taxable in India?

R — Rule. 1. Under s.6(1), residence turns on the day-count; for an Indian citizen leaving India for employment (or as a member of a crew), the 60-day limb is extended to 182 days, so only the 182-day test applies. 2. Under s.5, a non-resident is taxed only on income received or accruing in India; foreign income earned after he ceases to be resident is not taxable.

A — Analysis. - Count the days from 1 April to the date of departure. A person leaving in, say, late May is present in India for only about 60 days in that previous year — well below 182. - Because he does not meet the 182-day test (and the extended limb rules out the 60-day test for a departing citizen), he is a non-resident for that year. - As a non-resident, only his Indian income up to departure (salary earned in India, Indian interest) is taxable; the income he earns abroad after settling there is outside the Indian charge.

C — Conclusion. The citizen is a non-resident in the year of departure. India may tax only his Indian-source income up to the date he leaves; his foreign earnings after departure are not taxable in India. The tell is the short pre-departure presence, well under 182 days.

Problem 3 — A foreign company pays salary outside India to its… (Unit 2)

Problem: A foreign company pays salary outside India to its non-resident foreign employee for services the employee rendered in India. Discuss the tax liability.

I — Issue. Is the salary taxable in India when the payer is a foreign company, the payment is made abroad, and the employee is a non-resident — but the services were rendered in India?

R — Rule. 1. Under s.9(1)(ii), salary is deemed to accrue in India if it is earned in India, i.e. for services rendered in India — regardless of where it is paid or by whom. 2. Under s.5(2), a non-resident is taxed on income that accrues or is deemed to accrue in India. So the place of service, not the place of payment, fixes the charge.

A — Analysis. - The three facts urged in the employee’s favour — a foreign payer, payment outside India, and non-resident status — are the planted decoys; none of them removes the Indian source. - Because the services were rendered in India, the salary is deemed to accrue in India under s.9(1)(ii). - A non-resident is chargeable on Indian-source income; the salary therefore falls squarely within s.5(2), even though not a rupee was paid in India.

C — Conclusion. The salary is taxable in India in the employee’s hands. The foreign payer, foreign payment and non-resident status are irrelevant: under s.9(1)(ii) salary follows the place of service, and the service was in India.

Problem 4 — An engineer from India goes abroad on a job visa (becoming a… (Unit 2)

Problem: An engineer from India goes abroad on a job visa (becoming a non-resident) and sends ₹10,00,000 to his father in India for a family function. Is it taxable?

I — Issue. Is the engineer’s foreign salary taxable in India, and is the ₹10,00,000 remittance to his father in India a taxable receipt?

R — Rule. 1. Under s.5(2), a non-resident is taxed only on income received or accruing in India. Salary earned abroad for services rendered abroad is foreign-source income of a non-resident and is not taxable in India. 2. A remittance of already-earned money is a transfer of funds, not a fresh accrual of income, so it is not taxed again in the recipient’s or the sender’s hands.

A — Analysis. - The engineer works in the USA on a job visa and is a non-resident; his salary is earned and paid abroad for services rendered abroad — foreign-source income outside s.5(2). - The ₹10,00,000 he sends to his father is that same money being moved to India; it is not a new income event. A gift to a relative (father) is in any case exempt under s.56(2)(x).

C — Conclusion. Neither the foreign salary nor the ₹10,00,000 remittance is taxable in India. The salary is a non-resident’s foreign income, and the remittance is a mere transfer of funds to a relative — not a second taxable event. (Had he been ROR, the world salary would be taxable, but the remittance still would not be.)

Problem 5 — A resident of India receives agricultural income (e (Unit 2)

Problem: A resident of India receives agricultural income (e.g. ₹6,00,000) from agricultural land situated outside India. How is it treated under the Income Tax Act?

I — Issue. Is agricultural income of ₹6,00,000 derived from land situated outside India exempt as “agricultural income”, or is it taxable?

R — Rule. 1. Under s.2(1A), “agricultural income” means rent or revenue, or income by agriculture, from land which is situated in India and used for agricultural purposes. 2. Only income that meets s.2(1A) is exempt under s.10(1). Income from land outside India falls outside the definition, and — for a resident (ROR) taxed on world income under s.5 — is chargeable, under “Income from Other Sources”.

A — Analysis. - The receipt is genuinely agricultural in nature, but the land is outside India, so it fails the situs requirement of s.2(1A). - Because it is not “agricultural income” within the Act, the s.10(1) exemption cannot apply. - The assessee is a resident, taxed on world income (s.5), so this foreign farm income is included in total income and taxed as Other Sources.

C — Conclusion. The ₹6,00,000 is taxable in the hands of the resident, under Income from Other Sources. The exemption in s.10(1) is confined to agricultural income from Indian land (s.2(1A)); foreign-land farm income enjoys no such exemption.

Problem 6 — A person grows rose/jasmine flowers in his garden “as a… (Unit 2)

Problem: A person grows rose/jasmine flowers in his garden “as a hobby” and sells the year’s crop to a merchant for ₹80,000. Is the amount agricultural income?

I — Issue. Is the ₹80,000 from selling home-grown flowers agricultural income (exempt), given that the grower calls it a mere hobby?

R — Rule. 1. Under s.2(1A), income from land in India by agriculture is agricultural income, exempt under s.10(1). 2. CIT v Raja Benoy Kumar Sahas Roy (1957) requires basic operations on the land — tilling, sowing, planting — involving human skill and labour; where these exist, the produce and its sale proceeds are agricultural, whatever the grower’s motive.

A — Analysis. - The label “hobby” is the decoy; motive is irrelevant. What matters is whether there were agricultural operations on the land. - The flowers are grown — cultivated on the grower’s own land with tending, watering and harvesting — so the basic operations test of Benoy Kumar is satisfied. - The sale of that produce to the merchant is therefore income “derived from land by agriculture” within s.2(1A).

C — Conclusion. The ₹80,000 is agricultural income and exempt under s.10(1). Because there was real cultivation, the “hobby” description does not change the result. (Contrast the mere collection of naturally growing produce, which is not agricultural — see P2.7.)

Problem 7 — A senior advocate in Karnataka provides legal services to a… (Unit 3)

Problem: A senior advocate in Karnataka provides legal services to a company (a firm of advocates) located in Maharashtra. How is GST charged, and who pays it?

I — Issue. Where a senior advocate in Karnataka supplies legal services to a business recipient in Maharashtra, is GST payable, who is liable to pay it, and is it CGST + SGST or IGST?

R — Rule. 1. The provision of legal services by an advocate to a business entity is a taxable supply of service, but it is placed under the reverse charge mechanism (s.9(3) CGST) — the recipient, not the advocate, is liable to pay the GST. 2. Whether the supply is intra- or inter-State decides the tax: a supply between two States is an inter-State supply, attracting a single IGST (Unit IV), not CGST + SGST.

A — Analysis. - The service is a legal service supplied by an advocate; under the reverse-charge notification the recipient business must discharge the GST, so the advocate does not charge tax on his invoice. - The supplier is in Karnataka and the recipient in Maharashtra, so the supply crosses State borders and is inter-State, attracting IGST. - The recipient, being liable under reverse charge, pays the IGST directly to the government and may then take input tax credit of it, subject to the usual conditions.

C — Conclusion. GST is payable on the legal service, but under the reverse charge mechanism the recipient in Maharashtra, not the advocate, must pay it; and because the supply is inter-State, the tax is IGST. The advocate raises an invoice without charging GST, noting that tax is payable by the recipient under RCM.

Problem 8 — The gross total income (before the s (Unit 3)

Problem: The gross total income (before the s.80C deduction) of ‘X’, a resident individual aged 64, is ₹3,20,000; after the s.80C deduction the total income is ₹3,00,000. Determine his tax liability.

I — Issue. What is the tax liability of a resident senior citizen (aged 64) whose gross total income is ₹3,20,000 and whose total income after the s.80C deduction is ₹3,00,000?

R — Rule. 1. Total Income = Gross Total Income − Chapter VI-A deductions (here s.80C), and tax is charged on the total income, not the GTI. 2. A resident individual enjoys a basic exemption, and a resident senior citizen (aged 60 or above) is given a higher basic exemption than an ordinary individual; income within the exemption bears no tax.

A — Analysis. - Gross total income = ₹3,20,000; less the s.80C deduction of ₹20,000 → Total Income = ₹3,00,000. - ‘X’ is a resident senior citizen (aged 64), so his basic exemption is higher than an ordinary individual’s, and his total income of ₹3,00,000 falls within that exemption. - Since the whole total income is within the exemption limit, no amount is chargeable to tax; there is nothing on which a slab rate can bite.

C — Conclusion. ‘X’s tax liability is nil. After reducing the GTI of ₹3,20,000 by the s.80C deduction to a total income of ₹3,00,000, and applying the higher basic exemption available to a resident senior citizen, the entire total income falls within the exemption, so no tax is payable.

Problem 9 — ‘R’ of Chennai visits Mumbai and buys a washing machine and… (Unit 4)

Problem: ‘R’ of Chennai visits Mumbai and buys a washing machine and an air-conditioner for his home in Chennai. Which GST applies — CGST + SGST or IGST?

I — Issue. Where a Chennai resident buys appliances at a Mumbai showroom for use at his Chennai home, is the supply intra-State (CGST + Maharashtra SGST) or inter-State (IGST)?

R — Rule. 1. The tax turns on the place of supply of goods (s.10 IGST), which is generally where the movement of the goods terminates for delivery to the recipient — not where the buyer resides. 2. Comparing the supplier’s location with the place of supply decides the tax: same State → intra-State (CGST + SGST); different States → inter-State (IGST).

A — Analysis. - Over-the-counter delivery in Mumbai. If ‘R’ takes delivery in Mumbai, the movement terminates in Maharashtra; supplier and place of supply are both in Maharashtra → intra-State, attracting CGST + Maharashtra SGST. - Shipment to Chennai. If the showroom ships the goods to Chennai, the movement terminates in Tamil Nadu; the place of supply (Tamil Nadu) differs from the supplier (Maharashtra) → inter-State, attracting IGST, later apportioned to Tamil Nadu. - The buyer’s residence in Chennai is a decoy; only the place where delivery terminates matters.

C — Conclusion. The applicable tax depends on where delivery terminates, not where the buyer lives. A counter sale in Mumbai attracts CGST + SGST (Maharashtra); a shipment to Chennai attracts IGST, apportioned to Tamil Nadu. This is the place-of-supply rule for goods (s.10 IGST) at work.

Problem 10 — ‘A’, travelling in a KSRTC bus, meets with an accident and is… (Unit 4)

Problem: ‘A’, travelling in a KSRTC bus, meets with an accident and is temporarily disabled; KSRTC pays him ₹10,000 as compensation. Is this amount taxable?

I — Issue. Is the ₹10,000 paid by KSRTC to ‘A’ as compensation for a personal injury sustained in a bus accident a taxable receipt, or is it outside the charge to income tax altogether?

R — Rule. 1. A capital or personal receipt — money for the loss of, or injury to, a source or the person himself — is generally not income and is taxed only where the Act specifically brings it in. 2. Compensation for personal injury or disability is a personal/capital receipt; it replaces no income and arises from no source of income, so it is not chargeable to tax.

A — Analysis. - The ₹10,000 is paid because ‘A’ suffered a personal injury (temporary disability) in the accident, not for any service he rendered or any income he lost from a business. - It is therefore a capital/personal receipt — a solatium for bodily harm — not a revenue receipt from the use of any source. - Since no head of income (Salary, House Property, Business, Capital Gains, Other Sources) fits a personal-injury compensation, there is nothing to charge.

C — Conclusion. The ₹10,000 is not taxable. Compensation for a personal injury is a capital/personal receipt, not income, and falls outside the charge under the Income Tax Act. Only a receipt for the loss of income or trading profits would be revenue and taxable.

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