COSTING

1. Mention the objective of pricing for issue of materials.

Ans: Main objectives of material pricing stated as under:

(a) To charge the cost of materials issued to production on a realistic and consistent
basis.

(b) To arrive at the closing inventory value. This significantly influences the gross profit
or gross loss shown by Trading account.

(c) To ascertain the correct purchase price.

(d) To calculate the cost of the goods issued to production.

(e) To ascertain at the correct financial position of the organisation by including the
closing inventory value in Balance Sheet.

2. Discuss in brief four features of a good wage payment system.

Ans : A good wage system has the following features:

1. The system should be fair both to the employer and the employee. It should be based
upon scientific time and motion study to ensure a standard output to the employer and
a fair amount of wages to the workers.

2. The worker should be assured of a guaranteed minimum wage at satisfactory level

irrespective of the work done by him.

3. Workers should be paid according to their merits. Efficient workers should be able to
earn more wages as compared to the inefficient workers.

4. Skilled workers should be paid more as compared to the unskilled workers. Skilled
workers are to be compensated for the efforts put in by them to acquire the skill.

5. The system should ensure equal pay for equal work.

6. The system should be flexible to allow necessary changes which may arise.

3. Write the factors to be considered for selection of a good wage payment method.

Ans : The factors to be considered for selection of a good wage payment method -

Lower Cost of Production— The wage policy should result in a reduction of unit cost of
manufacture lowered prices and higher profits.

Incentive System— The wage policy should include an incentive system for the efficient
workers. The system should provide sufficient incentives to workers to work hard and with
great care. It should enable an efficient worker to earn more.

Guarantee of Minimum Wage— The wage policy should guarantee minimum wage to protect
the interests of workers against conditions beyond their control.

Flexibility— Wage policy should be flexible in order to meet changing conditions.

Simplicity— The wage system should be simple to understand otherwise the worker will look
at it with suspicion.

4. What do you mean by time keeping and time booking?

Ans : Time keeping –

Time keeping is concerned with maintenance of attendance time and job time of workers.
Attendance time is recorded for wage calculation and job time or time booking is
considered for computing time spent for each department, job, Operation and Process
for calculating labour cost department wise, job wise and of each process and operation.

Time Booking:

Time booking means recording the rime actually spend by a worker on various jobs done
by him in the factory.

5. Distinction between time keeping and time booking.

Ans:
Time keeping Time booking
Time Keeping is concerned with the Time booking means recording the rime
attendance and wage calculation of actually spend by a worker on various jobs
employees done by him in the factory.
The main functions of time keeping Time booking is necessary for:
department are as follows:
1.Ascertaining labour cost of every job.
1.To maintain discipline, regularly and
punctuality in the factory. 2.Providing time basis for apportionment for
overhead expenses
2.Meeting the statutory requirements.
3.Having control over wastage of time – idle
3.Preparation of pay rolls where workers are time i.e., the difference between time
paid on time basis. keeping and time booking.

4.To record the arrival and departure time of

labourers for making distinction between
normal time, overtime, delay in attendance
and early leaving.

5.For overhead rates, if based on labour

hours.

6. What is idle time? Give two example of idle time.

Ans : Idle Time –

It is the time during which the worker is not engaged in the production, but paid for even
during such time.

Idle Time = Total Time (as per Time keeping records) Minus Productive Time (as per
Time Booking records)

Example:

Tiffin break, time in going and coming from factory gate to work place, time lapsed in
ending and starting a new job, etc. are the kind of Normal Idle time.
 Machine break down, unavailability of raw material, etc. are the types of Abnormal Idle
time.

7. What is Idle Time? Mention any four causes of idle time?

Ans: Idle Time - Idle time indicates that time for which wages are paid to the workers but no
production is obtained during that time. There are two types of idle times:

1. Normal idle time: The normal idle time is that idle time which cannot be fully avoided
but effective effort should be made to reduce it.
2. Abnormal idle time: Abnormal idle time arises due to various causes which can be
avoided. Abnormal idle time can be avoided if proper precautions are taken.

Following are the causes of idle time:

a) Due to machine break down

b) Power failures
c) Waiting for instructions
d) Waiting for tools or raw materials to start the production
e) Economic Causes includes: Seasonal, cyclical or industrial nature.
f) Administrative decisions are also a big cause of idle time.

8. Mention two difference between Piece Rate and Time Rate method of wage
payment.

Ans : Following are the main differences between piece rate system and time rate system:

Based of Time Rate System Piece Rate System

differences

1. Basis of wages Wages is calculated on the basis of Wages is calculated on the

time spent by the worker on the basis of output or
jobs. production.

2. Idle time There is a possible of excessive idle There is a less chance of idle
time in this system. time in this system.

3. Quality of work The quality of work is good as there The quality of work may not
is no pressure to produce more be good because of pressure
goods. to produce more goods.

4. incentive There is a lack of incentive for the It encourages motivated

efficient and honest workers. workers to produce more
and earn more.

5. Control and Control and supervision are needed It encourages motivate

supervision as the workers may not work workers to produce more
properly. and earn more.

6. suitability If the quality is more concerned If the quantity is more

than quantity, this method is concerned than quality, this
suitable. method is appropriate.

7. equality All the workers get equal wages The works with high output
under this method irrespective of get higher wages and vice
the output. versa.
9. Mention any two advantages and two disadvantages of simple average cost
method.

Ans: Advantages of Simple Average Method:

1. Simple average method is very suitable when materials are received in uniform lot
quantities.

2. Simple average method is very easy to operate.

3. Simple average method reduces clerical work.

Disadvantages of Simple Average Method:

1. If the quantity in each lot varies widely, the average price will lead to erroneous costs.

2. Costs are not fully recovered. 3. Closing stock is not valued at the current assets.

10. Mention any two advantages and two disadvantages of Weighted average
method.

Ans: Advantages -

(a) The effect of price fluctuations on issue rates are smoothened effectively by the
method.

(b) The rate continues in its application unless a new purchase arrives.

(c) Only if, in the calculation of the rates, mathematical approximation is made then
profit or loss on materials arises.

(d) Simple & not too much clerical work is involved unless purchases are made
frequently.

(e) Where both the price & quantity ordered fluctuate, this method suits the condition.

Disadvantages -

(a) The work of calculation of rates becomes considerable in case where a frequent
purchase is made.

(b) The cost price (nor the market price) of the materials actually issued are not
represented by the charges made to issues.

(c) Unless the rates are calculated correcting up to 4 or 5 places of decimal whenever
necessary, profit or loss on materials may be created by the method.

11. Write two merits and demerits of Time Based method of wage payment.

Ans: Time-wage system offers the following advantages:

(i) Stable wages and security: It provides the worker with job security and stability
of wages. The inefficient workers are assured of stable earnings.

(ii) Better industrial relationship: This wage system is readily acceptable to unions
as it serves the workers on equity basis. This helps to promote better industrial
relationship.

(iii) Simplicity: Wage calculation is simple.

 (iv) Economy: The system is economical in the sense that it involves less clerical
expenditure resulting in saving of overheads.

(v) Quality Output: Time wages result in better quality of output since workers are not
in hurry to complete the jobs.

The following are the disadvantages of time wage system:

(i) The efficient workers are economically penalized for their efficiency since they are
not paid for it. In course of time they lose initiative and become inefficient.

(ii) With the decrease of productivity labour cost increases resulting in reduction in
profit.

(iii) It contributes to creation of bottlenecks in production by upsetting production

schedules and, thus, increases the cost per unit.

(iv) To make this system cost effective strict supervision is required. Thus, the additional
cost of supervision will increase the labour cost per unit.

(vii) It becomes very difficult to set the standards for labour under this system.

12. Write two merits and two demerits of Piece Rate System of wage payment.

Ans : Advantages Of Piece Rate System –

a) Piece rate system pays wages according to the output produced by the workers. It
encourages efficient workers.

b) Piece rate system helps to reduce idle time.

c) Piece rate system gives incentives to the workers to adopt a better method of
production for increasing their production and earning.

d) Piece rate system helps the management to determine the exact labour cost per unit
for submitting quotation.

e) Piece rate system reduces per unit cost of production due to increased volume of
production.

f) Piece rate system requires less supervision cost.

Disadvantages of Piece Rate System –

a) Piece rate system does not help in producing quality output as the workers are
concentrated more on quantity instead of quality.
b) Piece rate system does not help for a uniform flow of production and makes difficult
to regulate the production schedule.

c) It is very difficult to fix an acceptable and reasonable piece rate for each item of
output or job.

d) Piece rate system adversely affect the workers' health as well.

e) It requires extra supervision cost for quality output and effective use of materials,
tools and equipment.
13. Write the Formula of Taylor’s Differential piece wages rate. State two advantages
and two disadvantages of this system.

Ans :

Percentage of Efficiency Piece Rate

Less than 100% 83% of Normal Piece Rate
Equal to or More than 100% 125% of Normal Piece Rate

Advantage:

1. This method is simple to understand and wages to be paid to a worker can easily be
calculated.

2. It offers good incentives to efficient workers.

3. This method is preferred by employees because it reduces overhead expenses per unit
by raising output.

4. It helps in spotting and eliminating inefficient workers.

Limitations:

1. This method punishes slow workers very severely by giving them lower rates hence
less wages.

2. A seed of disunity is sown among workers. Those producing them will feel jealous of
others.

3. Workers are not guaranteed minimum wages and they feel insecure about their
earnings.

4. It adversely affects the health of workers because they try to over exert for reaching
the standard output.

5. It is difficult to determine labour cost because different rates are paid for production
purposes.

14. Mention the objectives of Wage Incentive Schemes.

Ans: The following are the objectives of Wage Incentive Schemes:

(i) To use wage incentives as a useful tool for securing a better utilisation of manpower,
better productivity scheduling and performance control, and a more effective personnel
policy.

(ii) To improve the profit of a firm through a reduction in the unit costs of labour and
materials or both.

(iii) To increase a worker’s earning without dragging the firm into a higher wage rate
structure regardless of productivity.

(iv) To avoid additional capital investment for the expansions of production capacity.
15. Distinguish between Direct wages and Indirect wages.

Ans: Following are the main differences between Direct wages and Indirect wages:

Bases of difference Direct wages Indirect wages

Meaning Direct labour cost is that cost Indirect labour cost is that cost
which is directly involved in the which is not directly involved in
production. the production.

Volume of Direct labour cost depends on the Indirect labour cost does not
Production volume of production. depend on volume of
production.

Separation It can be separated in cost, cost It cannot be separated.

center, or unit cost.

Payment Payment of direct cost is a direct Payment of indirect labour is an

expenditure. indirect expenditure.

Used It is used to covert raw materials It is used in the production

into finished goods. process.

Part This is a part of prime cost. It is a part of work, office,

selling and distribution
overhead.

16. What are the problems of pricing of material issue?

Ans:

The following factors are responsible for making the problem of pricing materials
issues more complicated:

(i) The stock of any given material is usually made up of several deliveries at different
prices.

(ii) Rapidly changing prices for materials and components.

(iii) Difficulties in identifying items with their delivery consignment.

(iv) The sensitivity of profit calculations to the pricing method adopted especially where
materials form a substantial part of total cost.

17. Write the features of a good time keeping system.

Ans: The main purpose/features of time keeping are as follows:

 It controls idle time.

 It identifies the late comers.
 It increases the discipline among the workers.
 It helps to create a healthy environment in the factory.
 it maintains a record of the job performed by labour.
 It enables implementation of various incentive schemes.
18. Make a comparative analysis between Halsey and Rowan Premium Plan (with
example)

Point of Difference Halsey Premium Plan Rowan Premium Plan

Method of Calculation (Hours worked × Hourly Rate) (Hours worked × Hourly Rate)
+ (50% × Time saved × hourly
(𝑇𝑖𝑚𝑒 𝐴𝑙𝑙𝑜𝑤𝑒𝑑 ×Time Taken ×
𝑇𝑖𝑚𝑒 𝑠𝑎𝑣𝑒𝑑
+
Rate)
Hourly Rate)

Bonus Amount Amount of bonus is found to Amount of bonus will be

be less than Rowan. higher than Halsey.

Earning per hour Hourly rate of earnings Hourly rate of earnings

increases at an accelerating increases steadily.
rate.

Cost consideration It is less expensive to install. It is more expensive to

install.

Bonus on Efficiency Less skilled worker will never Less skilled worker may have
get equal amount of bonus equal amount of bonus like
like skilled worker. skilled worker.

Increasing Bonus Amount of bonus increases Amount of bonus increases

steadily with increasing time up to 50% saving, then
saved. starts to decrease.

Reward Highly skilled workers are Highly skilled workers are

rewarded properly. not properly rewarded for
which they are dissatisfied.

Method of Computation It is very simple to calculate It is not so simple and. as

and easy to understand. such, not easily understood
by the worker.

19. Define Incentive Wage Plan. What are the essential elements of a successful
Incentive wage plan?

Ans: Incentive Wage Plan:

wage incentives are extra financial motivation. They are designed to stimulate human
effort by rewarding the person over and above the time rated remuneration, for
improvements in the present or targeted results.

The essential elements of a successful Incentive wage plan:

1. Simple to Understand: The plan must be simple, easy to understand and to operate.
It should involve least clerical work.
2. Just and Equitable: Just and equitable system will be successful. A worker should be
awarded for the work done by him.
3. Attraction for Workers: Incentive payments should be sufficient to attract workers for
improving their performance. If the incentive is small, then workers will not fell tempted
towards it.
4. Clarity of Objectives: Management should be clear about the goals to be achieved from
the incentive schemes. The aim of such schemes may be to raise output, improve quality
of products, etc. When workers are not clear about the aims of such schemes, then they
will not be able to work for their achievement.
 5. Incentive for Quantity and Quality: The scheme should provide incentive for both
quality and quantity of production. It should preferably be based on Time Study basis.

20. Mention advantages and disadvantages of Wage Incentive Plans.

Ans: Advantages -

a) Wage incentive plans provide an opportunity for hardworking and ambitious workers to
earn more.

b) It encourages employees to be innovative. They come out with more efficient ways of
doing work by overcoming the problems related to productivity and wasteful practice.

c) Incentive plans help to improve discipline and industrial relations. Effective incentive plan
helps in minimizing absenteeism, accidents etc.

d) The self-motivation on the part of the workers to work hard and improve performance
so as to earn monetary rewards will reduce the cost of supervision.

e) The scientific work study undertaken before introducing the incentive plans helps in
improving work flow, work methods etc.

Limitations: -

a) Jealousy and conflicts among workers may arise when some workers earn more than
others.

b) Unless strict check and inspections are maintained, quality may come under stake in the
enthusiasm among workers to increase productivity.

c) In the absence of a ceiling on incentive earnings, some workers may spoil their health.

d) Strict vigilance becomes necessary to ensure that workers do not disregard safety
regulation.

e) The cost and time of clerical work increases in introducing and administrating the
incentive plans.

f) Whenever production flow is disrupted due to the fault of management, workers insist
on compensation.

21. Explain the concept of pricing of issue of materials under simple average price
method.

Ans: Materials which are issued against stores requisition, before such issues are to be entered
in the stores ledger & a job or a service are charged, are required to be priced by the cost
department. For pricing the issues, there are different methods:

Simple Average Method:

Under this method, simple average rate at cost is obtained by adding the rate of
purchases represented by stock at the time of issue & then dividing the same by the
number of such rates. The rate needs to be revised at the time of any new purchase or
exhaustion of any existing stock. For the purpose of ascertaining the average rate, the
quantity by which each purchase is made has to be ignored.
 In case of fluctuating rates of purchase, average cost is used. However, obviously,
cost does not get properly represented by the average cost.

The simple average method can work well where:

(a) in each lot, there is standard quantity of purchase

(b) there is very mild fluctuation in prices.

22. Explain briefly how the methods of pricing issues of materials are selected.

Ans: The various method of pricing issues have merits and demerits. The choice of any method depends
on many factors which can be summarised as under:

1. The frequency of purchases.

2. Price fluctuations and its range.
3. Method of stock valuation.
4. Customs and practices followed in the industry, whether uniform costing system is being
followed.
5. Stock turnover rate.
6. Percentage cost of raw materials to total cost of products.
7. Economic order quantity.
8. Effect of pricing method on tax payable.
9. The accuracy required and the accuracy which would be obtained.
10.Clerical work involved.
11.Costing system adopted.
12.Traceability of issue to purchase lot.
13.Frequency of receipts and issues.
14.Whether standard costing system is adopted.
15.The nature of business.
16.The possibility of using different methods for different classes of items.

In addition to the above, the following factors have to be satisfied:

(i) The purchase cost is covered.
(ii) The issue price reflects the market price,
(iii) There is no significant variation in cost from period to period, and
(iv) The system does not necessitate heavy adjustment at the time of valuing closing
stock.

23. State the cause of overtime.

Ans: Causes of Overtime -

The following are the two principal causes of overtime. They are briefly explained below:

1. Scheduling More Production

The production department can decide the volume of production than normal production hours
when the workers requested to work in overtime. Likewise, the company can decide to sell
more. units for which more production is required. Now, the workers are expected to work in
overtime. In this way, production schedule is prepared to produce more units.

2. Rush Orders or Special Order or Urgent Order

The normal demand for the product can be fulfilled with the help of production carried on in
normal working hours. In case of accepting rush order, special order or urgent order, the
company is forced to employ its workers in overtime. If so, such accepted orders may be
executed without any difficulty.

Write down the difference between Bin Card and Stores Ledger.

BASIS FOR BIN CARD STORES LEDGER

COMPARISON

Meaning Bin Card implies a quantity record Stores ledger alludes to a

of the receipts, issue and balance subsidiary ledger, that keeps track
of materials in stores. of each and every transaction
relating to materials in the stores.

User Bin card is maintained by the Store ledger is prepared by cost

storekeeper. accounting department.

Nature Bin card is a record of quantity Store ledger is a record of

only. quantities and values.

Period In bin card, entries are made In store ledger, entries are made
immediately after each periodically.
transaction.

Posting Postings are made before a Posting are made after a

transaction in bin card. transaction in store ledger.

Using Bin card is kept inside the store. Store ledger is kept outside the
Department store.
 Taxation

1. Give four examples of income from house property that are exempted from tax
under the Income Tax Act, 1961.

Ans : FOLLOWING INCOMES ARE EXCLUDED FROM THE CHARGE OF TAX UNDER
“INCOME FROM HOUSE PROPERTY“ :

Under Section 10 of the Income Tax Act. 1961 following incomes from House Property
are exempted from tax. These incomes are not to be included in the total income of
assesse. Hence, no tax is payable on such incomes. These incomes are :

1. Annual Value of the House Property used for business purpose (This is subjected to
tax under Income from Other Sources.)

2. Income from Rent received from vacant land – (This will be treated under “Income
from Other Sources ”.)

3. Income from house property situated nearby agricultural land and used as a Store
House, Dwelling House etc., by the cultivators- This will be treated
under “Agricultural Income”.

4. House Property held for charitable purposes e.g. Rent from shops owned by a
Temple is also exempted.

5. Property held by restricted trade union is not to be included in its Gross Total
Income.

6. Income from Farm House.

7. Property income of a local authority.

8. Property income of an approved Scientific Research Association.

9. Property income from Educational Institution and Hospital

10. House Property held for Charitable purposes.

11. House Property income of a political party

12. One Self-Occupied Property.

However, the following incomes are Taxable under “Income From House
Property”:

1. Any arrears of rent, not taxed u/s 23 received in a subsequent year.

2. Incomes earned by letting-out any farm house or agricultural land for any purpose
other than agriculture.

3. Letting of Shops, Complexes, Commercial Buildings.

4. When the property is let-out.

2. Write down eight name of Income which is taxable under Income from other
sources.

Following are few examples of income which are treated as income from other
sources as per Indian Income Tax Act: -

1. Any amount received as rent from plant, machinery, furniture let on hire.
2. Any income from crossword puzzles, horse races, game, card games, television game,
shows and other entertainment programmes in which people win prizes and lottery etc.
3. Rent from sub-letting.
4. Dividend except which is exempt u/s 10 of Indian income tax act
5. Royalty received.
6. Interest received from banks on saving bank accounts.
7. Interest from Monthly Income Scheme from Post Office.
8. Any casual income
9. Salary received by Members of Parliament.

10.Interest received from bonds/debentures.

3. Mention the basis of taxability of income under the head ‘Income from Other
Sources’ as per the Income Tax Act, 1961.

Ans: BASIS OF CHARGE [Sec. 56(1)]

It is residuary head of Income which must satisfy the following conditions: -

1. There must be an income;

2. This income is NOT exempt under the IT Act 1961; and
3. This income is not chargeable to tax under the other heads of income viz.
"Salary", "House property", "Business or Profession" and "Capital Gains".

4. Mention the basis of taxability of income under the head ‘Capital Gain’ as per the
Income Tax Act, 1961.

Ans : CAPTAL GAINS – BASIS OF CHARGE [Sec. 45(1)]

Any gain arising from the transfer of a capital asset during a previous year is
chargeable to tax under the head “Capital Gain” in the immediately following
assessment year, if it is not eligible for exemption under Sec. 54, 54B, 54D, 54EC,
54G, and 54 GA.

5. Mention the conditions for deduction of Municipal tax while calculating Net Annual
Value of a Let out house under the head ‘Income from House Property’.

Ans :

The municipal taxes levied by the local authority are to be deducted from the Gross Annual
Value to arrive at the Net Annual Value. However, this deduction is allowed only if both the
following conditions are satisfied: -

1. The municipal taxes have been borne by the owner.

2. These have actually been paid during the financial year.

Municipal taxes which are due but have not been paid are not allowed as a deduction. Municipal
Tax due but not paid shall not be allowed as a deduction. However, municipal taxes paid during
financial year, are allowed even if they relate to past years or future years.

6. state the deduction available from Net Annual Value of a house property both in
case of let out property and self-occupied house.

Ans : While calculating house property income, deductions are allowed out of net annual value (NAV).
These deductions are as follows:

(1) Standard Deduction [Sec. 24(a)]

Let Out House

Standard Deduction is 30% of the Net Annual Value of the property is allowed to the
taxpayer. This deduction is allowed irrespective of the amount spent on insurance, repairs,
water and electricity supply, etc.

Self-Occupied House

No Standard deduction is allowed in respect of self-occupied house property because Net

Annual Value of self-occupied house is taken as NIL u/s 23(2)(a).

(2) Interest on ‘Housing Loan’ [Section 24(b)]

Let Out/Deemed to Be Let Out House:

While calculating house property income in respect of such house property, interest on loan
taken for purchase / construction / repairs / renovation etc. is allowed as deduction in full.
There is no maximum limit in respect of such interest.

In Case of ‘Self-Occupied House’:

Interest on loan taken for purchase/construction/repairs/renovation etc. for self-occupied

property is still allowed as deduction.

The maximum amount of interest permissible in cases of self-occupied property is ₹ 2,00,000

(from FY 2015-16 limit of 1.5 lakh was raised to 2 lakh) in respect of funds borrowed on or
after 01.04.1999 and 30,000 before 01.04.1999).

7. What do you mean by Capital Assets as per Income Tax Act, 1961?

Section 2(14) defines capital asset in Income Tax Act,1961. As per this section, capital asset
means property of any kind held by an assessee whether or not connected with his business
or profession but does not include;

1. Stock in trade, raw material or consumable stores held for the purpose of business or
profession (surplus arises out of these are taxed under the head profits and gains of business
or profession);

2. Personal effects of movable nature including wearing apparel, furniture and vehicle used
for personal use by the tax payer or any dependent member of such taxpayer.

Following assets shall not be treated as personal effects as these are specifically excluded
from the list;

 Jewellery  Painting
 Archaeological collections  Sculptures
 Drawings  Any work of art
3. Rural agricultural land i.e. agricultural land which is not situated within the specified area
as mentioned under section 2(1A) of IT act.

4. Gold bond as issued by the central government

5. Gold deposit bonds issued under the gold deposit scheme, 1999.

8. What do you mean by Long term Capital Assets under Income Tax Act, 1961?

Ans:

Long term capital asset means a capital asset held by an assesse for more than 36 months
immediately preceding the date of its transfer.

However, in the following cases, if Capital asset is held for more than 12 months it shall be
treated as long term capital asset-

1. Equity or preference shares held in a company listed in recognized stock exchange in

India
2. Any other security listed in recognized stock exchange in India
3. Units of UTI
4. Units of an equity oriented fund
5. Zero coupon bonds
6. Unlisted Equity or preference shares held in a company (if transfer of such shares takes
place on or before 10th July, 2014)
7. Units of mutual fund specified under section 10(23D) other than equity oriented fund
(whether quoted or not, if transfer of such shares takes place on or before 10 th July,
2014)
[**In calculation of period date of purchase will be included and date of transfer shall be excluded.]

9. What do you mean by Short term Capital Assets under Income Tax Act, 1961?

Ans: “Short Term Capital Asset” means a capital asset held by an assessee for not more than 36
months, immediately prior to its date of transfer.
However, in the following cases, an asset, held for not more than 12 months, is treated as short-term
capital asset:

 Equity or preference shares in a company listed in recognised stock exchange in India.

 Securities like debentures, bonds, Government securities, derivatives etc. listed in a
recognised stock exchange in India.
 Units of UTI.
 Units of an equity oriented fund whether quoted or not.
 Zero coupon bonds.
10. Give four examples of assets which will not be treated as capital assets under
Income Tax Act, 1961.

Ans: Examples of assets which will not be treated as capital assets under Income Tax Act,
1961:

1. Any stock in trade, consumable stores, or raw materials held for the purpose of
business or profession have been excluded from the definition of capital assets.

2. Any movable property (excluding jewellery made out of gold, silver, precious stones,
and drawing, paintings, sculptures, archaeological collections, dinosaur bones, etc.)
used for personal use by the assessee or any member (dependent) of assessee’s family
is not treated as capital assets. For example, wearing apparel, furniture, car or scooter,
TV, refrigerator, musical instruments, gun, revolver, generator, etc. is the examples of
personal effects.

3. Agricultural land situated in rural area.

4. 6.5% gold bonds or 7% gold bonds 1980, national defence gold bond 1980, issued by
the central government.

5. Special bearded bonds, 1991

6. Gold deposit bonds issued under gold deposit scheme, 1999.

11. Write about the mode of computation of income from winning of lottery, horse
races etc.

Ans: Where the total income of an assessee includes any income by way of winnings from
any lottery or crossword puzzle or race including horse race or card game and other game of
any sort or from gabling or betting of any form, tax shall be calculated at the rate of 30% of
such income plus surcharge. The taxability of income in the nature of winnings from any
lotteries, crossword puzzles, race, etc. are subject to the following:

(a) No expenditure or allowance can be allowed against such income;

(b) No deduction under Chapter VI-A can be allowed;

(c) No benefit of carry forward and set off of loss/unabsorbed depreciation allowance is
available against such income; and

(d) No basic exemption limit is available.

12. What do you mean by owner as per Income Tax Act?

Ans:

The term ‘owner’ includes a legal owner, a beneficial owner or a deemed owner. The following
points are considered useful in this context:

a) An owner may be an individual, a company, a firm, an association of persons or an

artificial juridical entity.
b) Owner of the building but not the owner of the land on which such building is situated
is regarded as the owner of the property.
c) A person may be the owner even if he has no right to alienate the property except with
the consent of a third party.
d) A person may be the owner even if he is under an obligation to let out the property
free for rent.
13. Who is Deemed Owner under Income Tax Act, 1961?

Ans: According to Section 27 of Income-tax Act the assessee in following cases is deemed to be
the owner of the house property, though not owner of the house property

(i) Transfer to a spouse/child [Sec. 27(i)]:

An individual who transfers otherwise than for adequate consideration any house property to
his or her spouse, not being a transfer in connection with an agreement to live apart or to a
minor child not being a married daughter, shall be deemed to the owner of the house
property so transferred.

(ii) Holder of an impartible estate [Sec. 27(ii)]:

The holder of an impartible estate shall be deemed to be the individual owner of all the
properties comprised in the estate.

(iii) Member of a Co-operative Society, etc. [Sec. 27(iii)]:

A member of a co-operative society to whom a building or part thereof is allotted or leased

under a house building scheme of the society, shall be deemed to be the owner of that
building or part thereof.

(iv) Person in possession of a property [Sec. 27(iiia)]:

A person who is allowed to take or retain possession of any building or part thereof in part
performance of contract of the nature referred to in section 53 A of the transfer of property
Act, 1882.

(v) Person having right in a property for a period not less than 12 years [Sec. 27(iiib)]:

A person who acquires any rights (Excluding any rights by way of a lease from month to
month or for a period not exceeding one year) in or with respect to any building or part
thereof, by virtue of a transfer by way of lease for a term of not less than 12 years as per
section 269 UA (f) (whether originally or by extension).

14. Distinguish between short term Capital Assets and Long term capital Assets.

Short-Term Capital Asset Long-Term Capital Asset

Any capital asset held by the taxpayer for a Any capital asset held by the taxpayer for a
period of not more than 36 months period of more than 36 months immediately
immediately preceding the date of its preceding the date of its transfer will be
transfer will be treated as short-term capital treated as long-term capital asset.
asset.
However, in respect of certain assets like However, in respect of certain assets like
shares (equity or preference) which are shares (equity or preference) which are
listed in a recognised stock exchange in listed in a recognised stock exchange in
India units of equity oriented mutual funds, India, units of equity oriented mutual funds,
listed securities like debentures and listed securities like debentures and
Government securities, Units of UTI and Government securities, Units of UTI and
Zero Coupon Bonds, the period of holding to Zero Coupon Bonds, the period of holding to
be considered is 12 months instead of 36 be considered is 12 months instead of 36
months months
15. Distinguish between short term Capital Gains and Long term capital Gains.

BASIS FOR COMPARISON SHORT TERM CAPITAL GAIN LONG TERM CAPITAL GAIN
Meaning Profit arising out of sale of Long term capital gain is one
short term capital asset is that arises on the transfer of
known as short term capital long term capital asset from
gain. an individual.
Capital Asset Less than 24 months for More than 24 months for
immovable property and 36 immovable property and 36
months in case of movable months in case of movable
one. one
Financial Asset Holding period is less than Holding period is more than
12 months 12 months
Rate of taxation Normal income tax rate 20%
Computation Short term capital gains = Long term Capital Gains =
sale cost of asset – cost of selling a property –
(expenditure incurred on Indexed cost of acquisition
asset) – (cost of
acquisition/improvement)

16. Discuss how the annual value of house property of residential house is
determined.

1. First compare Fair Rent and Municipal Value and select Higher of them, we will get
Reasonable Expected Rent.

2. Now compare Reasonable Expected Rent with Standard Rent and select the lower of them,
we will get the Expected Rent.

3. Now compare Expected Rent with your Rent Received or Receivable or Actual Rent and
select the highest of them and we will get Gross Annual Value of your house.

17. Mention six transactions which do not constitute as transfer as per Indian
Income Tax Act for computation of Income from Capital Gain.

Ans: Transactions which do not constitute transfer (sec 47): -

1. Distribution of capital asset on total or partial partition of HUF

2. Transfer of capital asset under a gift or will or an irrevocable trust

3. Transfer of capital asset by a company to its 100 percent subsidiary company.

4. Transfer of capital asset by a company to its 100 percent holding company.

5. Transfer of capital asset in a scheme of amalgamation

6. Transfer of capital asset by a demerged company to the resulting company

18. Briefly explain the taxability of any movable asset received without
consideration.

Ans:

If any individual/HUF receives any movable property, without consideration, the aggregate
fair market value of which exceeds ₹50,000 then whole of the aggregate fair market value
of such movable property shall be treated as income of the individual or HUF, hence taxable
u/s 56(2)(vii).
19. Briefly explain the taxability of any sum of money (Gift received in Form of Cash
or Cash Equivalents) received without consideration.

Ans:

If any individual/HUF receives any sum of money, without consideration, the aggregate value
of which exceeds ₹50,000 than whole of the aggregate value of such sum shall be treated
as income of the individual or HUF, hence taxable u/s 56(2)(vii). If the value of Cash gift does
not exceed ₹50,000 then nothing is taxable in hands of assessee.

20. What is the meaning of Relative under the head Income from Other Sources
under Income Tax Act, 1961?

Ans:

Meaning of Relative for Section 56(2):

In case of individual -

1. Spouse of the individual

2. Brother or sister of the individual

3. Brother or sister of the spouse of the individual

4. Brother or sister of either of the parents of the individual

5. Any lineal ascendant or descendant of the individual

6. Any lineal ascendant or descendant of the spouse of the individual

7. Spouse of the person referred to in above points

In case of HUF – Any member of the HUF