The Hindu Business Line : Try this taxing exercise

ABC Ltd engaged in manufacture of medicines disclosed a net profit of Rs 40,70,000 for the year ended March 31, 2008. Compute the taxable income of the company after considering the following information, with reasons for each item of adjustment.

a) A sum of Rs 55,000 foregone by supplier of machinery is credited to profit and loss account.

b) Research equipment acquired during the year for Rs 2,00,000 was included in the block of plant and machinery and depreciation at 15 per 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) 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 under Section 194C. [10 marks]

2 (a) X Co Ltd contributed Rs 20 lakh to the employees’ pension scheme. For Mr A, one of the employees, the contribution amounts to Rs 15,000. Is 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 cheque, Rs 2,000 by credit card and Rs 5,000 by cash. How much is deductible under Section 80D? [3 marks]

c) Enumerate the principle of mutuality in the context of income-tax? [4 marks]

Situation analysis

3 (a) In the course of assessment of Easy Ltd, it was decided that the accounts have to be audited under Section 142(2A) of the Act. The assessee was given an opportunity of hearing before issuing direction for getting the accounts audited. The assessee objects to audit under Section 142(2A), as the expenditure relating to audit have to be met by it. Is it correct? [3 marks]

b) X Co Ltd, engaged in construction business, entered into an agreement with Mr A for development of his land by constructing residential apartments. The irrevocable power of attorney (POA) executed 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 for Rs 20 lakh and the POA provides for payment of Rs 200 lakh in two annual instalments of Rs 100 lakh each. Is the transaction chargeable to capital gains? [4 marks]

c) Mohan received loan of Rs 5 lakh from Sohan by way of account-payee crossed cheque. The assessing officer (AO) taxed the loan as income since Mohan could not prove the credit worthiness of Sohan. Is he correct? [4 marks]

Search assessment

4 (a) A search was made in the premises of A Co Ltd in December 2005. During the course of search assessment for the assessment year 2005-06, the AO made a reference to TPO (transfer pricing officer) for determination of arms’ length price in July 2007. What is the time limit within which the AO has to complete the assessment? [3 marks]

b) Stock statement of Jalal & Co furnished to the bank as at 31st March 2008 amounted to Rs 75 lakh though the closing stock value disclosed in the return was only Rs 50 lakh. Can the difference in stock be subjected to tax as undisclosed income? [4 marks]

c) Sriram & Co did not deduct tax at source under Section 194 C during the year 2007-08. The AO levied interest under Section 201(1A) and penalty under Section 271C. Now he wants to levy penalty for non-filing of TDS returns. Decide the validity. [4 marks]

5 (a) Ravi won a lucky dip conducted by a company. He is eligible for a Maruti car. The company seeks your advice as regards compliance with TDS provisions. Advice. [4 marks]

b) Chatterjee born in Kolkata left for the US in August 2007 for the purpose of employment. His income in India prior to his departure to US was Rs 2 lakh. His salary income in the US from August 2007 to March 2008 amounts to Rs 7 lakh (converted). Compute his total income and discuss his tax liability? [4 marks]

c) Distinguish slump sale and demerger? [4 marks]

d) To what extent the claim of intangible additions made earlier telescoped as a source for subsequent acquisition / expenditure provides relief from tax liability? [4 marks]

6 (a) Arvind (aged 70 years) sold equity shares of Reliance Industries Ltd in July 2007 for Rs 5 lakh. The shares were acquired in December 2006 for Rs 3 lakh. He paid Rs 15,000 towards life insurance premium in March 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 part-time MBA course. The employer gave a 6 per cent loan of Rs 3 lakh on 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 31, 2008, is computed at Rs 3,50,000. How much advance fringe benefit tax 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 acquired by X (P) Ltd in Y (P) Ltd in June 2000 for Rs 10 lakh. Y (P) Ltd went into liquidation and X (P) Ltd received some machinery in full settlement of its dues from the liquidator. The WDV of the machinery in the hands of Y (P) Ltd on April 1, 2007 was Rs 22 lakh and the fair market value on that date was ascertained at Rs 27 lakh. Is the transfer exempt under Section 47? [4 marks]

Perquisite value

7 (a) Chetan employed in Wipro Ltd was given accommodation owned by the employer at Bangalore. He is paid basic salary plus DA (eligible for retirement benefit) of Rs 1,70,000 per month. Population of Bangalore as per the 2001 census exceeds 30 lakh. Compute the perquisite value of rent-free accommodation. [3 marks]

b) List the conditions to be satisfied by an employer for complying with the requirements of voluntary retirement scheme prescribed in rule 2BA. [5 marks]

c) Ram Arts College received anonymous donation of Rs 20 lakh. It is claiming exemption under Section 10(23C)(iii)(ad) as the aggregate receipt is less than the prescribed limit. Is the anonymous donation chargeable to tax? [3 marks]

c) BB Ltd, having head-office at Delhi, has net profit of Rs 75 lakh for the year ended March 31, 2008. It has branch office at Tokyo, Japan where it incurred a loss of Rs 25 lakh. Is the loss in foreign country 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 March 31, 2007, was determined at Rs 50 lakh as against the admitted figure in the return of Rs 35 lakh. The assessee wants to adopt the opening stock at Rs 50 lakh as on April 1, 2007, being the value of 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 firm consisting of two equal partners.

v) Jewellery held by ‘A Jewellers Ltd’. [5 marks]

b) Mr A (aged 60 years) has life interest in a property which fetches average annual income of Rs 80,000. Compute the value of life interest adopting conversion factor at 6.255. [2 marks]

c) Write the monetary limit of jurisdiction applicable to various classes of valuation officers. [3 marks]

What follows are suggested answers to the model paper.

Solution

Q1(a): Computation of total income of ABC Ltd for the year ended March 31, 2008

Net profit as per P&L account, Rs 40,70,000

Add: Amount foregone by creditor being supplier of machinery of Rs 55,000 is not taxable under Section 41(1).

However, it can be taxed as value of benefit arising from business contained in Section 28(iv) [Protos Engineer Co (P) Ltd v. CIT 211 ITR 919 (Bom)].

Hence it can be taxed as income since the amount has been credited in profit and loss account, no adjustment is required — Nil

Payment towards erection charges relating to machinery is a capital expenditure on which tax was not deducted at source under Section 194C. Such non-deduction will not result in disallowance under Section 40(ia) since the expenditure is not claimed while computing the taxable income. In result, no adjustment is called for — Nil

Deferred tax liability debited to P&L account — Rs 1,00,000

Total net profit — Rs 41,70,000

Less: Expenditure towards acquisition of equipment by a company engaged in manufacture of medicine is eligible for weighted deduction of 150 per cent as per Section 35(2AB).

Amount eligible for deduction Rs 3,00,000. Depreciation already debited in P&L account at 15 per cent being Rs 30,000. The balance would go to reduce the taxable income. — Rs 2,70,000

Expenditure on construction of building in leasehold land is revenue expenditure. Though not debited in P&L account but capitalised in the books, it is deductible — Rs 5,00,000

Total income — Rs 34,00,000

Q2(a) Amount contributed by an employer (including Central Government) to the account of the employee under a pension scheme is an income deemed to be received in the previous year. Hence it is chargeable to tax. This in view of Section 7(iii) inserted by Finance Act, 2007 w.e.f. April 1, 2004.

(b) Deduction under Section 80 D is allowed to the extent of Rs 15,000 provided the mediclaim premium is paid by any mode other than cash. The total payment made by means of cheque and credit card is eligible for deduction. Hence Rs 12,000 is deductible. The amount paid in cash is 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 engage amongst themselves, the income arising therefrom is not chargeable to tax. However, all the contributors to the common fund must be eligible to participate to the surplus arising from mutual contributions. Principle of mutuality could be found in Cawnpore Club Ltd vs CIT (1983 183 ITR 620 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) wherein the expenditure including remuneration for audit shall be paid by the Central Government provided the direction for audit is issued by assessing officer (AO) on or after June 1, 2007. Hence, the objection of the assessee is not tenable.

(ii) When general power of attorney (POA) is granted to the developer with possessory rights it is not a mere licence to develop the property. In reality the developer is not just a licencee or agent. The irrevocable POA given in favour of developer amounts to ‘transfer’ and therefore the transaction is chargeable to capital gains [Jasbir Singh Sarkaria (2007) 294 ITR 196 (AAR)].

(iii) The onus of proof in respect of the loan borrowed is on the borrower. Merely because the loan was received by way of account-payee cheque will not exonerate the assessee from discharging his legal obligation. Hence, the assessee’s contention is not tenable in law [CIT v. P.Mohanakala (2007) 291 ITR 278 (SC)].

Q4(a) As per the third proviso to Section 153B, where a reference is made to the TPO for determination of arms’ length price relating to international transaction, the time period for completion of assessment would be 33 months from the end of the financial year in which the last of the authorisations for search under Section 132 or for requisition under Section 132A was executed. Hence the time limit for completion of assessment is December 31, 2008.

(b) The stock statement furnished to the bank may be an approximate value and normally not subject to physical verification. In the absence of adequate materials to show that the stock statement given to bank is a 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 subjected to penalty under section 271C. Having penalised the basic failure viz. non-deduction of tax at source, the subsequent failure viz. non-filing of TDS return cannot be penalised as it amounts to levy of two penalties for single failure. [CIT v. Sriram Memorial Education Promotion Society 287 ITR 155 (All)].

Q5(a) Since winning from luck dip is covered by Section 194B and the tax is deductible at source. Ravi has to remit the TDS amount at 30.9 per cent of winning amount to the company for remittance of TDS since the winning is in kind. The company must release the prize winning only after remitting the tax deducted at source in accordance with Section 194B.

(b) The assessee born and brought up in India has left for employment in August 2007. During the previous year 2007-08 he has not stayed in 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 not taxable. His total income for the assessment year 2008-09 would be Rs 2 lakh.

(c) Slump sale is dealt with in Section 50B of the Act. In slump sale the consideration is in lump sum without identification to various assets transferred. It may result in short term or long term capital gain / loss.

Demerger is applicable in the case of companies only and transfer of assets in the scheme of demerger is not regarded as a transfer in view of Section 47(vib). However, its application is limited to company assessee’s only.

(d) Intangible additions made by the AO in any earlier year could be 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 subsequent to such claim. It can be initiated even though the assessment of the year in which the intangible addition was made has already been completed.

Q6(a)The short term capital gain on sale of shares amounts to Rs.2 lakhs. Assuming the transaction is routed through stock exchange (not being an off-market transaction) it is chargeable to tax at 10 per cent plus cess. The effective rate being 10.3 per cent. The assessee is a senior citizen eligible for basic exemption limit of Rs.1.95 lakhs. The balance of Rs.5,000 is taxable at 10.3 per cent. The amount paid towards life insurance premium is not eligible for deduction in view of section 111A (2).

(b)Perquisite value in respect of education loan would be computed by applying SBI rate as on 01-04-2007 which is 11.5 per cent. The company has charged 6 per cent interest on the loan given to the employee. The balance of 5.5 per cent on Rs.3 lakhs for 10 months is taxable and the value of perquisite being Rs.13,750.

(c)Advance tax in respect of fringe benefits is to be paid as per section 115 WJ. Assuming the fringe benefits are spread uniformly throughout the year the FBT payable before the specified instalment dates 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 company would not fall within the exception provided in Section 47(iv). Hence it cannot be given any exemption. The assessee acquired shares in June 2000 for Rs 10 lakh and the fair market value of assets received from liquidator was Rs 27 lakh. The fair market value less indexed cost of capital asset (being shares) is chargeable to tax as capital gain or loss. [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 perquisite in respect of rent free accommodation provided in a place owned by the employer. The perquisite value would be Rs 4,08,000 (20 per cent of Rs 20,40,000).

(b) The employer must satisfy the conditions prescribed in rule 2BA for enabling the employees to avail exemption under Section 10(10C) in respect of VRS compensation. However the employer is eligible to amortise the expenditure on VRS compensation as per Section 35 DDA in five equal instalments regardless of whether the VRS scheme complies with the requirements of rule 2BA. Employees receiving VRS compensation in excess of Rs 5 lakh can claim relief in respect of such excess as per Section 89.

(c) As per Section 115BBC anonymous donation received by educational institution referred to in Section 10(23C)(iii)(ad) is chargeable to tax 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 against its income earned in India. Even though DTAA has been entered into between the Government of India and foreign country the assessee has the option to seek application of the provisions of the Act instead of the DTAA. Accordingly, the assessee can claim set off while computing its 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 year on automatic basis. The AO has valued stock as on March 31, 2007 at Rs 50 lakh as against the admitted figure of Rs 35 lakh. The assessee having accepted such value for the preceding year could claim such (inflated) closing stock value as opening stock of the subsequent year [Mahendra Mills Ltd vs P.B.Desai 99 ITR 135 (SC)].

8(a)(i) Building under construction is not an asset under Section 2(ea).

(ii) Stock exchange membership card is not an asset under the Wealth-tax Act.

(iii) Building allotted by housing society to its member is deemed to 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 stock-in-trade or not meant for industrial purpose, appropriate fraction taxable in the hands of partners.

(v) Since the concern is engaged in jewellery business, the stock-in-trade is not liable to tax.

(b) Value of life interest = Rs 80,000 x 6.255 = Rs 5,00,400.

Up to Rs 50 lakh — valuation officer; and

Value exceeding Rs 50 lakh — district valuation officer.