NISM Series X-B Chapter 7: Concepts of Taxation Practice Questions

Question 1

Mr. P received bonus shares from Company X. If these bonus shares were issued on April 15, 2005, what would be the cost of acquisition for these shares when Mr. P sells them?

Accepted Answer

Nil.. According to Table 8.4, under the 'Bonus share' situation, it states: 'If bonus shares issued on or after 01-04-2001: Nil'. Since the bonus shares were issued on April 15, 2005 (which is after April 1, 2001), their cost of acquisition is Nil

Question 2

Which of the following expenses incurred in connection with the transfer of a capital asset is NOT allowed as a deduction when computing capital gain?

Accepted Answer

Securities Transaction Tax (STT) paid on the sale of equity shares.. The text states, 'However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax (STT), Commodities Transaction Tax (CTT) while calculating the capital gains from sale of securities.' Brokerage, stamp duty, and legal expenses are allowed deductions

Question 3

A non-resident investor holds Rupee Denominated Bonds of an Indian company. Upon redemption of these bonds, how is the 'full value of consideration' calculated for capital gains purposes?

Accepted Answer

The full redemption value, excluding the amount equal to the appreciation of the rupee against a foreign currency from the date of issue to the date of redemption.. As per Table 8.3, for 'Redemption of rupee denominated bonds by non-resident', the 'Full value of consideration' is defined as: 'An amount equal to the value of appreciation of rupee against a foreign currency from the date of issue to the date of redemption shall be excluded for the purpose of computing the full value of consideration.'

Question 4

Which of the following transactions is NOT regarded as a 'transfer' for the purpose of computing capital gains under the Income Tax Act?

Accepted Answer

Conversion of Gold into an Electronic Gold Receipt (EGR) issued by a vault manager.. The text explicitly states under section 8.4.1 (x) that 'Conversion of Gold into Electronic Gold Receipt (EGR) issued by a vault manager, or conversion of EGR into Gold, is not treated as transfer for the purpose of computing capital gain.' Options A, B, and D are all described as transfers or covered in the definition of exchange of asset in the provided text

Question 5

According to the Income Tax Act, a transfer of a capital asset under a gift or will or an irrevocable trust is generally excluded from the ambit of transfer for capital gains purposes. However, this exclusion does NOT apply to:

Accepted Answer

Shares allotted by a company to its employees under an Employees' Stock Option Plan (ESOP) and subsequently transferred under an irrevocable trust.. Section 8.4.1 (ii) states that 'Any transfer of a capital asset under a gift or will or an irrevocable trust is excluded from the ambit of transfer, except shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with prescribed guidelines.' Therefore, the exclusion does not apply to ESOP shares transferred under an irrevocable trust

Question 6

When computing capital gains from the sale of securities, which of the following expenses is explicitly NOT allowed as a deduction?

Accepted Answer

Securities Transaction Tax (STT) paid on the sale.. Under the section 'Expenditure incurred in connection with transfer', the text explicitly states: 'However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax (STT), Commodities Transaction Tax (CTT) while calculating the capital gains from sale of securities.'

Question 7

Which of the following transactions is NOT regarded as a 'transfer' for the purpose of capital gains under the Income Tax Act, as per the provided text?

Accepted Answer

Redemption of Sovereign Gold Bonds by an individual.. As per the text, 'Redemption of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, by an individual will not be regarded as transfer.' Options B, C, and D are explicitly mentioned as transactions that amount to transfer

Question 8

Which of the following transactions is generally NOT regarded as a 'transfer' for the purpose of computing capital gains under the Income Tax Act?

Accepted Answer

Distribution of capital assets on the total partition of a Hindu Undivided Family (HUF).. The text explicitly states under '8.4.1 Transactions not regarded as transfer' that 'Distribution of capital asset on the total and partial partition of a Hindu undivided family' is not regarded as a transfer for capital gains purposes. Redemption of zero-coupon bonds, relinquishment of assets, and exchange of shares during business reconstruction are generally covered under the definition of 'transfer'

Question 9

Mr. P received bonus shares from ABC Ltd. on October 15, 2005. What would be the cost of acquisition for these bonus shares when calculating capital gains upon their sale?

Accepted Answer

Nil.. According to Table 8.4, under the 'Bonus share' situation, it is stated: 'If bonus shares issued on or after 01-04-2001: Nil.' Since Mr. P received the bonus shares on October 15, 2005, which is after April 1, 2001, their cost of acquisition is Nil

Question 10

When a capital asset is converted into stock-in-trade by the assessee, how is the 'full value of consideration' determined for capital gains purposes?

Accepted Answer

The Fair Market Value of the capital asset on the date of conversion.. As per Table 8.3, for 'Conversion of capital asset into stock-in-trade', the full value of consideration is the 'Fair market value of capital asset on the date of conversion.'

Question 11

Mr. C sells an unlisted share and incurs brokerage charges, stamp duty, and Securities Transaction Tax (STT). Which of these expenses are allowed as deductions when computing capital gains?

Accepted Answer

Brokerage charges and stamp duty only.. The text states, 'Any expenditure, incurred wholly and exclusively, in connection with transfer of a capital asset is allowed as a deduction... Thus, the brokerage or commission, stamp duty, registration fee, travelling expenses and legal expenses, etc., incurred in connection with transfer are allowed to be deducted... However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax (STT), Commodities Transaction Tax (CTT) while calculating the capital gains from sale of securities.'

Question 12

Mr. Sharma received bonus shares from Company X on June 15, 2005. How will the cost of acquisition for these bonus shares be determined for capital gains computation when Mr. Sharma sells them?

Accepted Answer

Nil.. According to Table 8.4, under 'Bonus share', if bonus shares are issued on or after 01-04-2001, the cost of acquisition is 'Nil'. Since June 15, 2005, is after April 1, 2001, the cost of acquisition for these bonus shares will be Nil

Question 13

Which of the following transactions is NOT regarded as a 'transfer' for the purpose of capital gains under the Income Tax Act?

Accepted Answer

Redemption of Sovereign Gold Bonds by an individual.. As per the text, 'Redemption of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, by an individual will not be regarded as transfer.' Options A, C, and D are explicitly or implicitly covered under the definition of 'transfer' or 'exchange of asset' as per the initial sections of the chapter

Question 14

Mr. S acquired 1000 units of an equity-oriented mutual fund on January 10, 2017, for ₹50 per unit. The Fair Market Value (FMV) of these units on January 31, 2018, was ₹70 per unit. Mr. S sold these units on June 15, 2024, for ₹90 per unit. Assuming STT was paid on acquisition and sale, what would be the cost of acquisition for calculating the Long-Term Capital Gain?

Accepted Answer

₹70 per unit. As per Table 8.4, for 'Equity shares, units of equity oriented mutual fund or units of business trust (being long-term capital asset) chargeable to STT acquired on or before 31-01-2018 and sold after 01-04-2018', the cost of acquisition is the higher of:
    a) Actual cost of acquisition
    b) Fair Market value as on 31-01-2018 or full value of consideration, whichever is lower

Given:
Actual cost of acquisition = ₹50 per unit
Fair Market Value (FMV) as on 31-01-2018 = ₹70 per unit
Full value of consideration = ₹90 per unit

Step 1: Determine the lower of FMV as on 31-01-2018 or full value of consideration.
Lower of (₹70, ₹90) = ₹70

Step 2: Determine the higher of Actual cost of acquisition or the result from Step 1.
Higher of (₹50, ₹70) = ₹70

Therefore, the cost of acquisition for calculating Long-Term Capital Gain is ₹70 per unit

Question 15

According to the Income Tax Act, which of the following scenarios involving a transfer of a capital asset under a gift or will or an irrevocable trust would still be considered a 'transfer' for capital gains purposes?

Accepted Answer

Transfer of shares allotted by a company to its employees under an Employees' Stock Option Plan (ESOP) through an irrevocable trust.. The text states: 'Any transfer of a capital asset under a gift or will or an irrevocable trust is excluded from the ambit of transfer, except shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees' Stock Option Plan or Scheme of the company offered to such employees in accordance with prescribed guidelines.' Option C directly matches this exception, making it a transfer for capital gains

Question 16

Which of the following statements regarding transactions not regarded as transfer for capital gains purposes is most accurate, considering the current provisions mentioned in the text?

Accepted Answer

Conversion of Gold into Electronic Gold Receipt (EGR) issued by a vault manager is not treated as a transfer for computing capital gain.. A) The text states: 'To promote consolidation of different similar scheme of transfer of mutual fund, Income Tax Act provides that consolidation of units shall not be treated as transfer.' So, A is incorrect. B) The text states that while rollover of FMPs is not treated as a transfer, 'this exemption is no longer relevant' for schemes investing 65% or more in debt due to Section 50AA, making the statement 'highly relevant for all types of FMPs' inaccurate. C) The text states that transfers under gift/will/irrevocable trust are excluded 'except shares, debentures or warrants allotted by a company... under any Employees' Stock Option Plan or Scheme...', meaning ESOP shares transferred as gift/trust *are* considered a transfer, making C incorrect. D) The text explicitly states: 'Conversion of Gold into Electronic Gold Receipt (EGR) issued by a vault manager, or conversion of EGR into Gold, is not treated as transfer for the purpose of computing capital gain.' This statement is accurate

Question 17

According to the Income Tax Act, what is the cost of acquisition for bonus shares issued on or after April 1, 2001?

Accepted Answer

Nil.. As per Table 8.4 under 'Cost of Acquisition' for 'Bonus share', if bonus shares are issued on or after 01-04-2001, the cost of acquisition is Nil

Question 18

According to the provided text, for which specific long-term capital asset is the indexation benefit still available, albeit as a parallel calculation to determine tax liability?

Accepted Answer

Land and building bought before July 23, 2024.. The text states: 'In case of a long-term capital asset the indexation benefit is no longer available except as a parallel calculation to determine capital gains tax liability in respect of long-term capital gains arising from sale of land and building bought before July 23, 2024.'

Question 19

Ms. Priya was allotted shares under an Employees' Stock Option Plan (ESOP). She later transferred these shares as a gift to her family member. For the purpose of computing capital gains, how will the 'full value of consideration' be determined for this transfer?

Accepted Answer

The market value of such securities on the date of transfer.. Table 8.3, 'Calculation of full value of consideration in special cases', specifies for 'Transfer of securities allotted under ESOPs as gift or under irrevocable trust', the 'Full value of consideration' is the 'Market value of such securities on the date of transfer'. Although gifts are generally excluded from transfer, ESOP shares transferred as gift are an exception and are considered a transfer

Question 20

Mr. S sold shares of a listed company. While calculating the capital gains, which of the following expenses incurred by Mr. S is NOT allowed as a deduction?

Accepted Answer

Securities Transaction Tax (STT) paid on the sale of shares.. Under point 2, 'Expenditure incurred in connection with transfer', the text states: 'Thus, the brokerage or commission, stamp duty, registration fee, travelling expenses and legal expenses, etc., incurred in connection with transfer are allowed to be deducted in computing capital gain. However, no deduction is allowed in respect of any sum paid on account of Securities Transaction Tax (STT), Commodities Transaction Tax (CTT) while calculating the capital gains from sale of securities.'

Ch.7: Concepts of Taxation

What You Will Learn in This Chapter

Multiple Choice Questions (20)

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