KSLU Solved Question Papers
Law of Taxation
Previous Year Question Paper with Solution
B.A. LL.B. (Five Years) · Sem 7
2017 Dec Examination
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Mumbai
B.A. LL.B. (Five Years) Sem 7 Law of Taxation 2017 Dec Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2017 Dec examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2017 Dec examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1What are the incomes chargeable under income from salary ? And state the deduction from salary.[16]
Answer
For full marks, cover: the charge under section 15 of the Income-tax Act, 1961 (salary due, paid in advance, arrears) and the need for an employer and employee (R.M. Chidambaram Pillai); what "salary" includes (section 17(1)); allowances; perquisites (section 17(2)) with L.W. Russel and Arun Kumar; profits in lieu of salary (section 17(3)); the main exemptions; the deductions under section 16: standard deduction (Rs 50,000, or Rs 75,000 under section 115BAC(1A)), entertainment allowance and tax on employment; a worked computation; the Income-tax Act, 2025.
The charge: section 15
Section 15 charges three kinds of income under the head "Salaries":
- salary due from an employer or former employer in the previous year, whether paid or not;
- salary paid in the year, even though not yet due, that is, an advance; and
- arrears of salary paid in the year, if not taxed in an earlier year.
So salary is taxed on the "due" or "receipt" basis, whichever comes first. Explanation 1 stops the same salary being taxed twice, once when paid in advance and again when due.
An employer and an employee are essential. There must be a relationship of master and servant. Explanation 2 says that salary, bonus or commission paid by a firm to its partner is not salary. It is taxed as business income of the partner.
Commissioner of Income-Tax, Madras v. R.M. Chidambaram Pillai, AIR 1977 SC 489, decided on 17 November 1976. Partners of tea-growing firms drew salaries from the firms. The firms' income was 60 per cent agricultural and exempt. The Supreme Court held that a firm is not a person separate from its partners, so it cannot employ one of them. A partner's "salary" is only a special share of the firm's profits. So 60 per cent of it shared the exemption.
What salary includes: section 17(1)
"Salary" includes:
- wages;
- any annuity or pension;
- any gratuity;
- fees, commissions, perquisites or profits in lieu of or in addition to salary;
- advance of salary;
- payment for leave not taken (leave encashment);
- the taxable part of the yearly accretion in a recognised provident fund;
- the employer's contribution to the employee's pension account under section 80CCD.
Allowances
An allowance is a fixed cash sum paid for a purpose. Dearness allowance and city compensatory allowance are fully taxable. Some are partly exempt: house rent allowance under section 10(13A), and special allowances for official duties under section 10(14), within prescribed limits.
Perquisites: section 17(2)
A perquisite is a benefit given by the employer in addition to salary. The main ones are:
- rent-free accommodation, or accommodation at a concessional rent, valued under the Rules;
- benefits and amenities given free or cheaply to a director, a person with a substantial interest, or an employee earning above a prescribed limit;
- any obligation of the employee paid by the employer, such as his club bill or school fees;
- premiums paid by the employer for life insurance or an annuity for the employee, outside approved funds;
- shares allotted under an employee stock option plan or as sweat equity. They are valued at fair market value on the date the option is exercised, less what the employee paid;
- the employer's combined contribution to the employee's provident fund, pension scheme and superannuation fund above Rs 7.5 lakh a year.
Commissioner of Income-tax, Kerala and Coimbatore v. L.W. Russel, AIR 1965 SC 49, decided on 1 April 1964. An employer paid part of the premium for a deferred annuity under a superannuation scheme. The employee would get the annuity only if he reached superannuation. The Supreme Court held that the contribution was not a perquisite. A benefit is taxable only when a vested right in it accrues to the employee. A merely contingent interest is not enough.
Arun Kumar v. Union of India, (2006) 286 ITR 89, decided on 15 September 2006. Steel company officers challenged the 2001 rule valuing company housing at a percentage of salary. The Court upheld the rule as valid machinery. But it applies only where there is in fact a concession in rent. An employee may still show that he received no concession.
Profits in lieu of salary: section 17(3)
These include:
- compensation from an employer for termination of employment, or for a change in its terms;
- payments from an unrecognised provident fund or other unapproved fund, beyond the employee's own contributions;
- sums received under a Keyman insurance policy;
- sums received before joining or after leaving employment from the employer or a former employer.
The main exemptions
Some salary receipts are exempt under section 10, wholly or within limits. Examples are gratuity, commuted pension, leave encashment on retirement and voluntary retirement compensation up to Rs 5 lakh.
Other rules on salary income
- Where salary is earned (section 9(1)(ii)). Salary earned in India is deemed to accrue in India. Pay for services rendered in India, and for rest or leave periods between such services, counts as earned in India. So a non-resident is taxed on it too.
- Pension. Pension from a former employer is salary under section 17(1). Family pension, received by the family after the employee's death, is not salary. It is taxed as income from other sources, with a deduction under section 57(iia) of one-third or Rs 15,000, whichever is less. Under the section 115BAC regime the figure is Rs 25,000.
- Tax at source (section 192). The employer must deduct tax from salary at the time of payment. The rate is the average rate on the employee's estimated salary income for the year.
- Relief for arrears (section 89). Arrears or advance salary received in one year may push income into a higher slab. The Assessing Officer then grants relief on application, so the employee pays no more than if the salary had been taxed in the right years.
Deductions from salary: section 16
After adding everything up, the gross salary is reduced by three deductions:
1. Standard deduction (section 16(ia)). A flat Rs 50,000, or the salary if it is less. No proof of expenses is needed. Under the concessional regime of section 115BAC(1A), it is Rs 75,000 from assessment year 2025-26. That regime now applies unless the individual opts out under section 115BAC(6).
2. Entertainment allowance (section 16(ii)). Only a Government employee gets this. First the allowance is added to salary. Then a deduction is allowed of one-fifth of his salary, excluding allowances and perquisites, or Rs 5,000, whichever is less.
3. Tax on employment (section 16(iii)). Professional tax actually paid under State law, which article 276(2) caps at Rs 2,500 a year.
Under the section 115BAC regime, only the standard deduction is allowed. Section 115BAC(2)(i) denies the deductions under section 16(ii) and (iii). It also denies exemptions such as house rent allowance and leave travel concession.
Worked computation
Ravi, a private sector employee, has basic salary of Rs 6,00,000, dearness allowance of Rs 60,000 and a bonus of Rs 40,000. He pays professional tax of Rs 2,500.
| Item | Old regime (Rs) | Section 115BAC regime (Rs) |
|---|---|---|
| Gross salary | 7,00,000 | 7,00,000 |
| Less standard deduction | 50,000 | 75,000 |
| Less professional tax | 2,500 | not allowed |
| Income from salary | 6,47,500 | 6,25,000 |
The section 115BAC regime gives Ravi a smaller salary figure here. But the better choice for him also depends on the slab rates, and on deductions such as section 80C that only the old regime allows. That comparison is made on his whole income, not on salary alone.
The Income-tax Act, 2025
For tax years from 1 April 2026, section 15 of the 2025 Act carries the charge. Salary, perquisites and profits in lieu of salary are defined in sections 16, 17 and 18. The deductions are in the Table to section 19.
Conclusion. The head "Salaries" taxes salary due, paid in advance and in arrears, but only between employer and employee. That is why a partner's salary falls outside it (R.M. Chidambaram Pillai). Salary includes wages, pension, gratuity, allowances, perquisites and profits in lieu of salary, but a benefit must be vested to be taxed (L.W. Russel). Section 16 then allows a standard deduction, entertainment allowance for Government employees and professional tax. Under section 115BAC, only the standard deduction of Rs 75,000 survives.
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