Compute the taxable income of X Ltd for AY 2003-04, with reasons for adjustments made.

Solution: The computation of taxable income of the assessee, X Ltd, for the assessment year (AY) 2003-04 as per the normal provisions is as follows:

Profit before allowing deduction under Section 33AC (working note 1) — Rs 444 lakh

Less: Deduction under Section 33AC

Transfer to shipping reserve (WN 3) — Rs 400 lakh

Taxable income — Rs 44 lakh

Tax on Rs 44 lakh (A) — Rs 16.17 lakh

Computation of book profit under Section 115JB is as follows:

Profit before transferring to reserve under Section 33AC as per P&L account — Rs 400 lakh

Less: Transfer to reserve under Section 33AC (refer Note a) — Rs 400 lakh

Taxable income — Nil

Tax at 7.5 per cent (B) — Nil

Therefore, the taxable income of X Ltd., for the year ending March 31, 2003, is Rs 44 lakh.

WN 1 (profits of business before allowing deduction under Section 33AC),

WN 2 (calculation of depreciation on reducing balance) and WN3 (amount deductible under Section 33AC) are presented in Tables 1, 2 and 3.

Notes: a) In the question, the quantum of amount transferred to special reserve under Section 33AC for the year ended March 31, 2003, is not given. Therefore, it is assumed that the entire net profit of Rs 400 lakh given in the question is transferred to shipping reserve.

b) Balance in reserve under Section 33AC after purchase of new ship for Rs 920 lakh and increase in cost of old ship by Rs 2 lakh on exchange difference is reduced to Rs 78 lakh and, consequently, the general reserve increased to Rs 1,022 lakh (100 L + 920 L + 2 L).

c) According to explanation to Section 37(1), any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business. Thus, the payment made to the don is disallowed.

d) It is assumed that the ship transferred during the year is not subject to Section 33AC(3)(c). In other words, if it is sold within eight years from the end of the year in which it was acquired, then Rs 210 lakh (deficit of 60 plus sale price of 150) will be chargeable to tax.

Free stay

CALCULATE the value of perquisite, if any, chargeable to tax in respect of free accommodation provided by the employer in a hotel to an employee, the previous year being March 31, 2003:

i) For 10 days when he was transferred from Delhi to Mumbai.

ii) Throughout the year as per contract of employment.

Solution: Perquisite in respect of hotel accommodation: i) Where hotel accommodation is provided for a period not exceeding in aggregate 15 days on the transfer of the employee from one place to another place, there will be no taxable perquisite.

ii) Where the accommodation is provided by the employer in a hotel, 24 per cent of salary paid or payable for the previous year or the actual charges paid or payable to such hotel, whichever is lower, shall be the value of perquisite. The calculation shall be for the period during which such accommodation is provided and the value shall be reduced by the rent, if any, actually paid or payable by the employee.

US building, Delhi dairy

X, AN American national, is a resident in India during the previous year ended on March 31, 2003. He was owner of a building located in New York. The same was on rent at $12,500 per month. The Municipal Corporation of New York was paid taxes on such building of $10,000 on February 12, 2003. Besides the above property, he purchased a piece of land in Delhi for constructing a house. The said land was given on rent for running of a dairy at Rs 3,000 p.m. w.e.f. October 1, 2002. The value of one dollar in Indian rupee throughout the year remained at Rs 46.50. X wants to know his taxable income for AY 2003-04.

Solution: According to Section 5, in the case of resident assessees, their global income is taxable in India. Accordingly, in the given case, the taxable income of Mr X who is resident during the previous year 2002-03 shall be as shown in Table 4.

Note: In case the DTA agreement provides for tax relief in respect of such income, then Section 90 would apply and, subject to the terms of such agreement, the income from house property in foreign country will be subjected to tax.

Stamp duty

X, purchased on June 18, 1982, a house property for Rs 2,25,000 which was sold to A on October 18, 2002, for Rs 8,75,000. Sub-registrar at the time of registration of sale deed charged stamp duty on Rs 12,50,000 which was paid by the buyer. The AO, while assessing for capital gain, referred the matter to valuation officer who determined the value of property at Rs. 15,00,000 on the date of transfer. X seeks your advice on the following:

i) Is the AO correct to charge capital gain on the value of Rs 15,00,000 as determined by valuation officer?

ii) The amount of capital gain on which X is required to pay capital gain tax. (The CII for 1982-83 is 109 and for 2002-03, 447)

Solution: i) According to Section 50C, the AO can refer the property to the valuation officer, only when the following two conditions are satisfied:

a) the value fixed by the stamp valuation authority is not disputed;

b) the assessee claims before the AO officer that the value adopted or assessed by the stamp valuation authority exceeds the fair market value (FMV) of the property as on the date of transfer.

In the instant case, the assessee paid the stamp duty as fixed by the stamp valuation authorities. The assessee did not request the AO to refer the property to the valuation officer for valuation. Hence, the AO's action, in referring the property to the valuation officer, is not correct.

ii) The computation of capital gains for the AY 2003-04 is shown in Table 5.

Home for orphans

A PUBLIC charitable trust, registered under Section 12A of the I-T Act for the previous year ending March 31, 2003, derived gross income of Rs 16 lakh, which consists of the following:

a) Income from properties held by trust (net) — Rs 5 lakh

b) Income (net) from business (incidental to main objects) — Rs 4 lakh

c) Voluntary contributions from public — Rs 7 lakh

The trust applied a sum of Rs 11.60 lakh towards charitable purposes during the year, which includes repayment of loan taken for construction of an orphanage of Rs 3.60 lakh.

Determine the taxable income of the trust for the AY 2003-2004.

Solution: The computation of taxable income of the trust for AY 2003-04 is shown in Table 6.

Note: Repayment of loan taken for construction of orphanage is to be considered as application of income

Kargil martyr

AMIT, a captain in the Indian army, was killed at the Kargil border during a war. The widow of Amit was paid, besides the family pension during the year of Rs 90,000, an ex-gratia payment of Rs. 50,000 in March 2003. She wants to know about the taxability of both the receipts.

Solution: According to CBDT Circular No.776 of June 8, 1999, any lumpsum ex-gratia payment made by the Central Government/State Government/Local Authority or Government public sector undertaking, to the widow or other legal heirs of an employee, who dies while in active service will not be taxable as income under the I-T Act, 1961. Therefore, Rs 50,000 is not taxable.

By virtue of Section 56, family pension received is taxable under the head "Income from Other Sources". However, deduction under Section 57 can be claimed to the extent of 33.33 per cent of family pension or Rs 15,000, whichever is less. Therefore, in the given case, the taxable family pension is Rs 75,000 (that is, Rs 90,000 - Rs 15,000)

(To be concluded)

(Suggested answers to May 2003 CA (Final) paper on direct tax laws.

Courtesy: Snow White Publications Pvt. Ltd, Mumbai.)

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