![](3D"http://www.thehindubusinessline.com/bline/mn/newbline.gif"=20) Business Daily from THE HINDU group of=20 publications Monday, Nov 10,=20 2008 ePaper | |
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Mentor=20
- Taxation Try this taxing exercise
![](3D"http://www.thehindubusinessline.com/mentor/2008/11/10/images/20081=) Applying their minds. V. K. Subramani ABC Ltd engaged in manufacture of medicines disclosed a net = profit of=20 Rs 40,70,000 for the year ended March 31, 2008. Compute the = taxable income=20 of the company after considering the following information, with = reasons=20 for each item of adjustment. a) A sum of Rs 55,000 foregone by supplier of machinery is = credited to=20 profit and loss account. b) Research equipment acquired during the year for Rs 2,00,000 = was=20 included in the block of plant and machinery and depreciation at = 15 per=20 cent thereon debited to P&L account. c) Deferred tax liability debited in P&L account, Rs = 1,00,000. d) Construction cost of building on leasehold land (lease for = 10 years)=20 of Rs 5,00,000 has been capitalised in the books of account. e) During the year the company paid Rs 2,05,000 for erection of = machinery to an erecting agency on which no tax was deducted at = source=20 under Section 194C. [10 marks] 2 (a) X Co Ltd contributed Rs 20 lakh to the employees=92 = pension scheme.=20 For Mr A, one of the employees, the contribution amounts to Rs = 15,000. Is=20 the amount credited to the account of the employee taxable? [3 = marks] b) Chandra paid medical insurance premium of Rs 10,000 by = account-payee=20 cheque, Rs 2,000 by credit card and Rs 5,000 by cash. How much is=20 deductible under Section 80D? [3 marks] c) Enumerate the principle of mutuality in the context of = income-tax?=20 [4 marks] Situation=20 analysis3 (a) In the course of assessment of Easy Ltd, it was decided = that the=20 accounts have to be audited under Section 142(2A) of the Act. The = assessee=20 was given an opportunity of hearing before issuing direction for = getting=20 the accounts audited. The assessee objects to audit under Section = 142(2A),=20 as the expenditure relating to audit have to be met by it. Is it = correct?=20 [3 marks] b) X Co Ltd, engaged in construction business, entered into an=20 agreement with Mr A for development of his land by constructing=20 residential apartments. The irrevocable power of attorney (POA) = executed=20 in June 2007 gave powers to the company of possession, control and = supervision of development. The land was acquired by Mr A in April = 1990=20 for Rs 20 lakh and the POA provides for payment of Rs 200 lakh in = two=20 annual instalments of Rs 100 lakh each. Is the transaction = chargeable to=20 capital gains? [4 marks] c) Mohan received loan of Rs 5 lakh from Sohan by way of = account-payee=20 crossed cheque. The assessing officer (AO) taxed the loan as = income since=20 Mohan could not prove the credit worthiness of Sohan. Is he = correct? [4=20 marks] Search = assessment=204 (a) A search was made in the premises of A Co Ltd in December = 2005.=20 During the course of search assessment for the assessment year = 2005-06,=20 the AO made a reference to TPO (transfer pricing officer) for=20 determination of arms=92 length price in July 2007. What is the = time limit=20 within which the AO has to complete the assessment? [3 marks] b) Stock statement of Jalal & Co furnished to the bank as = at 31st=20 March 2008 amounted to Rs 75 lakh though the closing stock value = disclosed=20 in the return was only Rs 50 lakh. Can the difference in stock be=20 subjected to tax as undisclosed income? [4 marks] c) Sriram & Co did not deduct tax at source under Section = 194 C=20 during the year 2007-08. The AO levied interest under Section = 201(1A) and=20 penalty under Section 271C. Now he wants to levy penalty for = non-filing of=20 TDS returns. Decide the validity. [4 marks] 5 (a) Ravi won a lucky dip conducted by a company. He is = eligible for a=20 Maruti car. The company seeks your advice as regards compliance = with TDS=20 provisions. Advice. [4 marks] b) Chatterjee born in Kolkata left for the US in August 2007 = for the=20 purpose of employment. His income in India prior to his departure = to US=20 was Rs 2 lakh. His salary income in the US from August 2007 to = March 2008=20 amounts to Rs 7 lakh (converted). Compute his total income and = discuss his=20 tax liability? [4 marks] c) Distinguish slump sale and demerger? [4 marks] d) To what extent the claim of intangible additions made = earlier=20 telescoped as a source for subsequent acquisition / expenditure = provides=20 relief from tax liability? [4 marks] 6 (a) Arvind (aged 70 years) sold equity shares of Reliance = Industries=20 Ltd in July 2007 for Rs 5 lakh. The shares were acquired in = December 2006=20 for Rs 3 lakh. He paid Rs 15,000 towards life insurance premium in = March=20 2008. Assume he has no other income. Compute his tax liability. [3 = marks] b) Balan employed in ABC & Co got education loan for = pursuing a=20 part-time MBA course. The employer gave a 6 per cent loan of Rs 3 = lakh on=20 June 1, 2007. What is the value of perquisite? [3 marks] c) The deemed fringe benefit value of X Co Ltd for the year = ended March=20 31, 2008, is computed at Rs 3,50,000. How much advance fringe = benefit tax=20 is to be paid and when it should be paid by the assessee? [5 = marks] d) X (P) Ltd is the holding company of Y (P) Ltd. The shares = were=20 acquired by X (P) Ltd in Y (P) Ltd in June 2000 for Rs 10 lakh. Y = (P) Ltd=20 went into liquidation and X (P) Ltd received some machinery in = full=20 settlement of its dues from the liquidator. The WDV of the = machinery in=20 the hands of Y (P) Ltd on April 1, 2007 was Rs 22 lakh and the = fair market=20 value on that date was ascertained at Rs 27 lakh. Is the transfer = exempt=20 under Section 47? [4 marks] Perquisite value7 (a) Chetan employed in Wipro Ltd was given accommodation = owned by the=20 employer at Bangalore. He is paid basic salary plus DA (eligible = for=20 retirement benefit) of Rs 1,70,000 per month. Population of = Bangalore as=20 per the 2001 census exceeds 30 lakh. Compute the perquisite value = of=20 rent-free accommodation. [3 marks] b) List the conditions to be satisfied by an employer for = complying=20 with the requirements of voluntary retirement scheme prescribed in = rule=20 2BA. [5 marks] c) Ram Arts College received anonymous donation of Rs 20 lakh. = It is=20 claiming exemption under Section 10(23C)(iii)(ad) as the aggregate = receipt=20 is less than the prescribed limit. Is the anonymous donation = chargeable to=20 tax? [3 marks] c) BB Ltd, having head-office at Delhi, has net profit of Rs 75 = lakh=20 for the year ended March 31, 2008. It has branch office at Tokyo, = Japan=20 where it incurred a loss of Rs 25 lakh. Is the loss in foreign = country=20 eligible for set off against income earned in India? [3 marks] d) In the course of assessment the value of stock for the year = ended=20 March 31, 2007, was determined at Rs 50 lakh as against the = admitted=20 figure in the return of Rs 35 lakh. The assessee wants to adopt = the=20 opening stock at Rs 50 lakh as on April 1, 2007, being the value = of=20 closing stock adopted for assessment earlier. Is it correct? [3 = marks] 8) Write the taxability or otherwise of the following: i) Building under construction owned by Mr X employed in a = company. ii) Stock exchange membership card. iii) Building allotted by housing society to its member. iv) Market value of Rs 50 lakh in respect of vacant site owned = by a=20 firm consisting of two equal partners. v) Jewellery held by =91A Jewellers Ltd=92. [5 marks] b) Mr A (aged 60 years) has life interest in a property which = fetches=20 average annual income of Rs 80,000. Compute the value of life = interest=20 adopting conversion factor at 6.255. [2 marks] c) Write the monetary limit of jurisdiction applicable to = various=20 classes of valuation officers. [3 marks] What follows are suggested answers to the model paper. SolutionQ1(a): Computation of total income of ABC Ltd for the year = ended March=20 31, 2008 Net profit as per P&L account, Rs 40,70,000 Add: Amount foregone by creditor being supplier of machinery of = Rs=20 55,000 is not taxable under Section 41(1). However, it can be taxed as value of benefit arising from = business=20 contained in Section 28(iv) [Protos Engineer Co (P) Ltd v. CIT = 211 ITR=20 919 (Bom)]. Hence it can be taxed as income since the amount has been = credited in=20 profit and loss account, no adjustment is required =97 Nil Payment towards erection charges relating to machinery is a = capital=20 expenditure on which tax was not deducted at source under Section = 194C.=20 Such non-deduction will not result in disallowance under Section = 40(ia)=20 since the expenditure is not claimed while computing the taxable = income.=20 In result, no adjustment is called for =97 Nil Deferred tax liability debited to P&L account =97 Rs = 1,00,000 Total net profit =97 Rs 41,70,000 Less: Expenditure towards acquisition of equipment by a company = engaged=20 in manufacture of medicine is eligible for weighted deduction of = 150 per=20 cent as per Section 35(2AB). Amount eligible for deduction Rs 3,00,000. Depreciation already = debited=20 in P&L account at 15 per cent being Rs 30,000. The balance = would go to=20 reduce the taxable income. =97 Rs 2,70,000 Expenditure on construction of building in leasehold land is = revenue=20 expenditure. Though not debited in P&L account but capitalised = in the=20 books, it is deductible =97 Rs 5,00,000 Total income =97 Rs 34,00,000 Q2(a) Amount contributed by an employer (including Central = Government)=20 to the account of the employee under a pension scheme is an income = deemed=20 to be received in the previous year. Hence it is chargeable to = tax. This=20 in view of Section 7(iii) inserted by Finance Act, 2007 w.e.f. = April 1,=20 2004. (b) Deduction under Section 80 D is allowed to the extent of Rs = 15,000=20 provided the mediclaim premium is paid by any mode other than = cash. The=20 total payment made by means of cheque and credit card is eligible = for=20 deduction. Hence Rs 12,000 is deductible. The amount paid in cash = is=20 however not deductible under Section 80D. (c) The concept of mutuality says that the contributors and the = beneficiaries must be identical. If the contributors and = beneficiaries=20 engage amongst themselves, the income arising therefrom is not = chargeable=20 to tax. However, all the contributors to the common fund must be = eligible=20 to participate to the surplus arising from mutual contributions. = Principle=20 of mutuality could be found in Cawnpore Club Ltd vs CIT (1983 183 = ITR 620=20 Allahabad); CIT vs Bankipur Club Ltd (1997 226 ITR 97 SC). Q(3)(i) The Finance Act, 2007 has inserted proviso to Section = 142A(2D)=20 wherein the expenditure including remuneration for audit shall be = paid by=20 the Central Government provided the direction for audit is issued = by=20 assessing officer (AO) on or after June 1, 2007. Hence, the = objection of=20 the assessee is not tenable. (ii) When general power of attorney (POA) is granted to the = developer=20 with possessory rights it is not a mere licence to develop the = property.=20 In reality the developer is not just a licencee or agent. The = irrevocable=20 POA given in favour of developer amounts to =91transfer=92 and = therefore the=20 transaction is chargeable to capital gains [Jasbir Singh Sarkaria = (2007)=20 294 ITR 196 (AAR)]. (iii) The onus of proof in respect of the loan borrowed is on = the=20 borrower. Merely because the loan was received by way of = account-payee=20 cheque will not exonerate the assessee from discharging his legal=20 obligation. Hence, the assessee=92s contention is not tenable in = law [CIT v.=20 P.Mohanakala (2007) 291 ITR 278 (SC)]. Q4(a) As per the third proviso to Section 153B, where a = reference is=20 made to the TPO for determination of arms=92 length price relating = to=20 international transaction, the time period for completion of = assessment=20 would be 33 months from the end of the financial year in which the = last of=20 the authorisations for search under Section 132 or for requisition = under=20 Section 132A was executed. Hence the time limit for completion of=20 assessment is December 31, 2008. (b) The stock statement furnished to the bank may be an = approximate=20 value and normally not subject to physical verification. In the = absence of=20 adequate materials to show that the stock statement given to bank = is a=20 correct figure, it cannot be adopted for tax purposes [CIT v.Apcom = Computers (P) Ltd (292 ITR 630 (Mad))]. (c) For failure to deduct tax at source, the assessee has been=20 subjected to penalty under section 271C. Having penalised the = basic=20 failure viz. non-deduction of tax at source, the subsequent = failure viz.=20 non-filing of TDS return cannot be penalised as it amounts to levy = of two=20 penalties for single failure. [CIT v. Sriram Memorial Education = Promotion=20 Society 287 ITR 155 (All)]. Q5(a) Since winning from luck dip is covered by Section 194B = and the=20 tax is deductible at source. Ravi has to remit the TDS amount at = 30.9 per=20 cent of winning amount to the company for remittance of TDS since = the=20 winning is in kind. The company must release the prize winning = only after=20 remitting the tax deducted at source in accordance with Section = 194B. (b) The assessee born and brought up in India has left for = employment=20 in August 2007. During the previous year 2007-08 he has not stayed = in=20 India for more than 182 days and does not satisfy any of the basic = conditions. Being a non-resident his salary income earned outside = India is=20 not taxable. His total income for the assessment year 2008-09 = would be Rs=20 2 lakh. (c) Slump sale is dealt with in Section 50B of the Act. In = slump sale=20 the consideration is in lump sum without identification to various = assets=20 transferred. It may result in short term or long term capital gain = / loss.=20 Demerger is applicable in the case of companies only and = transfer of=20 assets in the scheme of demerger is not regarded as a transfer in = view of=20 Section 47(vib). However, its application is limited to company = assessee=92s=20 only. (d) Intangible additions made by the AO in any earlier year = could be=20 claimed as source of investment / acquisition / expenditure in the = subsequent year or years. However, Explanation 2 to Section 271(1) = empowers the AO to initiate penalty proceedings for levy of = penalty=20 subsequent to such claim. It can be initiated even though the = assessment=20 of the year in which the intangible addition was made has already = been=20 completed. Q6(a)The short term capital gain on sale of shares amounts to = Rs.2=20 lakhs. Assuming the transaction is routed through stock exchange = (not=20 being an off-market transaction) it is chargeable to tax at 10 per = cent=20 plus cess. The effective rate being 10.3 per cent. The assessee is = a=20 senior citizen eligible for basic exemption limit of Rs.1.95 = lakhs. The=20 balance of Rs.5,000 is taxable at 10.3 per cent. The amount paid = towards=20 life insurance premium is not eligible for deduction in view of = section=20 111A (2). (b)Perquisite value in respect of education loan would be = computed by=20 applying SBI rate as on 01-04-2007 which is 11.5 per cent. The = company has=20 charged 6 per cent interest on the loan given to the employee. The = balance=20 of 5.5 per cent on Rs.3 lakhs for 10 months is taxable and the = value of=20 perquisite being Rs.13,750. (c)Advance tax in respect of fringe benefits is to be paid as = per=20 section 115 WJ. Assuming the fringe benefits are spread uniformly=20 throughout the year the FBT payable before the specified = instalment dates=20 are given below. PercentageRs. On or before 15.06.200715 per cent16,220 On or before 15.09.200745 per cent 48,670 On or before 15.12.200775 per cent81,110 On or before 15.03.2008100 per cent1,08,150 (d)Transfer of asset on liquidation of subsidiary company to = holding=20 company would not fall within the exception provided in Section = 47(iv).=20 Hence it cannot be given any exemption. The assessee acquired = shares in=20 June 2000 for Rs 10 lakh and the fair market value of assets = received from=20 liquidator was Rs 27 lakh. The fair market value less indexed cost = of=20 capital asset (being shares) is chargeable to tax as capital gain = or loss.=20 [CIT vs Brahmi Investments (P) Ltd 286 ITR 66 (Guj)] 7(a) 20 per cent of the salary is to be taken as the value of=20 perquisite in respect of rent free accommodation provided in a = place owned=20 by the employer. The perquisite value would be Rs 4,08,000 (20 per = cent of=20 Rs 20,40,000). (b) The employer must satisfy the conditions prescribed in rule = 2BA for=20 enabling the employees to avail exemption under Section 10(10C) in = respect=20 of VRS compensation. However the employer is eligible to amortise = the=20 expenditure on VRS compensation as per Section 35 DDA in five = equal=20 instalments regardless of whether the VRS scheme complies with the = requirements of rule 2BA. Employees receiving VRS compensation in = excess=20 of Rs 5 lakh can claim relief in respect of such excess as per = Section=20 89. (c) As per Section 115BBC anonymous donation received by = educational=20 institution referred to in Section 10(23C)(iii)(ad) is chargeable = to tax=20 at 30 per cent. Hence the claim of the assessee is not tenable in = law. (d) The assessee can claim set off of loss suffered in foreign = country=20 against its income earned in India. Even though DTAA has been = entered into=20 between the Government of India and foreign country the assessee = has the=20 option to seek application of the provisions of the Act instead of = the=20 DTAA. Accordingly, the assessee can claim set off while computing = its=20 taxable income [Deputy CIT vs Patni Computer Systems Ltd 114 ITD = 159]. (e) The closing stock of a year would become opening stock of = the next=20 year on automatic basis. The AO has valued stock as on March 31, = 2007 at=20 Rs 50 lakh as against the admitted figure of Rs 35 lakh. The = assessee=20 having accepted such value for the preceding year could claim such = (inflated) closing stock value as opening stock of the subsequent = year=20 [Mahendra Mills Ltd vs P.B.Desai 99 ITR 135 (SC)]. 8(a)(i) Building under construction is not an asset under = Section=20 2(ea). (ii) Stock exchange membership card is not an asset under the=20 Wealth-tax Act. (iii) Building allotted by housing society to its member is = deemed to=20 be owned by the member and hence liable to wealth tax. [Section = 4(7)]. (iv) Market value of vacant site if it is not forming part of=20 stock-in-trade or not meant for industrial purpose, appropriate = fraction=20 taxable in the hands of partners. (v) Since the concern is engaged in jewellery business, the=20 stock-in-trade is not liable to tax. (b) Value of life interest =3D Rs 80,000 x 6.255 =3D Rs = 5,00,400. (c) Value of asset up to Rs 10 lakh =97 jurisdiction, assistant = valuation=20 officer; Up to Rs 50 lakh =97 valuation officer; and Value exceeding Rs 50 lakh =97 district valuation = officer. More=20 Stories on : Taxation=20 | Education=20
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