Compute the taxable income and tax liability of Savita Rani for the AY 2004-05.

Solution: This is a typical problem that requires a student to compute the total income and tax liability. To solve this problem, a student must have conceptual clarity on the subject and apply the same. The computation of total income and tax liability, income from salaries (working note 1), and capital gains (working note 2) are presented in Tables 1, 2 and 3 respectively.

Additional Note: As per Section 112, asessees have an option to compute LTCG either with indexation or without indexation and accordingly pay tax @ 20 per cent or

10 per cent respectively. However, for the purpose of computing total income, the amount of capital gain computed applying indexation only shall be considered.

Farm income

MR TONY had estates in rubber, tea and coffee. He derives income from them. He has also a nursery wherein he grows plants and sells. For the previous year ending March 31, 2004, he furnishes the following particulars of his sources of income form estates and sale of plants. You are request to compute the taxable income for the assessment year 2004-2005:

Manufacture of rubber — Rs 5,00,000

Manufacture of coffee grown and cured — Rs 3,50,000

Manufacture of tea — Rs 7,00,000

Sale of plants from nursery — Rs 1,00,000

Solution: This is a simple problem on agricultural income. The student is required to segregate the total income into agricultural and business.

Mr Tony's total taxable income for AY 2004-05 (PY 2003-04) is Rs 5,95,000, which is worked out in Table 4.

Note: a) Income from nursery can be considered as agricultural income (CIT vs Soundharya Nursery — 241 ITR 530 Madras); b) Even though agricultural income is exempt from tax, the same shall be included for rate purposes.

Clubbing provision

A PROPRIETORY business was started by Rani in 2001. As on April 1, 2002, her capital in business was Rs 3,00,000. Her husband gifted Rs 2,00,000 on April 10, 2002, which amount Rani invested in her business on the same date. Rani earned profits from her proprietary business for the financial year (FY) 2003-2004 of Rs 3,90,000. Compute the income, to be clubbed in the hands of Rani's husband for the AY 2004-2005 with reasons.

Solution: This is a standard problem which requires the student to apply the clubbing provision. He should apply accounting knowledge also to solve the problem.

As per explanation 3 to Section 64, if the assets transferred directly or indirectly by an individual to his spouse are invested by the transferee in any business, the following formula shall be applied for the purpose of computation of income to be clubbed:

Income from business x amount invested out of gift by spouse as on the first day of PY / total investment of transferee as on the first day of PY

In the present case, applying the above formula, we get:

3,90,000 x 2,00,000 / 6,50,000 = Rs 1,20,000 (refer note)

Out of the total income of Rs 3,90,000 received by Rani, Rs 1,20,000 shall be clubbed under Section 64 and taxable in the hands of Rani's husband. The balance is taxable in Rani's hands.

Note: Total investment of transferee as on the first day of the PY is computed as follows:

Capital as on April 1, 2002 — Rs 3,00,000

Add: Gift on April 10, 2002, invested in business — Rs 2,00,000

Add: Profit of PY 2002-03 — Rs 1,50,000

Total investment on April 1, 2003 — Rs 6,50,000

Statement analysis

STATE the special provisions in respect of certain undertakings or enterprises in certain special category States as laid down under Section 80IC of the Act.

This is straightforward theory question relating to `deductions from the gross total income'. The answer can be found in Section 80IC.

Is it mandatory for an assessee to claim deprecation under Section 32 of the Income-tax Act?

Yes, the depreciation provisions are mandatory in nature. The Supreme Court, in CIT vs Mahendra Mills and others (109 Taxmann 225), held that the provision for claim of depreciation is certainly for the benefit of the assessee and if the assessee is not interested the same shall not be forced on him.

To nullify this judgment, an explanation to Section 32 has been inserted w.e.f. 2002-03 to clarify that the depreciation provisions shall apply, whether or not the assessee has claimed the depreciation in computing the total income.

Ownership itself is the criteria for assessment under the head `income from house property'. Discuss

Though generally true, there are certain instances in which `income from house property' is assessable in the hands of the assesee, who is not a legal owner thereof. The instances have been enumerated in Section 27 (deemed owner) of the Act.

State the conditions to be fulfilled by an amalgamated company for carry forward of the accumulated losses and unabsorbed depreciation of the amalgamating company

This is a simple question, requiring the student to write the conditions specified under section 72A of the Act.

State the provisions relating to the exemption in respect of long-term capital gains on transfer of listed equity shares.

This question is based on the introduction of Section 10(36) with effect from AY 2004-05, requiring the student to write the provisions of the aforesaid section.

The I-T Act grants exemption from tax to political parties in respect of their income. Should the incomes so exempt be stated as per the provisions of the Act.

This question requires the student to write the conditions specified for claiming exemption by a political party as provided under Section 13A of the Act.

Taxable income computation

MR X furnishes the following data for the previous year (PY) ending March 31, 2004:

a) Equity shares of AB Ltd, 10,000 in number were sold on May 31, 2003, at Rs 350, for each share.

b) The 10,000 shares were acquired by `X' in the following manner:

You are required to compute the taxable capital gain. He has no other source of income chargeable to tax.

(Cost of Index for financial year 1992-93 is Rs 223, and for FY 2003-2004, Rs 463.)

This is a standard question requiring the student to compute the long-term capital gain and claim exemption under Section 54F of the Act. While claiming exemption, the student should be very careful because of the application of descending order per cent method. The marks allotted to the question is not directly proportionate to the time consumed in order to solve the question.

The computation of long-term capital gains (LTCG) is presented in Table 5.

Total LTCG = Rs 15,63,913

Less: Exemption under Section 54F = Rs 13,05,424

Balance taxable income = Rs 2,58,489

Car problems

MR A is provided two cars to be used for official and personal work, by his employer ABC Ltd. The information given in Table 6 is available from the company records:

The taxable monetary emolument of Mr A is Rs 90,000. Compute the taxable `perk' in request of cars, assuming that car 2 is exclusively used by `A'.

As the taxable monetary emolument is Rs 90,000, it makes Mr A a specified employee. Car 2, it is assumed, if fully for personal use, and, therefore, car 1 is partly for personal and partly for official use. The perquisite is computed as shown in Table 7.

The total value of perquisite in respect of car = Rs 1,13,600

A car purchased by S on August 10, 1999, for Rs 3,25,000 for personal use is brought into the business of the assessee on December 1, 2003, when its market value is Rs 1,50,000. Compute the actual cost of the car and the amount of depreciation for the AY 2004-2005 assuming the rate of depreciation to be 20 per cent.

The term actual cost has been defined in Section 43(1) and deemed actual cost in the explanations to the section. The market value in any case should not be considered. Similarly, 50 per cent of normal depreciation shall be provided only when the asset is acquired and put to use for less than 180 days during the previous year.

In the present case, the actual cost of the car is Rs 3,25,000 and the depreciation at 20 per cent works out to Rs 65,000 (assuming that this is the only asset in the block).

Note: Fifty per cent of normal depreciation shall not apply as asset is not acquired during the year. Similarly, explanation 5 to Section 43(1) is applicable only in the case of building and not other assets and, hence, not applied.

Short notes

WRITE short notes on any three of the following: i) deduction in respect of royalty income of patents; ii) the term `business connection' under the I-T Act 1961; iii) `encashment of earned leave' and its taxability under the Act; and iv) special provision for full value of consideration in certain cases, in the context of capital gains liability.

The four subdivisions in this question are simple and straightforward. The answer is provided in various sections of the Act as given in Table 8.

Central Sales Tax

TOTAL inter-State sale for the FY 2003-2004 of X Ltd is Rs 15,070,000, which consists of the following:

4 per cent CST sales — Rs 91,50,000

2 per cent CST sales — Rs 59,20,000

Out of the goods sold for Rs 1,50,000 on July 16, 2003, that were liable to CST at 4 per cent, goods worth Rs 50,000 were returned on December 12, 2003 and goods worth Rs 1,20,000 were returned on February 1, 2004. A buyer to whom goods worth Rs 55,000 carrying 2 per cent CST was despatched on April 16, 2003, rejected the goods and the same were received back on November 15, 2004. Compute the taxable turnover and tax liability of X Ltd, since all the relevant Forms have been received.

This problem requires the student to compute the taxable turnover and tax liability as per the provisions of the CST Act. The student should apply Section 8A of the Act to solve this problem.

The computation of taxable turnover and tax liability is as follows:

Total inter-State sale — Rs 1,50,70,000

Less: Sales returns within six months from the date of sale (CST @ 4%) — Rs 50,000

Turnover — Rs 1,50,20,000

Less: Sales tax included above

a) 91,00,000 x 4/104 — Rs 3,50,000

(91,50,000 - 50,000)

b) 5920000 x 2/102 — Rs 1,16,078

Sub-total — Rs 4,66,078

Taxable turnover — Rs 1,45,53,922

Total tax liability — Rs 4,66,078

Note: It is assumed that the sale price includes sales tax.

Mentor features Sticklish Issues, Number Crunch, Swati CA and Just Do IT will be carried next week.

To access Mentor archives visit: www.thehindubusinessline.com/mn/arcmn.htm

Send your feedback on Mentor to: Mentor@TheHindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page