Mf0003 Taxation Management

Fall 2009 MBA-III SEMESTER MF0003 – TAXATION MANAGEMENT (B0769) ASSIGNMENT SET 1 – (30 MARKS) Note: Answer all the questions. Each question carries 10 marks . 1. Following are the taxable income of Sri. Akash for the previous year 2008-09 1. 2. 3. 4 5. 6 7.

Income from salary accrued in India and received in India Dividend income declared in United States but received in India Income from long term capital gains in India Interest on debentures of a company at Paris, received in India Royalty received in Paris for technical fee provided for a business carried on in London. Interest received from Vivek, a non-resident on the loan provided to him for the business carried on in India. Profit from cloth business in Malaysia Compute Sri. Akash’s total income for the assessment year 2009-10 if he is (i) Resident, (ii) Not Ordinarily Resident (iii) Non Resident.

75,000 50,000 30,000 10,000 15,000 6,000 85,000

Resident

Not Ordinarily Resident

Non Resident

Income from salary accrued in India and received in India Dividend income declared in United States but received in India

75000

75000

75000

50000

50000

50000

3.

Income from long term capital gains in India

30000

30000

30000

4.

Profit from cloth business in Malaysia

85000

-

-

5.

Royalty received in Paris for technical fee

15000

-

-

1.

2.

Fall 2009 provided for a business carried on in London. 6.

Interest received from Vivek, a non-resident on the loan provided to him for the business carried on in India.

6000

6000

6000

7.

Interest on debentures of a company at Paris, received in India

10000

10000

10000

271000

171000

171000

Total

2. Compute income from house property from the following particulars for the assessment year 2009-10 I 40,000 35,000 32,000 36,000 3 months 15,000

II 45,000 46,000 37,000 40,000 14,000

III 50,000 54,000 45,000 48,000 17,000

IV 52,500 65,000 55,000 57,000 19,000

Municipal Value Fair Rental Value Rent received Standard Rent Vacancy Period Repairs Municipal Tax: - Paid 6,000 3,500 - Due 1,800 2,400 The assessee had borrowed on 1.10.2002 Rs.3,50,000 at 14% for the construction of the second house which was completed on 31-12-2005. As on 1-4-2008 Rs.3, 00,000 was outstanding. In respect of the fourth house one month rent was unrealized. The claim was genuine and satisfied the conditions: and the recent received was for 10 months.

Preconstruction period is form 01.10.2002 to 31.12.2005i.e.,39 month (3+12+12+12) Interest for PCP = 3,50,000*14/100*39/100 =159250*1/5

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=31850 allowed for 5 years (2005-06 to 2009-10 previous years)

Computation of income from house property for the assessment years 2009-10

Rs.

Rs.

Rs.

I House: I

Expected Rent

II Actual rent receivable III Actual rent received

40,000 N.A. 32,000

G.A.V.

32,000

Less Municpal taxes paid

6,000

Annual value

26,000

Less: Standard deduction 30%

7,800

18200

II House: II Expected Rent: II Actual rent receivable III Actual rent received Gross Annual Value Less Municpal taxes paid

45,000 N.A. 37,000 37,000 3,500

Annual value

33,500

Less: Standard deduction 30%

10,050

23,450

Fall 2009 III House: Expected Rent: Actual rent receivable Actual rent received

50,000 N.A. 45,000

Gross Annual Value

45,000

Less Municpal taxes paid

NIL

Annual value

45,000

Less: Standard deduction 30%

13,500

31,500

IV House: Expected Rent: Actual rent receivable Actual rent received Gross Annual Value Less Municpal taxes paid

52,200 N.A. 55,000 55,000 NIL

Annual value

55,000

Less: Standard deduction 30%

16,500

Income from house Property

38,500 38,500

3. What is a Provident fund? Explain briefly various types of Provident Funds.

The word ‘Provident’ means to provide for the future, hence this fund is to provide for the future. This fund is created by an amount deducted from the salary of the employee every month at a certain rate. The employer also makes his own contribution to this fund. These contributions are invested to earn interest, which is also credited to the employee’s provident fund account. When an employee retires from his service,

Fall 2009

he receives this amount in lump-sum along with interest on it and is a great help to him at that time. If unfortunately, the employee dies during the tenure of his service, the amount of this fund is received by his wife and children or legal heirs, which is of great help to them. Provident funds are of four kinds: i) Statutory Provident Fund, ii) Recognized Provident Fund iii) Unrecognized Provident Fund, iv) Public Provident Fund Statutory Provident Fund. It is that Provident fund to which the Indian Provident Fund Act, 1925 applies. Generally, this Provident Fund is maintained by Government or Semi-Government offices, like local authorities, universities, other recognized educational institutions, statutory corporations and nationalized banks, etc., Recognised Provident Fund. It is a fund to which the Provident Fund Act,1952, applies. Under this scheme, any person who employs 20 or more employees is under an obligation to register his firm or organization under the provident Fund Act, 1952, and start a provident fund scheme for the employees in his organization. It is after 3 years of its establishment, that the registration should be done under this Act. There is one more alternative also. The funds which are not established under E.P.F. Act of 1952 have to be expressly recognized by the Chief Commissioner or Commissioner of Income Tax. The Chief Commissioner or Commissioner recognizes this fund only when he is satisfied that this fund fulfils certain conditions set-out in the Income Tax Act of 1961. Generally this fund is maintained by scheduled banks, factories and several business houses. Thus, this fund is maintained by private sector organizations. Unrecognised Provident Fund: It is that provident fund which is neither statutory nor recognized. Any institution or organization can maintain this fund. It is approved by the P.F. commissioner but not by the commissioner of income tax. Public Provident Fund: The Public Provident Fund Scheme was started from Ist July, 1968, under the provision of PPF Act, 1968. Every individual (including a salaried employee) can subscribe to this fund any amount being not less than Rs.500 and not more than Rs.70, 000 in year. He can also deposit money in installments which cannot exceed 12 in a year. An individual can open a public provident fund account either on his own behalf or on behalf of a minor of whom he is the guardian. However, an individual can open only one account in his own name. An account under this

Fall 2009

scheme can be opened at a branch of the State Bank of India or its subsidiaries or at a branch of any of the nationalized banks authorized for this purpose by the Central Government. A withdrawal is permissible every year from the seventh financial year of the date of opening the account, of an amount not exceeding 50% of the balance at the end of the 4 preceding year or year immediately preceding the year of the withdrawal, whichever is lower, less the amount of loan if any.PF scheme allows the assessee to withdraw the entire amount at his credit, after adjustment of the dues if any to government, on completion of 15 years after the end of the year in which the account is opened. The first loan can be taken in the third financial year, upto 25% of the amount at the credit at the end of the first financial year. This facility can be availed only before the expiry of 5 years from the end of the year in which the initial subscription was made. The loan is repayable either in lump sum or in convenient installments. The account can be transferred to any other accounts office. The interest credited to the fund and amount standing to the credit of subscribers are exempted from income tax and wealth tax respectively. Nomination facility is available. NRI are not permitted to open account under this scheme.

MBA-III SEMESTER

MF0003 – TAXATION MANAGEMENT (B0769)

Fall 2009 ASSIGNMENT SET 2 – (30 MARKS) Note: Answer all the questions. Each question carries 10 marks 1. What are the expressly disallowed expenses while computing income under the head profits and gains from business or profession?

Expenses Expressly Disallowed The following expenses are expressly disallowed by the Act while computing income chargeable under the head’ profits and gains of business or profession’. Expenditure on advertisement in any souvenir, etc. published by a political party in the case any assessee (i) Payments outside India. Royalty, fees for technical services, etc. which tax is deductible at not been paid during the previous year or in prescribed time. Shall not be allowed as a deduction. (ia) Payments to residents. any interest, commission or brokerage, fees for professional services or feeds for technical and such tax has not been deducted or, after deduction. Any sum paid on account of securities transaction tax. Any sum paid on account of fringe benefit tax . Wealth tax. chargeable under Wealth Tax Act. Tax on Profits and Gains. Any sum paid on account of any tax levied on the profits and gains of any business or profession Salaries Payable outside India or to a non-resident, if tax has not been paid thereon nor deducted at source. Payment to P.F., etc. Any payment to a provident or other funds shall not be allowed as a deduction unless it is ensured that tax shall be deducted at source from any payment made from the fund provided it is chargeable to tax Tax on perquisites of employee. 2. Write short notes: a. Unabsorbed depreciation

Unabsorbed Depreciation Depreciation allowance for a particular previous year is first deductible from the profits and gains of the business or profession. If the profits and gains of the same business

Fall 2009

or profession are insufficient for this purpose, the balance of the amount of current depreciation allowance is deductible from the profits of any other business or profession of the assessee. If the profits of any other business or profession are also unable to absorb the whole amount of depreciation allowance, the balance of such allowance which remains unabsorbed can be set-off against any other taxable income of the same year. If still, the whole amount of current depreciation allowance is not deductible on account of the insufficiency of the other taxable income, the remaining unabsorbed amount is called “Unabsorbed Depreciation”. If unabsorbed depreciation cannot be wholly set-off, the amount of depreciation not set-off shall be carried forward to the following assessment year. The unabsorbed depreciation shall be added to the depreciation allowance for the following previous year or for the succeeding previous years till such time it is fully deducted. In other words the unabsorbed depreciation shall be treated as part of the current year’s depreciation.

b. General deductions (Section 37(1) )

General deduction [Sec. 37(1) It is a residuary section: Under section 37(1), the following conditions should be fulfilled, in order that a particular item of expenditure may be deductible under this head: The expenditure should not be of the nature described in section 30 to 36. It should be in respect of a business or profession carried on by the assessee and the profits and gains of which are to be computed and assessed. It should not be in the nature of personal expenses of the assessee. It should have been paid out or expended wholly and exclusively for the purpose of such business or profession. It should not be in the nature of capital expenditure. It should relate to the previous year concerned. The following are the few examples of admissible general deduction under section 37: 1) Expenses incurred in the purchase, manufacture and sale of goods. 2) General expenses incurred in the day to day running to the business. 3) Expenses incurred in defending a case for damages for breach of contract. 4) Amount of sales-tax paid and expenses incurred in connection with sales-tax proceedings including appeals. 5) Compensation paid to an undesirable employee for the retrenchment of his services or to a director to get rid of his services. 6) Contribution made to provident fund maintained for the benefit of employees

Fall 2009

under an Act and with the previous approval of a state Government may not be allowable u/s 36(1)(iv) but allowable u/s 37(1). 7) Commission, etc. paid for securing orders for the business. 8) Compensation paid to employees in connection with injury sustained by them or accident met by them while on duty. 9) Royalties paid in connection with mines. 10) Insurance premium paid under a policy insuring its employees against injury or against liability for compensation in respect of accident to its workmen. 11) Reasonable expenses incurred commencement of the business, etc.

on

the

occasion

of

Dussehra,

Diwali,

12) Compulsory subscription or a subscription given to an association in the interest of the business. 13) Legal expenses incurred in connection with the business or profession. 14) Legal expenses incurred by a director of a company in defending a suit brought against him to challenge the validity of his election as a director; as it is incurred to save his income from the source. 15) Interest on unpaid purchase price of any business assets purchased by an assessee and put to use will be allowed. 16) Expenditure incurred to oppose nationalization or to prevent extinction of business. 17) Under executive instructions, cost of installing new telephone. 18) Normal advertisement expenditure incurred to maintain the sales. 19) Penalty paid by the assessee for saving from confiscation the good which he purchased from a third party without knowing that they had been illegally imported. 20) Amount paid by a director of a company in liquidation for compounding misfeasance proceeding started against him by the liquidator. 21) Welfare expenditure incurred by the assessee. 22) Payment of excise duty. 23) Guarantee fee paid to him Government for machinery.

loan obtained for purchase of

Fall 2009

24) Expenditure incurred in connection with alterations made in the Memorandum or Articles of Association of a company if there alterations are warranted by the changes made in Companies Act. 25) If an asseessee stand ss surety for the debt of another and it is usual in this trade to guarantee debts, any payment made as a result of such guarantee may be allowed as a business loss. 26) Professional tax levied by local authorities the payment of which is a necessary condition for the carrying on the business within the area of a local authority. 27) Rebate granted by co-operative stores to their members on the value of the purchases made by them. 28) The interest payable on arrear of cess is in the nature of compensation paid to the Government of delay in the payment of cess and not as penalty, hence it is deductible. Similarly, interest paid for delay in payment of municipal taxes is also allowable as deduction. 29) Amount spent by an assessee expenditure.

in purchasing loom hours is deductible as revenue

30) Amount paid as damages to the Government Department for delay in the execution of contracts was held to be allowable deduction, if the delay was inherent in the nature of business carried on by the assessee. 31) Annual listing fee paid to Stock Exchange by public limited company is allowable. 32) Interest levied for failure to pay installment of the assets purchased on hire-purchase basis is allowable. 33) Expenditure incurred on inauguration ceremony is allowable. 34) Expenditure incurred on foreign tour of director for purposes of expansion of business of the managed company is allowable. 35) Wife of chairman-cum-managing director accompanying him for fulfilling social aspects. Expenses incurred on foreign tour of wife are deductible. 36) Liability to pay debenture premium is to be spread over the years between date of issue and date of redemption. 37) Payment towards Flat Day Fund is deductible. 38) Cash shortage found in business at the end of the day.

Fall 2009

39) Deposit made under ‘own your telephone’ scheme. 40) Expenses in connection with income tax, sales tax proceedings

3. Mr. Radha Krishna, an individual submits the following information relevant for the assessment year 2009-10 Salary Income (computed) Income from House Property House 1 House 2 Profit & Gains of business or Profession Business X Business Y Business Z (speculative) Business A (speculative) Capital Gains Short term capital gains Short term capital loss Long term capital gains on sale of land Income from other sources: Income from card games Loss on card games Loss on maintenance of race horses Interest on securities Determine the net income of Mr. Radha Krishna for the assessment year 2009-10

Profit 54.000

Loss

17,000 23,000 7,000 14,000 15,000 19,000 8,000 12,000 24,000 6,000 9,000 4,500 3,000

Computation of total income for the assessment year 2007-08 Income 54,000

from

salary

Income from house property: House A House B -5,000 Profits and gains of business or profession Non- speculative

(+) 17,000 (-) 23,000

Fall 2009 Business A

(+) 7,000

Business B

(-) 14,000

Business C

(+) 15,000

Business D

(-) 19,000

•

It will be carried forward to the next year (-4,000)

Capital gains Short-term capital gains

8,000

Short-term capital loss

(-) 12,000

Short-term capital loss

(-) 4,000

Long-term capital gains It will be carried forward to the next year

24,000 (+) 20,000

Income from other source Income from card games (loss from card games cannot be deducted)6,000 Interest on securities 9000 Loss on maintenance of race horses C/F Net 58,000

3,000 (-)4,500 Income