Revisionary Test Paper for June 2012 Examination

Paper 7 Applied Direct Taxation

Question No. 1: (a) State the situations, when previous year and assessment years are same. Answer: Previous year & Assessment year are same in the following cases: (i) (ii) (iii) (iv) (v) Shipping business of nonresident [Section 172] Persons leaving India [Section 174] AOP or BOI or Artificial Juridical Person formed for a particular event or purpose Persons likely to transfer property to avoid tax [Section 175] Discontinued business [Section 176]

[Sec. 174A]

(b) State the undisclosed sources of income. Answer: The undisclosed sources of income are: (i) Unexplained Cash Credits u/s 68 (ii) Unexplained investments u/s 69 (iii) Unexplained money, bullion or jewel or valuable article u/s 69A (iv) Undisclosed investments u/s 69B (v) Unexplained expenditure u/s 69C (vi) Amount borrowed or repaid on hundi, other than by way of account payee cheque u/s 69D.

(c) State the difference between Application of Income and Diversion of income. Answer: An application of income is an obligation to apply income, which has accrued or has arisen or has been received amounts to merely the apportionment of income. Therefore the essentials of the concept of application of income under the provisions of the Income Tax Act are : (i) Income accrues to the assessee (ii) Income reaches the assessee (iii) Income is applied to discharge an obligation, whether self-imposed or gratuitous. Diversion of Income is an obligation to apply the income in a particular way before it is received by the assessee or before it has arisen or accrued to the assessee results in diversion of income. The source is charged with an overriding title, which diverts the income. Therefore the essentials are the following: (i) Income is diverted at source, (ii) There is an overriding charge or title for such diversion, and (iii) The charge / obligation is on the source of income and not on the receiver. Examples of diversion by overriding title are (i) Right of maintenance of dependants or of coparceners on partition (ii) Right under a statutory provision (iii) A charge created by a decree of a Court of law. (d) Mr. Hari, an employee of Hello India Ltd. is transferred from Mumbai to Bhubaneswar. On his transfer, he was provided accommodation in Bhubaneswar for a period of 15 days. Hotel room rent paid `33,708/- (inclusive of service tax @12.36%). His basic salary is `35,000 per month. Dearness allowances @ 50%. Discuss the taxability of hotel accommodation at Bhubaneswar.
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Revisionary Test Paper for June 2012 Examination

Answer: In cases, where an assessee is provided a hotel accommodation, on the event of his transfer, if the period of stay does not exceed 15 days, then the payment made for hotel accommodation, would not be considered as perquisite. If the accommodation exceeded more than 15 days, then the perquisite value would have been calculated as follows: Lower of the followings: (i) 24% of Salary (ii) Actual hotel accommodation charges paid Note: (1) 24% of Salary refers to the salary of the time period during which the assessee was in the hotel accommodation [ example: if assessee was in hotel accommodation for 19 days, then salary would be calculated as follows: Salary per month x 19/30 x 24%] (2) Salary for hotel accommodation = Basic Pay + Dearness Allowance (forming part of retirement benefit) + Bonus + Commission (if received as a fixed percentage on turnover)+ any other monetary benefits + All taxable allowances. (e) Chris, an employee of Beautiful World Ltd. was presented a gift voucher of Pantaloons amounting to ` 7,000, on the occasion of his marriage. Discuss taxability. Would your answer differ, if the same was presented to Chris on the occasion of her first marriage anniversary? Answer: As per Rule 3(7)(iv), value of any gift or voucher or token other than gifts made in cash or convertible into money (e.g. gift cheques) on ceremonies, would be taxable as a perquisite, if the amount exceeds `5,000. However, since this gift was received on the occasion of marriage, this gift received would not be considered as a taxable income. If this gift was presented on the occasion of her first marriage anniversary, then , the same would be considered as a taxable income to the extent it exceeds `5,000. In this case, the amount involved is `7,000. Hence, taxable income would be `2,000 [ `7,000 `5,000] (f) Aakansha holds 18% shares in a Private Limited Company. She gifted all her shares to her husband Mr.Dolichand on 1.10.2011. After a month, Mr.Dolichand obtained loan of ` 50,000 from the company, when the companys accumulated profit was ` 75,000. What are the tax implications of the above transactions? Answer: U/s 2(22)(e), payment of any sum by a company in which the public are NOT substantially interested, as advance or loan, to the extent the Company possesses accumulated profits, to a shareholder, who is the beneficial owner of shares with not less than 10% voting power, shall be deemed to be dividend. In view of the above, since Mr.Dolichand has 18% shareholding in a Private Limited Company, the loan amount of `50,000 would be considered as deemed dividend u/s 2(22)(e) in his hands. Since the shares were gifted to Mr. Dolichand, by his wife, Aakansha, the said amount of `50,000 shall be clubbed in his total income of Ms. Aakansha. (g) Mr. Bhanu, sold a house property in Mumbai for `45 lacs in March 2012. The property was purchased by him during 2004-05 for ` 30 lacs. The Stamp duty was collected on the value of ` 52 lacs. Determine the capital gains. The value adopted was not disputed in any court of law.
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Revisionary Test Paper for June 2012 Examination

Answer: If an assessee transfers land, building or both and if the sale consideration is less than the value adopted or assessed or assessable by the State Government Authority, then the value adopted by the Stamp Valuation Authority would be taken as Consideration for determining Capital gains. In this case, the computation of capital gains would be as follows: Consideration for Transfer: = Stamp Duty Value Less: Indexed Cost of Acquisition [ 30,00,000 x 785/480] Long-term Capital Gains (h) Explain the concept of Reverse Mortgage and discuss its tax implications. Answer: Reverse mortgage is a scheme for the benefit of senior citizens who own a residential house property. The senior citizens can mortgage their house with a scheduled bank or housing finance company, in return for a lump sum amount or for a regular monthly/quarterly/annual income. Senior citizens can continue to live in the house and receive regular income without the botheration of having to repay the loan. They can use the loan amount for renovation and extension of residential property, familys medical expenditure and emergency expenditure, etc, but not for speculative or trading purpose. The bank will recover the loan along with the accumulated interest by selling the house after the death of the borrower. The excess amount, if any, will be given to the legal hei` However, before resorting to the sale of the house, preference will be given to the legal heirs to repay the loan and interest and vacate the mortgaged property. (i) Mohini, a non-resident Indian, purchased 5,000 shares in Happy Days Ltd, an Indian Company, in foreign currency for $50,000 in August 2010. She sold these shares to Mrigakshi, another non-resident in Singapore, in March 2012 for $67,000. Discuss the impact of the given transactions, if any, in the assessment of Mohini. Answer: As per Sec.47(viia), where a Non-resident Indian acquires or bonds in foreign currency, and the same is transferred outside India to another non-resident in foreign currency, then the transaction is not a transfer and hence not chargeable to capital gains. However, if the asset was transferred in India, then provisions of Sec.115AC shall apply and the Capital Gain shall be chargeable to tax @ 10%, as it is a Long-Term Capital Asset. (j) X Ltd. having an issued capital of `50,00,000 in equity shares of `100 each. On March 2012, Company decided to buy-back equity shares to the extent of 20%. Tushar, holding 500 shares of the company, has received the buy-back consideration on the shares bought-back, @ `130 per share. He had purchased these shares 14 months earlier @ `105 per share. Discuss the taxability. Answer: Where a shareholder receives any consideration from the company for purchase of its own shares or other specified securities, it is a transfer chargeable under the head capital gains. Such capital gain is chargeable to tax in the previous year in which the shares or securities are purchased by the company. Computation of Capital Gains Consideration for transfer of 100 equity shares [ 500 shares x 20%] @ `130 per share Less: Indexed Cost of Acquisition [ 100 equity shares x 105 x 785/711] Long term Capital Gains
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

52,00,000 49,06,250 2,93,750

13,000 11,592 1,408

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(k) Mr. Kashyap, a Government servant, died on 15 April, 2009, while in service. In terms of the rules governing his service, his widow Mrs.Kashyap, is paid a family pension of `5,937 p.m. and a dearness allowance @ 58% thereof. For the assessment year 2012-13, is Mrs. Kashyap assessable on the receipt and if no, under what head of Income? Is she entitled to any relief or deduction on the above receipt? Answer: Family pension received by Mrs. M is chargeable under the head Income from other sources. She rd can claim the lower of `15,000 or 1/3 of her family pension, as deduction u/s 57 in respect of such income. Computation of Taxable Family Pension Family Pension Received [ ` 5,937 x 12 months] Add: Dearness Allowance @ 58% of `71,244 Total Pension Received Less: Deduction u/s 57 : Least of the followings: rd (i) 1/3 of Gross Pension ( `1,12,566 x 1/3) = `37,522 (ii) Maximum deduction `15,000 Taxable Family Pension 71,244 41,322 1,12,566 15,000 97,566

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(l) A company issued discount coupons to its shareholders which entitled them to purchase the products of the company at a discount. The Assessing Officer is of the opinion that this is to be considered as deemed dividend. Discuss the tenability. Answer: (i) Arguments for treating discount coupons as deemed dividend u/s 2(22)(e): Since the shareholders are only entitled to receive those coupons, therefore, these coupons can be considered as release of profits, otherwise, than by way of actual cash payment/outflow; The company suffers a reduction in the gross value of sales to the extent of discount coupons are used and therefore it can be inferred that the assets to that extent get released indirectly in favour of the shareholders. (ii) Arguments against treatment of discount coupons as deemed dividend u/s 2(22)(e): Issue of discount coupons is a managerial decision and hence cannot be considered at par with dividend; There is no certainty that each shareholder will use the discount coupons. The discount coupons do not necessarily confer any vesting right in favour of the shareholders and it does not create any liability for the company to the shareholder. (m) Ashim incurred an expenditure of ` 5 lakhs, on the occasion of his daughters marriage on 14 February, 2012. He has no explainable source of this expenditure. What is the tax implication, if any?
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Answer: Vide Sec. 69C, unexplained expenditure incurred by the assessee shall be treated as income under the head Income from Other Sources. It is chargeable to tax as income of the previous year, in which the expenditure was incurred. In view of the above, the sum of ` 5 lakhs, expended by Ashim, on his daughters marriage, shall be treated as income for the financial year 2011-12 and chargeable to tax. (n) Aniket was holding 5,000 listed shares in Blue Arrow Ltd. purchased by him on 15.9.2010 at `50 per share. He gifted them to his girlfriend, Chitralekha on 14.2.2011. Aniket married Chitralekha on 17.2.2011. Chitralekha was allotted bonus shares by the company at the rate of one for every four shares held on 21.9.2011. She sold all shares including bonus shares at `135 per share. State in whose hands capital gain on sale of shares is taxable. Also compute the capital gain.
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Revisionary Test Paper for June 2012 Examination

Answer: U/s 64(1)(vi), where an individual transfers an asset to his/her spouse for inadequate consideration, then the income from such asset shall be clubbed in the hands of the individual. The spouse relationship shall exist both at the time of transfer of asset, and at the time of accrual of income. In this case, spouse relationship between Aniket and Chitralekha did not exist on the date of transfer, i.e. on 14.2.2011., and so income of Chitralekha shall not be clubbed in the hands of Aniket. Computation of Capital Gains in the hands of Chitralekha for the assessment year 2012-13 Particulars Consideration for Transfer ( No. of shares x Sale Price per share) Less: Indexed Cost of Acquisition of Shares Capital Gains Nature of Capital Gains Original Shares 5,000 x `135 = `6,75,000 5,000 x 50 x 785/711= `2,76,020 `3,98,980 LTCG Bonus Shares 5,000 x x `135 = ` 1,68,750 NIL 1,68,750 STCG

(o) A proprietary business was started by Mr.Ratnesh in 2010. As on 1.4.2010, his capital was `4,00,000. His wife, gifted ` 5,00,000 on that day, which was also invested by him in the business. For the financial year 2010-11 and 2011-12, profits earned from business `1,90,000 and `4,50,000. Discuss taxability of income, to be clubbed in the hands of Mrs. Ratnesh for the assessment year 2012-13. Answer: The amount of profit to the extent of gifted amount to total capital on the first day of the previous year must be clubbed in the hands of M` Ratnesh. Income arising from transferred asset shall only be clubbed. Any income earned out of such income should not be clubbed. Particulars Profit earned Amount gifted Total Capital Financial Year 2010-11 `1,90,000 `5,00,000 ` 9,00,000 (`4,00,000 + `5,00,000) Profit earned x Gifted amount / Total Capital = ` 1,90,000 x 5,00,000/9,00,000 = ` 1,05,555 Financial Year 2011-12 `4,50,000 Nil `10,90,000 (`9,00,000 + `1,90,000) Profit earned x Gifted amount / Total Capital = `4,50,000 x 5,00,000/10,90,000 = `2,06,422

Clubbed Amount

(p) Interest of `15,000 on Bank Fixed Deposits, received by minor son of Ms. Soma. These FDRs were made by Ms. Soma, out of his sons earnings from stage acting. Discuss the tax treatment in this case. Answer: If the minor receives any income by exercise of labour, hard work, skill, knowledge or experience then such income shall not be clubbed. In the given case, the income of the minor son of Ms. Soma, is from application of special talent, hence, shall not be clubbed in the hands of parents. (q) An assessee sustained a loss under the head Income from House Property in the previous year relevant to the assessment year 2011-12, which could not be set off against income from any other head in that assessment year. The assessee did not furnish the return of loss within the time allowed u/s 139(1) in respect of the relevant assessment year. However, the assessee filed the return within the time allowed u/s 139(4). Can the assessee carry forward such loss for set-off against income from house property of the assessment year 2012-13? Answer: Loss u/s 71B and Section 32(2), can be carried forward even if the return of income has been filed after the due date u/s 139(1) but before the time limit u/s 139(4) for filing belated return.
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Revisionary Test Paper for June 2012 Examination

As per Sec. 139(4) of the Act, it states that, where an assessee failed to file return of income for any assessment year within the prescribed time limit u/s 139(1), the belated return can be filed either before: (i) (ii) The expiry of one year from the end of the relevant assessment year; or Completion of assessment, whichever is earlier.

In the instant case, the assessee has filed the return of income for the assessment year 2011-12 belatedly but within the time limit u/s 139(4). In view of the above provisions of law, the loss under the head house property, can be carried forward and set off against the income of the assessment year 2012-13. (r) Resham & Co. started two separate industrial undertakings, which prima facie are eligible for deduction u/s 80-IB. For the year ending 31.3.2012, the profit of one unit was `11 lakhs while the other unit suffered a loss of `3 lakhs. The Assessing officer has allowed the deduction u/s 80-IB on the net profit of `8 lakhs. Discuss the validity of the order of the Assessing Officer. Answer: Vide Sec.80-IB, deduction is available in respect of the profits and gains derived from the eligible industrial undertaking of the assessee. Even u/s 80-IB, it is expressly stated that the deduction under this section shall be calculated on the gains derived from such undertaking. In view of the above, Resham & Co. is entitled for deduction u/s 80-IB at 25% of income derived from first undertaking, not on the net income of the two undertakings. The amount, eligible for deduction = 25% of `11 lakhs = `2,25,000. Total Income = ` (11,00,000 3,00,000 2,25,000) = `5,75,000. The action of the Assessing Officer is not valid in law. (s) Is a firm allowed to carry forward share of accumulated loss of a retired/deceased partner? Answer: Vide Sec.78, in case of retirement or death of a partner, the share of the retired or deceased partner in the accumulated losses of the firm, excluding unabsorbed depreciation, shall not be allowed to be carried forward by the firm. (t) A company received a sales tax refund from the Government, which was refunded to the customers, from whom it was collected. Discuss the taxability of receipt of refund. Answer: Sales Tax refund made by Government shall be deemed as business income u/s 41(1) unless the same was refunded to the customers from whom it was collected. [Tirumalaiswamy Naidu & Sons 230 ITR 534(SC)]. (u) Biswas & Co., a partnership firm, was dissolved on 31 March, 2011. The dues of the firm were received by its erstwhile partners during the period May 2011 to April 2012. Can the same be taxed in the hands of the firm for the Assessment Year 2012-13? If not, in those hands can they be taxed? Answer: Vide Sec.176 (3A), any sum received after discontinuance of a business shall be taxable in the hands of the recipient in the year of receipt under the following circumstances: Business should have been discontinued; Any sum should have been actually received; Such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance; In the above case, the amount received shall be taxable in the hands of the partners.
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Revisionary Test Paper for June 2012 Examination

(v) Discuss the taxability of the followings: (i) Unpaid excise credit (ii) Remission of unsecured loan Taxable Transfer of unpaid excise credit to the Profit & Loss Account of the assessee is chargeable to tax [CIT Vs. London Machinery Company 146 Taxman 326 (All.)] Remission of unsecured loan cannot be treated as income u/s 41(1), since there have been no allowance of deduction in any of the preceding years in respect of such loan.[ Chetan Chemicals Pvt. Ltd. 139 Taxman 301 (Guj.)] Amount collected as sales tax by a commission agent and paid to Department. Sales tax was found not payable and refunded. It was held as not an income of the Assessee [ D.Shankariah 247 ITR 798(SC)] In case of financial concession or assistance to a sick unit referred to BIFR (Board for Industrial and Financial Reconstruction), then the taxability of such concession or assistance shall be considered by CBDT in each individual case in coordination with a nodal agency [ Circular No.683 dated 8.6.1994] Taxable for all assesses excluding successor of business. The amount received shall be taxable in the year of receipt/recovery. Predecessors debt recovered by the successor shall not be treated as income of the successor.

Not taxable

(iii) Sales tax refund received by agent (iv) Concession to sick unit

Not taxable

To be decided by CBDT, case to case basis

(v) Bad debts earlier allowed, subsequently recovered by the Assessee

Taxable

(w) A soft drink manufacturer, claimed 100% depreciation on bottles and crates used by them. Subsequently, such bottles were sold. Discuss taxability, if any. Answer: Income arising from sale of such written off bottles shall be liable to capital gains tax u/s 50. [ Nectar Beverages Pvt. Ltd. (2009) (SC) 314 ITR 314] (x) Ritu received a gift, from her mother, 6 % Gold Bonds of the value of `5 lakhs in 1980. These bonds were redeemed by the Government on 1.10.2000 and he received gold of equivalent value, weighting 5,000 grams approximately of fair market value of `10 lakhs. The gold was sold by him on 1.7.2011 for `21 lakhs. Examine the impact of the transactions in Ritus assessment. Answer: Vide Circular No.415 dated 14.3.1985 [152 ITR (St.) 205], exchange of gold bonds for gold on redemption does not attract Capital gains because it is not a capital asset. In case of subsequent sale of such gold, capital gain is chargeable to tax. For this purpose: Date of acquisition = date of redemption of such gold bonds; Cost of acquisition of gold = market value of the gold on the date of redemption. Computation of Capital Gains on sale of gold Consideration for transfer of gold Less: Indexed Cost of Acquisition [` 10,00,000 x 785/406] Long Term Capital Gains ` 21,00,000 19,33,498 1,66,502

(y) EPABX and Mobile Phones owned by a company are charged to depreciation @ 60%, similar to Computers. Discuss the tenability.

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Answer: EPABX and mobile phones are not computer and therefore, not entitled to higher depreciation @ 60%, like computer. [Federal Bank Limited Vs. ACIT (2011) 322 ITR 319 (Kerala)] (z) X Ltd. transferred unpaid excise credit to the Profit & Loss A/c. Discuss taxability, if any. Answer: Transfer of unpaid excise credit to the Profit & Loss A/c of the assessee is chargeable to tax. [CIT vs. London Machinery Company 146 Taxman 326 (All.)] (aa) Agricultural income in India earned by Master Soham (aged 15 years). Discuss taxability. Answer: Agricultural income of minor son of the assessee has to be included in the income of the assessee for the purpose of determining the rate of income-tax applicable to the income of the assessee. [ Suresh Chand Talera vs. Union of India 152 Taxman 348 (MP)]. (bb) A farmer resident of Bikaner sold his rural agricultural land in Nepal and received Indian Rupees of 5 lacs over the cost of acquisition of this land. Explain the taxability of sale. Answer: U/s 2(14), only rural agricultural lands in India are not a capital asset. In this given case, the farmer has sold rural agricultural lands in Nepal and therefore, the transaction shall be attracted by the provisions of capital gains. (cc) A Plantation company, holding several acres of land, sold trees of spontaneous growth. The Assessing officer is of the opinion that there arises capital gains. Discuss Answer: Sale proceeds of spontaneous growth will not result in capital gains, as they do not bring in any profit or gain [ Suman Tea & Plywood Industries Pvt. Ltd (1997) 226 ITR 34 (SC)]. (dd) Amit owns a plot of land acquired on 1.7.2002 for a consideration of `4 lakhs. He enters into an agreement to sell the property on 23.3.2012 for a consideration of `11 lakhs. In part performance of the contract, he handed over the possession of land on 25.3.2012 on which date, he received the full consideration. As on 31.3.2012, the sale was pending registration. Discuss liability of capital gains for the assessment year 2012-13 (no computation is required) Answer: U/s 2(47), transfer includes part performance of a contract of the nature specified in Sec.53A of the Transfer of Property Act. In the given case, consideration was received by Amit and the possession was handed over on 25.3.2012. hence, the part performance condition is satisfied. Capital gains on the above transaction is chargeable to tax as income for the assessment year 2012-13. (ee) Well Wishers & Associates, a partnership firm, is holding land. This firm is not engaged in real estate business. The land was sold during the year. Discuss taxability, whether, this would be assessed to tax as business income or capital gain. Answer: Land held by partnership firm, which is not engaged in real estate business, would be treated as fixed asset of the firm. Transfer of the same is assessable as capital asset, hence capital gains and not as business income. [Mohakampur Ice & Storage 281 ITR 354 (All.)] (ff) Explain the tax treatment of income from Deep Discount Bonds (DDBs). Answer: Deep discount bonds as clarified vide Circular No.2/2002 as follows: 1. Income based on market value (i) Income treated as interest for investors
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Revisionary Test Paper for June 2012 Examination

(ii) 2.

Income treated as business income for traders

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(i) For original subscribers, Income = difference between market value on 31 March of the previous st year and 1 April of the previous year (ii) for subsequent purchases, income = difference between market value on 31 march of the previous year and cost of purchase of the bond
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3.

If there is a transfer before maturity: (i) (ii) For the Investor, Short term Capital Gains = Sale Price less Cost of Bond; For Traders, Business Income = Sale price less cost of bond.

4. 5.

Cost of bond = Cost of acquisition + Income already taxed upto the date of transfer. If there is a redemption on maturity: (i) For the Investor, Interest Income = Redemption Price less market value as on the last valuation date, immediately preceeding the maturity date. In case of a trader, this interest income would be construed as Business Income. (ii) For subsequent purchasers, Interest Income = Redemption price less cost of the bond to such purchaser. In case of a trader, this interest income would be construed as Business Income. Where, Cost of bond = cost of acquisition + income already taxed by the bond holder upto the date of redemption

(gg) Tina was the owner of two residential houses. On 5 April,2011, she disposed one of the houses and utilized the entire sale proceeds to construct first floor on her second house which he completed by th 15 March,2012. She seeks your advice as to the taxability of transaction to capital gains under the provisions of Income Tax Act, 1961. Answer: Vide Sec.54, where an assessee transfers a residential house being a Long-term Capital Asset and the Long-term capital gain on such transaction is utilized for construction of another residential house, within a period of 3-years from the date of transfer, is entitled for exemption. Construction of first floor in the existing building should be treated as independent residential unit entitled for exemption u/s 54/54F. [P.V.NARASIMHAN 181 ITR 101] (hh) Write short notes on Reverse Merger Answer: Reverse merger refers to the arrangement where a profit making company merges with a sick company and thereby is eligible to carry forward the losses of the sick company. Profit making company becomes extinct losing its name and the surviving sick company retains its name. It is a device to avoid implications of merger u/s 72A. The following benefits are expected to be derived from reverse merger: Losses shall be carried forward without compliance of provisions of Sec.2(1B) or Sec.72A, but only for the balance period;
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Revisionary Test Paper for June 2012 Examination

Goodwill of the profit making company shall also be retained. (ii) Gross Total Income `5,00,000 (including LTCG `3,90,000]. Deductions under Chapter VIA [Sections 80C to 80U] `1,79,000. Compute tax liability for Mr.A. Computation of Total Income for Mr.A Gross Total Income Less : Deduction under Chapter VIA Eligible deduction `1,79,000, but restricted to the balance of other income, i.e. `(5,00,000 3,90,000) = `1,10,000. Deductions under Chapter VIA are not deductible against LTCG. Total Income (consisting of LTCG only) Tax Liability: On other income On LTCG = @ 20% on [LTCG Unavailed basic exemption limit] = 20% of [` 3,90,000 (Basic exemption limit other income)] = 20% of [ ` 3,90,000 (1,80,000 Nil) = 20% of ` 2,10,000 = Tax Liability = `42,000/- ( excluding Education Cess and SHEC) (jj) A partnership firm, consisting of two partners, X and Y is engaged in the business of civil construction, had a turnover of `53 lakhs for the assessment year 2012-13. The firm submitted its return of income wherein it had been stated that it wished to be governed by the provision of Sec.44AD of Income Tax Act. As authorized by the Partnership Deed, the firm paid remuneration to the partners within the limit of Sec.40(b). The Assessing officer declines to allow such remuneration in computation of the firms business income. Discuss the validity of AOs action. Answer: As per provision of Sec.44AD(2), where the assessee is a partnership firm, the salary and interest paid to its partners shall be deducted from the income computed on presumptive basis under this section i.e. income computed u/s 44AD shall be the book profit for the purpose of computing allowable remuneration to partners u/s 40(b) Computation of Income of the firm Presumptive Income u/s 44AD 8% of `53,00,000 Less: Interest allowable u/s 40(b) Book Profit Less: Maximum remuneration on book profit : 90% of first `3,00,000 + 60% of ` (4,24,000 3,00,000) Total `4,24,000 Nil `4,24,000 `3,44,400 ` 42,000 Nil `3,90,000 5,00,000 1,10,000

`79,600

As the partners have drawn remuneration within the prescribed limits u/s 40(b), the action of the Assessing officer is not justified.
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(kk) ABC LLP is liquidated. What is the liability of partners of XYZ LLP in respect of its tax dues? Answer: U/s 167C, every person who was a partner of the limited liability partnership at any time during the relevant previous year, shall be jointly and severally liable for the payment of such tax. However, this rule will not be applicable if the partner proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the limited liability partnership. (ll) Who shall sign and verify the return of income of a Limited Liability Partnership? Answer: U/s 140, for LLP the return should be signed by the designated partner. Where, however, there is no designated partner as such, return of income can be signed by any partner except by minor. (mm) Write short notes on Alternate Minimum Tax ( AMT) Answer: Where the income tax payable by a limited liability partnership is less than the alternate minimum tax payable for a previous year, it is liable to pay income tax @ 18.5% u/s 115JC. Tax would be computed on adjusted total income. Adjusted total income shall be the total income before giving effect to this chapter and must be increased by the followings: Deductions claimed ( if any) included in Chapter VIA from Sec. 80H to 80TT ; and Deduction claimed (if any) under Sec.10AA (nn) ABC LLP has income of ` 15,00,000 under the head profits and gains from business or profession. One of its business is eligible for deduction @ 100% of profits u/s 80IB for the assessment year 2012-13. The profit from such business included in the business income is ` 6,50,000. Compute Tax payable by the LLP assuming that it has no other income during the previous year 2011-12. Solution: Computation of Tax Payable under Income Tax for the A.Y. 2012-13. Profits and gains from Business or Profession Less: Deduction u/s 80IB Total Income Tax Payable (`8,50,000 x 30%) Add: Education Cess @ 2% Add: SHEC @ 1% Total Tax Payable Computation of Alternate Minimum Tax (AMT) Total Income as per provisions of Income Tax Act,1961 Add: Deduction u/s 80IB Adjusted Total Income Alternate Minimum Tax Payable ( `15,00,000 x 18.5%) Add: Education Cess @ 2% Add: SHEC @ 1% Total Tax Payable `8,50,000 `6,50,000 `15,00,000 `2,77,500 `5,550 `2,775 `2,85,825 `15,00,000 `6,50,000 `8,50,000 `2,55,000 `5,100 `2,550 `2,62,650

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Note: (1) Income Tax payable as per the provision of Income Tax Act is less than the Alternate Minimum Tax. So the adjusted total income of ` 15,00,000 would be deemed to be the total income of the LLP and the LLP would be liable to pay tax @18.5% thereof. (2) The Tax payable by the LLP for the Assessment Year 2012-13 would be ` 2,85,825 (3) The LLP is eligible for the credit to the extent of `23,175 ( = `2,85,825 `2,62,650), to be set off in the year in which tax on total income computed under the regular provisions of the Act exceeds the AMT. (oo) Is a Company liable to pay advance tax on Book profits? Answer: The Book profit computed u/s 115JB shall be deemed to be the Total Income of the Assessee for the purpose of payment of any tax under the Income Tax Act, 1961. Where the company fails to pay advance tax on such book profits, then it is liable to pay interest u/s 234B and 234C. [Circular No.13/2001] [Kotak Mahindra Finance Ltd.265 ITR 114 (Bom)] (pp) A foreign company has put forth the following arguments amongst others to say that provisions of Sec.115JB regarding minimum alternate tax is not applicable to it: (i) The company does not prepare the accounts in accordance with the provisions of part II and III of Schedule VI of the Companies Act,1956 (ii) It does not lay its accounts before the general meeting in accordance with Sec.210 of the Companies Act, since no meeting is held in India. (iii) It does not declare any dividend in India Answer: U/s 2(17), company includes any company incorporated outside India, i.e. a Foreign Company. The provisions of Sec.115JB are applicable for an assessee being company. Since Sec.115JB are applicable to an assessee, who is a foreign company also, it is immaterial, as to whether the company actually declares any dividend or lays its accounts in a general meeting or not. Hence, they are liable to pay tax u/s 115JB. (qq) A company is owning animals, which are being used for their business purpose. Cost of animals `5,00,000. Due to an accident, the animals died and their carcass was sold for `45,000. What is the tax implication arising out of this incident? Answer: Loss in respect of dead animals is an allowable expenditure u/s 36(1) (vi). This is computed as follows: Actual cost of animal Less: Sale proceeds of carcass Amount to be debited in P & L A/c ` 5,00,000 ` 45,000 ` 4,55,000

(rr) A company paid `35,000/- as bonus through bearer cheque to an employee, who has resigned from the company. Discuss taxability. Answer: Expenditure for which aggregate payment made in excess of `20,000 in a day to a single person, otherwise by account payee cheque/bank draft shall be fully disallowed as per Sec.40A(3). Hence, bonus of `35,000/- should be disallowed, as this was paid by bearer cheque.

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(ss) State the conditions for claiming exemption u/s 11 Answer: The conditions for claiming exemption u/s 11 are: (i) (ii) Registration of the trust must be made with the Commissioner of Income tax; The activities of the charitable trust should be confined within India;

(iii) Not less than 85% of such income shall be applied for charitable purposes within the previous year. It can be accumulated for a period of 5 years; (iv) If the total income before claiming exemption exceeds the maximum amount not chargeable to tax, the accounts should be audited; (v) Unapplied income should be invested in specified deposits. Corpus donations are not considered as income but as capital receipt;

(vi) Agricultural income will not form part of total income for the purpose of computing application of 85% as laid down u/s 11. (tt) Income from House Property before considering arrears of rent `98,000. Arrears of rent received `42,000. Calculate net Income from House Property. Answer: Computation of Taxable Income from House Property Income from house property before considering arrears of rent Add: Arrears of rent received Less: Deduction u/s 25B : [ 30% of `42,000] Net Income from House Property 98,000 42,000 12,600 1,27,400

(uu) An assessee, whose turnover in the previous year was `16 lakhs had neither opted to be taxed u/s 44AE of the Act nor had kept and maintained books of accounts. Discus the consequences, which the assessee may likely have to come across. Answer: If the assessee has not opted for Sec.44AE, he has to maintain the books of accounts u/s 44AA and get them audited u/s 44AB. In the given case, since the assessee has not maintained the books of accounts, he is liable for penalty u/s 271A. Where the books of accounts for preceding assessment years were not upto date, it is not possible to get the books audited. Hence, penalty u/s 271B cannot be imposed for subsequent yea` (vv) State the conditions stated in Sec. 44AA. Answer: As per Sec.44AA, maintenance of books of accounts is compulsory in the following cases: Specified Professionals Assessees carrying on profession of :(i) Law, (ii) Medicine , (iii) Accountancy; (iv) Architecture (iv) Technical Consultancy (v) Interior Decoration (vi) Authorized Representative (vii) Film Artist (viii) Information Technology Professionals

Whose gross receipts exceed `1,50,000, in all the prior three years or during current previous year in which the business is commenced Others (i) (ii) Where income from business or profession exceeds `1,20,000 in any of the 3 preceeding previous years or likely to exceed during current year; Where the turnover or sales or gross receipts exceeds `10,00,000 in any of the 3
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preceding previous years or likely to exceed during the current year; (iii) (iv) (v) Upto Assessment Year 2010-11, declaring lower income than as prescribed u/s 44AD/44AE/44AF/44BB/44BBB W.e.f. Assessment Year 2011-12, when the Assessee has declared lower income than as prescribed u/s 44AE,44BB,44BBB; W.e.f. Assessment Year 2011-12, Assessee whose income exceeds basic exemption, but declaring lower income than as prescribed u/s 44AD

(ww)

Discuss the allowability of the following expenditures for scientific research: Amount donated (`) Section reference Sec. 35(1)(iia) Sec.35(1)(ii) Deduction @ (%) 125% Amount eligible for Deduction = `50,000 x 125% = `62,500 = `1,00,000 x 175% = `1,75,000

Contribution to

Scientific Research Company

`50,0000

Research Association Scientific Research

for

`1,00,000

175%

National Laboratory/University/IIT Social /Statistical undertaking Research

`40,000

Sec.35(2AA)

200%

= `40,000 x 200% =`80,000 = `30,000 x 125% = `37,500

`30,000

Sec.35(1)(iii)

125%

(xx) What is arms length price? State the methods prescribed for its computation. Answer: Arms length price is a price which is applied or proposed to be applied in a transaction: (i) Between persons other than associated enterprises; (ii) In uncontrolled conditions. The methods prescribed u/s 92C for computation of arms length price are: (i) Comparable Uncontrolled Price method; (ii) Resale Price method; (iii) Cost Plus method; (iv) Profit split method; (v) Transactional net margin method; (vi) Such other method as may be prescribed by the Board.

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Question No.2. (a) Mr. X furnishes the particulars of his income earned during previous year 2011-12: (i) Income from agriculture in Bangladesh, received there ` 2,00,000, subsequently remitted to India, (ii) (iv) Interest on Asian Development Bonds, ` 90,000, one-third of which received outside India, Arrears of salary ` 50,000 received in India from a former employer in Pakistan. (iii) Gift of ` 50,000 received in foreign currency from a relative in India, (v) Income from property received outside India ` 3,00,000 (` 1,00,000 is used in Bahrain for the educational expenses of his son in Bahrain, and ` 2,00,000 later on remitted to India). (vi) Income from business in Iran which is controlled from India (` 90,000 being received in India) ` 2,00,000. (vii) Dividends received on 30.06.2011 outside India from an Indian company, ` 2,50,000. (viii) Untaxed profit of the FY 2008-2009 brought to India in July 2011, ` 2,50,000. (ix) Profit (computed) on sale of building in India received in Pakistan ` 2,00,000. (x) Profit from business outside India managed from India ` 90,000, received outside India. Find out gross total income of Mr. X for AY 2012-2013, if Mr. X is (a) resident and ordinarily resident; (b) resident but not ordinarily resident; (c) non-resident. Solution: Computation of Gross Total Income for Assessment Year 2012-2013 Particulars ROR ` 2,00,000 RNORs ` Nonresident `

(i) Income from agriculture in Bangladesh, received there but later on remitted to India (ii) Interest on Pakistan Development Bonds: 1/3 of ` 90,000 received outside India 2/3 of ` 90,000 being received in India (iii) Gift received from a relative in India: Exempt [Sec. 57(v)] (iv) Salary arrears received in India from a former employer in Pakistan (v) Income from property received outside India but later on remitted to India (vi) Profit from Iran business controlled from India: (a) Profits received in India (b) Profits received outside India (vii) Dividends received from an Indian company, outside India, deemed to accrue or arise in India but exempt under Sec. 10(34) (viii) Untaxed foreign profit of PY 2008-2009 brought to India (ix) Profit on sale of building in India, received outside India deemed to accrue or arise in India (x) Profit from business outside India, managed from India Gross Total Income
rd rd

30,000 60,000 50,000 3,00,000

--60,000 50,000

--60,000 50,000

90,000 1,10,000

90,000 1,10,000

90,000

2,00,000 90,000 11,30,000

2,00,000 90,000 6,00,000

2,00,000 ---4,00,000

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Question No.2 (b): An US Company invested in shares of Indian Joint Venture and RBI permitted shares to be issued in the name of its 100% Mauritius Subsidiary. On sale of share to Indian JV partners, gains accrued in India. Discuss the taxability and the company on which the tax is to be levied. Answer: In the given case, since gains accrued in India, this would attract levy of tax and the liability shall vest in the hands of US Company and not in the hands of Mauritius Company. [Aditya Birla Nuvo Ltd. vs. DDIT(International Taxation) (2011)(Bom.)] Question No.2(c): An Indian Insurance Company paid to a Singapore Company for providing access to applications and to serve hardware system hosted in Singapore and related support under the terms of Service Agreement. Can this be taxed as royalty? Answer: Payment made by an Indian Insurance Company to a Singapore Company for providing access to applications and to serve hardware system hosted in Singapore and related support under the terms of Service Agreement is not in the nature of royalty within the meaning of term in Explanation 2 to Clause (vi) of Sec.9(1). [Bharati Axa General Insurance Co. Limited, In re 2010 (AAR)] Question No. 2(d) A nonresident TV channel uplinks TV programme to Satellite through their own facilities situated outside India and satellite, which are not stationed over Indian Airspace amplifies and relays waves using transponders capacity and Indian Cable Operators receive the signals, merely because footprint area of Satellite Transponders includes India and ultimate viewer are watching programmes in India. The income received is taxed as royalty for business operations in India. Discuss the validity of this action. Answer: In this given case, the fact that viewers are viewing the telecast in India would not mean that Satellite owners are carrying on its business operations in India. Such amounts is not a royalty as defined in Explanation 2 to Sec. 9(1)(vi) [Asia Satellite Telecommunications Co. Ltd vs DIT (2011)(Del.)] Question No. 2(e) th Mr. Harry, after 25 years of residing in India, returns to UK on 2.2.2009. He again returns to India on 19 September, 2011 to join British Company in India. Determine his residential status for the assessment year 2012-13. Answer: No. of days physically present in India during the previous year: [19.09.2011 to 31.3.2012] = 12 + 31 + 30 + 31 + 31+ 29+ 31= 195 days. He satisfies the basic condition of at least 182 days physically present in India during the previous year. Further, considering the information provided in this case, it is construed that Mr. Harry satisfies both the additional conditions, i.e. at least 2 times resident out of the 10 previous years, immediately preceding the previous year and at least 730 days physically present in India during the 7 previous years immediately preceding the previous year. Hence, Mr. Harry is a Resident and Ordinary Resident for the assessment year 2012-13. Question No. 3(a): th Ms.A, a Sikkimese woman married Mr.B, a non-sikkimese on 17 March, 2008. During the previous year 2011-12, she received rent of `6 lakhs from letting out house properties situated in the State of Sikkim. Is she liable to income tax for the assessment year 2012-2013? What will be your opinion, if she married Mr.B th on 10 April, 2008? Answer: In case of an individual, being a Sikkimese, any income which accrues or arises to him: From any source in Sikkim, or As dividend or interest on securities. This provision shall not apply to a Sikkimese woman who on or after 01.04.2008 marries an individual who is not Sikkimese.
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Situation 1: st In the instant case, the assessee marries a Non-Sikkimese individual before the cut-off date, i.e. 1 April, 2008. Therefore, the exemption u/s 10(26AAA) shall continue to apply to her. Hence, Ms. J is eligible for exemption in respect of House Property income situated in the State of Sikkim. Situation 2: th Here, since they got married on 10 April,2008, i.e. after the cut-off date, Ms. A will not be eligible for claiming exemption u/s 10(26AAA). Question No. 3(b) State the difference between Exemption u/s 10 and deduction under Chapter VIA of the Income Tax Act. Answer: Exemption u/s 10 Deduction under Chapter VIA Income exempt does not form part of total income Income forms part of Total Income Expenditure in relation to income exempt is not Expenditure in relation to income is deductible deductible It will not be considered for the purpose of computing It will be considered for the purpose of deduction total income from Gross Total Income Income is normally exempt subject to certain Deduction is normally allowed based on payment or conditions fulfillment of specified conditions

Question No.3(c): Z is employed in A Ltd. As on 31.3.11, his basic salary ` 16,000 p.m. He is also entitled to a dearness allowance of 65% of basic salary. 70% of the dearness allowance is considered for retirement benefits. The company gives him HRA `8,000pm. With effect from 1.1.11 he receives an increment of `1,000 in his basic salary and was staying with his parents till 31.10.2011. From 1.11.11 he takes an accommodation on rent in Delhi and pays ` 10,500 pm as rent for the accommodation. Compute taxable HRA for the assessment year 2012-13. Solution: Salary for the purpose of HRA shall cover the time period for which the assessee, who is in receipt of HRA, resided in a rented accommodation and the rent paid by such assessee, is more than 10% of salary. Salary for HRA (for 5 months) = Basic Pay + DA (considered for retirement benefits) + Commission (if received as a fixed percentage on turnover as per terms of employment) Basic Pay = (15,000 2) + (16,000 3) DA = 65% of Basic Pay 70% forming part of retirement benefits [65 % 78,000 70%] Total Salary for HRA Computation of Taxable House Rent Allowance Particulars Amount received during the financial year for HRA (8,000 12) Less: Exemption u/s 10(13A) Rule 2A Least of the followings: (i) Actual amount received (ii) 50% of Salary[ 50% of 1,13,490] (iii) Rent paid less 10% of Salary [10,500x 5 10% of 1,13,490] Taxable HRA ` ` 96,000 = 35,490 1,13,490 = 78,000

96,000 56,745 41,151 41,151 54,849

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Question No.3 (d): Mr. King is getting a salary of `5,400 pm since 1.1.10 and dearness allowance of `3,500 pm, 50% of which is a part of retirement benefits. He retires on 30th November 2011 after 30 years and 11 months of service. His pension is fixed at ` 3,800 pm. On 1st February 2012 he gets 3/4ths of the pension commuted at `1,59,000. Compute his gross salary for the previous year 2011-12 in the following cases: (i) If he is a government employee, getting gratuity of ` 1,90,000 (ii) If he is an employee of a private company, getting gratuity of ` 1,90,000 (iii) If he is an employee of a private company but gets no gratuity. Solution: Previous Year 2011-12. Tenure of Service: 1.4.11 to 30.11.11 = 8 months Post-retirement period: December 11 to March 12 = 4 months Particulars Salary D.A Taxable Gratuity Uncommuted Pension [(3,8002)+(9502)] Commuted Value of Pension Case (i) 43,200 28,000 Exempted 9,500 Exempted Case (ii) 43,200 28,000 82,750 9,500 88,333 ` 1,90,000 1,90,000 1,07,250 10,00,000 Case (iii) 43,200 28,000 Nil 9,500

Case (ii) Gratuity received by an employee of a private company Actual amount received Less: Exempted amount (least of the followings): (i) Actual amount received (ii) x Avg. Salary x No. of years of Completed service [ 7,150 30] (iii) Maximum Limit Taxable Gratuity Commuted Value of Pension (Non-govt employee, gratuity received) Actual commuted value of pension received Less: Exempted u/s 10(10A) 1/3rd of Full Value of Commuted Pension [1/3 2,12,000] Full Value of Commuted Pension Taxable Commuted Value of Pension Case (iii) Commuted Value of Pension (Non-govt employee, gratuity not received) Actual commuted value of pension received Less: Exempted u/s 10(10A) 1/2 of Full Value of Commuted Pension [1/2 ` 2,12,000] Full Value of Commuted Pension = [ ` 1,59,000 x 4/3=2,12,000] Taxable Commuted Value of Pension 1,59,000 1,06,000 53,000 1,59,000 70,667 88,333

1,07,250 82,750

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Question No. 3(e) : M` Vandana retires on 16th October 2011 after 30 years and 8 months of service. Salary structure is given below: FY 2011-12 FY 2010-11 Salary ` 15,000 pm Salary ` 12,000 pm D.A ` 7,500 pm D.A ` 6,000 pm

60%of dearness allowance forms a part of superannuation benefits. Record of Earned Leave is given below: Leave allowed for one year of completed service -23 days; Leave taken while in service-150 days; Leave encashed during the year-60 days. Determine the gross salary in the following cases: (i) she retires from government service (ii) she retires from the service of Delhi Municipal Corporation (iii) she retires from the service of Life Insurance Corporation of India (iv) she retires from private sector Solution: Particulars Salary for 6months & 16 days Dearness Allowance Taxable amount of Leave encashment Gross Income from Salary Working Notes: Average monthly salary for 10 months, prior to retirement: Salary of 6 months 16 days: (1st April 2011 to 16th October 2011) Salary of 3 months 14 days: (14th December 2010 to 31st March 2011) Total Basic Salary Add: Dearness allowance For 6 months 16 days: (1st April 2011 to 16th October 2011) For 3 months 14 days: (14th December 2010 to 31st March 2011) Total D.A. D.A. [60% of 69,800, forming part of retirement benefits] Total salary of 10 months Average Salary = 1,81,480 / 10 = 18,148 Computation of Taxable Leave Encashment Amount of encashment received: (30 x 23) (150 + 60) x (15,000 + 7,500)/ 30 = Less: Exempted u/s 10(10AA) [Least of the followings] (i) Actual amount received (ii) 10 months salary (preceding the month of retirement) (iii) Leave credit on the date of retirement [(30 23) (150 + 60) (18,148/ 30)] (iv) Maximum Limit Taxable amount of Leave encashment 3,60,000 3,60,000 1,81,480 2,90,368 3,00,000 1,81,480 1,78,520 = 49,000 = 20,800 69,800 41,880 1,81,480 ` = 98,000 = 41,600 1,39,600 Case (i) 98,000 49,000 Exempted 1,47,000 Case (ii) 98,000 49,000 1,24,980 2,71,980 Case(iii) 98,000 49,000 1,24,980 2,71,980 Case(iv) 98,000 49,000 1,24,980 2,71,980

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Question No.4 (a) Mr. Z is the manager of F Ltd. his son is a student of Amity International School. School fees of ` 6,000 pm and hostel fees of ` 4,000 pm., are directly paid by F Ltd. to the school but it recovers from Mr. Z only 40%. Mr. Z also joins an advanced course of Marketing Management for 4 months at IIM, Ahmedabad, fees of the course, ` 4,50,000 is paid by F Ltd. Determine the perquisite value of the education facility. Solution: Computation of taxable value of education facility [As per Rule 3(5)] Particulars (1)(a) School fees of his children, studying in a school run by employer: (`6,000 x 12) - (2,400 x 12) (b) Hostel fees: (4,000 x 12) (1,600 x 12) 2) Fees paid for Marketing Management course for Mr.Z (it is a fully exempted perquisite) Total value of taxable perquisite Question No.4 (b) Mr. D takes interest-free loan of ` 6,00,000 on 1.11.11 from his employer to construct his house. The loan is repayable in 40 monthly installments from January 2011. Compute the value of interest free loan. SBI Lending rate 10.5% p.a. (for housing loans not exceeding 5 years). Solution: Computation of taxable value of Loan provided by employer [As per Rule 3(7)(i)] Time period during which loan remains outstanding November December January February March Total Perquisite value of interest-free loan: = `29,10,000 10.5% 1/12 = ` 25,463 Question No.4 (c) Mr. Prabir Nandy is a Manager in H Ltd. He gets salary @ ` 30,000 pm. He is also allowed free use of computer, video-camera and television of the company. H Ltd. has purchased (i) Computer for ` 1,00,000 (ii) Video-camera for ` 30,000. Their written down value on 1.4.09 is ` 60,000 and ` 30,000 respectively. Television set has been taken on lease rent @ ` 100 pm. The employer recovers ` 500 per month for use of the assets. Compute his gross salary for the assessment year 2012-13. Solution: Computation of taxable value of Loan provided by employer [As per Rule 3(7)(vii)] 3,60,000 Nil 3,000 1,200 3,64,200
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Taxable value of perquisite (`) 43,200 28,800 Nil 72,000

Balance on the last day of the month 6,00,000 6,00,000 5,85,000 5,70,000 5,55,000 29,10,000

Salary: 30,000 12 Add: Free use of computer, u/s 17(2)(vi) read with Rule 3(7)(vii) Add: Free use of video camera, u/s 17(2)(vi) read with rule 3(7) (vii) [10% of 30,000] Add: Free use of telephone, u/s 17(2)(vi) read with rule 3(7)(vii) (100 12) Gross Salary
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Question No.4 (d) Mr. C is an accountant of D Ltd. He gets salary of `25,000 pm. He has purchased motor car and washing machine from the company on 1 February 2011. He was also provided with a laptop and Particulars of cost and sale price of the two assets are given below: Year of Purchase 01.07.1998 15.09.2007 Particulars of the Asset Motor car Washing Machine Purchase Price (`) 2,50,000 10,000 Sale price (`) 25,000 5,000

Compute the taxable value of perquisites for the assessment year 2012-13. Solution: Laptop provided to an employee by the employer is not taxable as a perquisite. Further, any movable asset, which is used for more than 10 years and thereafter transferred/sold to an employee, would not be considered for the purpose of valuation of perquisites. Computation of taxable value of perquisites on transfer of moveable assets [As per Rule 3(7) (viii)] TRANSFER OF MOVABLE ASSET TO EMPLOYEE Washing Machine (Actual Cost) Less: Less: Less: Less: Depreciation @ 10% on SLM from 15.09.2007 to 14.09.2008 WDV Depreciation @ 10% on WDV from 15.09.2008 to 14.09.2009 WDV Depreciation @ 10% on WDV from 15.09.2009 to 14.09.2010 WDV Depreciation @ 10% on WDV from 15.09.2010 to 14.09.2011 WDV Computation of Taxable Value of Perquisite Washing Machine 6,000 5,000 1,000 (as the amount recovered is more than WDV) 10,000 1,000 9,000 1,000 8,000 1,000 7,000 1,000 6,000

Particulars WDV on the Asset

Less: Amount recovered from employee Taxable value of perquisite Question No.4 (e)

Vineet had been working with M Ltd., in a tribal area since 1-10-1997. He was entitled to the following emoluments: 1. 2. 3. 4. 5. 6. 7. 8. Basic salary w.e.f. 1-1-2011 ` 6,000 p.m. Dearness allowance 50% of basic salary (40% of which forms part of salary for retirement benefits) Medical allowance ` 1500 p.m., (entire amount is spent on his own medical treatment). Entertainment allowance ` 400 p.m. Children education allowance ` 80 p.m. per child for three children. Hostel expenditure allowance ` 100 p.m. per child for three children. Uniform allowance ` 250 p.m. (He spends ` 1,500 on the purchase and maintenance of uniform) House rent allowance ` 750 per month. He pays ` 1,000 per month as rent.

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9. He contributes ` 900 per month to a recognised provident fund to which his employer contributes an equal amount. He resigned from his job on 1.1.2012 and shifted to Delhi. He was entitled to the following benefits at the time of his retirement: (a) Gratuity ` 1,35,000 (b) Pension from 1.1.2012 ` 3,000 p.m. (c) Payment from recognised provident fund ` 3,00,000 (d) Encashment of earned leave for 150 days ` 36,000 He was entitled to 40 days leave for every completed year of service. He got 50% of his pension commuted in lump sum w.e.f. 1.3.2012 and received ` 1,20,000 as commuted pension. He joined K Ltd. at Mumbai w.e.f 1-2-2012 and was entitled to the following emoluments: (1) Basic salary ` 5,000 p.m. (2) Dearness allowance (forming part of salary) 20% of basic salary (3) Rent-free unfurnished accommodation in Delhi which is owned by the employer and whose fair rental value is ` 48,000 p.a. He was also given the following facilities by the employer: (a) Motor car (1.4 ltr. engine capacity) with driver, which he uses partly for official and partly for personal purposes. (b) The monthly expenses incurred by A on gas and electricity were ` 500 which were reimbursed by the employer. (c) Reimbursement of educational expenses of his two children which amounted to ` 350 p.m. (d) On 4.3.2011 his wife fell ill and the employer reimbursed the expenditure of medical treatment amounting to ` 17,500. (e) A watchman, a sweeper, a cook and a gardener have been provided to whom the company pays a salary of ` 400 p.m. each. (f) Loan of ` 1,00,000 @ 8% p.a. for construction of his house was given by the company. SBI rate of interest is 7% p.a. He made the following payments during the previous year: (1) Professional tax ` 500 (2) Premium on Life Insurance Policy of his own, ` 1,00,000 amounting to ` 15,000. (3) Deposit in PPF account ` 50,000. Compute his total income and tax liability for the assessment year 2012-13. Solution: Assessee : Mr. Vineet Computation of Total Income and Tax Liability Particulars Employer M Ltd Basic salary 6,000 9 DA @ 50% of Basic Salary Medical allowance @ ` 1,500 pm 9 months Entertainment allowance @ ` 400 pm 9 months Children education allowance `80 3 9 Less : Exempt u/s 10(14) = `80 2 9 Hostel expenditure allowance= `100 3 9 2,160 440 2,700
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A. Y : 2012-13 ` ` 54,000 27,000 13,500 3,600 720

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Revisionary Test Paper for June 2012 Examination

Less: Exempt u/s 10(14) = `100 2 9 Uncommuted pension (`2,000 2 + ` 1,000 1) Uniform allowance (`250 9 `1,500) House Rent Allowance Amount Received `750 9 Less : Exemption u/s 10(13A) Rule 2A Lease of the following: (i) Amount Received (ii) 40% of Salary (iii) Rent paid 10% of Salary (`1000 9 `6,480) Salary for HRA = Basic Pay + Dearness Allowance ( forming part of salary) + Commission (if received at a fixed percentage on turnover) = 54,000 + (40% of 27,000) = 54,000 + 10,800 = 64,800 Employers Contribution to RPF @ ` 900 pm 9 months Less : Exemption u/s 10(14) upto 12% of salary Salary = Basic Pay + D.A (forming part) = 54,000 + 40% of 27,000 = 64,800 = 12% of 64,800 = Gratuity (from A Ltd.) Actual Amount Received Less : Exemption u/s 10(10) Least of the followings: (i) Actual Amount Received (ii) Max. limit (iii) 1/2 months average salary for each Years of completed service [1/2 7,200 14] Salary for Gratuity (not covered by Payment of Gratuity Act) = Basic Pay + D/A 50,400 1,25,000 10,00,000 1,25,000 6,750 25,920 2,520

1,800

900 5,000 750

6,750

2,520

4,230

8,100

7,776

324

50,400

74,600

(forming part for retirement benefits) + Commission (if received at a fixed percentage on turnover) Again, Average Salary = Salary for 10 months preceeding the month of retirement B/P = 6,000 10 = 60,000 D/A (forming part) = 40% 50% 6,000 = Therefore, Average Salary per month = ` 7,200 Commuted Value of Pension Amount Received Less: Exemption u/s 10(10A) 1/3 of Full Value of Commuted Pension [ 1/3 of `2,40,000] Full Value of Commuted Pension = [ `1,20,000/50% = `2,40,000] Payment from RPF (Exempt) Leave encashment Actual amount Less: Exemption u/s 10(10AA) 1,20,000 80,000 40,000 36,000 4,800 31,200 2,55,824
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12,000 72,000

Revisionary Test Paper for June 2012 Examination

Least of the followings: (a) Actual encashment (b) Eligible encashment (7,200/30 20) (c) 10 months average salary (7,200 10) (d) Amount specified

` 36,000 ` 4,800 ` 72,000 ` 3,00,000

Leave encashment shall be exempt to the extent , calculated as follows : Completed years of service Number of days leave allowed every year Total leave allowable Leave encashed Therefore leave availed (520 150) Leave available on basis of 30 days (30 13) Less: Leave availed Therefore encashment eligible for exemption (390 370) EmployerS Ltd Basic salary 5,000 2 Dearness Allowance @ 20% of B/Pay Motor Car facility (1,800 + 900) 2 months Free Gas/Electricity (500 2) Education Re-imbursement (350 2) Medical Re-imbursement (17,500 15,000) Watchmen (400 2) Sweeper (400 2) Cook (400 2) Gardener (400 2) Interest on Loan (not taxable as interest charged is more than the rate of SBI) Perquisite for Value of Rent-free unfurnished accommodation Valuation of unfurnished rent-free accommodation: 15% of salary which includes the following: Basic (5,000 2) DA Uncommuted pension from R Ltd. (2,000 + 1,000) Value of the unfurnished accommodation 15% of ` 15,000 = ` 2,250 Aggregate salary from M Ltd. and S Ltd. Less : (i) Entertainment allowance u/s 16(ii) (ii) Professional-tax u/s 16(iii) Income from salary Other Income Gross Total Income Less : Deduction u/s 80C RPF (900 9) LIP PPF Total Income (rounded off) ` 10,000 ` 2,000 ` 3,000 ` 15,000 2,82,874 Nil 500 500 2,82,374 Nil 2,82,374 10,000 2,000 5,400 1,000 700 2,500 800 800 800 800 2,250 27,050 13 years 40 520 days 150 days 370 days 390 days 370 days 20 days

8,100 15,000 50,000

73,100 2,09,274
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Revisionary Test Paper for June 2012 Examination

Total Income (Rounded of u/s 288) Tax on ` 2,09,270 upto ` 1,80,000 @ 10% on (209270 1,80,000) = 10% of 29270 Add : Education cess @ 2% Add : SHEC @ 1% Total tax liability Tax Payable (Rounded off u/s 288A) = Nil = 2,927

2,09,270

2,927 58 29 3,014 = ` 3010

Since he has received lump sum payment on account of gratuity, commuted pension and leave encashment, he can claim relief u/s 89 if the same is beneficial to him. Question No.5 (a) Discuss Deemed owner as per Section 27. Answer: Deemed owner is defined as per Sec.27 of the Income Tax Act, 1961. Under the following circumstances, Income from House Property is taxable in the hands of the Individual, even if the property is not registered in his name (i) (ii) Where the Property has been transferred to spouse for inadequate consideration other than in pursuance of an agreement to live apart. Where the Property is transferred to a minor child for inadequate consideration (except a transfer to minor married daughter)

(iii) Where the Individual holds an impartible estate. (iv) Where the Individual is a member of Co-operative Society, Company, or other Association and has been allotted a house property by virtue of his being a member, even though the property is registered in the name of the Society / Company / Association. (v) Where the property has been transferred to the individuals name as part-performance of a contract u/s 53A of the Transfer of Property Act, 1882. ( i.e. Possession of the Property has been transferred to Individual, but the Title Deeds have not yet been transferred).

(vi) Where the Individual is a holder of a Power of Attorney enabling the right of possession or enjoyment of the property. (vii) Where the property has been constructed on a leasehold land. (viii) Where the ownership of the Property is under dispute. (ix) Where the property is taken on a lease for a period of not less than 12 years, then the lessee shall be deemed as the owner of the property. Question No.5 (b) State the conditions for allow ability of unrealized rent. Answer: As per Rule 4, Unrealized Rent means the rent not paid by the tenant to the owner and the same shall be deducted from the Actual Rent Receivable from the property before computing income from that property, provided the following conditions are satisfied: (i) The tenancy is bonafide; (ii) The defaulting tenant should have vacated the property; (iii) The assessee has taken steps to compel the defaulting tenant to vacate the property; (iv) The defaulting tenant is not in occupation of any other property owned by the assessee; (v) The assessee has taken all reasonable steps for recovery of unrealised rent or satisfies the Assessing Officer that such steps would be useless.
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Revisionary Test Paper for June 2012 Examination

Question No. 5(c) Puja has occupied three houses for his self-occupancy. Their particulars for the previous year 2011-2012 are given below: Particulars Municipal value Municipal taxes paid Fair rent Standard rent Repairs Ground rent paid Insurance premium paid Interest on loan taken for purchase of H.P. Year of the loan She has suffered loss in his business, amounting ` 3,00,000 Compute her total income, advising her which house should be specified for self-occupancy concession: Solution: Computation of income from house property under different options: House X (SO) ` Annual value Less: Interest on loan Loss from house property (b) Assuming all the properties as Deemed Let Out (DLO) Gross annual value Less: Municipal taxes paid Net annual value Less: Statutory deduction u/s 24(a) @ 30% of net annual value Interest on Loan u/s 24(b) Income from house property (c) Total Income under different options for self-occupancy: Particulars Option 1 House X ` (-) 30,000 (SO) House Y House Z 2,44,000 (DLO) 3,67,000 Option 2 House Y ` 2,12,000 (DLO) (-) 30,000 (SO) 3,67,000 Option 3 House Z ` 2,12,000 (DLO) 2,44,000 (DLO) (-) 1,50,000
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House X ` 3,60,000 40,000 5,40,000 4,50,000 1,50,000 20,000 5,000 75,000 1997-98

House Y ` 9,60,000 80,000 8,00,000 6,00,000 2,50,000 25,000 6,000 1,20,000 2000-2001

House Z ` 9,50,000 90,000 10,00,000 9,00,000 3,00,000 30,000 7,000 2,00,000 2005-06

(a) Assuming all the properties are self-occupied (SO)

House Y (SO) ` Nil 30,000 30,000 House Y (DLO) ` 6,00,000 80,000 5,20,000 1,56,000 (-) 1,20,000 2,44,000

House Z (SO) ` Nil 1,50,000 1,50,000 House Z (DLO) ` 9,00,000 90,000 8,10,000 2,43,000 (-) 2,00,000 3,67,000

Nil 30,000 30,000 House X (DLO) ` 4,50,000 40,000 4,10,000 1,23,000 (-) 75,000 2,12,000

House X

The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Revisionary Test Paper for June 2012 Examination

(DLO) Income from house property Loss from business Total income 5,81,000 (-) 3,00,000 2,81,000

(DLO) 5,49,000 (-) 3,00,000 2,49,000

(SO) 3,06,000 (-) 3,00,000 (-) 6,000

Conclusion: A house with minimum income/maximum loss should be opted for self-occupancy concession to minimise the tax liability. The option can be changed from year to year. In the instant case, House Z should be treated as self-occupied. There will be no tax-liability, and the assessee will carry forward the unabsorbed business loss of ` 94,000 for next 8 assessment yea` Question No.5 (d) Mr. Pradipto completed construction of a residential house on 1.4.2011. Interest paid on loans borrowed for purpose of construction during the 2 years prior to completion was ` 40,000. The house was let-out on a monthly rent of ` 4,000. Annual Corporation Tax paid is ` 2,000. Interest paid during the year is ` 16,000. Amount spent on repairs is ` 2,000. Fire Insurance Premium paid is ` 1,500 p.a. Property was vacant for 3 months. Annual letting value as per corporation records is ` 30,000. Compute the income under the head Income from House Property for the A.Y. 2012-13. Solution: Assessee : Mr. Pradipto Previous Year : 2011-2012 Computation of Income from House Property Particulars Gross Annual Value u/s 23(1)(c) Less : Less : Municipal Taxes Paid Net Annual Value (NAV) Deduction u/s 24 (a) 30% of Net Annual Value (b) Interest on Borrowed Capital: Interest for Current Year Interest of Prior Period Income from House Property Note: Computation of Gross Annual Value Municipal Value Annual Rent (4,000 12) () Unrealised Rent Annual Rent Higher of MV & Actual Rent Less : Vacancy Allowance Gross Annual Value 30,000 48,000 Nil 48,000 48,000 12,000 36,000 (` 40,000 1/5) ` 16,000 ` 8,000 24,000 (33,000) 1,000 (` 30,000 30%) 9,000 (Note 1) ` ` 36,000 (2,000) 34,000 Assessment Year : 2012-13

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Revisionary Test Paper for June 2012 Examination

Question No. 5(e) A House property in Kolkata, having a municipal value of `5 lacs, Fair Rental Value `6 lacs, was intended for let-out to tenants. Unfortunately, during the entire previous year, there was no tenant for this house property. Municipal Tax `5,000 ( of which `1,200 is payable). Interest paid on loan taken for purchase of this property `1,79,000. Compute Income from House Property. Answer: Computation of Income from House Property Annual Value u/s 23(1)(c ) Less: Municipal tax and tax for services paid Net Annual Value Less: Deduction u/s 24(a): - Interest on borrowed capital ( no limit) Income from House Property NIL 3,500 (3,500) (1,79,000) (1,82,500)

Question No.6 (a): The WDV of plant and machinery on 1.4.2011 of Z Ltd. engaged in manufacturing of PVC granules is ` 3000 lacs. Company purchased additional plant and machinery for ` 1,600 lacs on 18.4.2011 inclusive of secondhand machine imported from Ireland of ` 400 lacs to increase its installed capacity of production from 1000 TPA to 1500 TPA. The production from new machine commenced w.e.f 1.12.2011. Work out by giving reasons the amount of allowable depreciation. Assessee : Z Ltd. Particulars ` Opening WDV Add: Less: Additions During the year Net Value for the purpose of Depreciation Depreciation of the Year On Opening Block ` 3,000 Lakhs 15% On Additions (Period of usage less than 180 days) ` 1,600 lakhs 15% 50% Additional Depreciation on Eligible Assets (Notes) Closing WDV Notes: 1. Second hand machinery imported from China is not an eligible asset for the purpose of Additional Depreciation computation. Therefore, cost of eligible assets = ` 1,600 lakhs ` 400 lakhs = ` 1,200 lakhs. 2. Period of usage of new machine is less than 180 days. Therefore, they are entitled to only 50% of additional depreciation rate of 20%. 450 120 120 690 3,910 Previous Year: 2011-12 Computation of Depreciation Lakhs ` 3,000 1,600 4,600 Assessment Year : 2012-13

Question No.6 (b) ZED Ltd. imported machinery from South Korea on 12.5.2011 for US$ 50,000. Exchange rate on that date : US$ = ` 44. 70. Customs Duty paid @ 20%. Government granted subsidy of ` 15,00,000. The assessee had a forward contract on 2.4.2011 at US$ 45.30. Logistics services was provided by Carrywell Courier Ltd. Service
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Revisionary Test Paper for June 2012 Examination

Charges paid ` 2,00,000 including service tax of ` 25,000. Engineers and labourers were engaged at site for installation of the machinery. Salary and wages paid for site engineers and labourers including their travelling expenses amounted to ` 4,60,000. Expenses incurred during trial run period ` 1,50,000. Sale of output produced during trial run period ` 90,000. Interest earned on deposits made to open Letter of Credit for purchase of this machinery ` 15,000. The machine was put to use from 05.10.11. Depreciation @ 15%. Compute Actual Cost and Written Down Value. Solution: Assessee: ZED Ltd. Computation of Actual Cost and Written Down Value Particulars Cost of the Asset ( US$ 50,000 ` 44.70) Add : Customs Duty paid @ 20% on ` 22,35,000 Less : Government Subsidy granted Add : Exchange Rate Difference [US$ 50,000 ` (45.30 - 44.70)] Add : Transportation charges paid ` 2,00,000 (including Service Tax ` 25,000) Less : CENVAT credit adjustment (credit for Service tax included in service charges paid to Carrywell Courier Ltd.) Add : Installation expenses incurred for payment of site engineers & labourers including travelling expenses Add : Expenses incurred during trial run period Less : Sale of output generated during trial run period Less : Interest earned on deposits made to open Letter of Credit for purchase of this machinery Actual Cost for the purpose of determining depreciation Less : Depreciation @ 50% of 15% (since Put to Use < 180 days) for previous year 2011-12 ( ` 18,92,000 50% x 15%) WDV as on 01.04.2012 Amount (` crores) 22,35,000 4,47,000 (15,00,000) 30,000 2,00,000 (25,000) 4,60,000 1,50,000 (90,000) (15,000) 18,92,000 1,41,900 17,50,100 Previous Year: 2011-12

Question No.6(c) Mr. Hari purchased a house property on 18.11.2007 for ` 15,00,000. Till 1.7.2011, the same was self-occupied for own residence. Thereafter, the said building was brought into use for the purpose of his profession. Determine the amount of depreciable admissible for the Assessment Year 2012-13, given rate of depreciation @ 10%. Solution: (a) Property acquired by the assessee himself: As per Sec. 43(1), if a building/asset used for private purpose of the assessee is subsequently put to use for the purpose of business, the cost of acquisition shall be determined in the following manner: Assessee : Mr. Hari Previous Year : 2011-12 Assessment Year : 2012-13 ` 15,00,000 75,000 14,25,000 1,42,500 12,82,500
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Cost of acquisition of Residential House Property as on 18.11.2007 Less: Deemed depreciation for the Financial year 2007-08 @ 50% of 10% on ` 15,00,000 (since period of usage is less than 180 days) WDV as on 01.04.2008 Less: Deemed Depreciation for Financial year 2008-09 @ 10% on `14,25,000 WDV as on 01.04.2009

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Revisionary Test Paper for June 2012 Examination

Less: Deemed Depreciation for Financial year 2009-10 @ 10% on `12,82,500 WDV as on 01.04.2010 Less: Deemed Depreciation for Financial year 2010-11 @ 10% on `11,54,250 WDV as on 01.04.2011 = Actual cost for the purpose of charging depreciation Less: Deemed Depreciation for Financial year 2011-12 @ 10% on `10,38,825 WDV as on 01.04.2012 Question No.6 (d)

1,28,250 11,54,250 1,15,425 10,38,825 1,03,883 9,34,942

Jammer International Ltd. incurs an expenditure of `300 crores for acquiring the right to operate telecommunication services for Orissa and Jharkhand. The payment was made in August 2010 and the licence to operate the services was valid for 12 yea` In December 2011, the company transfers part of the licence, in respect of Orissa to Hammer International Ltd. for a sum of `280 crores and continue to operate the licence in Jharkhand . What is the deduction allowable u/s 35ABB to Jammer International Ltd. for the Assessment Year 2012-13? Solution: Assessee: Jammer International Ltd. Previous Year: 2011-12 Assessment Year : 2012-13 (a) u/s 35ABB, where part of the Telecom Licence is transferred and Net Consideration received on such transfer, is more than the expenditure remaining unallowed, the amount of deduction shall be computed as follows: (i) Unallowed amount as on 01.04.2011 = Total Expenditure Less Deduction for Financial Year 2009-10 = `300 crores Less ( `300 crores / licence period of 12 years) = `300 crores less `25 crores= `275 crores. (ii) Net Consideration received = `280 crores = 11 years (including current previous year) = ` (224 crores less 56 crores) / 14 years = `12 crores. Question No.6 (e) Sleepwell Ltd. is an existing Indian Company, which sets up a new industrial unit. It incurs the following expenditure in connection with the new unit: ` Preparation of project report 4,00,000 Market survey Legal and other charges for issue of additional capital required for the new unit Total The following further data is given: Cost of project Capital employed in the new unit Solution: The deduction admissible under section 35D is one-fifth of the expenditure incurred for the project. This works out to `2,20,000. However, such expenditure should not exceed the following limits as prescribed in section (3): (a) 5% of cost of the project or (b) 5% of the capital employed in the new industrial undertaking (being a company) whichever is higher.
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(iii) Remaining period of licence (iv) Deduction u/s 35 ABB

5,00,000 2,00,000 11,00,000 30,00,000 40,00,000

What is the deduction admissible to the company under section 35D for Assessment Year 2012-13?

Revisionary Test Paper for June 2012 Examination

In this case (a) 5% of the project cost is `1,50,000 and (b) 5% of the capital employed is `2,00,000. Hence, the expenditure eligible for amortization under section 35D would be ` 2,00,000. And the admissible deduction for the current assessment year is ` 2,00,000 1/5 = ` 40,000. Question No.7 (a) A firm comprising of four partners A, B, C and D carrying on business in partnership, sharing profits/losses equally shows a profit of ` 2,00,000 in its books after deduction of the following amounts for the year : Particulars (a) Remuneration to partner A who is not actively engaged in business (b) Remuneration to partners B & C actively engaged in business Partner B Partner C (c) Interest to partner D on loan of ` 1,50,000 80,000 90,000 36,000 ` 60,000

The deed of partnership provides for the payment of above remuneration and interest to partne` You are required to work out the taxable income of the firm as well as partners for assessment year 2012-13. Solution: Computation of Income under the head Profits and Gains of Business or Profession Particulars Net profit as per P/L A/c Add : Inadmissible expenses (i) (ii) Remuneration to A (not an active partner) disallowed u/s 40(b) Remuneration to B and C (considered separately [` 80,000 + 90,000] (iii) Interest paid to D on Loan advanced Net Profit before Interest and Remuneration to Partners Less : Maximum Permissible Interest u/s 40(b) @ 12% on Loan from D = ` 1,50,000 12% p.a. Book Profit Less : Maximum Permissible Remuneration to B and C u/s 40(b) (i) upto ` 3,00,000 ` 1,50,000 or 90% of Book Profits, whichever is higher = 2,70,000 Balance of Book Profits 60% of Book Profits = 60% of 1,48,000 = 88,800 Actual Remuneration paid lower of (i) & (ii), allowed as deduction Taxable Income 1,70,000 1,70,000 2,78,000 18,000 4,48,000 36,000 4,66,000 60,000 1,70,000 ` 2,00,000

3,58,000

(ii)

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Revisionary Test Paper for June 2012 Examination

Taxable Income of the partners Particulars Remuneration Interest Taxable income Working notes: (1) In the case of a firm, remuneration to a partner who is not a working partner is not eligible for deduction. In the case of working partners the remuneration paid is disallowed if it exceeds the limit prescribed u/s 40(b) with reference to book profit. Book working partners remuneration is worked out as under: ` 2,70,000 1,18,800 3,88,800 A Nil Nil Nil B 80,000 Nil 80,000 C 90,000 Nil 90,000 D Nil 18,000 18,000

First ` 3,00,000 of the book profit @ 90% On the balance ` 1,98,000 of book profit @ 60% Total

(2) Any interest and salary to partners disallowed in the firms case shall not be included in the total income of the partner and shall not be chargeable to tax in the partners hands. (3) Share of profits of the partners is exempt u/s 10(2A) of the Income-tax Act and therefore, not included in the partners taxable income.

Question No. 7(b) D Ltd., carrying on business in manufacture, sale and export of tyres, tubes and accessories, has disclosed a net profit of ` 21,00,000 in its P & L account for the period ending March 31, 2012. On the basis of the following particulars furnished by the company and ascertained on inquiry, compute, giving reasons, its total income for the assessment year 2012-13. The company follows the mercantile system of accounting: (a) A sum of ` 20,000 is debited to compensation account. The company had placed an order for machinery to manufacture tyres with a UK company. However, due to a sudden increase in the price of machinery by the vendor, the assessee, had to cancel the contract, in lieu of compensation The company claims the said amount as deduction on revenue account or, in the alternate, as loss under the head Capital gains as the payment was mode towards extinguishment of right to acquire a capital asset. (b) Loss on export of accessories account shows a debit of ` 4 lakh. In this connection it is explained that two trucks belonging to the company carrying tyres accessories were intercepted at the international border and seized by customs authorities for illegal export. The goods were confiscated by the customs authorities and a fine of ` 2 lakh was levied. The company claims the value of confiscated goods as a trading loss under section 28 and the payment of the fine of ` 2 lakh which is debited to rates and taxes account as on expenditure in the course of business under section 37(1). (c) The company had set up a separate unit for manufacture of plastic tubes at Bangalore in 1996. The said unit suffered heavy losses. As a result the same was closed down and the plant and machinery were sold away. The company, however, claims unabsorbed depreciation amounting to ` 8 lakh in its return of income. It is not debited to the profit and loss account. (d) During the previous year 1996-97, the assessee-company acquired 5,000 shares of E Ltd., on Indian company, as a result, the entire share capital of the said company is now held by the assessee-company. In May 2011, the assessee-company sold to E Ltd. plant and machinery for ` 6,00,000. The actual cost is ascertained at ` 4,00,000 and written down value at ` 1,50,000. (e) In the years 2001-2002 and 2002-03, the Government of India arranged exports of tyres and tubes through the Federation of Tyre Dealers of which the company was a member. The exports which were
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Revisionary Test Paper for June 2012 Examination

made to For Eastern countries resulted in loss which was shared by all members including the company. The Federation thereafter took up the questions of reimbursement of losses with the Government, which after protracted discussion and correspondence agreed to grant a subsidy calculated at a certain percentage of exports. The assessee-company received its share of subsidy amounting to ` 3 lakh in the previous year. The amount stands credited to the Capital reserve account and claimed as exempt. Solution: Computation of Total Income for A.Y. 2012-13 ` 21,00,000

Net profit as per Profit and Loss Account Adjustments: (i) Payment of compensation [not allowable since payment is in the nature of capital expenditure, being made to avoid unnecessary investment in capital asset ; nor can it be allowed as capital loss as there is no transfer of capital asset] (ii) Loss arising out of confiscation of stock by customs authorities [not deductible by virtue of Explanation to section 37(1)] (iii) Fine [not allowable as penalty paid for breach of law is not normal incidence of business (iv) Unabsorbed depreciation of a unit closed before the commencement of previous year [allowable as deduction] (v) Recovery of loss [taxable under section 41 (1)] (vi) Compensation paid on voluntary retirement of employees [under section 35DDA, one-fifth of such compensation is deductible in the year in which the expenditure is incurred and the balance is deductible in the next four years; section 35DDA is applicable even if the voluntary retirement scheme has not been framed in accordance with the guidelines given under section 10(10C); Business Profit

(+) 20,000 (+) 4,00,000 (+) 2,00,000 () 8,00,000 (+) 3,00,000

(+) 22,40,000 44,60,000

Capital gain on sale of machinery to wholly owned subsidiary company [since transferee-company is wholly owned Indian subsidiary company of the assessee, the transaction is not treated as transfer under section 47(iv) and surplus arising on transfer is not taxable as capital gain] Net Income 44,60,000 Question No. 7(c) During the previous year 2011-12, profit and loss account of Shri Amarnath, proprietor of Free Bird Enterprises engaged in the business of dye-made garments, shows profits of ` 4,50,000. With the following information, compute his taxable income from business : (a) Interest on capital ` 5,000 (b) Purchases include goods of ` 42,000 from his younger brother in cash. However, market value of such goods is ` 35,000. (c) Interest paid outside India ` 1,00,000 without deducting tax at source. (d) Penalty paid to local government for non-filing of sales tax return ` 5,000 (e) Penalty paid to customer for non-fulfilling of order within time ` 10,000 (f) Bad debts ` 1,00,000. Money has been advanced for purchase of Building. (g) Revenue expenditure on promoting family planning among employees ` 10,000. (h) Premium paid on health of employees ` 6,000 in cash
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(i) Premium paid on health of his relatives ` 6,000 in cheque (j) Employers contribution to RPF ` 12,000. One-half of the amount is paid after due date as per relevant Act but before 31.3.2011 (k) Employees contribution to RPF ` 10,000. of the amount is paid after due date as per relevant Act. (l) Interest on late payment of sales tax ` 1,000 (yet to be paid) (m) Interest on loan from State Bank of India `10,000 (` 5,000 is not paid till due date of filing of return) (n) Interest on late refund from income tax department ` 500 (o) Sale includes sale to Raj ` 10,000. (Cost of such goods ` 8,000; Market value of such goods ` 12,000) (p) He received ` 80,000 from a debtor at a time in cash. (q) Recovery of bad debt `10,000 (out of which ` 8,000 was allowed as deduction during AY. 2007-08) (r) Depreciation (being not debited in accounts) ` 20,000 allowed as deduction u/s 32 Solution: Computation of Profits and Gains of business or profession of Shri Amarnath for the AY. 2012-13 Particulars Net profit as per Profit and Loss account Add : Expenditure disallowed but debited in P &L A/c Interest on capital Payment to relative in excess of market value of goods Interest paid outside India without deducting tax at source Penalty paid to local government for non-filling of sales tax return Bad debt Premium paid on health of employees in cash Premium paid on health of his relatives in cheque Employees contribution to RPF Interest on loan from State Bank of India Cost of goods sold to himself Less: Expenditure allowed but not debited in P & L A/c Depreciation u/s 32 Less: Income not taxable but credited to P & L A/c Sales to himself (goods withdrawn for personal purpose) Recovery of bad debts Less: Income taxable under other head but credited to P & L A/c Interest on late refund from income tax department Profits and Gains of business or profession Notes: (1) Interest on capital to proprietor is not allowed as no one can earn from a transaction with himself. The provider of loan and receiver of loan are same hence does not involves any actual expenses. (2) Any unreasonable payment to relative is disallowed u/s 40A(2). Hence, `3,000 is disallowed. Since cash payment towards allowed expenditure (i.e. `19,000) does not exceed ` 20,000, hence provision of sec. 40A (3) is not applicable.
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Note

Details

Amount 4,50,000

1 2 3 4 6 8 9 11 13 14

15,000 7,000 1,00,000 5,000 1,00,000 6,000 6,000 5,000 5,000 8,000 2,43,000 6,93,000 20,000

14 15

10,000 2,000

16

500

32,500 6,60,500

Revisionary Test Paper for June 2012 Examination

(3) Any salary paid outside India without deducting tax at source is disallowed u/s 40(a). (4) Any payment made for infringement of law is disallowed. (5) Payment made for non-fulfilling of contract is not a payment for infringement of law Hence, allowed u/s 37(1). (6) Bad debt is allowed only when such debt has been taken into account as income of previous year or any earlier previous year(s) [Sec. 36(1)(vii)]. Since, the debt is in respect of purchase of a building, which was not considered as income of any previous year, hence it is disallowed. (7) Any expenditure for promoting family planning is allowed to company assessee [Sec. 36(1)(ix)]. However, such expenditure (revenue in nature) incurred by assessee other than company shall be allowed u/s 37(1). (8) Payment of insurance premium on health of employees in cheque is allowed u/s 36(1)(ib). (9) Payment of insurance premium on health of relative is not related to business, hence disallowed. (10) Employers contribution towards RPF is allowed if payment is made before due date of filing of return irrespective of fact that such payment was made after due date prescribed in the relevant Act. (11) Any sum received from employees as their contribution towards RPF is allowed only when such sum has been credited to such fund within the due date prescribed in the relevant Act [Sec. 36(1)(va)]. (12) Interest on late payment of sales tax is not a penalty but compensatory in nature. Hence, it is allowed u/s 37(1) Further such interest is not governed by the provisions of sec. 43B. (13) Any interest payable to any scheduled bank is allowed on cash basis [Sec. 43B]. Hence, unpaid amount is disallowed. (14) Any expenditure of personal nature is not allowed. Further, no one can earn from a transaction with himself. Hence, sale made to himself is not treated as income. (15) Bad debt recovery is treated as income in the year of recovery to the extent of bad debt allowed in the earlier year [Sec. 41(4)] (16) Interest on late refund of income tax is taxable under the head Income from other sources. (17) Receipt from debtor ` 80,000 in cash is not attracted by provision of sec. 40A (3). Question No. 7(d) Discuss the admissibility or otherwise of any five of the following claims in connection with assessment to income-tax. They do not necessarily relate to the same assessee: (i) An expenditure of ` 1,00,000 was incurred on the occasion of the silver jubilee of the company for presentation of silver mementos to shareholders and directors, the value of each memento being ` 1,000 only. (ii) An assessee carries on business in respect of which it holds tenancy rights. It carries out improvements to the said building at a cost of ` 2,00,000 and claims depreciation @ 10% thereon. The assessing officer rejects the claim on the ground that the assessee is not the owner of the building. (iii) Excise duty amounting to ` 2,00,000 for the period 2010-11 was paid by the company by 30-9-2011 before furnishing the return of income for the assessment year 2011-12. (iv) A criminal case was filed against a company under the Essential Commodities Act, 1955. The company incurred litigation expenses amounting to ` 50,000 to defend the directo` The directors were ultimately acquitted. (v) A company was generating electricity privately for its factory. Later, at its expense, electric lines were laid from the trunk road to the factory. It paid ` 5,00,000 to the State Electricity Board as its contribution for this purpose. The ownership of the power-line was to vest with the State Electricity Board. (vi) X and Y are two shareholders of Pooja Ltd., a closely held company. X holds 55% share capital on 30-12011, X transfers his shares to A. Pooja Ltd. wants to set off brought forward loss of ` 4,00,000 (business loss ` 1,00,000; unadjusted depreciation ` 3,00,000) of the previous year 2009-10 against the income of the previous year 2010-11 (i.e., ` 9,00,000). Can it do so?
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Solution: (i) As per the decision of the Apex Court in the case of Aluminum Corporation of India Ltd. v CIT (1972) 86 ITR 11 (SC) and various other decisions, where an expenditure is incurred for commercial expediency, the same shall be allowed as deduction under section 37(1). If at the time the expenditure is incurred, commercial expediency justifies it, it will be taken to be for the purpose of the business even though not supported by any prevailing practice. Presentation of silver mementos to the directors and shareholders on the occasion of silver jubilee is to motivate both the directors and the shareholde` The expenditure has been incurred on account of commercial expediency and should qualify for deduction under section 37(1). (ii) According to Explanation to section 32(1) where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of section 32 shall apply as if the said structure or work is a building owned by the assessee. Hence, depreciation in this case will be allowable. (iii) As the excise duty has been paid or before the due date of furnishing return under section 139(1) in respect of the previous year in which the liability to pay such sum was incurred, the same shall be allowed as deduction on due basis as per section 43B. (iv) Section 37(1) does not make any distinction between expenditure incurred in civil litigation and that incurred in criminal litigation. All that the court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidental to assessees business. Further, it is to be seen whether the expenditure was bona fide incurred wholly and exclusively for the purpose of the business. [CIT v Birla Cotton Spg. & Wvg. Mills Ltd. (1971) 82 ITR 166 (SC)]. In view of this, the litigation expenses of ` 50,000 incurred in detending directors is deductible under section 37(1). (v) The new electric power lines were laid to run the factory efficiently but since the ownership of the power lines was to vest with the State Electricity Board, the contribution of ` 5,00,000 paid to the State Electricity Board shall be allowable as revenue expenditure under section 37(1). (vi) According to section 79 the losses of a closely held company can be carried forward and set off in the subsequent assessment year only when at least 51% of the shares of the company carrying voting rights are held by the same persons as on the last day of the previous year in which the loss was incurred and the last day of the previous year in which the losses are set off. In this case business loss will not be allowed to be set off but unabsorbed depreciation is not a loss and shall be allowed to be set off. Question No. 7(e) Discuss the correctness or otherwise of the following propositions with reasons thereof: (a) Where a person draws from his own stock-in-trade for personal use, there can be no taxable profit. (b) Even an outlay for acquiring an enduring advantage for business may be deductible as revenue expenditure. Solution: (a) The Supreme Court in CIT v. Kikabhai Premchand (1953) 24 ITR 506 held that when a person draws from his own stock-in-trade for personal use, there can be no taxable profit as in this case the vendor and the vendee are not different. To constitute a sale these should be one buyer and seller. The buyer and seller has to be different entity to constitute a proper sale. (b) Normally, an amount spent for acquiring an enduring advantage for business is of capital nature but there can be certain cases when the amount spent on acquiring an enduring advantage may be treated as revenue expenditure. The Supreme Court in CIT v. Empire Jute Co. Ltd. (1980) 124 ITR 1 held that
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Revisionary Test Paper for June 2012 Examination

when a jute mill as a result of an arrangement with other Jute mil had undertaken to work only for specified hours during a week but exceeded the same and paid for such excess period to other members of the pooling arrangement, such payment is known as purchasing loom hou` Though looms are capital assets, the payment was for their operations. By the purchase of loom hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the company. Hence, such payment is of revenue nature. Question No. 8(a) Mr. Tony has 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 31.3.2012, he furnishes the following particulars of his sources of income from estates and sale of Plants. You are requested to compute the taxable income for the Assessment year 2012-2013. (a) Manufacture of Rubber (b) Manufacture of Coffee grown and cured (c) Manufacture of Tea (d) Sale of Plants from Nursery Solution: Assessee : Mr. Tony Previous Year : 2011-12 Assessment Year : 2012-2013 ` 5,00,000 ` 3,50,000 ` 7,00,000 ` 1,00,000

From the words Mr. Tony has estates, it is presumed that the had grown Tea, Coffee and Rubber, and also Plants in his Estates, and the amount given is the Profits of the Business. Computation of Taxable Income Particulars Growing and Manufacture of Rubber [Rule 7A] Grown and Cured Coffee [Rule 7B] Growing and Manufactured of Tea [Rule 8] Growing & Sale of Plant by Nursery [See Note] Total Agricultural Income 5,00,000 65% = ` 3,25,000 3,50,000 75% = ` 2,62,500 7,00,000 60% = ` 4,20,000 ` 1,00,000 ` 11,07,500 Taxable Income Question No. 8(b) Romit acquired a plot of land on 1.6.75 for ` 5,00,000. He converts the plot into stock in trade of his real estate dealing business on 18.2.2007 when the fair market value of the plot was ` 39,00,000. The stock-in-trade is sold by him on 18.5.2011 for ` 40,00,000 (FMV as on 1.4.81 was ` 7,00,000 and FMV as on 1.4.76 `4,50,00). Solution: The conversion of capital asset into stock-in-trade is treated as a transfer as per sec. 2(47). Capital asset was converted into stock-in-trade on 18.2.2007 i.e. previous year 2006-07. Computation of Capital Gains ` Consideration for Transfer (FMV) Less : Indexed Cost of Acquisition [7,00,000 x 519/100] Long term Capital Gains
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Non-Agricultural Income 5,00,000 35% = ` 1,75,000 3,50,000 25% = ` 87,500 7,00,000 40% = ` 2,80,000 ` 5,42,500 Exempt u/s 10(1)

39,00,000 36,33,000 2,67,000

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Computation of Business Income Sale Proceeds of HP Less : FMV on the date of conversion 40,00,000 39,00,000 1,00,000 Question No. 8(c) Mr. B acquired a house property for ` 50,000 in 1969-70. On his death in October 1985 the house was acquired by his son C. The market value of the house as on 1/4/81 was ` 3,50,000. This house was acquired by the Government on 15.3.2008 and a compensation of ` 16 lacs is paid to him on 25.3.2011. C filed a suit against the Government challenging the quantum of compensation and the court ordered for giving additional compensation of ` 24,00,000. He incurred an expenditure of ` 60,000 as an expenditure in connection with the suit. The additional compensation was received on 25.3.2012. Compute capital gains chargeable to tax. Solution: Capital Gain on initial compensation shall be chargeable in the A.Y. 2011-12. Computation of Long Term Capital Gains for the A.Y. 2011-12 ` Consideration for transfer (being the compensation) Less : Indexed Cost of Acquisition [3,50,000 x 711/133] Long Term Capital Loss 16,00,000 18,71,053 2,71,053

Note: This loss shall be carried forward for adjustment only against Long Term Capital Gains arising within the next 4 assessment yea` Computation of Long Term Capital Gains for the A.Y. 2012-13 ` Enhanced Compensation received Less : Cost of Acquisition Cost of Improvement Expenses on Transfer Long Term Capital Gains Less : Long Term Capital loss Set off from the A.Y. 2011-12 Balance of LTCG Question No. 8(d) A holds 15,000 shares (10% of total share holding) in B Ltd. which he had purchased on 10.2.96 for ` 7,00,000. The company went into liquidation on 16.7.2011 and paid a sum of ` 23 per share in cash and an asset whose market value as on the date of distribution i.e. 5.10.11 was ` 18,20,000 to A. the accumulated profits of the company were ` 15 lacs. (a) Compute the income of A for the A.Y. 2012-13 assuming that he has no other income. (b) Compute the capital gain chargeable to tax if the asset of B Ltd. is sold by A for ` 25 lacs on 28.3.12. Solution: Computation of Capital Gains of Mr. B for the A.Y. 2012-13 ` (a) (i) Capital Gain on transfer of shares Total consideration (15,00023+ 18,20,000) Less: Proportionate amount of deemed dividend (10% of ` 12,86,353)
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

24,00,000 NIL NIL (60,000) 23,40,000 (2,71,053) 20,68,947

21,65,000 1,28,635
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Less: Indexed Cost of Acquisition [`7,00,000 x 785/281] Long Term Capital Gains (ii) Income from others Sources Dividend from Indian Company (b) Capital Gain on transfer of asset (B Ltd.) Full Value of Consideration Less: Cost of Acquisition (being the market value as on the date of distributions) Short Term Capital Gains Accumulated Profits Dividend tax @ 16.60875% (= 15% + 7.5% + 2% Education Cess + 1% SHEC)

19,55,516 80,849 Exempted 80,849 25,00,000 18,20,000 6,80,000 15,00,000

Hence, the amount to be distributed plus tax @ 16.60875% on such amount should be ` 15,00,000 Amount of tax = ` 2,13,647 Profits available for distribution = ` (15,00,000 2,13,647) = ` 12,86,353. Question No. 8 (e) (a) P commenced a business on 10.5.92. The said business is sold by P on 25.8.11 and he received ` 12 lacs towards goodwill. (b) What will be your answer in the above case, if P had acquired the goodwill for this business for a consideration of ` 3,00,000. Solution : Computation of Long Term Capital Gains for the A.Y. 2012-13 (a) Consideration for transfer Less: Indexed Cost of Acquisition (Self-Generated) Long term Capital Gains (b) Consideration for transfer Less: Indexed Cost of Acquisition = [` 3,00,000 x 785/223] Long term Capital Gains Question No. 9(a) R has been living in a rented accommodation since August 1983, and he is paying a rent of ` 4000 per month. The landlord got the house vacated from R on 16.7.2011 and paid a sum of ` 5 lacs for vacating the house. Compute Capital Gains, if any, in the hands of R. Solution: Computation of Long Term Capital Gains for the A.Y. 2012-13 ` Consideration for transfer Less : Indexed Cost of Acquisition (Self-Generated asset) Long term Capital Gains 15,00,000 NIL 15,00,000 ` 12,00,000 NIL 12,00,000 12,00,000 10,56,054 1,43,946

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Question No. 9(b) Rohit purchased a house in Delhi in December 2003 for ` 2,50,000. In March 2011, he entered into an agreement to sell the property to Z for a consideration of ` 5,00,000 and received an earnest money of ` 50,000. As per the terms of agreement, the balance payment was to be made within 30 days of the agreement. If the intending purchaser does not make the payment within 30 days, the earnest money would be forfeited. As Z could not make the payment within the stipulated time the amount of ` 50,000 was forfeited by Rohit. Subsequently, on 16.6.11, Rohit sold the house to Mohit for ` 9,00,000. He paid 2% brokerage on sale of the house. Compute capital gains chargeable to tax for the assessment year 2012-13. Solution: Computation of Capital Gains for the A.Y. 2012-13 ` Consideration for transfer Less : Expenses on transfer (Brokerage @ 2% on 6,00,000) Net Consideration Less : Indexed Cost of Acquisition Cost of Acquisition Less : Amount received and forfeited (u/s 51 to be adjusted against cost) Net Cost of Acquisition Indexed Net cost of Acquisition [ ` 2,00,000 x 785/463] 3,39,093 Long Term Capital Gains Question No. 9(c) Ravi owns a residential house which was purchased by him in 1975 for ` 2,40,000. The FMV as on 1.4.81 was ` 2,00,000. This house is sold by him on 16.7.2011 for a consideration of ` 25,00,000. The brokerage and expenses on transfer was ` 55,000. Compute capital gains for the assessment year 2012-13. If he invests ` 6,00,000 for purchase of a new house on 15.3.2012. If the HP so purchased in 15.3.2012 is again sold in 21.10.12 for ` 12 lacs, what will be the tax liability? Solution: Computation of Capital Gains for the A.Y. 2012-13 ` Consideration for transfer Less: Expenses on transfer Net Consideration Less: Indexed Cost of Acquisition [`2,40,000 x 785/100] [Since FMV as on 1.4.1981 was less than the original cost, the original cost is considered for indexation purpose] Long term Capital Gains Less: Exemption u/s 54 Cost of New HP Purchased ` 6,00,000 (exemption restricted upto the balance of LTCG) Taxable Long term Capital Gains 5,61,000 NIL 5,61,000 25,00,000 55,000 24,45,000 18,84,000 5,42,907 2,50,000 50,000 2,00,000 9,00,000 18,000 8,82,000

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If the HP purchased in 15.3.2012 is again sold on 21.10.12 for ` 12 lacs, there share a rise short term capital gains. The cost of acquisition shall be adjusted to the extent of long term capital gains exemption already availed. Computation of Capital Gains for the A.Y. 2013-14 ` Consideration for transfer Less: Cost of Acquisition Cost of purchase Less: Exemption u/s 54 availed during A.Y. 2012-13 now withdrawn Short term Capital Gains 12,00,000 6,00,000 5,61,000

39,000 11,61,000

Question No. 9 (d) Saptarshi acquired shares of G Ltd. on 15.12.98 for ` 5 lacs which were sold on 14.6.11 for ` 19 lacs. Expenses on transfer of shares ` 40,000. He invests ` 8 lacs in the bonds of Rural Electrification. Corporation Ltd. on 16.10.2011. (a) Compute capital gain for the assessment year 2012-13. (b) State the period for which the bonds should be held by the assessee. What will be the consequences if such bonds are sold within the specified period? (c) What will be the consequences if Saptarshi takes a loan against the security of such bonds. Solution: Computation of Capital Gains for the A.Y. 2012-13 ` Consideration for transfer Less : Expenses on Transfer Net Consideration Less : Indexed Cost of Acquisition [5,00,000 x 785/351] Long-term Capital Gains Less : Exemption u/s 54EC Taxable long-term Capital Gain 19,00,000 40,000 18,60,000 11,18,234 7,41,766 7,41,766 NIL

(b) Saptarshi should not transfer or convert (otherwise than transfer) into money such bonds within 3 years from the date of their acquisition. If these bonds are transferred or converted into money within 3 years, capital gain exempted earlier shall attract taxability towards long-term capital gain of the previous year in which such asset is transferred or converted into money. (c) If any loan is taken against security of such bonds, it shall be taxable as long-term capital gains of the previous year in which such loan is taken against the security of such bonds. Question No. 9 (e) Mr. N is employed at a gross salary of ` 8,00,000. He gets ` 15,000 interest on bank deposit. He has made the following investment/deposit during the year 2010-2012: ` 1. Life insurance premium: (i) Own life, insured for ` 80,000
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

15,000
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2. 3. 4. 5. 6.

(ii) Brothers life, dependent on him (iii) Major son, not dependent on him Contribution to unrecognised provident fund Contribution to public provident fund Contribution to ULIP Repayment of loan to SB1 to purchase a residential house: 50% repayment is towards interest. Infrastructure bonds of an Indian public company under Sec. 80C(2)(xix) He has paid education fees for his 3 children: A B C

5,000 4,000 60,000 20,000 5,000 1,20,000 10,000 12,000 9,000 6,000

Besides, interest of ` 1,632 on NSC-VIII, (purchased during the year 2008-2009) has been credited on them during the year 2011-2012. Compute deduction u/s 80C for the assessment year 2012-2013. Solution: Computation of Deduction u/s 80C of Mr. N for the assessment year 2012-2013 Particulars Deduction in respect of contribution to approved savings (Sec. 80C) : 1. Life insurance premium; (i) Own life(ii) Brothers life (iii) Major son 2. Contribution to unrecognised provident fund 3. Contribution to ULIP 4. Contribution to public provident fund 5. Repayment of housing loan to SBI 6. Infrastructure bonds of Indian public company [Sec. 80C(xix)] 7. Accrued interest on NSC- VIII issue 8. Education fees for two children: A B Deduction restricted upto ` 1,00,000 Question No.10 (a) Mr Jamal, a resident assessee, runs a manufacturing business in Delhi. For the previous year 2011-2012, he disclosed his taxable income as below: ` Business profits Long-term capital gains Short-term capital gain 2,55,000 25,000 15,000 15,000 4,000 5,000 20,000 60,000 10,000 1,632 12,000 9,000 1,33,632 1,00,000 ` `

He has hired furnished accommodation for his own use and pays ` 4,000 p.m. He has paid donation amounting to `10,000 to National Defence Fund. He has deposited ` 50,000 under a scheme framed by the Life Insurance Corporation for maintenance of his dependant brother with a disability. The disability is certified by the medical authority. Compute his total income for the assessment year 2012-2013.
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Solution:

Computation of Total Income of Mr. Jamal Assessment Year 2012-2013 Particulars ` ` 2,55,000 25,000 15,000 2,95,000 50,000 10,000 60,000

Income from business (computed) Long-term capital gain (computed) Short-term capital gain (computed) Gross Total Income Deductions from gross total income: (i) Deposit for maintenance of a dependent with disability [Sec. 80DD]: (ii) Charitable donations to National Defence Fund [Sec. 80G]: Amount of Deduction @ 100% of ` 10,000 (iii) Expenditure incurred on rent [Sec. 80GG] [ W.N.1 ] Total Income Workings Note 1: Particulars Expenditure incurred on rent [Sec. 80GG]: [Rent paid -10% of ATI], i.e. 48,000 -21,000 = 17,000, or 25% of AGTI, i.e. 25% of 2,10,000 = 52,500, or ` 2,000 p.m. = ` 24,000 ` 17,000

77,000 2,18,000 `

whichever is less, is to be deducted, i.e. ` 17,000 Adjusted Total Income for Sec. 80GG: Gross total income Less: Aggregate of (i) All permissible deduction from GTI except for deduction for u/s 80GG (ii) Any long-term capital gain Adjusted Gross Total Income [AGTI] for Sec. 80GG Question No.10 (b) M, resident in India, furnishes the following particulars of his receipts and outgoings during the previous year 2011-2012. ` Receipts: (i) Income from salary (ii) Income from house property (iii) Gross winning from crossword puzzle Outgoing : (i) Contribution to LIC annuity plan (ii) (a) (b) (c) Medical insurance premium: For himself His wife, not dependent Mother, non-resident, 67 years, dependent 15,000 4,000 3,000 5,000
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2,95,000 60,000 25,000 85,000 2,10,000

2,00,000 3,00,000 3,00,000

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Revisionary Test Paper for June 2012 Examination

(d) (e) (iii) (iv) (v) (vi) (vii) (viii) (ix)

Nephew, wholly dependent with disability Grandson, dependent Expenditure on medical treatment and maintenance of the nephew referred to Medical treatment for grandson, suffering from a disease specified under income-tax rules(v) Donation to Gujarat government for family planning Scholarship to a poor but meritorious student Contribution to approved scientific research association Contribution to Delhi Municipal Corporation for sewage scheme for slum-dwellers, approved by National Committee Donation to Political party paid during November 2011

3,000 2,000 30,000 50,000 50,000 20,000 30,000 50,000 20,000

Compute his total income for the assessment year 2012-2013. Make necessary assumptions and clarify them. Solution: Computation of Total Income for AY 2012-2013 Particulars Income from salary Income from house property Gross winnings from crossword puzzle Gross Total Income Less: Deductions under Chapter VIA : Contribution to LIC annuity plan [Sec. 80CCC] Medical insurance premium [Sec, 80D] Self His wife Mother, 67 years old Nephew dependent with disability Grand son ` ` 2,00,000 3,00,000 3,00,000 8,00,000 10,000 4,000 3,000 5,000 x x

12,000

Maintenance and medical treatment of a dependent with disability [Sec. 80DD] Expenditure for medical treatment of grandson [Sec. 80DDB] Donations for scientific research or rural development [Sec. 80-GGA] (a) Donation to approved scientific research association (b) Contribution to MCD for slum-dwellers scheme, approved by National Committee Donations to political party [Sec. 80GGC w.e.f. 22.9.2004] Charitable donations [Sec. 80G] (a) Scholarship to a poor meritorious student (b) Gujarat government for family planning: 100% of qualifying amount 1. Actual donation = 50,000, or 2. 10% of specified GT1 = 37,800 8,00,000 (3,00,000 + 10,000 + 12,000 + 30,000 + 50,000 + 20,000) = `3,78,000 whichever is less, is QA 37,800= 100% of 37,800 Total Income

Nil 30,000 50,000 20,000 xxx

37,800

1,59,800 6,40,200

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Question No.10 (c) SK Industries, a diversified group, discloses profit from the following sources for the previous year 2011-2012: (` in lakhs) (i) Profits from small-scale unit, started in 2002-2003 (ii) Profit from industrial undertaking 2003-2004, in Vidisha, a B-class industrially backward district. (iii) Profit from multiplex theatre, started in 2007-2008 (a) Delhi (b) Allahabad (iv) Profits from convention centre, started in 2009-2010 (a) Delhi (b) Allahabad (v) Profits from Hill View, a hotel started in 2003-2004 at Manali in Himachal Pradesh. Hotel is approved by prescribed authority (vi) Profits from undertakings engaged in refining of mineral oil since 1 January 2005 in Uttar Pradesh, not listed in backward state in Eighth Schedule. Compute the total income for the assessment year 2012-2013. Solution: (i) Profits from SSI (ii) Profits from undertaking located in industrially backward B-class district (iii) Profits from multiplex theatre: (4 + 2) = (iv) Profits from convention centre: (5+3) = (v) Profits from Hill View Hotel (vi) Profits from refining undertaking Gross Total Income Less: Deduction in respect of profits and gains from certain industrial undertaking, other than infrastructure undertakings (Sec. 80-IB) : 1. Profits from SSI [Sec. 80-IB (3)] : 25% of ` 6 Lakh : 2. Profits from undertaking in B-class industrially backward district [Sec. 80-IB (4)] 25% of ` 10 lakh 3. Profits from multiplex theatre [Sec. 80-IB(7A) 50% of ` 2 lakh (No deduction for Delhi) 4. Profits from convention centre [Sec. 80-IB(7B)] 50% of ` 8 lakh 5. Profits from Hill View Hotel [Sec. 80-IB(7)] Allowed only for Indian company 6. Profits from refining undertaking [Sec. 80-IB(9)]-100% of profits for 7 assessment years Total Income 4.00 Nil 10.00 19.00 31.00 6.00 3.00 10.00 10.00 50.00 Computation of Total Income Particulars (` lakhs) (` lakhs) 6.00 10.00 10.00 5.00 3.00 10.00 4.00 2.00 6.00 10.00

1.50 2.50 1.00

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Question No.10 (d) Mekon Ltd., an Indian company, starts an industrial undertaking on 1 April 2011. During the previous year, it earns profits of ` 80 lakh before allowing any deduction for wages. Compute its total income for the previous year 2011-2012 taking into account the following employment schedules of workers: Date of employment 1-5-2011 1-6-2011 1-7-2011 Solution: Number of workers 90 20 10 Status of workers Casual Reuglar Regular Rate of wages 300 p.m. 4000 p.m. 4000 p.m.

Computation of Total Income for the AY 2012-2013 Particulars ` ` 80,00,000 29,70,000 8,00,000 3,60,000 (-) 41,30,000 38,70,000 (-) 1,20,000 37,50,000

Profits before allowing deduction for wages Less: Wages paid to workers [Sec. 37(1)] : (i) (ii) (iii) 90 ` 3000 11 20 ` 4000 10 10 `4000 9

Business Profits and Gross Total Income Less: Deduction in respect of employment of new workmen [Sec. 80 JJAA] 30% (` .4000 x 10 x 10) Total Income Question No.10 (e)

Mr. R has developed an improved economical model of a motor cycle and got it patented on 31-3-2011 under the Patent Act, 1970. He allowed Z Ltd. to use his patent rights and licenses has been granted to it under the Patent Act, 1970. He has received royalty of ` 8,00,000 during the previous year 2011-2012. However, the royalty in accordance with the terms and conditions of the license settled by the Controllers under the said Act is ` 2,80,000. He has incurred ` 1,00,000 expenses in developing his invention and getting it patented. Compute his total income for the assessment year 2012-2013 (i) if he is resident in India, (ii) non-resident India.

Solution:

Computation of Total Income for the Assessment Year 2012-2013 Particulars (i) ` 8,00,000 60,000 7,40,000 (ii) ` 8,00,000 60,000 7,40,000

Income from other sources Less : Expenses Gross Total Income (GTI) Less : Deduction for respect of royalty on patent (Sec. 80-RRB) Least of the followings: (a) Income from royalty 5,00,000; or (b) Royalty under the terms of license settled by the Controller 2,80,000; (c) Maximum limit ` 3,00,000 Whichever is less, is to be deducted Total Income

2,80,000 2,20,000

xxx 7,00,000
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The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Revisionary Test Paper for June 2012 Examination

Question No.11 (a) Mr. J is suffering with 60% locomotor disability which is certified by medical authority. He is employed as Technical Supervisor with Air Tel at a salary of ` 20,000 p.m. Particulars (i) Income from government securities (ii) Long-term capital loss (iii) Short-term capital gain (Sec. 111A) (iv) Insurance commission (gross) (v) Interest on Saving Fund a/c from bank He has incurred the following expenses: (i) Medical insurance paid by cheque for his father, resident in India and 70 years 18,000 ` 20,000 (-) 40,000 1,00,000 1,00,000 10,000

(ii) Deposit with LIC for maintenance of father, mainly dependant on him for support and maintenance and suffering from low-vision with a severe disability of 80%, as per certificate of the medical authority (iii) Rent paid for the year 2011-2012 for accommodation hired by him. Compute his total income for the assessment year 2012-2013. Solution: Computation of Total Income for the Assessment Year 2012-2013 Particulars 1. Income from salaries 2. Income from capital gains : (a) Short-term capital gains (Sec. 111A) (b) Long-term capital loss to be carried forward 3. Income from others sources : (a) Interest government securities (b) Interest on savings fund a/c with Bank (c) Insurance commission Gross Total Income Less : Deductions under Chapter VIA: Medical insurance (Sec. 80D) Deduction in respect of maintenance including medical treatment of a department, a person with severe disability (Sec. 80DD) Deduction in case of a person with disability (Sec. 80U) : Deduction u/s 80GG :( Least of the followings) (a) (i) Rent paid less 10% of Adjusted Gross Total Income 40,000-23,300 = 16,700, (b) (ii) 25% of 2,33,000 Adjusted Gross Total Income=58,250, (iii) 2,000 p.m. 12 = 24,000 Whichever is less, is or be deducted Total Income 2,85,300 16,700 1,84,700 50,000 18,000 1,00,000 20,000 10,000 1,00,000 1,30,000 4,70,000 1,00,000 Nil ` ` 2,40,000 40,000

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Revisionary Test Paper for June 2012 Examination

Question No.11 (b) Mr. Krishna is a lawyer of Allahabad High Court. He keeps his accounts on cash basis. His Receipts and Payments A/c for the year ending 31-03-2012 is given below : Dr. Cr. Receipts Balance b/d Legal fees Special commission fees Salary from Law College as part time lecture Exam. Remuneration Interest on Bank Deposit Sale proceeds of residential property Dividend from Co-operative society Dividend received from units of UTI Rent from house property ` 3,820 3,45,000 5,500 87,000 1,480 3,500 3,01,000 1,000 2,000 15,000 Payments Purchase of Infrastructure Bonds Subscription and membership Purchase of legal books Rent Municipal Tax paid on H. P. Car expenses Office expenses Electricity Expense Income tax Gift to daughter Domestic expenses Donation to Institutions approved u/s 80G Car purchased Life Insurance premium Balance c/d ` 20,000 4,500 17,500 47,500 3,000 44,000 38,500 4,000 8,000 12,000 85,000 12,000 3,27,000 16,000 1,26,300 7,65,300

7,65,300 Following information are available:

1. The Rent and electric expenses are related to a house, of which half portion in used for self residence and remaining half portion in used for office. 2. Car is used only for professional purposes. 3. Outstanding legal fees ` 10,000. 4. Rent has been paid for 10 months only. 5. Car was purchase on 25-09-2011. Law books purchased are annual publications out of which books of ` 2,000 were purchased on 6-4-2011 and balance on 31-10-2011. 6. The house was purchased in January 1987 for ` 50,000 and sold on 1-7-2011. 7. Rent of the property which has been sold was ` 5,000 p.m. The property was vacated by the tenant on 30-6-2011. Compute his Total Income for the assessment year 2012-13. Solution: Computation of Total Income of Mr. Sen for the assessment year 2012-13 Particulars 1. Income from salary Salary as a part time lecturer Less: Deduction Income from House Property Annual Rent Less: Vacancy Allowance Gross Annual Value (GAV) Less: M/ Tax paid ` 87,000 Nil 60,000 45,000 15,000 3,000
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87,000

2.

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Revisionary Test Paper for June 2012 Examination

Net Annual Value (NAV) Less: Standard deduction @ 30% of NAV 3. Income from Profession Professional Earnings: (i) Legal fees (ii) Special commission Less: Allowable expenses (i) Subscription etc. (ii) 1/2 Rent (Office) (iii) Car expenses (iv) 1/2 electric charges (v) Office expenses (vi) Depreciation on car @ 15% on 3,27,000 (vii) Depreciation on books [@ 100% on Annual Publication of ` 2,000 = 2,000 @ 50% on Others of 15,500 = 7,750 4. Capital gains: Sale consideration Less: Indexed cost of acquisition 50,000 lncome from Other Sources : Interest on bank deposit Examiners fees Dividend from Co-operative Society Dividend from UTI Gross Total Income Less : Deductions (i) 80C - LIP (ii) 80G - Donation @ 50% of ` 12,000 (iii) 80CCF - Purchase of Infrastructure Bonds Total Income Total Income (rounded off u/s 288A) Notes: 1.

12,000 3,600

8,400

3,45,000 5,500 3,50,500 4,500 23,750 44,000 7,000 38,500 49,050

9,750

1,76,550 3,01,000 2,80,357

1,73,950

20,643

5.

3,500 1,480 1,000 Exempt

5,980 2,95,973

16,000 6,000 20,000

42,000 2,53,973 2,53,970

As the assessee follows the cash system of accounting, amount actually received and payment actually made on account of expenditure, during the year, shall be considered for computing the income. Therefore, any outstanding receipts will not be included in the Total Income. Similarly rent not paid for two months will not be allowed as deduction. The system of accounting does not affect the computation of income from salary, house property and capital gains. Therefore, in this case, rent for three months, though not received (as it has not been shown in the Receipt and Payment Account) shall be taken into account in computing the income under the head house property. Car was purchased and put to use for more than 180 days. Therefore, full depreciation @15% has been claimed. Law books worth ` 2,000 were purchased and put to use for more than 180 days and are. therefore, eligible for depreciation @100%. The balance books worth ` 15,500 were purchased on 31-10-2011; therefore, 50% of the normal depreciation will be allowed as the books were purchased and put to use for less than 180 days. The total depreciation shall, therefore, be ` 2,000 + 50% of `15,500 = ` 9,750.

2.

3. 4.

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Revisionary Test Paper for June 2012 Examination

Question No.11 (c) From the following details compute the total income of Mr. X, a resident of Delhi, for the AY 2012-13. Particulars (a) (b) (c) (d) (e) (f) (g) (h) `

Salary including Dearness Allowance 6,30,000 Bonus 57,600 Contribution to a Recognised Provident Fund 36,000 Life Insurance Premium 57,000 Rent paid by the Employer for flat provided to Mr. X 90,000 Cost of Furniture provided by the employer at the aforesaid flat 80,000 Rent recovered from Mr. X by employer 36,000 Bills paid by the employer for gas, electricity and water provided free of cost at the above flat 18,000 (i) Mr. X was provided with Companys car (self-driven) also for personal use, not possible to determine expenditure on personal use and all expenses were borne by the employer. ` 72,000 48,000 12,000 2,000 1,000 3,400 48,000 14,000 20,000

Mr. X owns a house. The particulars are : Rent received (12 months) Municipal valuation Municipal taxes paid Ground rent Insurance charges Collection charges Interest on borrowing used for construction of house (constructed in June 2004) Other Information : Dividend received from UTI India Deposits under National Saving Certificate Solution: Assessee: Mr. X Particulars Income under the head Salary Salary including Dearness Allowance Bonus Gross Salary before including value of perquisites Value of Concessional Furnished Accommodation [Rule 3(1)] Least of Rent Paid by employer [` 90,000 or 15% of Salary ` 6,87,600] 10% of Furniture Value [` 80,000 10%] Less : Rent recovered from Mr. X Gas, Electricity and Water provided by the employer Motor Car provided to the employee for use (assumed capacity upto 1.6 liitres) ([` 1,800 p.m. + ` 900 p.m. for chauffeur] 12 Months) as per Rule 3 Gross Income from Salary
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Previous Year: 2011-12 Computation of Total Income

Assessment Year: 2012-13 ` ` 6,30,000 57,600 6,87,600

62,000 8,000 (36,000) 18,000 32,400

8,00,000
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Income from House Property: Gross Annual Value u/s 23(1) Higher of Municipal Value ` 48,000 or Rent Received ` 72,000 Less : Municipal Taxes paid Net Annual Value Less : Deduction Standard deduction @ 30% of Net Annual Value u/s 24(a) Interest on borrowed capital u/s 24(b) Income from Other Sources: Income from UTI Exemption u/s 10(35) GROSS TOTAL INCOME Less : Deduction under Chapter VIA - Section 80C - Contribution to RPF - LIC Premium - Deposits in NSC Deduction u/s 80C restricted to `1,00,000 [sec. 80CCE] TOTAL INCOME (Rounded Off u/s 288A) Question No.11 (d) Mr. X, Finance Manager of K Ltd. Mumbai, furnishes the following particulars for the previous year 2011-2012. ` (a) Gross Salary (per month) 64,000 [Tax deducted from Salary ` 1,09,000] (b) Valuation of medical facility in a hospital maintained by the Company (c) Rent Free Accommodation owned by the Company (d) Housing Loan of ` 6,00,000 at the interest rate of 5% p.a. (no repayment made during the year, to be repaid within 10 years) (e) Gift made by the Company on the occassion of wedding anniversary of X (f) A wooden table and 4 Chairs were provided to X at his residence (Dining Table). This was purchased on 1.5.2008 for ` 60,000 and sold to X on 1.8.2011 for ` 30,000 (g) Personal purchases through Credit Card provided by the Company amounting to ` 20,000 was paid by the Company. No part of the amount was recovered from X. (h) A Maruti Esteem Car which was purchased by the Company on 16.7.2007 for ` 5,50,000 was sold to the assessee on 14.8.2011 for ` 1,30,000. (i) Other income received by the assessee during the previous year 2011-2012 are : Interest on Fixed Deposits with a Company Income from specified mutual fund Interest on bank deposits of a minor married daughter Income from UTI received by his handicapped minor son (j) Contribution to LIC towards Premium u/s 80CCC
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

72,000 (12,000) 60,000 (18,000) (48,000) 14,000 (14,000) Nil 7,94,000 36,000 57,000 20,000 1,13,000 (1,00,000) 6,94,000 (6,000)

7,000

4,750

` 5,000 3,000 3,000 1,200 10,000

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Revisionary Test Paper for June 2012 Examination

(k) Deposit in PPF Account made during the year 2011-2012 (l) Bonds of ICICI (Tax Savings) eligible for tax deduction Compute the Taxable Income of Mr. X and the tax liability for the Asst. Year 2012-2013. Solution: Assessee: Mr. X Particulars Income from Salaries : Basic Salary (` 64,000 12) Add : Value of Perquisites : 1. Value of Medical Facility in hospital maintained by K Ltd. Treatment in hospital maintained by Employer Fully Exempt 2. Rent Free Accommodation owned by Company Explanation 1 to Sec. 17(2) 15% of salary = 15% of ` 7,68,000 (Population > 25 Lakhs) 3. Housing Loans at concessional rate Rule 3(7)(i) = ` 6,00,000 (10% 5%) 4. Use of Furniture & Fittings upto 1.8.2011 - Rule 3(1)(vii) = 10% ` 60,000 4/12 5. Transfer of Assets - Rule 3(7)(viii) Dining Table as per WN 1 (a) Motor Car as per WN 1 (b) 6. Gifts made by the Company on the occasion of the Wedding Anniversary 7. Credit Card Purchases taxable as perquisite u/s 17(2) Gross Income from Salary Less : Deduction u/s 16 Net Income from Salaries Income from Other Sources : Interest on Fixed Deposits with a Company Income from specified mutual fund Less : Exempt u/s 10(35) Interest on Bank Deposits of minor married daughter Less : Exempt u/s 10(32) Income received by handicapped minor son - not clubbed u/s 64(lA) GROSS TOTAL INCOME Less : Deduction under Chapter VI-A U/s 80CCC Contribution towards Pension Fund U/s 80C Contribution towards PPF U/s 80CCF Bonds of ICICI (Long term infrastructure bonds) TOTAL INCOME TAX PAYABLE Add : Education Cess @ 2% Add : Secondary and Higher Education Cess @ 1% Gross Tax Payable Less : Tax Deducted at source Net Tax Liability
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75,000 25,000

Previous Year: 2011-12 Computation of Total Income

Assessment Year : 2012-13 ` ` 7,68,000

Nil 1,15,200

30,000 2,000 12,000 95,280

1,07,280 Nil 20,000 10,42,480 Nil 10,42,480

5,000 3,000 (3,000) 3,000 (1,500)

1,500 Nil 6,500 10,48,980 10,000 75,000 25,000 9,38,980 1,33,694 2,674 1,337 1,37,705 1,09,000 28,705
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Working Notes: 1. Valuation of Perquisites on transfer of Movable Assets : (a) Transfer of Assets: Dining Table Purchase Price Less: Depreciation till date of Sale (` 60,000 3 10%) WDV as at date of transfer Less: Deduction for collection from Employee Value of Perquisite (b) Motor Car Cost of Purchase (16.7.2007) Less : Depreciation @ 20% (16.7.2007 - 15.7.2008) 16.7.2008 WDV Less : Depreciation for 16.7.2008 - 15.7.2009 16.7.2009 WDV Less : Depreciation for 16.7.2009 - 15.7.2010 16.7.2010 WDV Less : Depreciation for 16.7.2010 - 15.7.2011 16.7.2011 WDV Less : Amount Recovered on Transfer Value of Perquisite (30,000) 12,000 ` 5,50,000 1,10,000 4,40,000 88,000 3,52,000 70,400 2,81,600 56,320 2,25,280 1,30,000 95,280 42,000 (`) 60,000 (18,000)

2. Gifts received from the employer on the occasion of the wedding anniversary (a) Taxable as perquisite u/s 17(2). (b) As per Rule 3(7)(vi), value of any gift or voucher or token (other than made in cash) or convertible ; in cash on ceremonial occasion or otherwise shall be taxable if the aggregate value of Gift during the previous year is ` 5,000 or more. Since the value of gifts received is less than ` 5,000, it shall be exempt from tax. Question No.11 (e) M, an individual, retired from the services of a Company on 31.10.2011. He joined another employer on 1.11.2011 and was in service till end of March 2012, when he furnishes the following details and information 1. Salary and Allowances for the period From First Employer Basic Salary Dearness Allowance Conveyance Allowance From Second Employer Basic Salary Fixed Conveyance Allowance

` Per month 30,000 16,000 6,000 ` Per month 35,000 8,000

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Revisionary Test Paper for June 2012 Examination

2. While he was with the first employer, M contributed 10% of his basic salary to a Provident Fund Account with the Regional Provident Fund Commissioner. He did not become a member of the Provident Fund maintained by the second employer. 3. M was permitted by the second employer to encash 15 days leave he had accumulated during his service and received `12,500 from his employer. 4. M had constructed a residential house in Chennai in February 2008 for `30 Lakhs. Part of the costs of construction was met by borrowals of ` 20 lakhs from the Housing Development Corporation, at interest of 12.5% p.a. The loan was taken on June 2006. The loan outstanding at the beginning of the current year was `12,00,000. The rate of interest applicable for the current year was reduced to 9% p.a. due to reduction in rates. [He had also borrowed from some relatives `4,00,000 on which interest at 15% p.a. was due.] The property had been let-out soon after completion. 5. In the Assessment Year 2008-09, M was allowed a deduction of `50,000 for irrecoverable rents. The annual value decided by the Corporation of Chennai for the property is ` 80,000. The property was letout in the current year to a Company on a rent of `20,000 p.m. The half-yearly municipal taxes on the property were fixed by the Corporation of Chennai only in August 2011 at `15,000 for every half year from 1.4.2008. M paid the taxes due in September 2011 upto the half-year ending 31.3.2011. 6. M also received from the previous tenant ` 40,000 (out of the dues of ` 50,000). 7. After retirement from the first employer, M received ` 4,50,000 from the Regional Provident Fund Commissioner, money was fully invested by him in the 15% Non-Redeemable Debentures issued by the Indian Oil Corporation interest on these had not come in by the end of March 2012. 8. M received interest of ` 60,000 on long-term fixed deposits with Banks, ` 25,000 as interest on Post Office Savings Bank Accounts and ` 20,000 as income from units. 9. M owns a car which is used for office purposes also and it is found that the entire conveyance allowance from his employer had been fully spent on travel for official purposes. 10. One of the policies of insurance taken by M had matured for payment and ` 8,00,000 received by him in June 2011 from the LIC was invested by him, in the name of his 16-year old son, in fixed deposits with companies. Interest received uplo 31.3.2012 on these deposits was ` 90,000. On one of the continuing policies of insurance, M paid a premium of ` 60,000 in the year. Compute Ms total income for the Assessment Year 2012-13. Solution : Assessee : Mr. M Previous Year : 2011-12 Computation of Total Income Assessment Year : 2012-13 ` Income under the head Salaries From First Employer Basic Pay Dearness Allowance Conveyance Allowance Less: Exempt u/s 10(14) Amount received from Regional Provident Fund Commissioner Less: Exempt u/s 10(12) From Second Employer Basic Salary Conveyance Allowance performance of duties) (` 35,000 5) (` 8,000 5) 40,000 (40,000) Nil
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(` 30,000 7) (` 16,000 7) (` 6000 7) 42,000 (42,000) 4,50,000 (4,50,000)

2,10,000 1,12,000 Nil 3,22,000

Nil 1,75,000

Less: Exempt u/s 10(14) (incurred for official

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Revisionary Test Paper for June 2012 Examination

Leave Encashment - Fully taxable while in service Gross Income from Salary Income from House Property: Gross Annual Value u/s. 23(1) Higher of Municipal Value of `80,000 or Actual Rent of ` 2,40,000 Less: Municipal Taxes paid during the year @ ` 15,000 for every half year from 1.4.2008 upto 31.3.2011 (Current Year - Not Paid) Net Annual Value (NAV) Less: Deduction @ 30% of NAV u/s 24(a) Interest on Borrowed Capital u/s 24(b) Loan from Housing Development Corporation: Current Period Interest: `12,00,000 9% Prior Period Interest (Interest upto 31.3.2007) [(`20,00,000 12.5%) + (4,00,000 15%)] 10/12 1/5 Loan from Relative - Current Period Interest (` 4,00,000 x 15%) Add: Unrealised Rent recovered (taxable in the year of recovery u/s 25AA] Income from Other Sources Interest on Long-term Fixed Deposits with Bank Interest on Post Office Savings Bank A/c Less: Exempt u/s 10(15) Income from Units of UTI Less: Exempt u/s. 10(35) LIC Policy matured Less: Exempt u/s. 10(1D) Interest from Fixed Deposits with Companies in the name of minor son Less: Exemption u/s. 10(32) Gross Total Income Less: Deduction under Chapter VIA u/s 80C LIC Premium RPF 10% of ` 1,40,000 Total Income Total Income (Rounded Off u/s 288A) Assumptions: 1. It is presumed that Mr. M accounts for his interest income on receipt basis. 90,000 (1,500) 25,000 (25,000) 20,000 (20,000) 8,00,000 (8,00,000) 60,000 1,08,000 51,667

12,500

1,87,500 5,09,500

2,40,000

(90,000) 1,50,000 (45,000)

(2,19,667)

40,000 60,000 Nil Nil Nil

(74,667)

88,500

1,48,500 5,83,333

(60,000) (14,000) (74,000) 5,09,333 5,09,330

2. Assumed that there has been no repayment of Housing Loan Principal during the year ending 31.3.2006 for the purpose of calculation of prior period interest.
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Revisionary Test Paper for June 2012 Examination

3. Recognised Provident Fund received on retirement shall not be taxable u/s 10 (assuming conditions are satisfied). 4. Unrealised Rent recovered : Since the assessee has been allowed a deduction of ` 50,000 from his house property income in ealier years in respect of Unrealised Rent, entire ` 40,000 recovered during current year becomes taxable. 5. Deduction of Interest u/s 24 shall be allowed even if the amount is borrowed from any person other than the Banks/Financial Institutions in respect of Let Out property. Question No.12 (a) Mr. A, a Senior Citizen, has furnished the following particulars relating to his House Properties Particulars Nature of Occupation Municipal Valuation Fair Rent Standard Rent Actual Rent per month Municipal Taxes paid Interest on Capital borrowed House I ` Self Occupied 60,000 90,000 75,000 6,000 90,000 House II ` Let-out 1,20,000 1,50,000 1,40,000 12,000 12,000 80,000

Loan for both Houses were taken on 1.4.2007. House II remained vacant for 4 months. Besides the above two house, A has inherited during the year 1987-88 an old house from his grandfather. Due to business commitments, he sold the house immediately for a sum of ` 250 Lakhs. The house was purchased in 1962 by his grandfather for a sum of ` 2 Lakhs. However, the Fair Market Value as on 1.4.1981 was ` 30 Lakhs. With the sale proceeds, A purchased a new house in March 2011 for a sum of ` 140 Lakhs and the balance was used in his business. The other income particulars of Mr. A besides the above are as follows (AY 20122013) Business Loss Income from Other Sources (Bank Interest) Investments made during the year PF ICICI Infrastructure Bond Purchased (u/s 80CCF) ` 9 Lakhs ` 1 Lakh ` 70,000 ` 30,000

Compute Total Income of Mr. A and his Tax Liability for the Assessment Year 20122013. Solution: Assessee : Mr. A Particulars 1. Income from House Property : (a) House I : Self Occupied Annual Value u/s 23(2) Less : Deduction u/s 24(b) = Interest on Housing Loan taken on 1.4.2007 (Note 1) (b) House II : Let-out (Note 2) 2. Profits and Gains of Business or Profession Loss 3. Capital Gains Sale of Residential House Property Long Term Asset Sale Consideration 2,50,00,000
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Previous Year : 2011-12 Computation of Total Income ` Nil 90,000

Assessment Year : 2012-13 ` `

(90,000) (21,000) (1,11,200) (9,00,000)

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Revisionary Test Paper for June 2012 Examination

Less : Expenses on Transfer Net Consideration Less : Indexed Cost of Acquisition Fair Market Value as on 1.4.81 CII of year of Sale /CII of year of first holding (` 20 Lakhs 785/150) Long Term Capital Gain Less : Exemption u/s 54 New House purchased 4. Income from Other Sources: Bank Interest

Nil 2,50,00,000

1,04,66,667 1,45,33,333 1,40,00,000 5,33,333 1,00,000

Gross Total Income [representing unabsorbed business loss to be carried forward] (3,77,867) Hence, no Deduction under Chapter VI-A is allowed in this year. Notes: 1. Assumed that loss from House Property & Loss from Business are at first adjusted inter-head, against Long Term Capital Gains and then against Income from other sources since it is beneficial to the assessee. 2. It is assumed that the construction of the house was completed within 3 years from the end of the financial year in which the loan was taken. 3. Annual Value of House Property II is computed as under (i) Municipal Value (MV) (ii) Fair Rental Value (FRV) (iii) Higher of MV + FRV (iv) Standard Rent (v) Reasonable Expected Rent (RER) [lower of (iii) + (iv)] (vi) Annual Rent @ ` 12,000 pm (vii) Unrealised Rent (viii) Actual Rent [(vi) (vii)] (ix) Vacancy Allowance (x) Gross Annual Value [(viii) (ix)] Less: Municipal Tax paid Net Annual Value (NAV) Less: Standard deduction @ 30% of NAV u/s 24(a) Less: Interest on borrowed Capital u/s 24(b) Income for House II Question No.12 (b) Mr. Anurag is a Cost Accountant in practice. The Income & Expenditure Account for the year ending March 31, 2012 read as follows: Expenses ` Income ` To Employees cost 1,50,000 By Professional earnings 12,00,000 To Travelling & Conveyance 50,000 By Dividend income To Administration & Office exp. 4,00,000 from shares 6,00,000 To Interest 1,50,000 from equity oriented To Demat Charges 10,000 mutual funds 1,00,000 To Net profit 11,40,000 Total 19,00,000 Total 19,00,000 1,44,000 Nil 1,44,000 48,000 96,000 12,000 84,000 25,000 80,000 (21,200) 1,20,000 1,50,000 1,50,000 1,40,000 1,40,000

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Other Information: (a) (b) (c) (d) (e) (f) Entire Dividend income is claimed as exempt from taxation by virtue of Section 10(34) and 10(35). Anurag claims that no expenditure has been incurred against the dividend income, which is claimed as exempt from tax. The value of investment in shares as on the first day and the last day of the previous year is ` 7,50,000 and ` 9,00,000 respectively. The value of investment in units of Mutual Funds as on the first day and the last day of the previous year is ` 5,00,000 and 2,00,000 respectively. All expenditure including interest expenditure of ` 1,50,000 incurred by Anurag are relating to taxable and non taxable Income. Demat charges are directly attributable to exempt income. The value of the total assets as appearing in the Balance sheet of the assessee as on the first day and last day of the previous year is ` 60,00,000 and `80,00,000 respectively.

You are required to compute the taxable income of Anurag for the assessment year 2012-13. Solution: Computation of Taxable Income A.Y. 2012-13 Particulars Income from Profits & Gains of Business or Profession( W.N.1) Income from other sources (W.N. 2) Total Add : Disallowance u/s 14A as per Working Note 3 Taxable Income Working Note 1 Profits & Gains of Business or Profession Net profit as per Income & Expenditure Account Less : Income considered under other heads Dividend Income from shares Income from UTI Taxable Income from Profession Working Note 2 Income from other sources 1. Dividend Income from Shares Less : Exempt under sec 10(34) 2. Income from units in Mutual funds Less : Exempt under sec 10(35) Taxable income from other sources Working Note 3 Disallowance u/s 14A (a) (b) (c) Amount of expenditure directly relating to exempt income (Other than interest) Demat charges Amount of interest incurred by way of expenditure other than those included above (1,50,000 8,25,000 / 70,00,000) Amount equal to 0.5% of the average value of Investments (8,25,000 0.5%) Total amount disallowed u/s 14A (a) + (b) + (c) ` ` 4,40,000 Nil 4,40,000 31,804 4,71,804 ` 11,40,000 6,00,000 1,00,000 ` 6,00,000 6,00,000 1,00,000 1,00,000

7,00,000 4,40,000 ` Nil Nil Nil ` 10,000 17,679 4,125 31,804

Note : 1. Average value of Investment = (7,50,000 + 9,00,000) / 2 = ` 8,25,000. 2. Average value of Total Assets = (60,00,000 + 80,00,000) / 2 = ` 70,00,000.
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Question no. 12(c) XY & Co., a partnership concern had established an undertaking for manufacturing computer software in Free Trade Zone. It furnishes the following particulars of its second year operations, ending on 31-03-2012: Particulars Total sales of business Export sales Profit of the business ` (in lakh) 100.00 80.00 10.00

Out of the total sales, realisation of sale of ` 7 lakh is difficult because of the deficiency of the buyer. realisation of rest of the sales is received in time. The plant and machinery used in the business had been depreciated @ 15% on SLM basis of depreciation and depreciation of ` 3 lakh was charged to the Profit and Loss Account. Compute the taxable income of XY & Co for the assessment year 2012-2013. Solution: Profit of business Add : Depreciation charged on SLM basis Less : Depreciation on WDV basis @ 15% of 17,00,000 [See Note below] Less : Deduction under Sec. 10A : 10,45,000 73 100 Taxable income Note : ` 1. Computation of Depreciation : Total purchase price of machine : 3,00,000 15 100 Less : Depreciation in the first year @ 15% WDV at the end of first year Less: Depreciation for second year @ 15% WDV at the end of second year 2. Export Turnover: Export Sales Less: Remittance not received due to insolvency of buyer Question no. 12(d) Mr.B holds agricultural fields for growing sugarcane to manufacture sugar in his factory. The data for the financial year 2011-12 is as follows: Cost of cultivation of sugarcane Market value of sugarcane when transferred to factory Other manufacturing cost (excluding overheads) Sales of sugar Overhead expenses related to production ` 8,00,000 ` 12,00,000 ` 9,00,000 ` 23,00,000 ` 4,00,000 80,00,000 7,00,000 73,00,000 20,00,000 3,00,000 17,00,000 2,55,000 14,45,000 Computation of Taxable Income for the A.Y. 2012-13 Particulars ` (in lakh) 10,00,000 3,00,000 13,00,000 2,55,000 10,45,000 7,62,850 2,82,150

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Solution: (1) Business Income: Sales of Sugar Less: Market value of sugarcane when transferred to factory Other manufacturing cost (excluding overheads) Overhead expenses related to production ` 23,00,000 ` 12,00,000 ` 9,00,000 ` 4,00,000

Business Loss (` 2,00,000) This business loss shall have to be carried forward for adjustment, against profits from business, arising within the immediately succeeding 8 previous years. (2) Agricultural Income: Market value of sugarcane when transferred to factory Less: Cost of cultivation Question no. 13(a) The following is the profit and loss account for the year ending 31.3.2012 of XYZ (LLP) having 3 partners: Profit and Loss Account ` 48,00,000 Gross profit Profit on sales of equity shares sold after 90,000 1,20,000 60,000 2,40,000 1,80,000 2,70,000 Rent from house property Interest on bank deposits 4,20,000 Profit on equity shares sold after 17,60,000 10 months through RSE 72,50,000 1,20,000 72,50,000 60,000 10,000 2 years through recognised stock exchange 1,40,000 ` 68,20,000

` 12,00,000 ` 8,00,000 ` 4,00,000

Establishment & other expenses Interest to partner @ 15% X Y Z Salary to designated partners X Y Net profit Additional information:

(1) Establishment expenses include ` 1,20,000 on account of bonus which was due on 31.3.2012. (2) The LLP is eligible for 100% deduction under section 80-IC as it is established in notified area in Himachal Pradesh. (3) Shares were sold through recognized stock exchange and securities transaction tax of ` 1000 is included in the establishment expenses on account of the same. Compute the tax payable by the Limited Liability Firm Solution : Computation of total income of XYZ (LLP) for the A.Y. 2012-13 Income under the head house property ` Actual rent Less : Deduction 30% ` 1,60,000 48,000 ` 1,12,000

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Income from Business Net profit as per P&L A/c Less: Income credited but either exempt or taxable under other head Rent Profit on sale of shares sold after 2 years Interest on bank deposit Profit on sale of shares sold after 10 months Add : Expenses disallowed Bonus as per section 43B Securities Transaction Tax Interest to partners in excess of 12% Salary to partners Book profit Less : Salary as per section 40(b) (See working note) Short-term capital gain on sale of equity shares Income from other sources Gross Total Income Less : Deduction under section 80-IC Total income Regular income tax payable on total income (1) Short-term capital gain of ` 1,20,000 @ 15% (2) Balance total income ` 1,22,000 @ 30% Adjusted total income Total income Add : Deduction u/s Chapter VIA 2,42,000 15,05,000 17,47,000 Alternate Minimum Tax (AMT) 18.5% on ` 17,47,000 = ` 3,23,195 18,000 36,600 54,600

16,60,000 60,000 1,40,000 10,000 1,20,000

3,30,000 13,30,000

1,20,000 1,000 54,000 4,20,000

5,95,000 19,25,000 4,20,000

15,05,000 1,20,000 10,000 17,47,000 15,05,000 2,42,000

Hence, adjusted total income shall be total income and the tax (payable shall be the alternate minimum tax i.e. on ` 17,47,000 @ 18.5% + 3% (EC + SHEC). Tax payable Alternate minimum tax 18.5% on ` 17,47,000 Add: Education Cess @ 2% & SHEC @ 1% Rounded off Working Note Book profit Maximum salary allowed First 3,00,000 of book profit 90% Balance ` 16,25,000 of book profit 60% Salary allowed shall be ` 12,45,000 or ` 4,20,000 whichever is lower i.e. ` 4,20,000. 2,70,000 9,75,000 12,45,000 19,25,000 ` 3,23,195 9,696 3,32,891 3,32,890

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Question no. 13(b) D Ltd., a closely-held Indian company, is engaged in the business of manufacture of chemical goods (value of plant and machinery owned by the company is ` 55 lakh). The following information for the financial year 2011-12 are given : D Ltd. is engaged in the business of manufacture of garments. ` Domestic Sales Export Sales Amount withdrawn from general reserve (reserve was created in 1997-98 by debiting P&L A/c) Amount withdrawn from revaluation reserve Total Less : Expenses Depreciation (normal) Depreciation (extra depreciation because of revaluation) Salary and wages Wealth tax Income-tax Outstanding customs duty (not paid as yet) Proposed dividend Consultation fees paid to tax expert Other expenses Net Profit 6,16,000 2,70,000 2,10,000 10,000 3,50,000 17,500 60,000 21,000 1,39,000 13,56,500 20,00,000 7,00,000 2,00,000 1,50,000 35,50,000

For tax purposes the company wants to claim the following: Deduction under section 80-1B (30 per cent of ` 14,56,500). Depreciation under section 32 (` 5,36,000) The company wants to set off the following losses/allowances: For tax purposes ` Brought forward loss of 2004-05 Unabsorbed depreciation 14,80,000 For accounting purposes ` 4,00,000 70,000

Compute the net income and tax liability of D Ltd. for the assessment year 2012-13 assuming that D Ltd. has a (deemed) long-term capital gain of ` 60,000 under proviso (i) to section 54D(2) which is not credited in profit and loss account.

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Solution: Computation of Book Profit & Minimum Alternate Tax ` Net profit as per P&L A/c Add : Excess depreciation [i.e., ` 6,16,000 + ` 2,70,000 ` 5,36,000] Wealth tax Income tax Customs duty which is not paid Proposed dividend Total Less : Amount withdrawn from reserve (i.e., ` 2,00,000+ ` 1,50,000) Business income Less : Unabsorbed loss carried forward, now adjusted Business Income (after adjustment of carried forward unabsorbed business losses) Long-term capital gain Gross Total Income Less : Deductions under section 80-IB [30% of ` 3,14,000] (= `3,74,000 `60,000 LTCG) Net Income (rounded off) Tax liability (under normal provisions) [20% of ` 60,000 + 30% of ` 2,22,800, plus 3% of tax as cess] Computation of Book Profit Net Profit as per Profit & Loss A/c Add : Depreciation (i.e. ` 6,16,000 + ` 2,70,000) Wealth tax Income-tax Proposed dividend Less : Amount withdrawn from general reserve Unabsorbed depreciation Depreciation (normal) Amount withdrawn from revaluation reserve to the extent it does not exceed extra depreciation because of revaluation Book profit Tax liability (19.055% of ` 16,16,500) 8,86,000 Nil 3,50,000 60,000 () 2,00,000 () 70,000 () 6,16,000 () 1,50,000 16,16,500 3,08,024 13,56,500 3,50,000 10,000 3,50,000 17,500 60,000 21,44,000 3,50,000 17,94,000 14,80,000 3,14,000 60,000 3,74,000 91,200 2,82,800 81,205 13,56,500

D Ltd. will pay ` 3,08,024 as tax for the assessment year 2012-13 as per section 115JB. Tax credit is however, available in respect excess tax ( =`2,26,819 = ` 3,08,024 81,205) under section 115JB.

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Question no. 13(c) Y Ltd. is a company in which 60% shares are held by P Ltd. Y Ltd declared a dividend amounting to `45 lakhs th to its share holders for the financial year 2010-11 in its AGM held on 12 May,2011. Dividend Distribution th th Tax was paid by Y Ltd. on 14 May,2011. P Ltd declared an interim dividend amounting to `70 lakhs on 15 st October, 2011 for the year ended 31 March, 2012. Compute: (i) The amount of tax on dividend payable by P Ltd. (ii) What would be your answer, if 58% shares of P Ltd are held by K Ltd. an Indian company? (iii) Does the position change further, if K Ltd. is a foreign company? Answer: Assessee : P Ltd. Status: Residential Company 1. Principle: (a) Since P Ltd holds more than 50% of nominal value of equity shares in Y Ltd., Y Ltd is a subsidiary of P Ltd. (b) Dividends subject to Dividend Distribution Tax shall be reduced by the dividend received by the domestic company during the financial year if: Such dividend is received from its subsidiary Subsidiary has paid dividend distribution tax Domestic company is not a subsidiary of any other company 2. Computation of Dividend Distribution Tax Particulars Case I (Note 2) ` (a) Dividend declared by P Ltd (b) Less: Dividend received by P Ltd from Y Ltd, being a subsidiary [ 60% of `45,00,000] Net Dividend on which Dividend Distribution Tax is payable [(a) (b)] Dividend distribution tax @ 15% Add: Surcharge @ 5% on DDT Dividend Distribution Tax + Surcharge Add: Education Cess @ 2% on [DDT + Surcharge] Add: SHEC @ 1% on [DDT + Surcharge] Total Dividend Distribution Tax Payable Dividend Distribution Tax ( rounded off) 70,00,000 27,00,000 43,00,000 6,45,000 32,250 6,77,250 13,545 6,773 6,97,568 6,97,570 Case II & III (Note 3) ` 70,00,000 Nil 70,00,000 10,50,000 52,500 11,02,500 22,050 11,025 11,35,575 11,35,580 Previous Year: 2011-12 Assessment Year : 2012-13

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Notes: 1. 2. Dividend u/s 115-O includes all dividend except dividend u/s 2(22)(e). Hence, interim dividend is also covered u/s 115-O. Case (I) refers to dividend received by a domestic company which is a holding company of another company and is not a subsidiary of any other company. Benefit of set off of dividend received during previous year 2011-12 available as all the conditions are satisfied. Case (II) and Case (III): Domestic company is a subsidiary of another company: (a) Case (II)- P Ltd is a subsidiary of K Ltd. an Indian Company. Benefit of set-off of dividend received not available as all the conditions are not satisfied [ Refer Point No.(b) of the Principle] (b) Case (III) P Ltd. is a subsidiary of K Ltd. a Foreign Company. Benefit of set-off of dividend received not available as all the conditions are not satisfied as the Holding company should not be a subsidiary of any other company. *Refer Point no (b) of principle]. U/s 2(17), Company includes a Foreign company.

3.

Question no. 13(d) Explain briefly the consequences of opting for tonnage tax scheme. Answer: The following are the consequences: (i) (ii) (iii) (iv) (v) (vi) All deductions u/s 30 to 43B shall be deemed to be allowed Depreciation shall be deemed to be allowed. No question of unabsorbed depreciation of operating qualifying ship No benefit of Sections 70,71,72,72A,73 relates to the loss of operating qualifying ship No chapter VI deduction available on the tonnage income Book profit or loss of the tonnage tax company shall be excluded in computation of book profit u/s 115JB. In case relevant shipping income is a loss, it shall be ignored while computing tonnage income.

Question no. 14(a) Write short notes on the scheme of submission of returns through tax return preparers [Section 139B] Answer: The Tax Return Preparer shall assist the persons furnishing the return in a manner that will be specified in the Scheme, and shall also affix his signature on such return. The specified class or classes of persons for this purpose means any person other than a company or a person whose accounts are required to be audited under section 44AB (tax audit) or under any other existing law, who is required to furnish a return of income under the Act. Question no. 14(b) Write short notes on Tax Return Preparer. Answer: A Tax Return Preparer can be an individual, other than (i) any officer of a scheduled bank with which the assessee maintains a current account or has other regular dealings. (ii) any legal practitioner who is entitled to practice in any civil court in India.
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(iii) a chartered accountant. (iv) an employee of the specified class or classes of persons. (3) The Scheme notified under the said section may provide for the following (i) the manner in which and the period for which the Tax Return Preparers shall be authorised, (ii) the educational and other qualifications to be possessed, and the training and other conditions required to be fulfilled, by a person to act as a Tax Return Preparer, (iii) the code of conduct for the Tax Return Preparers, (iv) the duties and obligations of the Tax Return Preparers, (v) the circumstances under which the authorisation given to a Tax Return Preparer may be withdrawn, and (vi) any other relevant matter as may be specified by the Scheme. Question no. 14(c) Write short notes on Permanent Account Number (PAN) [Sec. 139A] Answer: Permanent Account Number (PAN) is a 10-character alpha-numeric number, allotted to an assessee by the Income Tax Department. (1) Where any person in th the following category has not been allotted a permanent account number (PAN), he should apply to the Assessing Officer within the prescribed time for allotment of a PAN (i) Every person whose total income or the total income of any other person in respect of which he is assessable under this Act during any previous year exceeded the basic exemption limit; or (ii) Every person carrying on any business or profession whose total sales, turnover or gross receipts exceeds or is likely to exceed `5 lakhs in any previous year; or (iii) Every person who is required to furnish a return of income under section 139(4A); or (iv) Every person, being an employer, who is required to furnish a return of fringe benefits under section 115WD [Sub-section (1)]. (2) The CBDT had introduced a new scheme of allotment of computerized 10 digit PAN. Such PAN comprises of 10 alphanumeric characters and is issued in the form of a laminated card. (3) All persons who were allotted PAN (Old PAN) earlier and all those persons who were not so allotted but were required to apply for PAN, shall apply to the Assessing Officer for a new series PAN within specified time. (4) Once the new series PAN is allotted to any person, the old PAN shall cease to have effect. No person who has obtained the new series PAN shall apply, obtain or process another PAN. (5) On receipt of allotment of PAN it must be mentioned on all tax payment challans, returns, correspondence. (6) Where TDS or TCS is made, the person from whom it is made must communicate his PAN to the person deducting or collecting tax. (7) Every person receiving any document relating to a transaction prescribed under clause (c) of sub-section (5) shall ensure that the permanent account number or the General Index Register Number has been duly quoted in the document. Question no. 14(d) (i) What is the due date of filling of return of income in case of a non-working partner of a firm whose accounts are not liable to be audited?

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Answer : Due date of furnishing return of income in case of non-working partner shall be 31st July of the assessment year whether the accounts of the firm are required to be audited or not. A working partner for the above purpose shall mean an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner and is drawing remuneration from the firm. (ii) Can unabsorbed depreciation be carried forward even if the return is filed after due date?

Answer : Unabsorbed depreciation can be carried forward even if the return of loss is submitted after the due date, as it is not covered under Chapter VI of set off or carry forward of losses but covered u/s 32(2).[ East Asiatic Co.(India) Pvt. Ltd. vs.CIT (1986) 161 ITR 135(Mad.)] (iii) Can a belated return of income filed u/s 139(4) be revised?

Answer: There was a difference of opinion among various courts regarding filling of revised return in respect of belated returns. However, it has been held that a belated return filed u/s 139(4) cannot be revised as section 139(5) provides that only return filed u/s 139(1) or in pursuance to a notice u/s 142(1) can be revised [ Kumar Jagdish Chandra Sinha vs.CIT(1996) 220 ITR 67(SC)]. (iv) Can a revised return be further revised?

Answer: If the assessee discovers any omission or any wrong statement in a revised return, it is possible to revise such a revised return provided it is revised within the same prescribed time [Niranjan Lal Ram Chandra Vs.CIT (1982) 134 ITR 352 (All.)] (v) Can an Assessing Officer himself allot permanent account number to an assessee?

Answer: The Assessing Officer having regard to the nature of the transactions as may be prescribed may also allot a permanent account number to any other person( whether any tax is payable by him or not) in the manner and in accordance with the procedure as may be prescribed.

Question no. 15(a) (i) Joseph engaged in profession filed his return of income for assessment year 2011-12 on 15th November, 2011. He disclosed an income of `4,00,000 in the return. In February, 2012 he discovered that he did not claim certain expenses and filed a revised return on 3 rd February, 2012 showing an income of `1,80,000 and claiming those expenses. Is the revised return filed by Joseph acceptable? Answer: Joseph is engaged in profession. The due date for filing income tax return for assessment year 201112 as per section 139(1) of the Income-tax Act is 30th September, 2011 if his accounts are required to be audited under any law. The due date is 31st July, 2011 if the accounts are not required to be audited under any law. The return was filed beyond the due date prescribed in section 139(1). The return so filed is covered by section 139(4) and the time limit is one year from the end of the relevant assessment year. The Apex court in Kumar Jagadish Chandra Sinha v. CIT 220 ITR 67 (SC) has held that a return filed under section 139(4) is not eligible for revision and hence a revised return cannot be filed. Hence, the return filed by Joseph is not valid as the original return was not filed before the due date mentioned in section 139(1). (ii) An assessee filed a return of income on 31.8.2011 in respect of Assessment year 2011-12 disclosing an income of `5 lakhs from business. It was not accompanied by proof of payment of tax due on self-assessment. Discuss the validity of such a return.

Answer :As per Explanation to sub-section (9) of section 139 a return is regarded as defective unless it is accompanied by proof of tax deducted at source, advance tax and tax on self-assessment, if any, claimed to have been paid. Therefore, the return is prima facie defective. It is not invalid at that stage. On receipt of the return, the Assessing Officer has to intimate the defect to the assessee and give him an opportunity to rectify
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the defect within a period of 15 days from the date of such intimation or within such further period which, on application by the assessee, he may, in his discretion allow. If the defect is not rectified within the said period, the return will be treated as an invalid return and the provisions of the Income-tax Act shall apply, as if the assessee has failed to furnish the return. Also, it may noted that section 140A(3) says that if an assessee fails to pay tax or interest on self assessment he shall be deemed to be an assessee in default in respect of the tax or interest or both remaining un paid and all the provisions of the Act shall apply accordingly. (iii) If an assessment is remanded back to Assessing Officer, can he introduce new sources of income for assessment? Answer: Where the assessment is set aside by the Tribunal and the matter remanded to the Assessing Officer, it is not open to him to introduce into the assessment new sources of income so as to enhance the assessment. Any power to enhance is confined to the old sources of income which were the subject matter of appeal [Kartar Singh vs.CIT (1978) 111 ITR 184 (P &H)]. (iv) Can Department make fresh computation, once the assessment is made final? Answer: It is now a well settled principle that an assessment once made is final and that it is not open to the department to go on making fresh computation and issuing fresh notices of demand to the end of all time. [ITO vs.Habibullah (S.K.) (1962) 44 ITR 809 (SC)] (v) Can an Assessing Officer make an assessment for a year other than the assessment year for which the return is filed?

Answer: It is not open to the Assessing Officer to make assessment in respect of a year other than the Assessment Year for which the return is filed. Thus, in respect of a return filed for assessment year 2010-11, assessment cannot be made for the assessment year 2011-12. [ CIT vs. Amaimugan Transports Pvt.Ltd.(1995) 215 ITR 553 (Mad.)] (vi) Can an Assessing Officer assess the income below the returned income or assess the loss higher than the returned loss? Answer: The Assessing Officer cannot assess income under section 144 for an assessment below the returned income or cannot assess the loss higher than the returned loss. (vii) Can incomplete, unsigned or unverified return lead to best judgement assessment? Answer: Incomplete, unsigned or unverified return may lead to best judgement assessment. A best judgement assessment can be made when the return is filed woefully incomplete or not signed and verified. [Behari Lal Chatterji vs.CIT (1934) 2 ITR 377 (All.) (viii) Can assessee follow different method of accounting for different businesses? Answer: If an assessee is carrying on more than one business, he can follow cash system of accounting for one business and mercantile system (accrual system) of accounting for other business. Similarly, if he had more than one sources of income under the head income from other sources, he can follow accrual system for one source of income under the head income from other sources, he can follow accrual system for one and cash system for other sources of income. Question no. 15(b) Anand and Aniket are equal members in AA & Associates. The profit and loss account of the AOP for the st year ending 31 March 2012 is as follows: Particulars Selling and administrative Expenses Interest to Anand @ 15% Remuneration:
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` Gross Profit 8,00,000 60,000

Particulars Income from house property

` 20,00,000 3,60,000

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Anand Aniket Net profit: Anand Aniket

1,50,000 1,50,000 6,00,000 6,00,000 23,60,000 23,60,000

Other information: 1. Selling and administrative expenses include ` 60,000 paid to a consultant in cash. 2. The other income/investment details of the members are given as below: Members Anand Aniket Income Source of income Investments Purchase of NSC VIII ` 30,000 Contribution to PPF ` 50,000

90,000 Interest on fixed deposit from bank 1,00,000 Interest on govt. securities

Compute the tax liability of the AOP and it members Answer: Computation of Total ncome of AOP: Previous Year 2011-2012 Particulars Net profit Add: Inadmissible payments. 1. Fees paid to consultants in cash Sec. 40A (3) 2. Interest paid to members [Sec. 40(ba)]: 3. Remuneration paid to members Sec. 40(ba) Less: Income from house property Business profits Add: Income from house property Total income Tax liability of AOP on total income Tax on slabs rates Add: Education cess 2% SHEC @ 1% Tax payable Allocation of income amongst the members: Particulars Interest Remuneration Share of divisible profit (12,60,000-60,000-3,00,000) Share of profit Share of income from house property Anand ` 60,000 1,50,000 4,50,000 6,60,000 1,80,000 8,40,000 Aniket ` 1,50,000 4,50,000 6,00,000 1,80,000 7,80,000 Total ` 60,000 3,00,000 9,00,000 12,60,000 3,60,000 16,20,000
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` 12,00,000 60,000 60,000 3,00,000 16,20,000 3,60,000 12,60,000 3,60,000 16,20,000 3,90,000 7,800 3,900 4,01,700

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Revisionary Test Paper for June 2012 Examination

Computation of Total Income of members: Particulars Share income from AOP Income from other sources: Interest on bank deposits Interest on government securities Gross Total Income Less: Deduction under Sec. 80C Total Income Tax liability of members: Tax on slab rates Add: Education Cess @ 2% on income tax Add: SHEC @ 1% Less: Rebate on share of profit at the average: (See Note below) Tax payable Tax payable rounded off to the nearest multiple of ` 10 (See. 288B) Note: Anand = `1,79,220 x 8,40,000/9,00,000 Aniket = `1,57,590 x 7,80,000/8,30,000 Question no. 15(c) Devdas Charitable Trust submits the particulars of its receipts and outgoing during the previous year 20112012. as below : (i) Income from property held under trust for charitable purposes (ii) Voluntary contribution (out of which ` 5,00,000 will form part of the corpus) (iii) Donations paid to blind charitable school (iv) Scholarship paid to poor students (v) Amount spent on holding free eye camps in urban slums (vi) Amount set apart for setting up an old age home by March 2014 ` 20,00,000 15,00,000 6,00,000 4,00,000 3,00,000 10,00,000 Anand ` 8,40,000 90,000 9,30,000 30,000 9,00,000 1,74,000 3,480 1,740 1,79,220 1,67,272 11,948 11,950 15,050 12,290 Aniket ` 7,80,000 1,00,000 8,80,000 50,000 8,30,000 1,53,000 3,060 1,530 1,57,590 1,48,097 9,493 9,490

Compute the total income of the trust for the previous years 2010-2011 and 2015-2016 if it spends ` 5,00,000 during the previous year 2014-2015 and ` 3,00,000 during the previous year 2015-2016 in setting up the old age home. Solution: (a) Computation of the Taxable Income of the trust for previous year 2011-2012/AY 2012-2013. Particulars (i) Income from property held under charitable trust (ii) Income from voluntary contributions (` 15,00,000- ` 5,00,000) Total Less : 15% set apart for future application Balance Less: Income applied for charitable purposes: (i) Donations to blind charitable school (ii) Scholarship to poor students (iii) Free eye camps in urban slums ` 20,00,000 10,00,000 30,00,000 4,50,000 25,50,000 6,00,000 4,00,000 3,00,000
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Revisionary Test Paper for June 2012 Examination

Total Amount set apart for old age home Taxable Income (b)Previous year 2015-2016 /AY 2016-2017: Amount set apart for old age home Less: 1. Amount spent during 2014-2015 2. Amount spent during 2015-2016 Taxable Income Question no. 15(d)

13,00,000 10,00,000

23,00,000 2,50,000

10,00,000 3,00,000 5,00,000 2,00,000

Happy Home Cooperative Society Ltd. furnishes the following particulars of its income for the previous year ending on 31st March 2012: (i) Interest on government securities (ii) Profits from banking business (iii) Income from purchase and sale of agricultural implement and seeds to its members (iv) Income from marketing of agricultural produce of its members (v) Profits and gains of business (vi) Income from cottage industry (vii) Interest and dividends (gross) from other cooperative societies 4,00,000 2,20,000 3,50,000 30,000 40,000 3,50,000 2,50,000

Compute Total Income of the society and calculate the tax payable by it for the assessment year 2012-2013. Solution: Happy Home Cooperative Society Ltd.

Computation of income of the for the previous year 2011-2012, Assessment Year 2012-2013 Particulars 1. Profits and gains of business or profession: a) Banking business b) Income from purchase and sale of agricultural implements and seeds to its members c) Income from marketing of agricultural produce of its members d) Profits and gains of business e) Income from cottage industry 2. Income from other sources: a) Interest on government securities b) Interest and dividends from other cooperatives Gross Total Income Less: Deduction allowable from gross total income under Sec. 8OP 1. Banking business 2. Income from purchase and sale of agricultural implement and seeds to its members 3,50,000 2,50,000 40,000 30,000 70,000 16,40,000 4,00,000 2,20,000 3,50,000 15,70,000 3,50,000 2,50,000 ` `

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3. Income from marketing of agricultural produce of its members 4. Income from cottage industry 5. Interest on government securities(not eligible for deduction) 6. Interest and dividends from other cooperative societies Total Income Computation of Tax Liability: Particulars On first ` 10,000 On next ` 10,000 On balance ` 2,40,000 Income tax payable Add: Education cess @ 2% Add: SHEC @ 1% Tax payable Question no. 16(a)

4,00,000 3,50,000 Nil 30,000 13,80,000 2,60,000 ` 1,000 2,000 72,000 75,000 1,500 750 77,250

Rate 10% 20% 30%

The following details have been supplied by the Karta, of an HUF aged 62 years. You are required to compute its total income and tax liability for the assessment year 2012-2013. Particulars (i) Profits from business (after charging ` 1,00,000 salary to Karta for managing the business). (ii) Salary received by the member of a family. (iii) Directors fee received by Karta from B Ltd where HUF holds 20% shares but he became director because of his qualifications, (iv) Rental income from house property (after deduction of municipal taxes ` 2,000). (v) Dividends (gross) from Indian companies (vi) Long-term capital gain (vii) Short-term capital gain (viii) Donation to a school, which is an approved institution, (ix) Deposits in Public Provident Fund (x) NSC-VIII issues purchased Solution: Computation of Total Income for the A.Y. 2012-13 Particulars (i) Income from house property: Gross annual value (` 78,000 + ` 12,000) Less: Municipal taxes paid Annual value Less: Statutory deduction: 30% 78,000 (ii) Profits and gains from business (iii) Capital gains (a) long-term + (b) short-term (iv) Income from other sourcesgross dividends from Indian ` 90,000 12,000 78,000 23,400 ` 78,000 15,000 80,000 30,000 1,00,000 20,000 40,000 60,000 40,000 ` 15,00,000

54,600 15,00,000 1,10,000 Nil

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The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Revisionary Test Paper for June 2012 Examination

companies: Exempt [Sec. 10(34)] Gross Total Income Less: 1. Contribution to approved savings (Sec. 80C) (i) Deposits in Public Provident Fund (ii) NSC-VIII Issue 2. Donation to recognised school: (a) Actual donation: ` 1,00,000 or (b) 10% of adjusted total income = (Gross Total Income Long Term Capital Gains All deductions under Chapter VIA excluding Sec. 80G) of ` 15,24,600 (16,64,600 - 80,000 - 60000) whichever is less, is qualifying amount. Amount of deduction: : 50% of ` 1,00,000 Total Income Computation of Tax Liability: Particulars of total income (a) Long-term capital gain (b) Balance of total income: ` 14,74,600 (i) First (ii) Between 2,50,000 5,00,000 (iii) Between 5,00,000 8,00,000 (iv) Between 8,00,000 14,74,600 Gross Tax Add: Education cess @ 2% on income tax SHEC @ 1% on income tax Tax payable Rounded off u/s 288B Question no. 16(b) Fashion Ltd., a well-diversified group, gives below its profit and loss account for the previous year 2011-2012: Particulars Manufacturing expenses Salaries/wages Cultivation expenses ` Particulars ` 9,00,000 5,50,000 4,00,000 15,00,000 Power generation/distribution expenses 4,00,000 Irrigation expenses 6,00,000 Expenses of I.U., located in backward district5,00,000 Expenses of I.U., located in free trade zone(Sec. 10A) 1,50,000 9,50,000 Expenses of I.U. (Sec. 10B) 1,00,000 Expenses of I.U. (Sec. 10C) 50,000 Provision for losses of subsidiary 4,00,000 Sundry expenses 10,000 Sale of manufactured goods 10,00,000 Sale of agriculture produce 15,00,000 Receipt from generation/distribution of power Receipt from water supply/ irrigation projects Receipt from I.U. set up in backward district in July 2004 10,00,000 Transfer from Reserve & Provision a/c, debited to profit and loss account in 2005-06 on account of free service under warranty period Sale of goods of I.U. (Sec. 10B) Sale of goods of I.U, located in free trade 2,50,000 2,50,000 3,00,000 6,74,600 Nil 10% 20% 30% 25,000 60,000 2,02,380 3,03,380 6,068 3,034 3,12,482 3,12,480 Rate of income tax ` 80,000 ` 20% ` 16,000 16,64,600

20,000 40,000 60,000

50,000

1,10,000 15,54,600

2,00,000 2,00,000
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Revisionary Test Paper for June 2012 Examination

Provision for bad and doubtful debts 2,00,000 zone (Sec. 10A) 1,00,000 Provision for bills under discount 50,000 Sale of goods of I.U. located in Northern Provision for sales tax, wealth tax against Eastern Region (NER) (Sec. 10C) 50,000 demand notice 3,30,000 Income from UTI 5,00,000 Income tax provision against demand notice3,00,000 Dividend paid on preference shares 2,00,000 Long term capital gain on sale of equity Proposed dividend on equity shares 4,00,000 shares, transaction chargeable to Transfer to general reserve 1,00,000 Securities Transaction Tax 35,00,000 Dividend Equalisation reserve 2,00,000 Penalties under direct tax laws 60,000 Goodwill written off 50,000 Depreciation 3,00,000 Amortisation of patent rights 30,000 Expenses on transfer of equity shares 20,000 Net profit 42,00,000 1,05,00,000 1,05,00,000 The following additional information is provided as below: 1. Depreciation includes, a sum of ` 1,00,000 on account of revaluation of building and plant and machinery. 2. Past year losses, before depreciation, are given below: Loss (`) 2007-2008 2008-2009 2009-2010 2010-2011 (-) 5,00,000 Nil (-) 7,00,000 (-) 5,00,000 Depreciation (`) (-) 6,00,000 (-) 5,00,000 (-) 4,00,000 Nil

Compute book-profits for the previous year 2011-2012/AY 2012-2013 for MAT under Sec. 115 JB. Solution: Computation of Book Profit for the AY 2011-2012 Particulars Net profit as per profit and loss account Add: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) Cultivation expenses Expenses of I.U. located in Free Trade Zone (Sec. 10A) Expenses of I.U. under Sec. 10B Provision of loss of subsidiary Provision for bad and doubtful debts an unascertained liability Provision for bills under discount an unascertained liability Provision for wealth-tax, sales- tax, against demand notice an ascertained liability Income-tax provision an ascertained liability to be added back Dividend paid on preference shares Proposed dividend on equity shares Transfer to general reserve Dividend Equalisation reserve Depreciation [Sec. 115JB(2)(g) w.e.f. AY 2011-2012] 4,00,000 1,50,000 1,00,000 4,00,000 2,00,000 50,000 3,00,000 2,00,000 4,00,000 1,00,000 2,00,000 3,00,000 ` ` 42,00,000

28,00,000 70,00,000

Adjusted profits

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Less: (i) (ii) (iii) (iv) Sales of agriculture produce [Sec. 10(1)] Receipt from I.U. in Free Trade Zone [Sec. 10A] Receipt from I.U. Sec. 10B Depreciation, excluding depreciation on account of revaluation of assets (v) Brought forward loss or depreciation, whichever is less. 10,00,000 2,00,000 2,00,000 2,00,000 9,00,000 9,50,000 Nil 50,000 35,00,000 35,00,000

(vi) Withdrawals from Reserve & Provision for free sale service, under warranty scheme (vii) Long-term capital gain on transfer of equity shares {Sec. 10(38)] see Note below (viii) Receipts from UTI [Sec. 10(35)] Book-profits Note: 1. Calculation of brought forward losses or depreciation: 2007-2008 2008-2009 2009-2010 2010-2011 Loss Loss/depreciation Depreciation Loss/depreciation

5,00,000 Nil 4,00,000 Nil

1. Transfer from provision for after sale service, free of cost, made during the year 2005-2006, debited to profit and loss a/c and now credited to profit and loss a/c and now credited to profit and loss a/c is an allowable deduction [Sec. 115-JB(2)]. 2. Long-term capital gain from the transfer of equity shares in a company is exempt is chargeable to securities trans action tax (STT). However, for the purposes of computing book-profits, it is not to be deducted [Sec. 10(38)]. Accordingly, the expenditure incurred for the transfer of equity shares has not been added back in computing book profits. Question no. 16(c) Classic Exporters Ltd, runs a new industrial undertaking set up in 2006-2007 which satisfies the conditions of Sec. 80-IB. Given below is the profit and loss account for the previous year 2011-2012 : Particulars Stock Purchases Salaries and wages Entertainment expenses Freights and insurance attributable to exports Travelling expenses Depreciation Selling expenses Income tax paid Income-tax penalty Wealth tax paid Custom duty payable against demand notice ` 4,00,000 23,00,000 9,70,000 1,30,000 3,00,000 2,20,000 1,50,000 1,20,000 90,000 20,000 10,000 30,000
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Particulars Domestic sales Export sales Export incentives Sec. 28(iiia)/(iiic) Profit of foreign branch Brokerage/commission/interest/ rent, etc Transfer from contingency reserve Stock

` 24,00,000 43,00,000 50,000 2,50,000 50,000 10,00,000 3,50,000

The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Revisionary Test Paper for June 2012 Examination

Provision for unascertained liabilities Provision for ascertained liabilities Proposed dividend Loss of subsidiary company Net profit You are further informed:

20,000 50,000 3,00,000 50,000 32,40,000 84,00,000 84,00,000

(i) Excise duty for 2010-2011, amounting ` 1,20,000 was paid on 15 December 2011. (ii) Depreciation under Sec. 32 is ` 2,20,000. (iii) During the year 2008-2009, contingency reserve, amounting ` 10,00,000, debited to profit and loss a/c, was added back to the extent of ` 4,00,000 in the computation of book-profits. The company has transferred the said reserve to the profit and loss a/c during the year. (iv) Brought forward business loss/depreciation: PY 2007-2008 2008-2009 Accounting purposes Loss (-) 10,00,000 (-) 2,00,000 Depreciation (-) 1,00,000 (-) 3,00,000 Loss (-) 5,00,000 (-) 1,00,000 Tax purposes Depreciation (-) 2,50,000 (-) 2,00,000

Compute the following: (a) Total income, (b) Book-profits and (c) Tax liability. Solution: Computation of Total Income for the Assessment Year 2012-2013 Particulars ` Net profit as per Profit & Loss A/c Add : Expenses debited to P/L A/c disallowed (i) Income tax 90,000 (ii) Wealth tax 10,000 (iii) Custom duty payable 30,000 (iv) Provision for unascertained liability 20,000 (v) Proposed dividend 3,00,000 (vi) Loss of subsidiary company 50,000 (vii) Income-tax penalty 20,000 Less : Allowable Expenses and wrong credits in P/L A/c (i) Withdrawals from contingency reserve (ii) Excise duty (iii) Depreciation (iv) Brokerage, commission, interest and rent, etc. Business profits Add: Income from other sources: Brokerage/ commission, etc. Aggregate Income Less: (i) Brought forward losses (Sec. 72) (ii) Brought forward depreciation [Sec. 32(2)] Gross Total Income Less: Profit from industrial undertaking Sec. 80IB: 30% of ` 15,20,000 as included in GTI Total Income ` 32,40,000

5,20,000 37,60,000

10,00,000 1,20,000 70,000 50,000

12,40,000 25,20,000 50,000 25,70,000 10,50,000 15,20,000 4,56,000 10,64,000

6,00,000 4,50,000

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(b) Computation of Book Profits for the Assessment Year 2012-2013 Particulars Net profits as per Profit & Loss A/c Add : Expenses disallowed (i) Income tax (ii) Provision for unascertained liability (iii) Proposed dividend (iv) Loss of subsidiary 90,000 20,000 3,00,000 50,000 4,60,000 37,00,000 Less : Allowable expenses and wrong credit in P/L A/c (i) (ii) Withdrawals from contingency reserve Brought forward business loss or depreciation whichever is less 2007-2008 Depreciation 2008-2009 Loss Book-Profits (c) Computation of tax liability for the Assessment Year 2012-2013 Particulars (a) Tax on Total Income (including Education Cess and SHEC) = 30.9% of 10,64,000 (b) Tax on Book Profits (including Education Cess and SHEC) = 19.055% on 30,00,000 Tax payable Notes: (i) No adjustment is required for depreciation debited to profit and loss a/c because it is not on account of revaluation of any asset. 5,71,650 5,71,650 3,28,776 ` 1,00,000 2,00,000 7,00,000 30,00,000 4,00,000 ` ` 32,40,000

(ii) MAT credit available ` (5,71,650 3,28,776) = ` 2,42,874 Question no. 17(a) A firm made the following payments of advance tax during the Financial Year 2011-12: Figures in ` Lakhs 15.09.2011 15.12.2011 15.03.2012 9.30 9.0 14.5 32.80 The income returned by the firm is ` 100 Lakhs under the head Business and ` 10 Lakhs by way of Long-term Capital Gains on sale of a property effected on 1.3.2012. What is the interest payable by the assessee u/s 234B
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Revisionary Test Paper for June 2012 Examination

and 234C of the Income Tax Act for Assessment Year 2012-2013? Assume that the return of income was filed on 31.07.2012 and tax was fully made upon self-assessment. Solution: Assessee: Firm (a) (b) Previous Year : 2011-2012 Assessment Year : 2012-2013

Interest u/s 234B = Nil [since more than 90% of Tax Payable has been paid before the end of the previous year] Interest u/s 234C Due Date Advance Tax payable Advance Tax paid Cumulative Advance tax paid before due date ` 9,30,000 Shortfall in payment of advance tax ` Nil Surplus Months Interest @ 1% pm

` 15.09.2011 30% of 30,90,000 =9,27,000 15.12.2011 60% of 30,90,000 =18,54,000 15.03.2012 100% of 32,96,000 = 32,96,000 Total

` 9,30,000

` 3,000 3

9,00,000

18,30,000

24,000

----

720

14,50,000

32,80,000

16,000

----

160

880

Note: Tax on LTCG has been considered only for the 3rd instalment as such gain had arisen only on 1.3.2011. Computation of Actual Tax Payable by the Firm: Particulars Profits and Gains of Business or Profession Capital Gains Long Term Capital Gain Total Income Tax on Total Income including Surcharge and Cess On Long Term Gain of ` 10 lakhs @ 20%+ EC @ 2%+ SHEC @ 1% On Business Income @ of ` 100 lakhs @ 30%+ EC @ 2%+ SHEC @ 1% Net Tax Payable 2,06,000 30,90,000 32,96,000 ` ` 1,00,00,000 10,00,000 1,10,00,000

Note : Tax on Business income alone considered for computation of 1st and 2nd instalment.

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Question No. 17(b): A firm made the following payments of advance tax during the previous year 2011-12 : ` in lakh September 15, 2011 December 15, 2011 March 15, 2012 The return of income is filed on 31.7.2012 showing Bonus income Long term capital gain taxable @ 20% (as on 1.12.2011) Short term capital loss arised on 10 November, `9 lacs. Compute interest payable u/s 234C. Solution: Particulars Income Less: Set-off of short term capital loss Net Income Tax rate Tax liability before surcharge Add: Education Cess & SHEC Tax liability including cess Total Tax Liability = (24.72 + 2.267) lakhs = ` 26.987 lakhs. Computation of interest payable u/s 234C Due Date Advance Tax payable Advance Tax paid Cumulative Advance tax paid before due date ` 7,00,000 Shortfall in payment of advance tax ` 41,600 ` Nil 3 Surplus Months Interest @ 1% pm Computation of tax liability for the A.Y. 2012-13. ` in lakh Business Income 80.00 ---80.00 30% 24.00 0.72 24.72 Long term capital gain 20.00 (9.00) 11.00 20% 2.20 0.067 2.267
th

7.00 7.75 11.80 26.75 ` 80 lakh ` 20 lakh

` 15.09.2011 30% of 24,72,000 = 7,41,600 60% of 24,72,000 (+) 60% of 2,26,700 = 16,19,220 15.03.2012 100% of 26,98,700 = 26,98,700

` 7,00,000

` 1,248

15.12.2011

7,75,000

14,75,000

2,55,400

Nil

7,662

11,80,000

26,75,000

23,700

Nil

237

Total
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9,147
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Revisionary Test Paper for June 2012 Examination

Question No. 17(c): During the previous year 2011-12, Mrs. X (aged 46 years) pays the following instalments of advance tax: ` On September 15, 2011 On December 15, 2011 On March 15, 2012 On March 16, 2012 6,000 22,000 16,000 18,000

Mrs.X files return of ` 7,01,000. Assessment is also completed on the basis of income returned by Mrs. X after making addition of ` 25,000 (date of assessment order : January 20, 2013). Mrs. X is entitled to tax credit of ` 12,510 on account of tax deducted at source. Compute interest under sections 234B and 234C. Solution: Interest liability under section 234B ` Income (7,01,000 + 25,000) = Tax on ` 7,26,000 Less : Tax deducted at source Assessed tax 90% of assessed tax Advance tax paid during 2011-12 (i.e., ` 6,000 + 14,000 + 16,000 + 18,000) = ` 54,000. Since advance tax during the previous year 2011-12 is less than 90% of assessed tax, Mrs. X is liable to pay interest under section 234B, i.e., on the shortfall of ` 9,690 (being ` 63,690 54,000) for 10 months (` 9,690 1/100 10) which comes to ` 969. Interest liability under section 234C Tax on ` 7,01,000 = ` 71,200 Due Date Advance Tax payable Advance Tax paid Cumulative Advance tax paid before due date ` 6,000 6,000 Shortfall in payment of advance tax ` 15,360 Surplus Months Interest @ 1% pm 7,26,000 76,200 12,510 63,690 57,321

` 15.09.2011 30% of 71,200 = 21,360 15.12.2011 60% of 71,200 =42,720 100% of 71,200 = 71,200 Total

` Nil

` 3

` 461

22,000

28,000

14,720

Nil

442

15.03.2012

34,000

62,000

9,200

Nil

92

995
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Revisionary Test Paper for June 2012 Examination

Question No.18 (a) Compute the Advance Tax payable by R from the following estimated income submitted for the previous year 2011-12. ` (1) Income from Salary (2) Rent from house property (per annum) (3) Interest on Government securities (4) Interest on bank deposits (5) Receipt from horse race (net) (6) Agricultural Income (7) Contribution towards PPF Tax deducted at source by the employer on salary is ` 9,680. Solution: Computation of Estimated Total Income for the Previous Year 2011-12 ` Income from Salary : Gross salary Less : Deduction Income from House Property : Rent received Less : (Statutory deduction u/s 24(a) @ 30%) Income from Other Sources : Interest on Government securities Interest on Bank Deposit Horse Races (Gross) Estimated Gross Total Income Less : Deduction under section 80C Total Income Estimated Tax : Step-1 : Aggregate of Agricultural income + Non-Agricultural income (90,000 + 5,08,000) = 5,98,000 Tax on : Income from Horse Race of ` 20,000 @ 30% Balance income of ` 5,78,000 Step-2 : Aggregate of Basic exemption limit of agricultural income (1,80,000 + 90,000) = 2,70,000 Tax on ` 2,70,000 Step-3 : Tax on non-agricultural income Tax under step-1 - Tax under step-2 (53,600 9,000) = 44,900 Estimated tax payable
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

3,64,000 1,80,000 5,000 3,000 14,000 90,000 10,000

3,64,000 Nil 3,64,000 1,80,000 54,000 5,000 3,000 20,000 28,000 5,18,000 10,000 5,08,000 1,26,000

6,000 47,600 53,600

9,000

44,900
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Add : Education cess @ 2% Add : SHEC @ 1% Less : Estimated TDS on salary on horse races Advance tax payable (rounded off) First installment payable by 15.9.2011 (30%) Second installment payable by 15.12.2011 (30%) Third installment payable by 15.3.2012 (balance 40%) Working notes : Computation of gross winnings from horse races : Net Amount Grossing up Tax deducted at source (Gross amount ` 20,000 Amount received ` 14,000) Question No.18 (b) 9,680 6,000

898 449 46,247

15,680 30,567 9,170 9,170 12,227

` 14,000 20,000 6,000

X Ltd. estimates its income for the previous year 2010-11 at ` 1,20,000. Besides this income, it has also earned long-term capital gain of ` 80,000 on transfer of gold on 1.12.2011. Compute the advance tax payable by the company in various instalments. Solution: Tax on ` 1,20,000 @ 30% LTCG of ` 80,000 @ 20% Add : Education cess @ 2% SHEC @ 1% ` 36,000 16,000 52,000 1,040 520 53,560 Amount payable on 1st and 2nd instalment. For the first two instalments tax on LTCG will not be taken into account as this accrued on 1.12.2011 i.e. after the due date of the first 2 instalments. ` Tax including Education Cess and SHEC payable without Long-term Capital Gain (` 36,000 + 720 +360) =`37,080 Advance Tax Payable Due Date 15.6.2011 15.9.2011 15.12.2011 15.3.2012 Tax Liability as on due date 15% of 37,080 = 5,562 45% of 37,080 = 16,680 75% of 53,560 = 40,170 100% of 53,560 = 53,560 Amount of Instalment Payable (`) ` 5,562 = 16,680 5,560 = 11,118 = 40,170 5,562 11,118 = 23,490 = 53,560 5,562 11,118 23,490 = 13,390
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Revisionary Test Paper for June 2012 Examination

Question No.18(c): Find out the amount of advance tax payable by ABC Ltd. on specified dates for the previous year 2011-12 : Business income Long term capital gain on 31-7-2011 Bank interest TDS on business income Solution : Computation of Total Income of ABC Ltd. for the previous Year 2010-11 Particulars Profits and gains of business or profession Capital gains: Long term capital gains Income from other sources: Bank Interest Total Income Computation of tax liability of ABC Ltd. for the previous year 2011-12 Particulars Income Tax rate Tax on above Add : Education cess & SHEC Tax and cess payable Less : TDS Advance tax payable Advance tax to be paid on specified dates Advance tax on LTCG Date 15.06.2011 15.09.2011 15.12.2011 15.03.2012 Total Question No. 19(a) R a resident Indian, has derived the following income for the previous year relevant to the assessment year 2012-2013. Particulars (1) Income from profession (2) Share income from a partnership in country X (tax paid in country Y for this income in equivalent Indian rupees ` 25,000) (3) Commission income from a concern in country Y (tax paid in country Y at 20%) converted in Indian rupee. (4) Interest from schedule banks.
The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

` 1,75,000 ` 3,50,000 ` 10,000 ` 19,995

Amount ` 1,75,000 3,50,000 10,000 5,35,000 Long term capital gain ` 3,50,000 20% 70,000 2,100 72,100 72,100 Advance tax on income other than LTCG Amount (a) ` Nil 32,445 21,630 18,025 72,100 Workings 15% of ` 37,170 30% of ` 37,170 30% of ` 37,170 25% of ` 37,170 Amount (b) ` 5,576 11,151 11,151 9,292 37,170 Total (a+b) ` 5,576 43,596 32,781 27,317 1,09,270 Other income ` 1,85,000 30% 55,500 1,665 57,165 19,995 37,170

Workings As LTCG occurred on 31.7.11 45% of ` 72,100 30% of ` 72,100 25% of ` 72,100

` 4,00,000 2,00,000 40,000 20,000

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R wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India does not have any Double Taxation Avoidance Agreement with countries X and Y. Solution: (a) Computation of Total Income Particulars (a) Income from business: (i) Income from profession (ii) Share income in partnership firm in country X (b) Income from other sources: (i) Interest from schedule bank (ii) Commission earned in country Y, assumed from other sources Total Income (b) Computation of tax liability : Tax on total income of ` 6,60,000 Add : Education cess @ 2% Add : SHEC @ Less : Double taxation relief : (2,00,000 + 40,000) = 2,40,000 9.99% Tax payable Tax payable to be rounded off to the nearest multiple of ` 10 (Sec. 288B) Note: (i) Average rate of tax in the foreign country 20%. (ii) Average rate of tax in India: [`65,920 x100/6,60,000] =9.99% Whichever is less, is applicable Question No. 19(b) SIPRA Constructions Ltd. is engaged in the construction of residential flats. For the valuation date 31.3.2012, furnishes the following data and requests you to compute the taxable wealth: (a) Land in urban area (construction is not permitted as per Municipal laws in force) ` 50 lakhs (b) Motor-cars (in the use of company) `10lakhs (c) Jewellery (Investment) `10 lakhs (d) Cash balance (As per books) ` 3 lakhs (e) Bank Balance (As per books) ` 6 lakhs (f) Guest House (Situated in rural area) ` 8 lakhs (g) Residential flat occupied by Managing Director (Annual remuneration of whom is `8 Lakhs excluding perquisites) ` 10 lakhs (h) Residential house let-out for 100 days in the financial year ` 5 lakhs (i) Loan obtained for: Purchase of Motor Car ` 3 lakhs Purchase of Jewellery ` 2 lakhs 64,000 1,280 640 65,920 23,976 41,944 41,940 20,000 40,000 60,000 6,60,000 4,00,000 2,00,000 6,00,000 ` `

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Solution: Assessee: SIPRA Constructions Ltd. Valuation Date: 31.3.2012 Assessment Year: 2012-13 Nature of Asset Land in Urban Area Motor-cars Jewellery Cash Balance Bank Balance Guest House Residential Flat Occupied by MD Let-out Residential House Property TOTAL ASSETS Less: Debt incurred in relation to Assets 1. Purchase of Motor-car 2. Purchase of Jewellery NET WEALTH Less: Basic Exemption Taxable Net Wealth Tax Payable @ 1% Question No.19 (c) Abhishek, a person of Indian origin was working in Austria since 1991. He returned to India for permanent settlement in May 2011 when he remitted money into India. For the valuation date 31.3.2012, the following particulars were furnished. You are required to compute the taxable wealth. The reason for inclusion or exclusion should be stated Building owned and let-out for 270 days for residence. Net maintainable rent (`1,00,000) and the Market Value (Excess of Unbuilt Area over Specified Area is 20% of the Aggregate Area) ` 30 lakhs Jewellery : (a) Purchased in April 2011 out of money remitted to India from Austria ` 12,00,000 (b) Purchased in May 2011 out of sale proceeds of motor-car brought from abroad and sold for ` 40 lakhs.
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Amount taxable (` Lakhs) NIL 10 10 NIL NIL 8 10 5 43 (3) (2) 38 30 8 8,000

Reasons Land in which construction is not permitted as per municipal laws is not an asset u/s 2(ea) Motor-car other than those used in the business of hire or held as stock-in-trade is an asset u/s 2(ea) Not held as stock-in-trade - asset u/s 2(ea) Cash as per books - not an asset u/s 2(ea) Not an asset u/s 2(ea) Asset u/s 2(ea) Asset u/s 2(ea)-since Gross Annual Salary of Managing Director is greater than ` 5 Lakhs Asset u/s 2(ea) since not let-out for a period exceeding 300 days

Revisionary Test Paper for June 2012 Examination

Value of interest in urban land held by a firm in which he is a partner `10 lakhs Bonds held in companies `10 lakhs Motor car used for own business ` 25 lakhs Vacant house plot of 480 sq. mts. (purchased in December 2003) market value of ` 20,00,000 Cash in hand ` 45,000 Urban land purchased in the year 2008 out of withdrawals of NRE Account ` 15,00,000 Solution : Assessee : Abhishek Valuation Date : 31.3.2012 Assessment Year : 2012-13 Computation of Net Wealth Nature of the Asset Value of the House Jewellery: Purchased in April 2011 Less: Exempt u/s 5(v) Jewellery Jewellery: Purchased in May 2011 Less: Exempt u/s 5(v) Interest in Urban Land held by firm Bonds held in companies Motor car Vacant House Plot (480 sq. mts.) Less: Exempt u/s 5(vi) Cash in hand Urban Land Purchased Less: Exempt u/s 5(v) NET WEALTH Less : Basic Exemption Net Taxable Wealth Tax Payable @ 1% (1) Working Notes: Valuation of Building: Net Maintainable Rent(NMR) Capitalized Value of NMR=NMR12.5 (Owner of the land) = ` 1,00,000 12.5 Add : Premium for excess of unbuilt area (20%) over specified area = 40% of CNMR VALUE OF THE HOUSE = `1,00,000 = `12,50,000 = ` 5,00,000 `18,50,000 15,00,000 (15,00,000) Nil 53,50,000 30,00,000 23,50,000 23,500 20,00,000 (20,00,000) Nil Nil 12,00,000 (12,00,000) 40,00,000 (40,00,000) Nil 10,00,000 Nil 25,00,000 Nil ` ` 18,50,000 Reasons Asset u/s 2(ea). Working Note 1 Asset u/s 2(ea). Purchased out of money brought into India Asset u/s 2(ea). Purchased out of sale proceeds of assets brought into India Deemed Asset u/s 4(1)(b) Not an asset u/s 2(ea) Asset u/s 2(ea). Not held as stock-in-trade Asset u/s 2 (ea) House/part of house/plot less than 500 sq.mts. Since not exceeding `50,000 Purchased out of money brought into India

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Question No. 19(d) From the following dated furnished by Mr. Soumitra, determine the value of house property built on leasehold land as at the valuation date 31.3.2012: Particulars Annual Value as per Municipal valuation Rent received from tenant (Property vacant for 3 months during the year) Municipal tax paid by tenant Repairs on property borne by tenant Refundable deposit collected from tenant as security deposit which does not carry any interest The difference between unbuilt area and specified area over aggregate area is 10.5%. Solution: Assessee: Mr. Soumitra Valuation Date: 31.3.2011 Assessment Year: 2012-13 Computation of Value of House Property Step I: Computation of Gross Maintainable Rent(GMR) Particulars Actual Annual Rent- ` 1,08,000 x 12 Months/9 Months Add: Municipal tax paid by the Tenant10,000 l/9th of Actual Rent Receivable as repair expenses are borne by the tenant - ` 1,44,000/9 Interest on Refundable Security Deposit- ` 50,000 x 15% x 9/12 GROSS MAINTAINABLE RENT (GMR) Step II: Computation of Net Maintainable Rent (NMR) Particulars Gross Maintainable Rent (GMR) Less: Municipal Taxes levied by the local authority 15% of Gross Maintainable Rent - `1,76,000 x 15% NET MAINTAINABLE RENT (NMR) 10,000 26,400 (36,400) 1,39,600 ` ` 1,76,000 16,000 6,000 1,76,000 32,000 ` ` 1,44,000 ` 1,40,000 1,08,000 10,000 8,000 50,000

Step III: Capitalisation of the Net Maintainable Rent (CNMR) (Assumed that unexpired lease period is more than 50 Years) NMR Multiple Factor for an Unexpired Lease Period - ` 1,39,600 10 = ` 13,96,000 Step IV: Addition of Premium to SNMR in case of excess inbuilt area: Particulars Add: Capitalisation of the Net Maintainable Asset Premium for excess of 10.5% unbuilt area over specified area-30% of CNMR Value of House Property as per Wealth Tax Act ` 13,96,000 4,18,800 18,14,800

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Question No.19 (e) Property Company Ltd. has let-out a premise with effect from 1.10.2011 on monthly rent of ` 1.5 lakh. The lease is valid for 10 years and the tenant has made a deposit equivalent to 3 months rent. The tenant has undertaken to pay the municipal taxes of the premises amounting to ` 2 lakhs. What will be the value of the property under Schedule III of the Wealth Tax Act for assessment to wealth tax? Solution : Assessee: Property Company Ltd. Valuation Date: 31.3.2012 Assessment Year : 2012-13 Computation of Value of Let-out Property Actual Annual Rent Receivable - ` 1,50,000 12 Months Add: Municipal Taxes borne by the Tenant GROSS MAINTAINABLE RENT Less: Municipal Taxes levied by the Municipal Authority Less: 15% of Gross Maintainable Rent (` 20,00,000 15%) NET MAINTAINABLE RENT Value of the Property = Capitalized Value of NMR NMR 8 (unexpired period of lease is less than 50 years) = ` 15,00,0008 = ` 1,20,00,000 Question No.19(f) Net wealth of firm consisting of three partners Bidyut, Kingshuk and Deepak in 2:2:1 and a capital contribution of ` 17 Lakhs, `13 Lakhs, and `12 Lakhs respectively is as under (a) Value of assets located outside India (b) Value of assets located in India (c) Debts incurred in relation to assets in India Determine the value of interest of the partners in the firm under the Wealth Tax Act, 1957. Solution : Assesses: Bidyut, Kingshuk & Deepak Valuation Date: 31.3.2012 Assessment Year: 2012-13 Computation of net wealth of the Firm Particulars Value of Assets located in India Less: Liability in relation to assets in India Value of Assets located outside India Net Wealth of the Firm Solution : Computation of Interest of the Partner in the net wealth of the Firm (Amount in `) Particulars To the extent of Capital Contribution Balance (Net Wealth-Capital Contribution) in Profit sharing ratio since dissolution ratio is not given Interest of the Partner in the Net Wealth of the Firm Bidyut 17,00,000 11,20,000 28,20,000 Kingshuk 13,00,000 11,20,000 24,20,000 Deepak 12,00,000 5,60,000 17,60,000
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18,00,000 2,00,000 20,00,000 2,00,000 3,00,000 15,00,000

` 30,00,000 ` 80,00,000 ` 40,00,000

` 80,00,000 40,00,000

` 40,00,000 30,00,000 70,00,000

The Institute of Cost Accountants of India (ICAI) [Statutory Body under an Act of Parliament]

Revisionary Test Paper for June 2012 Examination

Computation of the Interest of the Partner in the net wealth of the Firm on the basis of location of assets: (Interest of the Partner in the Firm apportioned in the ratio of 4:3) Particulars Assets Located Inside India Assets Located Outside India Interest of the Partner in the Net Wealth of the Firm Question No.20 (a) A company has started a new industrial undertaking in an old building purchased by it for `30,00,000 and has installed both new and second hand machinery from time to time to cope with the increase in production. The details of the machinery installed (old and new) are furnished below. It wants to know whether it is eligible to any deduction u/s 80IB, if so, for how many years? Machinery New Second hand 2006-2007 2,50,000 1,50,000 2007-2008 Additions 2,50,000 Nil 2008-2009 Additions 2,00,000 Nil 2009-2010 Additions 2,50,000 Nil 2010-2011 Additions 1,00,000 1,50,000 Balu 16,11,429 12,08,571 28,20,000 Kausik 13,82,857 10,37,143 24,20,000 Deepu 10,05,714 7,54,286 17,60,000

Answer: For claiming deduction u/s 80IB, one of the conditions is that second hand machinery used should not exceed 20% of total value of machinery and plant used in the business [Explanation 2 to Sec.80IB(2)(iii)]. Financial Years 2006-07 2007-08 2008-09 2009-10 2010-11 New Machinery (Rs) 2,50,000 5,00,000 7,00,000 9,50,000 10,50,000 Old Machinery (`) 1,50,000 1,50,000 1,50,000 1,50,000 3,00,000 Total value (`) 4,00,000 6,50,000 8,50,000 11,00,000 13,50,000 % of old in Total (`) 1,50,000/4,00,000 x 100 = 37.5% 1,50,000/6,50,000 x 100 =23.1% 1,50,000 / 8,50,000 x 100 = 17.6% 1,50,000/11,00,000 x 100 = 13.6% 3,00,000/13,50,000 x 100 = 22.2%

From the above analysis, it is revealed that cost of second hand machinery used in business has exceeded the limit of 20% in the financial years 2006-07,2007-08 and 2010-11. Hence, deductions shall be allowed only for the previous years 2008-09 and 2009-10. Question No.20 (b) Entertainment Arts of Mumbai engaged in distribution of cinematography films. It started construction of multiplex theatre and convention hall in Navi Mumbai in May 2002 and completed in January 2005. The profits for the year ended 31.3.2012 of all activities are: (i) Distribution of cinematography films `10 lakhs (ii) Convention theatre `12 lakhs (iii) Multiplex theatre `5 lakhs Compute taxable income for the assessment year 2012-13 with reasons.

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Answer: Assessee: Entertainment Arts Particulars Profits and gains from business or profession Convention centre at Navi Mumbai Multiplex theatre at Navi Mumbai Gross Total Income Less: Deduction under chapter VI-A 80-IB(7B) Convention Centre 50% of `12,00,000 Total Income 6,00,000 21,00,000 Previous Year : 2011-2012 Computation of Total Income Amount (`) 10,00,000 12,00,000 5,00,000 27,00,000 27,00,000 Amount (`) Assessment Year: 2012-2013

Note: Though the multiplex was constructed between 1.4.2002 to 31.3.2005, deduction u/s 80-IB will not be available to a Multiplex Theatre located at a place within the municipal jurisdiction of Metros (whether known as a Municipality, Municipal Corporation, Notified Area Committee or a Cantonment Board or by any other name), i.e. Kolkata, Chennai, Delhi or Mumbai. It may be noted that there is no space/ area restriction for a Convention Centre. Question No.20(c) Define Manufacture in the context of Sec. 80-IB. Answer: With retrospective effect from Assessment Year 2009-10, Manufacture means change in non-living physical object/article/thing : Resulting in a transformation of the object or article or thing into a new and distinct object or article or thing, having a different name, character and use, or Bringing into existence a new and distinct object or article or thing, with different chemical composition or integral structure. According to Sec.80-IB, the Assessee company must be engaged in the business of manufacture or production of any article or thing [Hotel & Allied Trade Pvt. Ltd 245 ITR 538, Indian Hotels Co. Ltd and others 245 ITR 538 ( SC)] Question No. 20(d) In Uttaranchal, an undertaking commenced business of manufacturing an article( other than those specified in Schedule III) and had undergone substantial expansion during the specified period. The commercial th production had started on 15 April, 2003 and during the current previous year 2011-12, made a profit of `5 lakhs. Discuss exemption available, if any. Answer: The assessee is eligible to claim an exemption u/s 80-IC, based on the location of its establishment. In th the given case, the undertaking is located in Uttaranchal and the commencement is on or after 7 January, st 2003 (specified date) and between 1 April,2012 ( last date). Deduction is available @ 100% for the first 5 years and for the next 5 years @ 30% for companies and @25% for othe` Since this undertaking is presently in 9 year of its operations, it would be eligible to claim 30% (assuming this undertaking to be a company) on the profits earned u/s 80-IC. Computation: Profit as per profit & loss account Less: Deduction u/s 80-IC @ 30% of `5,00,000 Total Income `5,00,000 `1,50,000 `3,50,000
th

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Revisionary Test Paper for June 2012 Examination

Question No. 20(e) Happy Times Entertainment Ltd. is also engaged in the business of hotel, one of which is located in a specified district having a World Heritage Site. Discuss taxability of profits. Answer: U/s 80-ID, a undertaking engaged in the business of hotels located in specified district having a world heritage site (w.e.f. assessment year 2009-10), would be eligible for deduction @100% of profits for the first 5 st st years, provided, the date of commencement is on or after 1 April, 2008 but upto 31 March,2013. Hotel means a hotel of two-star, three-star or four-star category as classified by the Central Government. Specified area means the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad. Question No. 20(f) Discuss the provisions relating to deduction u/s 80-IE, for undertakings located in North-Eastern States. Answer: U/s 80-IE, any undertaking which commences its operation during the period beginning on 1 April, st 2007 and ending before 1 April,2017 in any of the North-Eastern States to: (i) Manufacture or produce any eligible article or thing; (ii) Undertake substantial expansion to manufacture or produce any eligible article or thing; (iii) Carry on any eligible business. Deduction is available @ 100% of the profits and gains derived from the business from 10 consecutive assessment years commencing from the previous years of manufacture, production or substantial expansion. Question No.20 (g) A foreign enterprise enters into a contract for the fabrication and supply of components for machinery with X & Co., a firm in India. X & Co. in turn subcontracts the work to Y & Co (a Partnership firm) and pays it `23 lakhs during the previous year 2011-12. Discuss the liability for tax deduction at source. Answer: U/s 194C, payments to contractors (including sub-contractors) for contracts shall be subject to TDS @ 1% if the payee is a resident individual/HUF and 2% in case of other resident payees. Since the payment is made to a firm, `23 lakhs shall be subject to TDS @ 2% i.e. `46,000 Therefore, X & Co. should deduct `46,000 from the amount payable to Y & Co and pay the balance of `22,54,000. Further, the foreign enterprise is also liable to deduct TDS on its payment to main contractor @ 2%. Question No. 20(h) X Ltd. has taken a 5,000 sq.ft. flat on rent from B Ltd to set up its Branch office. The rent payable to B Ltd for the flat is ` 90,000 per month plus applicable service tax. X Ltd. wishes to know whether tax is required to be deducted at source u/s 194-I, from gross amount of rent including service tax. Advice. Answer: Service tax paid by tenant is not in the nature of income for the landlord. Hence, TDS u/s 194-I would be required to be made on the amount of rent paid/payable without including service tax. [Circular No.4/2008 dated 28.4.2008] Since the amount of rent payable exceeds ` 1,80,000, TDS is to be deducted @ 10% during the previous year 2011-12 is as follows: = ` 90,000 x 12 months x 10% = ` 1,08,000.
st

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