Kalpesh Classes

Problem 1 (Section 28, adventure in nature of trade) (Business ID 13) (Revision ​​ / Home work)

Mr. Kalpesh Sanghavi, purchased certain agricultural lands over​​ period of 5 years. The lands were acquired immediately thereafter by the State Government. The assessees received compensation/enhanced compensation towards the acquisition of the lands. The Assessing Officer came to the conclusion that the material placed​​ on record indicated that the assessee did not have any intention to hold the lands and cultivate it therefore it will be treated as capital gains. You are required to offer your comments.

Problem 2 (Section 28, pre-commencement incomes) (Business ID 14)​​ (Revision ​​ / Home work)

The assessee company incorporated in October, 2010. Loans were obtained by it for purchase of capital equipment and for setting up the business of the company, which was manufacturing cement. The company had paid interest on all of​​ its borrowings. Besides the loan, the company had also received application money for the issue of share certificates and the application money so received was deposited with the bank as short-term deposit besides part of the borrowings. On such deposit, the company earned interest of Rs. 2,58,089. On the other hand, the amount of interest paid by the company on its borrowings was Rs. 14,32,072. The Income-tax Officer held that the interest income earned by the assessee on the amounts deposited with the bank had nothing to do with the construction activities and as such it was taxable income under the head "Income from other sources". Since the borrowing by the company was for the purpose of construction and had no relation with the earnings of interest on the deposit, the Income-tax Officer was of the view that the interest paid could not be deducted from the interest received. However, a sum of Rs. 10,000 was allowed which was considered as relatable to the earnings of the income of interest as there were certain administrative expenses incurred by the company. The Tribunal, however, held that the interest was not taxable under section 56 and that the interest received on short-term deposits with banks was to be reduced from the interest payments, while capitalising the various expenditures to capital account. You are required to discuss the correct tax treatment of interest.

Problem 3 (Section 28, pre-commencement incomes) (Business ID 15) (Revision ​​ / Home work)

The assessee was incorporated as a company​​ on May 20, 2011, for the object, among others, of taking over a tea estate as a going concern and it commenced business on June 23, 2011. In November 2011, the estate was purchased by the assessee with effect from January 1, 2011, one of the terms of the sale deed being that all income and profits from January 1, 2011, would belong to the assessee, and the assessee should pay all tax, etc., from that date. The trading results of the assessee's accounting year, showed a loss of Rs. 1,05,593. The Income-tax Officer held that the assessee was not entitled to claim the whole of this loss (which should be treated as business loss) but only a portion to the period from which it commenced business, i.e., from June 23, 2011, to year end.​​ 

Problem 4 (Section 28, scope of head of income) (Business ID 22) (Revision ​​ / Home work)

Mr. kalpesh sanghavi, which was doing business with of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set​​ up a market therein. You are required to answer whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income".

Problem 5 (Section 28, scope of head of income) (Business ID 16) (Revision ​​ / Home work)

Kalpesh Sanghavi , constructed a building on a certain plot of land, fitted it up with furniture and fixtures and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures You are required to answer whether the income realised was liable to be taxed as "business income".

Problem 6 (Section 28, scope of head of income) (Business ID 17) (Revision ​​ / Home work)

Kalpesh Sanghavi entered into a contract with the Government for executing certain works. A dispute arose between the assessee and the Government and the dispute was referred to arbitration. The arbitrator awarded a certain amount by way of compensation for work done and also awarded interest. The question is whether the interest awarded by the arbitrator was income assessable to tax.

Problem 7 (Section 28, scope of head of income) (Business ID 18) (Revision ​​ / Home work)

The assessee was a company which manufactured locomotives and locomotive boilers. For the purpose of purchasing capital goods required for its manufacturing activities, the assessee appointed the Tata Inc., New York, as its purchasing agent in the United State of America, and with the permission of the Reserve Bank remitted $ 33,850 to the agent. As the selling agent for the Baldwin Locomotive Works of America the assessee earned commission (on which the assessee paid tax on the accrual basis) and also spent in India amounts to meet the expenses of their representative. With the permission of the Reserve Bank the commission due from Baldwin Locomotive Works and the amounts by way of reimbursement of the expenses of the representative were retained in the U.S.A., in the assessee's account with the purchasing agent Tata Inc., solely for the purchase of capital goods. Out of the remittances from India the assessee had spent $ 30,283 and the balance in its accounts with Tata Inc., stood at $ 48,572 on September 16, 1949. The amount was composed of $​​ 3,567 being the balance of the remittances from India, $ 8,882 representing amounts reimbursed by the Baldwin Locomotive Works and $ 36,123 representing commission received and retained in America. On September 16, 1949, there was a devaluation in the pound sterling and in the rupee and as a result American goods became more expensive than before. The Government of India also imposed restrictions on the import of goods from the U.S.A. As further purchase of capital goods from America was rendered impossible the assessee, with the permission of the Reserve Bank, repatriated to India the entire balance in America. In the process of converting the balance into rupee currency the assessee gained a surplus of Rs. 70,147. You are required to answer the tax treatment of forex gain Rs. 70,147.

Problem 8 (Section 28, scope of head of income) (Business ID 25) (Revision ​​ / Home work)

The assessee an individual derived income from his profession as a photographer. In an all-India photography contest the assessee won the first prize and received a cash award of Rs. 30,000. He claimed that the said receipt did not bear the character of income and was, therefore, not taxable. You are required to answer whether assessee is justified or not.

Problem 9 (Section 28, scope of head of income) (Business ID 73) (Revision ​​ / Home work)

Explain in brief, the treatment as to their taxability and or allowability, in the following cases-

• A Ltd., an investment company receives dividend income of Rs. 1,00,000 on its investment in shares. It incurs interest expenditure of Rs. 2,00,000 on the borrowed ​​ capital utilized in the investment of shares.

• B Ltd. is a company engaged in the business of financing and investment in shares. It suffers loss in an amount of Rs. 3,00,000 on account of futures and options, a transaction in the form of derivatives in which the underlying asset was shares.

• C Ltd., which does not have any active business carried on by it, incurs capital expenditure on scientific research amounting to Rs. 5,00,000 that​​ relates to its subsidiary companies.

Problem 8 (Section 28, scope of head of income) (Business ID 80) (Revision ​​ / Home work)

A & Co. Ltd., a property developer and builder, disclosed unsold flats as stock in trade in its books of account as well as in​​ wealth tax return. it let out those flats and offered the same as income from house property by claiming statutory deduction under section 24 of the Act. The Assessing Officer disallowed statutory deduction and taxed the same as income from business, Decide the correctness of the action of the Assessing Officer.

Problem 10 (Section 28, benefit out of business) (Business ID 19) (Revision ​​ / Home work)

Mr. Kalpesh Sanghavi a social reformer who established a movement for the up-liftment of the masses which​​ was joined by great numbers of followers. The Assessing Officer as well as the Commissioner (Appeals) treated the gifts of Rs. 1,22,70,795 received by the assessee on his 80th birthday as his income from business and profession. You are required to answer​​ whether assessing officer and CIT (A) is justified in so assessing the income.

Problem 11 (Section 28, Non compete fees) (Business ID 20) (Revision ​​ / Home work)

The assessee was engaged in computer software business. In December, 2010, IBS entered into a​​ non-competition agreement with the assessee restraining the assessee from carrying on similar business in India. The agreement was not confined to any particular assessment year. The assessee received a consideration of $ 2.4 million which was payable in​​ 36 monthly instalments starting from January 1, 2011. IBS mentioned in its accounts, that the amount payable by it to the assessee had been capitalised and amortised at 30 per cent per year. IBS claimed depreciation allowance of 25 per cent. on the amount​​ treating it as cost incurred for acquiring commercial rights. The assessee argued before the assessing authority that the entire amount payable under the non-competition agreement had accrued to it at the time of entering into the agreement for the reason​​ that the compensation was to be paid in instalments over a period of 36 months. You are required to answer whether such compensation is taxable and if yes how ?

Problem 12 (Section 28, benefit out of business) (Business ID 26) (Revision ​​ / Home work)

The​​ assessee a dealer in cloth received Rs. 50,000 as cash equivalent of value of an ambassador car as a gift from a company under a gift scheme formulated in the company’s centenary year for having purchased suiting worth more than Rs. 8 lakhs from the company. The assessee contended that the receipt was not income, but was a gift, and that the receipt was of a casual and non-recurring nature. The assessee’s contention was rejected by the Income-tax Officer. You are required to state the correct tax treatment​​ of ​​ the said gift.

Problem 13 (Section 28, benefit out of business) (Business ID 27) (Revision ​​ / Home work)

The assessee was a film actor as also a film distributor. During the previous year he had entered into an agreement with producers of films and had received remuneration for acting in those films which were duly accounted for by him as also by the producers. The assessee’s children had received gifts from those producers. The Assessing Officer took the view that there was a pattern of the assessee’s children receiving gifts from the producers. He treated the amounts gifted to the children as additional remuneration of the assessee. The assessee is of the opinion that amounts gifted to the children by the producers were not to be treated as the assessee’s income. You are required to discuss the correct position of law.

Problem 14 (Section 28, benefit out of business) (Business ID 28) (Revision ​​ / Home work)

The company X had let out a portion of its commercial premises in Bombay and Hyderabad to its​​ sister concern for which the assessee received non-interest bearing security deposit. The assessee also received annual rent for both the properties from the concern. The Assessing Officer held that the arrangement was a collusive arrangement between the two sister concerns and that the assessee had received lesser rent vis-a-vis the market rent from the concern. Thus reasonable amount in opinion of the officer was chargeable to tax by virtue of 28(iv). You are required to answer whether he is justified in​​ so doing.

Problem 15 (Section 28, keymans insurance policy) (Business ID 21) (Revision ​​ / Home work)

M/S. XYZ is a firm with X, Y & Z as equal partners, Mr. X is looking after the entire operations of the firm and Mr. Y & Mr. Z are sleeping partners. The​​ firm proposes to undertake insurance policy for insuring the firm against the losses due to any unprecedented eventuality to Mr. X under any Keyman Insurance Scheme. The firm will be required to pay annual premium on such policy. Is such premium payable by​​ the firm an allowable expenditure ?​​ 

“Key​​ to​​ success​​ is​​ only​​ writing​​ practice.”

CA Kalpesh Sanghavi

Fundamental computation Questions

Problem 1 (Business Computation Basics) (Business ID 48)

Mr. Kalpesh Sanghavi, a retail trader of Cochin gives the​​ following Trading and Profit & Loss Account for the Year ended 31st March, PY.​​ 

Additional Information:

• It was found, some stocks were omitted to be included in both the Opening and Closing Stock:​​ the values of which were- Opening Stock – Rs. 9,000; Closing Stock – Rs. 18,000

• salary includes Rs. 10,000/- paid to his brother, which is unreasonable to the extent of Rs. 2,000/-

• The whole amount of printing and stationery was paid in cash.

• The depreciation provided in the profit and loss account Rs. 1,05,000/- was based on the following information,​​ 

The written down value of plant and machinery is Rs. 4,20,000/-. A new plant falling under the same block of depreciation of 15% was bought on 01.07.PY for​​ Rs. 70,000/- two old plants were sold on 01.10.PY for Rs. 50,000/-

• Rent and rates includes sales tax liability of Rs. 3,400/- paid on 07.04.AY.

• Other business receipts include Rs. 2,200/- ​​ recovery of excess expense paid on account of printing and​​ stationery to shyam Stationey & co 12 years back.

• Other general expenses included Rs. 2,000/- paid as donation to a public charitable trust.

• Assessee has incurred expenditure relating to exempt income and the same was charged to personal account and not debited to the P & L account.

• He has plan to purchase one residential house at pune from Mr. Ram for Rupees 55 Lakhs.

• There was an earthquake in Nepal, so local persons of his locality were collecting old household items to be forwarded to Nepal to help the​​ victims. In that regards one of his customer paid him Rs. 10,000 and requested him to buy kids garments and then forward it to Mr. Shyam who was in turn providing honorary services to help victims of earthquake.

You are required to​​ 

• Compute his business​​ income.

• Advice whether he can offer his business income u/s. 44AD.

• Advise him regarding precautions that he should take for the purpose of getting clear title of the house at pune from the taxation point of view.

“Key​​ to​​ success​​ is​​ only​​ writing​​ practice.”

CA Kalpesh Sanghavi

Problem 2 (Business Computation Basics) (Business ID 45)

Following is the Profit and Loss account of Mr. Kalpesh Sanghavi for year:

Following additional information is furnished:

Repairs on building includes Rs. 95,000 being cost of raising a compound wall for the own business premises. Interest payments include interest​​ payable outside India to a resident Indian on which TDS has not been deducted of Rs. 12,000 and penalty for contravention of Central Sales Tax Act of Rs. 24,000. Assessee has incurred expenditure relating to exempt income and the same was charged to personal account and not debited to the P & L account.​​ 

During the course of the assessment assessing officer has demanded the ledger copy of “Repairs on building”, bank book and bank statement, with the view to verify the correctness of the entries in books of​​ accounts. However assessee is not able to produce the same for the reason that books of accounts are seized by GST authorities.​​ 

You are required to​​ 

• Compute the income chargeable under the head ‘Profits and gains of business or profession’ .

• Advise​​ whether assessing officer is justified in asking for ledger copies, bank book and Bank statement.

• What are remedies available to officer to ensure that books of accounts are made available to him for the purpose of the assessment.

Problem 3 (Business Computation Basics) (Business ID 46)

Shri.Narayanasamy is a Chartered Accountant practicing at Manglore. The following is the analysis of his receipts and payments for the year up to his date of death:

Compute Shri​​ Narayanasamy’s gross total income after taking into account, the following:

• Silver coin received from clients during the course of profession is worth Rs. 5,000/-

• Allowable rate of depreciation on motor car is 15%;

• Municipal value of the house property is Rs. 42,000. This house was self occupied for residence for 4 months during the year.

• Assessee has incurred expenditure relating to exempt income and the same was charged to personal account and not debited to the P&L account.

• Kashmir tour with wife, 5 children and 2 servants would reasonably cost Rs. 50,000 in view of the assessing officer.

• Personal drawings is considered short by Rs. 50,000 by officer considering status and style of the living of assessee.

• Penalty is paid to customs authority for the non​​ declaring of gold that he has brought from dubai. He visited dubai for professional work but the foreign trip expenses are not recorded in books. Dubai travelling expense considered reasonable is Rs. 65,000.

• Misc. Office expenses includes stationery expense, at the end of the year when he was taking the inventory of his stationery the court fee stamp of Rs. 220 were found to be short / lost. Officer is of the view that it should not be allowed as deduction since it is not used for professional purposes.

• During the course of assessment officer observed that he had taken one loan from Mr. Ghotala which is bogus. Mr. Ghotala has given statement to officer that he is a name lender and not a money lender. Amount of loan appearing in books if Rs. 60,000 and interest provided in past is 6,000. Closing balance is 66,000.

• During the year he had constructed house in his village whose cost of construction is Rs. 350,000 assessing officer does not have any doubt about genuineness of the cost of construction.

Additional Information

Shri Narayanasamy has died on 21st​​ of March. In his will he has appointed Mr. A (advocate) as executor of the will, and all of his assets and liabilities are bequeathed to his Mr. S (Son of Shri Narayanasamy). After his death arrears​​ of professional fees Rupees 76,500 is received by Mr. A on 31st​​ of March and it is distributed 100 % to Mr. S on 4th​​ of April.​​ 

You are required to​​ 

• Compute the business income of the assessee indicating the period for which it is computed.

• Explain how the assessment of monies received after the death of Shri Narayanasamy will be brought to assessment to income tax.

• Explain the provisions of legal heirs and executors as much it relates to income tax assessment.

• Explain the scope of imposition of penalty on the assessee with respect to 269SS and 269T.

Problem 4 (Business Computation Basics) (Business ID 47)

K (age 26 years), a leading tax consultant, who maintains books of account on cash on basis furnishes the following particulars of income and expenditure:​​ 

Car is partly used for official purposes (40%) and partly for private purposes (60%).

During the course of the assessment officer came to know that he has got professional opportunity at Dubai and he is planning to leave India. Assessing officer has issued him notice for the purpose of section 174.​​ 

You are required to​​ 

• Determine the​​ taxable income of K.​​ 

• Discuss the tax obligation associated with the provisions of 269SS and 269T.

• Discuss whether action of officer issuing notice of 174 is justified.

• Discuss duties of Mr. K associated with his departure outside India.

Depreciation​​ 

Problem 1 (Depreciation Basics) (Business ID 32) (Revision ​​ / Home work)

A Company paid the full consideration for building acquired for its administrative office and occupied the same as the possession was taken. The registration could not take place before the end of the previous year for some reason or other. Can the depreciation claim be made?

Problem 2 (Depreciation Basics) (Business ID 33) (Revision ​​ / Home work)

A Ltd wants to claim depreciation on technical know how acquired in August for manufacture of a new product for its business at a lump sum cost of Rs.12 ​​ Lakhs. Comment.

Problem 3 (Depreciation Basics) (Business ID 34)

​​ From the following figures, you are required to ascertain depreciation admissible and other liabilities, if any, -

Company has two set of plant and machinery, and when one is idle and other is working.​​ 

Plant and Machinery was under maintenance and repairs for 20 days during the year.

Problem 4 (Depreciation Basics) (Business ID 35)

Vinai​​ Ltd​​ acquired a pressing machine for Rs. 10,00,000. it had incurred Rs. 1,50,000 towards trial​​ run expenses in​​ buying​​ steel plates and pressing tools etc, The product generated during the trial run was sold for Rs. 40,000. Compute the cost of the machine for the purpose of charging depreciation. What​​ will​​ be the cost if the trial run income amounted to​​ Rs.2,00,000 ?

Problem 5 (Depreciation Basics) (Business ID 49)

Compute the quantum of depreciation available under section 32 and any other benefit available in respect of the following items of plant and machinery purchased by X Ltd , which is engaged in the manufacture​​ of textile fabrics​​ 

Except new imported machinery, all other items were installed during the​​ year.

​​ X Ltd has commenced operation during the year.

Problem 6 (Depreciation Basics) (Business ID 50)

X purchases a machine for Rs. 3,00,000 on December 15, 2012. It is put to use on the same day. It is eligible for depreciation @ 15 per cent. He transfers this machine to Y on January 1, 2014 for Rs, 3,20,000 (FMV on that date : Rs. 2,50,000) Y uses the machine for his business purpose. Y again transfers it back to X on November 15, 2014 for Rs. 3,10,000.

Compute the amount of allowable depreciation and​​ of chargeable capital gain, if any, assuming that this is the only machine in the block of asset held by both the X and Y.​​ 

Problem 7 (Depreciation Basics) (Business ID 51)

XYZ Ltd. purchased a machine on April 1, for Rs 10 crore by availing 70 per cent loan facility from bank. The machine was required for extension of the business of the company and was put to use into effective production on February 1,. Interest on loan is charged at 12 per cent per annum. Advice XYZ Ltd. on the treatment of interest payment made on this loan and depreciation allowable for the year. Assume that this machine is the only machine in the related block of assets.​​ 

Problem 8 (Depreciation Basics) (Business ID 52)

X ltd. was incorporated on for manufacture of tyres and tubes for motor vehicles. The manufacturing unit was set up on April 30,. The company commenced it manufacturing operations on May 1,. The total cost of the plant and machinery installed in the unit is Rs. 100 crore. The said plant and machinery included second hand plant and machinery bought for Rs. 10 crore and new plant and machinery for scientific research relating to the business of the assessee acquired at a cost of Rs.10 crore.

Compute the amount of depreciation allowable under section 32.​​ 

Furnish explanations in support of your computation.​​ 

Problem 4 (Depreciation Basics) (Business ID 53)

XLtd. transferred its fertilizers business to a new company Y Ltd. by way of demerger with effect from appointed date as April 1, after satisfying the conditions of​​ demerger. Further information given:

• WDV of the entire block of plant and machinery held by X Ltd., as on April 1, is Rs. 100 crore.

• Out of the above, WDV of block of plant and machinery of fertilizer division is Rs. 70 crore.

• X Ltd. has brought forward unabsorbed depreciation of Rs. 50 lakh.

On the above facts:​​ 

You are required to explain the provisions of the income-tax as the allowability of depreciation of post-merger in the hands of X Ltd., ad Y Ltd., duly calculating the depreciation.​​ 

State how the​​ unabsorbed depreciation has to be dealt with ?

Problem 9 (Depreciation Meaning of Actual cost) (Business ID 36)

A car purchased by S on 10th​​ august of preceeding year for Rs. 3,25,000 for personal use is brought into the business of the assessee on​​ 01.12.PY, when its market value is Rs. 1,50,000. Compute the actual cost of the car and the amount of depreciation assuming the rate​​ of​​ depreciation to be 15%.

Problem 10 (Depreciation Meaning of Actual cost) (Business ID 37)

Doctor Kalpesh Sanghavi​​ purchased a house property two years back in January for Rs. 10,00,000. Till 1.5.PY, it was self-occupied as a residence. On this date, the said building was brought​​ into use for the purpose of his medical ​​ profession. ​​ What would ​​ be the depreciation assuming​​ that he owns no other building. ​​ Another house gifted​​ to him by his​​ father, who had​​ purchased the same three years back in the month of may​​ for​​ Rs. 9,00,000 ?

He is offered a position of a trustee in a Sanghavi and Sons Trust, having a tax liability of 100,000. Sanghavi and Sons Trust has already two other trustee Mr Patel and Mr Raj. He wants to know his tax obligations in case he decides to take up the position of being a trustee in this trust.

Problem 11 (Depreciation Meaning of Actual cost) (Business​​ ID 38)

How​​ will you​​ deal with the following​​ issues in the computation of Income from business?​​ A Company imported machinery on 15-09-PY​​ at​​ a cost of​​ Rs.10 Crores. The Custom Duty payable thereon was 20%, The Company claimed Input Credit of Rs. 1 Crore. The​​ rate of depreciation on the machinery is 15%. Assuming that it​​ was put​​ to​​ use​​ on 15-10-PY, what is​​ the​​ depreciation allowable​​ on the machinery.

Problem 12 (Depreciation Meaning of Actual cost) (Business ID 39) (Revision ​​ / Home work)

A Company was a lessee of an old building. Under an agreement with the Lessor, it demolished the old building and built a new building on the same site at a cost of Rs.10 Lakhs and was permitted to reoccupy the new building on the same site at a cost of Rs.10 Lakhs, and was permitted to reoccupy the new building for a further period of 20 years at the old rent. It claimed the expenditure of Rs.20 Lakhs as revenue expenditure. How will you deal with the above ?

Problem 13 (Depreciation Meaning of Actual cost) (Business ID 40)​​ (Revision ​​ / Home work)

Certain members of the Thakkar family entered into a partnership to carry on business in the name of Ashwin Vanaspati ​​ Industries. Later on the firm was dissolved and was incorporated with all ​​ the shareholders being erstwhile partners, viz., belonging to the Thakkar ​​ group. Upon the transfer the assets were taken over at price higher then the 20 % value of the assets and company claimed the depreciation at enhanced cost. You are required to answer whether company is justified in so​​ doing or not.

Problem 14 (Depreciation, Block Adjustment) (Business ID 41)

X & Co, a sole proprietary concern,​​ was converted into a Company on 31.08.PY Before the conversion, the sole proprietary concern had a block of Plant & Machinery (Rate of Depreciation 15%), whose opening WDV 01.04.PY was Rs.3,00,000. On 01.04.PY itself, a new plant of the same block was purchased for Rs. 1,20,000. After conversion, the Company has purchased the same type of Plant on 01.01.PY for Rs. l ,60,000. Compute the depreciation that would be allocated between the sole proprietary concern and the Successor Company.

Problem 15 (Depreciation, Block Adjustment) (Business ID 42) (Revision ​​ / Home work)

V Ltd. is a mill, producing silk fabrics. A fire broke out in the premises of the mills as​​ a​​ result of which the entire block of assets consisting of plant, machinery etc., was destroyed. The​​ written down value of the plant and machinery at the beginning of the year was Rs. 8 Lakhs. The original cost of which was Rs.12 Lakhs, it received a sum of Rs ​​ 15 lakhs from the insurance Co., in​​ full​​ settlement of its claim, which included a sum of Rs 2​​ lakhs compensation for the loss of profits due to the closure of the mill. Discuss the tax incidence on the receipt of Rs. 15,00,000.​​ 

Problem 16 (Depreciation Foreign Exchange Fluctuation) (Business ID 43)

U​​ & I​​ Ltd​​ purchased a machinery from Germany for USD​​ 1,00,000​​ on​​ 03rd​​ November of preceeding year​​ by​​ borrowing​​ from East West​​ Bank Ltd,​​ The​​ rate​​ of exchange on the date of acquisition was Rs.43.00.​​ The​​ assessee (U & I), took a forward exchange rate on 05.10.PY​​ when the rate​​ specified in the contract was​​ Rs.45​​ per USD. Compute depreciation for the previous year and year before that.

Problem 17 (Depreciation, sale of assets) (Business ID 44)

In the case of Veeresh, there are 2 lorries at the beginning of the year used in transport business. The written down value as on 01.04. of lorry A is Rs. 7,00,000 and lorry B is Rs. 5,00,000. During the year lorry C is purchased on 10.12. for Rs. 10,00,000. Rate of depreciation applicable is 30%. On 28.03., lorry A is sold for Rs. 8,00,000.​​ 

Determine the amount of depreciation available to the assessee for the year. What will be your answer if instead of selling lorry A, lorry C is sold for Rs. 8,00,000 ?

Tea / Rubber / Coffee development account

Problem 1 (Section 33AB Tea Development account) (Business ID 02)

R​​ Ltd. is engaged in the business of growing and manufacturing tea in India. For the previous year its composite business profits before allowing deduction u/s 33AB are Rs. 60,00,000. On 1-9-AY (before due date of filing of return) it deposited a sum of Rs.​​ 11,00,000 in the Tea Development Account. Two years back it has incurred a business loss of Rs. 14,00,000 which has been carried forward. on 25-1-AY, it withdraws Rs. 10 lakh which is utilised as under:​​ 

Rs. 6,00,000 for purchase of non-depreciable asset as per the scheme specified.

Rs. 3,00,000 for purpose other than specified in the scheme.

Rs. 1,00,000 was spent for the purpose of scheme.

• Compute the business income of R Ltd.

• What are the tax consequences of money misutilised / not utilised?

• What will be​​ the consequence if the asset which was purchased for Rs. 6,00,000 is sold for Rs. 8,00,000 after 18 months.

Problem 2 (Section 33AB Tea Development account) (Business ID 30) (Revision / Home work)

The business profit of T Ltd., a tea growing and manufacturing company, is 120 lacs (before deduction under section 33AB) for the year. It deposits 50 lacs with NABARD for claiming deduction under section 33AB. It wants to claim set – off of brought forward business loss of 40 lacs. Find out the taxable income of T Ltd..​​ 

Problem 3 (Section 33AB Tea Development account) (Business ID 54) (Revision / Home work)

X Ltd., is a company engaged in the business of growing , manufacturing and selling Tea. For the accounting year, ​​ its composite business profits, before an adjustment under section 33AB were Rs. 60 lakh. In the year, it deposited Rs. 25 lakh with NABARD.

The company has a business loss of Rs. 10 lakh brought forward from the previous year.

The company withdrew in February, Rs. 20 lakh from the deposit account to buy a non-depreciable asset for Rs. 18 lakh and could not use the balance before the end of the accounting year. The withdrawal and the purchase were under a scheme appeared by the Tea Board.

The non-depreciable assets were sold next year for Rs. 29​​ lakh.

Indicate clearly the tax consequences of the above transactions and the total income for the relevant years.

Problem 4 (Section 33AB Tea Development account) (Business ID 29)​​ 

Laxmi Tea Limited is engaged in growing and manufacturing tea in Assam and West Bengal. The company’s profit and loss account for the year shows a net profit of 550 lacs after debiting or crediting the following amounts:​​ 

• Depreciation 40 lacs.​​ 

• Interest amounting to 2 lacs on term loan from a bank for purchase of machinery​​ for one of its tea factories.​​ 

• Repairs to factory building amounting to 15 lacs for which a sum of 10 lacs was withdrawn from Tea Deposit account maintained with National Bank for Agricultural and Rural Development (NABARD) as per section 33AB of the Income-tax Act, 1961.​​ 

• Profit from sale of green tea leaves plucked in own gardens 20 lacs.​​ 

• 5 lacs on account of stamp duty and registration fees for the issue of bonus shares.​​ 

• 10 lacs, being sales tax dues of earlier years determined during the year on disposal of appeals by the appellate authority, for which (the company has furnished a bank guarantee to the Commercial Tax Authority.​​ 

• 5 lacs written of as bad in respect of a trade debt transferred from Saraswati Tea Limited 2 years back pursuant to a scheme​​ of amalgamation approved by the jurisdictional High Court.​​ 

• 2 lacs contributed to Employees Welfare Trust.​​ 

• Interest on inter-corporate deposit 1 lac and 1.50 lacs for February and March, for which tax deducted at source was paid to the Central Government​​ in June AY.​​ 

Following additional information are furnished by the management:​​ 

• Depreciation as per Tax Audit Report under section 44AB 55 lacs.​​ 

• One financial institution converted arrear interest of 10 lacs into a new loan 3 years back, which is repayable in five annual instalments. The company has paid 2 lacs towards the instalment due for the year.​​ 

• A sum of 250 lacs deposited in NABARD on 15th June, AY as per the provision of Section 33AB.​​ 

Compute total income of the company stating the reasons of​​ each item. Ignore provision relating to Minimum Alternate Tax.​​ 

“If you have​​ youtubed yourself​​ and done​​ oral study​​ remember you are doing a big mistake.”

CA Kalpesh Sanghavi

Scientific Research / Other allowance​​ 

Problem 1 (Section 35 Scientific​​ research) (Business ID 03)

R purchased an asset for scientific research for Rs. 15,00,000 in the previous year 2014-15. During the previous year, the said asset is ceased to be used for scientific research.

The following information is also submitted to you:

The scientific research asset if used for business shall be eligible for depreciation @ 15%.

Compute the total income if the​​ scientific research asset is sold for Rs. 25,00,000 assuming:

• It is sold without using for business;

• It is sold after using for business.

Problem 2 (Section 35 Scientific research) (Business ID 04)

Business income of R Ltd. before allowing expenditure on​​ scientific research for the year is Rs. 2,50,000. The company has incurred the following expenditure on scientific research during the previous year.

Compute the deduction available on account of Scientific Research assuming the company does not have any other income.

Problem 3 (Section 35 Scientific research) (Business ID 61)

A company engaged in manufacturing​​ of pharmaceutical products, commenced its business on April 1. During the last 3 financial year, it had incurred Rs. 2 lakh annually as expenditure on salaries and purchase of new raw materials for the purpose of research connected with its business. For the year it Incurred scientific research revenue expenditure of Rs. 2 lakh and a capital expenditure of Rs. 3.5 lakh on purchase of plant and machinery. Since the result of the research was unsuccessful, the company sold its plant and machinery on December​​ 31, for Rs. 8 lakh and closed its research activity. Compute the admissible deduction under section 35.

Amortisation of Expense​​ 

Problem 4 (Section 35D Amortisation of Expense) (Business ID 09)

• Compute the deduction allowable under section 35D on the basis of the following information submitted to you.

• What will be your answer if the above preliminary expense have been incurred by R Ltd. & the capital employed is Rs. 46,00,000.

“Key​​ to​​ success​​ is​​ only​​ writing​​ practice.”

CA Kalpesh Sanghavi

35AD Specified Business​​ 

Problem 5 (Section 35AD Specified business) (Business ID 08) (Revision ​​ / Home work)

R ltd. constructed a building and started operating a hotel of 3 star category w.e.f.​​ 1-4. The company incurred the following expenditure in this connection.

Compute the deduction available under section 35AD.

Problem 6 (Section 35AD Specified business) (Business ID 01)

On April 1, X Ltd. commences the​​ operation of a warehousing facility in Andhra Pradesh for storage of agricultural produce. The following information is available from the records of company –

Profit and loss account for the year

Out of other​​ operating expenses, a payment of Rs. 40,000 is made in cash. Other operating expenses are deductible under section 37. Find out the taxable income of X Ltd. on the assumption that X Ltd. has the following income from other sources – income from the business of commission agency: Rs. 20,15,000 (computed under the provisions of the income – tax Act) and dividend from a foreign company in Australia : Rs. 50,000. (TDS in Australia Rs. 10,000).​​ 

Problem 7 (Section 35AD Specified business) (Business ID 56)

X Ltd. commences its operation of the business of laying and operating a cross country natural gas pipeline network for distribution on July 1,. The company incurs a capital expenditure of Rs. 300 lakh (including cost of land Rs. 45 lakh and cost of financial​​ instrument Rs. 5 lakh) during the period 2 years before June 30,. The company did not claim deduction for such expenditure in the earlier assessment years. The entire expenditure is capitalised on July 1,. Further, during the previous year, the company incurs capital expenditure of Rs. 200 lakh exclusively for the said business.

• Compute the amount of deduction allowable under section 35AD assuming that the company has fulfilled all the conditions specified in section 35AD.

• If the company has loss from such​​ business 2 years back, how the same is to be set off and carried forward?​​ 

Telecom Rights

Problem 1 (Section 35ABB Telecom Rights) (Business ID 05)

R Ltd. obtained a licence to operate telecommunication services from Department of Telecommunication on​​ 5-6-2010 for a period of 11 years i.e. till 4-6-2021 for a sum of Rs. 13,20,000. Calculate the amount of deduction available to the company under section 35ABB for the various previous year assuming:-

• The payment of the entire licence fee is made on the​​ date of acquisition of the licence;

• Rs. 4,00,000 was paid on the date of acquisition, Rs. 2,50,000 was paid on 15-10-2010 and balance Rs. 6,60,000 will be paid in two equal installments of Rs. 3,30,000 each during previous year 2011-12 and 2012-13.

Problem 2 (Section 35ABB Telecom Rights) (Business ID 06) (Revision ​​ / Home work)

How would you treat the following:

Licence acquired for Rs. 24 lakhs on 1-4-2008 for 12 years

WDV as on 1-4-2010 Rs. 20 lakh

Part of licence sold for Rs. 12 lakh

Problem 3 (Section 35ABB Telecom Rights) (Business ID 07)

A licence for operating telecommunication service was acquired on 1-4-2010 by R Ltd. for 18,00,000. The licence was to remain in force for 12 years and payment of entire 18,00,000 was made in the previous year 2010-11. The assessee sold the entire licence on 17-12-2012 for:

• Rs. 12,00,000

• Rs. 17,80,000

• Rs. 20,00,000

How will the above transaction of sale be treated under Income Tax ?

Problem 4 (Section 35ABB Telecom Rights) (Business ID 55) (Revision ​​ / Home work)

X​​ Ltd. to provide telecom services in Mumbai, obtained a license on April 11, 2012 for a period of 10 years ending on march 31, 2022 against a fee of Rs. 27 lakh to be paid in 3 installments of Rs. 10 lakh, 9 lakh and 8 lakh by April 2012, April 2013 and April 2014 respectively. Explain how the payment made for license fee shall be dealt and work out the amount if any, deductible in this respect out of income chargeable to tax for assessment year 2015-16 and subsequent years.​​ 

Other Deductions from Business​​ Income​​ 

Problem 1 (Section 36 ​​ Other Deductions) (Business ID 10)

For the year, the business income of R ltd. before allowing expenditure on family planning is Rs. 2,00,000. The company had incurred the following expenditure on family planning amongst its​​ employees during the year:

• Revenue expenses on family planning Rs. 1,10,000

• Capital expenditure on family planning Rs. 6,00,000

Compute the deduction available for expenditure on family planning to the company assuming the company has income from other​​ sources amounting to Rs. 20,000.

Baddebts for Banks and Financial Institution​​ 

Problem 2 (Section 36 ​​ Other Deductions) (Business ID 11)

XY Ltd., a public financial institution, is eligible for claiming deduction under section 36(1)(viia). Its business​​ income (before claiming this deduction) for the previous year is Rs. 160 lakh. Provision for bad and doubtful debts account has an opening balance of Rs. 1 lakh. XY Ltd. wants to write off Rs. 14 lakh during year on account of bad debts. Compute the amount​​ of deduction under section 36(1)(vii) / (viia). What are the formalities the taxpayer is required to complete ?

Problem 3 (Section 36 ​​ Other Deductions) (Business ID 12)

X Ltd. is a financial corporation for the purpose of section 36(1)(viii). Income of​​ the taxpayer for the previous year from different sources is as follows-

Compute the amount of deduction under section​​ 36(1)(viii) for the assessment year taking into consideration the following data

• Paid-up capital and general reserve on March 31,: Rs. 610 lakh.

• Opening Balance standing to the credit of special reserve account: Rs. 1,050, lakh (and the same was allowed as​​ deduction in the earlier years).

• Amount transferred to special reserve account is Rs. 220 lakh.

Will your answer be different if, X Ltd. withdraws the following amount from the special reserve account

• Rs. 55 lakh on May 10, AY; and

• Rs. 20 lakh on June 10, ​​​​ AY

Problem 4 (Section 36 ​​ Other Deductions) (Business ID 31) (Revision / Home work)

Atul Housing Finance Co. Ltd., engaged in the business of providing long – term finance for construction or purchases of houses in India for residential purposes,​​ provides you the following particulars from its accounts for the year and seeks your opinion as to availability of deduction under section 36(1)(viii) and the amount thereof :​​ 

Profits from the business computed as per Part D of Chapter IV of the Income –​​ tax Act, 1961, but before claiming deduction under section 36(1)(viii) is ​​ 560 lacs.

Paid – up share capital ​​ - 500 lacs

General Reserve - 100 lacs

Opening Balance in reserve created u/s 36(1)(viii) - 1,100 lacs

Problem 5 (ID 62) (Section 36 ​​ Other Deductions)​​ 

The profit and loss account of East West Bank Ltd. operating in India contains, inter alia, the following particulars:

Other information:

• Two years back provision for​​ doubtful debts allowed in assessment amounted to Rs. 35 crore only.

• The assessment for preceding year resulted in a loss and unabsorbed depreciation amounting to Rs. 30 crore and Rs. 40 crore respectively and the bank was not allowed deduction on account of provision for doubtful debts.

• Unrealized interest income not recognized in the accounts in respect of non-performing assets as per assets classification norms of RBI amounts to Rs. 65 crore.

• The aggregate average rural advances calculated as per section​​ 36(1)(viia) read with rule 6ABA amounts to Rs. 30 crores.

From the above information compute total income of the bank.​​ 

Presumptive Incomes / Special Scheme of Tax computations

Problem 1 (Presumptive Incomes) (Business ID 23)

M/s ABC is a partnership firm engaged in the business of Civil Construction and it follows cash system of accounting i.e. all the expenses are debited to the profit and loss a/c on the basis of the actual. The firm during the P.Y. carried on the business of Civil Construction and actually received Rs. 55,00,000 and further as on 31st March it had prepared invoice aggregating to Rs. 10,00,000 and were remaining outstanding. M/s ABC submitted the return of income declaring total income of Rs. 5,50,000 calculated @ 10% on Rs. 55,00,000.​​ The Assessing Officer has disputed the computation and has taken a view that the provisions of section 44AD are not applicable M/s. ABC seeks the necessary advice.

Problem 2 (Presumptive Incomes) (Business ID 24)

M/s ABC was engaged in the business of​​ Civil Construction during the year and gross receipts during the said previous year amounted to Rs. 20,00,000. The assessee made the computation of total income as under:

In the next year

The assessee firm during derived Rs. 30,00,000 from the business of Civil Construction and the profit as per the P& L a/c was Rs. 2,00,000. The assessee made the income computation as under:

The Assessing officer has disputed the computation thus ​​ M/s. ABC seeks the advice for the computation of income of both the years.

Problem 3 (Presumptive Incomes) (Business ID 24A)

OPTIMA Ltd. is engaged in the business of plying goods carriages. On 1st April, the company owns 10 trucks (6 out of which are ―heavy goods vehicles‖). On May 2, one of the heavy goods vehicles is sold by​​ OPTIMA Ltd. To purchase a light goods vehicle on May 6, which is put to use only from June 15,. Find out the total income of OPTIMA Ltd. For the year taking into consideration the following data gathered from its books:

Question 4 (ID 60) (computation of business income)

X Ltd. is engaged in the business of​​ civil construction. The profit and loss account of the company for the year is as under:

The following additional information is also available:

• Municipal tax​​ of godown includes Rs. 3,000 not paid by the company

• The book value of plant and machinery, which was insured against fire, was Rs. 4,20,000. The opening written down value of plant and machinery block under section 43(6) was 1,85,000.

• The entire building​​ materials were purchased from a firm in which the managing director of this company is a partner. The fair market value of the materials purchased is Rs. 20,00,000.

• Interest on loan includes Rs. 15,000 being interest on loan taken for investment in shares​​ of various companies.

• Office administration expenses includes Rs. 90,000 paid as a donation to a charitable organisation recognized under section 80G.

• The prescribed rate of depreciation under the Income-tax Rules for plant and machinery is 15 per cent.

• The company has decided to follow the presumptive tax provision in respect of its business income.

Compute the total income of X Ltd.​​ 

Ignore the provision of minimum alternate tax under ​​ section 115JB.

Business Income Full computations – Examination Types

Business income Questions 10 mark type

Question 1 (ID 71) (computation of business income) (Revision / Home work)

The net profit for the year of India biotech Ltd. Engaged in the business of bio – technology works out at Rs. 45 lacs after debit / credit​​ of the following items :

• Profit of Rs. 2,50,000 from a hedging contract entered into for meeting out the loss in foreign currency payments towards an imported machinery of Rs. 80 lacs installed on 1.2.

• Incidental charges of Rs. 20 lacs paid to a financial​​ institution for taking short – term loan of Rs. 25 crores repayable in 18 months.

• Commission of Rs. 25,000 paid to a recovery agent for getting realization of an old outstanding.

• Registration fees of Rs. 20,000 and listing fees of Rs. 30,000 paid to the Registrar of Companies and the Stock Exchange respectively on the issue of bonus shares.

• Amount of Rs. 1,00,000 towards carry forward losses for Asst. Year 2013-14 of X Ltd., which got merged with the company during the financial year 2017-2018.

• Interest received from banks of Rs. 90,000 net of TDS of Rs. 10,000.

• Amount of Rs. 1,50,000 incurred towards reconditioning of generator.

• Employees share to the EPF for the month of March, of Rs. 40,000. The amount was deposited with the PF Commissioner on 22-04-AY.

Compute the total income of the company and given brief reasons for the treatment given to each of the items.

Question 2 (ID 75) (computation of business income) (Revision / Home work)

The net profit of ABC Ltd. for the year amounted to 7,22,000 after​​ debiting/crediting following items:​​ 

• Payment of interest on money borrowed from bank for purchase of land and building 222,000.

• Commission 1,00,000 paid in the month of February and 1,25,000 paid in March,. Tax deducted at source from the payments was​​ deposited to the Government on 20.09.AY.​​ 

• Travelling expenses of 90,000 on a foreign tour of a director for negotiating collaboration with a foreign manufacturer for initiation of new line of business.​​ 

• Securities Transaction tax paid 10,000. Income from​​ trading in shares already credited to profit and loss account  ​​​​ 3,82,000.​​ 

• As part of the restructuring of its debt, the company has converted arrears of interest of 3,00,000 on term loan into a new term loan with a revised repayment schedule. ​​ The company​​ has paid 50,000 towards such funded interest during the year. Entire 3,00,000 has been debited to profit and loss account. However, out of this, a further sum of 50,000 was paid before the due date of filing of return.​​ 

• 5,00,000, being contribution to S Ltd. (wholly owned subsidiary company) for construction to a school for the benefit of its employees.​​ 

• Provision for gratuity based on actuarial valuation 6,00,000. Actual gratuity paid 1,50,000 was debited to provision for gratuity account.​​ 

Other information:​​ 

• Provision for bonus for the 2 year back paid on 15.11.PY 98,000. It is inclusive of payment by bearer cheque of ​​ 34,000.​​ 

• The company has purchased a commercial vehicle of 8,00,000 for the purpose of business on 21.03.PY and calculated depreciation@ 15% for the full year. Depreciation debited to the profit and loss account is calculated on all other assets as per the rates prescribed in the Income-tax Act 1961.​​ 

• The company collected 3,00,000 from its customers towards sales tax in the year ​​ 2007-08​​ and remitted it to the State Government in due time. On the levy being ​​ challenged in the High Court, the Court held the levy as illegal and the State Government refunded the amount to the company in February PY. The company refunded 2,00,000 to the customers and the remaining amount of  ​​​​ 1,00,000 was shown under the head current Iiabilities.​​ 

Compute the income chargeable to tax and work out the amount of tax payable on such income, ignoring the provisions of section 115 JB.​​ 

Question 3 (ID 76) (computation of business income) (Revision / Home work)

ILT Limited is engaged in manufacturing pipes and tubes. The profit and loss account of the company for the year shows a net profit of ​​ 405 lacs. The following information and particulars are furnished to​​ you. You are required to compute total income of the company indicating reasons for treatment of each item.

• • A group free air ticket was provided by a supplier for reaching a certain volume of purchase. The same is encashed by the company 10 lacs in April.

  • A regular supplier of raw material agreed for settlement of ​​ 8 lacs instead of ​​ 10 lacs for poor quality of material supplied during the previous year which was not given effect in the running account of the supplier.

  • Andhra Bank sanctioned and disbursed​​ a term loan 4 years back for a sum of ​​ 50 lacs. Interest of ​​ 8 lacs was in arrear. The bank has converted the arrear interest into a new loan repayable in ten equal installments. During the year, the company has paid two installments and the amount so paid has been reduced from Funded Interest in the Balance Sheet.

  • The company remitted ​​ 5 lacs as interest to a company incorporated in USA on a loan taken two years ago. Tax deducted under section 195 from such interest has been deposited by the company on 15th July, AY. The said interest was debited to profit and loss account.

  • Liquidated damage of 3 lacs received from KS Limited for delay in supply of plant and machinery has been shown under the head “Other Income” in Profit & Loss Account.

  • Sandeep, a sales​​ executive stationed at HO at Delhi, was on official tour in Bangalore from 31st May, to 18th June, and 28th September, to 15th October, for the business development. The company has paid Sandeep’s salary in cash, from its local office at Bangalore for the​​ month of May, (payable on 1st June) and September (payable on 1st October), amounting to ​​ 25,000 and ​​ 27,000 respectively (net of TDS and other deduction), as Sandeep has no bank account at Bangalore. These were included in the amount of “salary” debited to Profit and Loss Account.

  • The company has taken up initiative to restructure its debt and paid ​​ 20,000 to a finance company, M/s ABC Ltd., towards are payment premium. As per the scheme, ​​ 50,000 loan was waived against its loan and B Limited directly credited it to its reserve account, considering loan waiver amount as capital receipt.

  • The company has contributed ​​ 50,000 to an electoral trust and the same stands included under the head “General Expenses”.

Question 4 (ID 77) (computation of business income) (Revision / Home work)

The Net Profit of “Simran Ltd.” for the year is ​​ 50 lacs after debit of the following :​​ 

• Amount of ​​ 1,50,000 contributed to Employees Welfare Trust.

• Amount of ​​ 15,00,000 paid towards college fee and hostel expenses for the MBA course of a close relative of a director.

• Amount of ​​ 3,00,000 incurred on installation of a traffic signal, so as to facilitate its employees coming to office to overcome traffic jam and save office time.

• Amount of ​​ 5,00,000 on the gift articles distributed​​ to various dealers under sales incentive scheme.

• Expenses of ​​ 5,00,000 incurred on the travelling of the wife of Managing Director, who accompanied him on a tour to U.K. on the invitation of Trade and Commerce Chamber, London.

• Amount of ​​ 3,00,000 paid consequent upon change in currency rate due to exchange fluctuation in excess of the amount due to the suppliers of machinery.

Following further information are also provided by the company :​​ 

• Both the employees and employers contribution towards PF amounting to ​​ 2 lacs each for the month of March, were deposited in 1.7.AY.

• Provision for audit fees of ​​ 5 lacs made in the books of last year was paid to the auditors in September, ​​ after deducting tax under section 194J and the tax so deducted was remitted by 7.10.​​ 

• A contract who carried out repairing work in the office was paid in cash on 25.9. by two vouchers No. 175 of ​​ 17,000 and No. 180 of ​​ 8,000.

• TDS, out of payment of interest of ​​ 1 lac in February, and of ​​ 2 lacs in March, was remitted to the Government​​ in July AY.​​ 

Compute the income chargeable to tax.

Business income Questions 10-16 mark type

Question 1 (ID 74) (computation of business income)

The trading and profit and loss account of X (P.) Ltd. having business of agricultural produce, consumer​​ items and other products for the year is as under:

On scrutiny of records the following further information and details were extracted/gathered-

• There was a survey under section 133A on the business premises on March​​ 31, in which it was revealed that the value of opening stock was Rs. 8,75,000 and sales of Rs. 75,000 made on March 31, was not recorded in the books. The value of closing stock after considering these facts and on the basis of inventory prepared in the department, worked out at Rs. 12,50,000, which was accepted to be correct and not disputed.

• Income-tax refund includes a sum of Rs. 4,570 of interest allowed thereon.

• Bonus to staff includes a sum of Rs. 7,500 paid in the month of December, which was provided in the books 2 years back.

• Rent of premises includes an amount of Rs. 5,500 incurred on repairs. The assessee was under no obligation to incur such expenses as per rent agreement.

• Advertisement expenses include an amount of Rs. 2,500 paid for advertisement published in the souvenir issued by a political party.

• Miscellaneous expenses include:

• Rs. 15,000 paid towards penalty for non-fulfillment of delivery conditions of a contract of sale for the reason beyond control.

• Rs. 1,00,000 spent on a notified​​ scheme meant for the uplift of residents of Mid Himalayan Region,

• Rs. 1,00,000 paid to the wife of a director, who is working as junior lawyer for taking an opinion on a disputed matter. The senior advocate of Supreme Court had charged only Rs. 25,000 for​​ the same opinion.

• Rs. 1,00,000 paid to an Electoral Trust.

• Sales-tax demand paid includes an amount of Rs. 5,300 charged as penalty for delayed filing of returns and Rs. 12,750 towards interest for delays in deposit of tax.

• The company had made an investment of Rs. 25 lakh on the construction of a warehouse in rural area for the purpose of storage of agricultural produce. This was made available for use from September 15, and the income from this activity is credited in the profit and loss account under the head of warehousing charges.

• Depreciation under the Income-tax Act works out Rs. 65,000.

• Interest on loans includes an amount of Rs. 20,000 on which tax at source was not deducted.

Compute the income chargeable to tax of X (P.) Ltd.​​ 

Support your answer​​ with working notes.​​ 

Question 2 (ID 78) (computation of business income) (Revision / Home work)

The profit and loss account for the year of Jolly Ltd., a company engaged in different types of business activities, continuously incurring losses, disclosed a net loss of Rs. 1,50,000 arrived at after debiting / crediting the following :

• • Profit of Rs.3,13,000 from a hedging contract entered into for meeting out the loss in foreign currency payments towards an imported machinery of Rs.60 lacs installed and​​ put to use on 1-1-2010.

  • Amount in U.K. Pounds 1,660 equivalent to Rs. 1,11,200 paid to a travel agent, resident of U.K. as commission for the booking of international tourists to India in one of the hotels of the company, on which the tax at source was​​ neither deducted nor paid.

  • Amount of Rs. 25,000 debited in commission account represents payments payment to a party as secret commission duly approved by the board.

  • Amount of Rs. 4,23,000 recovered from the C & F agents towards the excess freight charges​​ collected upto financial year 2008-09 by them from the customers of the company which was neither remitted to the company nor refunded back to customers.

  • Amount of Rs.5,00,000 of unpaid interest for the year 2008-2009 waived by SBI after considering the financial health of the company.​​ 

  • Interest on the amount of advance of Rs.3,00,000 given to the subsidiary company at 10% p.a. was not charged on the ground that the financial position of the subsidiary was not satisfactory.

  • Rs. 50,000 representing the value​​ of furniture found missing on physical verification and debited to General Expenses.

  • Amount of salary of Rs.1,50,000 paid to the Managing Director for which the approval of the Central Government was received.

  • Amount of Rs.3,30,000 received from the holding company in reimbursement of loss sustained in a particular transaction.

  • Expenses of Rs.26,00,000 incurred on the dismantling of building and machinery and transportation to the new site for refitting because of shifting of the location of one of its unit.

  • Provision of Rs.75,000 of interest on the unpaid purchase price of an asset.

Compute income under the head “Profits and gains of business of profession” of Jolly Ltd. for the year indicating brief reasons for treatment given to each of the items.

Question 3 (ID 79) (computation of business income)

XYZ Private Limited is engaged in manufacturing and selling ceramic tiles. The net profit of the company as per its Profit & Loss Account for the year is 150 lakh after debiting or crediting the following items:

• One- time license fee of​​ ​​ 20 lakh paid to a foreign company for obtaining franchise on 1st​​ June,​​ 

• 29,000 paid to A & Co., a goods transport operator in cash on 31st​​ January, for distribution of the company’s products to its warehouse.

• Rent of 6 lakh received from letting out a part of its office premises, Municipal tax in respect of the said part of the building amounting to 15,000 remains unpaid.

• 2 lakh, being contribution to a University approved and notified under section 35(1)(ii).

• 3 lakh, being loss due to destruction of a machinery caused by a fire due to short circuit. The Insurance Company did not admit the claim of the company.

• 4 lakh and 1 lakh being amounts waived by a bank out of principal and arrear interest respectively in an one time settlement. The loan was obtained for meeting working capital requirement four years back.

• 1 lakh, being amount payable to a contractor (who does not have Permanent Account Number) for repair work at the company’s factory. Tax of​​ ​​ 2,000 was deducted and paid in time.

• Dividend of ​​ 0.10 lakh from P. Limited on 1000 equity shares of ​​ 10 each purchased at ​​ ​​ 100 per share on 10th​​ October,. The rate of dividend declared is 100%, the record date being 1st​​ December,. The shares were sold on 1st​​ March, at 80 per share.​​ Loss of​​ ​​ 0.20 lakh has been debited to Profit & Loss Account.

• Depreciation on tangible assets ​​ 1 lakh.

Additional Information:

• Depreciation on tangible fixed assets as per Income –tax Rules ​​ 1.75 lakh.

• The company has obtained a loan of​​ ​​ 2 lakh from ABC​​ Private Limited in which it holds 16% voting rights. The accumulated profits of ABC Private Limited on the date of receipt of loan was​​ ​​ 0.50 lakh.

Compute total income of XYZ Private Limited indicating reasons for treatment of each item. Ignore the provisions relating to minimum alternate tax.

Question 4 (ID 57) (computation of business income)

X Ltd. is engaged in the business of manufacturing, plastic bottle. Its profit and loss account shows a net profit of Rs. 60 lakh for the year, after debiting/crediting the following items –​​ 

• Rs 5 lakh, being expenses incurred on the travelling of the wife of managing director, who accompanied him on tour to Beijing on invitation of Trade and Commerce Chamber, China.

• Rs. 10,000 and Rs. 15,000 paid in cash on October 15, by two separate vouchers to a contractor who carried out certain repair work in the office premises.

• One time license fee of Rs. 10 lakh paid toa foreign company for obtaining a franchise on July 1,.

• Rs. 5 lakh paid to S Ltd. towards feasibility study conducted for examining proposals for technological advancement relating to existing business, where the project was abandoned without creating a new asset.

• Dividend of Rs. 3,50,000 received from a foreign company, in which X Ltd. holds 28 per cent nominal value of equity share capital of the company. Rs. 25,000 spent on earning this income.

• Depreciation on tangible fixed assets Rs. 1,50,000.

• Rs. 5,00,000 and Rs. 1,50,000, being amounts waived by a bank out of principal and arrear interest, respectively in one time settlement. The loan was obtained for meeting working capital requirements two years back.

• Provision for gratuity based on actuarial valuation is Rs. 5,00,000. Actual gratuity paid Rs. 1,50,000 was debited to provision for gratuity account.

• The​​ opening and closing stock of the year were Rs, 18,00,000 and 18,72,000 respectively and were undervalued 10 per cent on cost.

Additional information –

• Provision for audit fee of Rs. 1,00,000 was made in the books of the last year , without deducting tax at​​ source. Such fee was paid to the auditors in September, after deducting tax under section 194J and the tax so deducted was deposited on October 7 afte the due date of filing of return of income.

• During the year, the company purchased 5,000 shares of RK​​ Private Ltd. at Rs. 20 per share. The fair market value of such shares on the date of transaction was Rs. 40 per share.

• Depreciation on tangible fixed assets as per Income-tax rules : Rs. 1.75 lakh.

• A debt of Rs. 8 lakh was claimed as bad debt in the previous year 2013-14. But the assessing Officer allowed only Rs. 4 lakh as bad debt in the previous year. Rs 3 lakh was recovered ultimately in respect of the debt during year. The effect of recovery of bad debt was not given in the books of account.

Compute the total income, giving the reasons for treatment of each item. Ignore MAT provisions.​​ 

Question 5 (ID 58) (computation of business income) (Revision / Home work)

X Ltd., engaged in the business of manufacturing, shows a net profit of Rs. 5 crore for the previous year after debiting / crediting the following items –​​ 

• On EPABX and mobile phones (exclusively used for the business purpose) purchased during the year, on which depreciation amounting to Rs. 18 lakhs was claimed at higher rate of 60 per cent treating them at par with computer.

• Rs. 50 lakh paid to N Ltd., towards feasibility studies conducted for examining proposals for technological advancement relating to the existing business, where the project was abandoned without creating a new asset.

• Rs.​​ 35 lakh paid on higher studies of the director’s son abroad, with a stipulation that he would be appointed as a trainee in the company under “apprentice training scheme” where there was no evidence of existence of such scheme.

• Payment of Rs. 29 lakh of purchase of software from a non-resident, meant for subsequent resale in the Indian market (no tax deducted at source) was ultimately sold at a profit during year.

• Dividend of Rs. 10 lakh received from a foreign company in which company holds 28 per cent in nominal value of the equity share capital of the company Rs. 0.25 lakh expended on earning this income.

• A machine is used since past 7 financial years having WDV amounting to Rs. 1.50 lakh on April 1,. The depreciation on the block 15 at per cent has been provided and charged to profit and loss account for the year. The entire block is used for the purpose of business.

• Rs. 45 lakh were paid on June 3, to a National Laboratory with a stipulation that the said contribution shall be used for the purpose of an approved scientific research programme only.

• Secret commission of Rs. 13 Lakh was paid and debited under commission account.

• Purchased a brand new bus and donated to a school where the employees’ children were studying and debited the same to the Workmen and Staff Welfare Account.

Additional Information –

• A debt of Rs. 10 lakh was claimed as bad debt in the previous year 2013-14. However, the Assessing Officer allowed only a sum of Rs. 5 lakh as bad debts. In the previous, a sum of Rs. 4 lakh is recovered ultimately in respect of the debt.

Compute the total income of X Ltd. and work out the amount of tax payable on such income, indicating reasons for treatment of each item.​​ 

Question 6 (ID 59) (computation of business income) (Revision / Home work)

The​​ profit and loss account for the year of X Ltd. (A company engaged in different type of business activities and continuously incurring losses) disclosed a net loss of Rs. 1,50,000 arrived at after debiting /crediting the following –​​ 

• Profit of Rs. 3,13,000​​ from a hedging contract entered into for meeting out the loss in foreign currency payments towards an imported machinery of Rs. 60 lakh installed and put to use on January 1,.

• Amount in UK Pounds 1,660 equivalent to Rs. 1,11,200 paid to a travel agent resident of UK as commission for the booking of international tourists to India in one of the hotels of the company , on which the tax at source was neither deducted not paid.

• Amount of Rs. 25,000 debited in commission account represents payment to a party as​​ secret commission duly approved by the board.

• Amount of Rs. 4,23,000 recovered from the C&F agents towards the excess freight charges collected up to financial year 2013-14 by them from the customers of the company which was neither remitted to the company​​ nor refunded back to customers.

• Amount of Rs. 5,00,000 of unpaid interest for the year 2013-14 waived by SBI after considering the financial health of the company.

• Interest on the amount of advance of Rs. 3,00,000 given to the subsidiary company at 1- per​​ cent per annum was not charged on the ground that the financial position of the subsidiary was not satisfactory.

• Rs. 50,000 representing the value of furniture found missing on physical verification and debited to general expenses.

• Amount of salary of Rs.​​ 1,50,000 paid to the managing director of which the approval of the Central Government was received on April 18, AY.

• Amount of Rs. 3,30,000 received from the holding company in reimbursement of loss sustained in a particular transaction.

• Expenses of 26,00,000 incurred on the dismantling of building and machinery and transportation to the new site for refitting because of shifting of the location of one of its units.

• Provision of Rs. 75,000 of interest on the unpaid purchase price of an asset which was put​​ to use in August.

Compute the income under the head “Profits and gains of business and profession” of X Ltd.​​ 

Indicate brief reasons for treatment given to each of the items.​​ 

Question 1 (section 68,69 deemed incomes)​​ (Revision ​​ / Home work) (ID 01)

Shares were floated by the company X and subscriptions were invited from the public through advertisement in the newspapers and the whole paraphernalia of subscription for shares was undergone in accordance with law. These subscriptions were dealt with through nationalised banks and ​​ were received by cheques. In the proceedings, the company had disclosed the names and addresses of each of the subscribers. The Assessing Officer had issued notice upon 37 subscribers on test basis. Out of these 37 persons, ten persons appeared and produced satisfactory evidence regarding the genuineness about the persons and the sources of the funds out of which the shares were subscribed. ​​ 14 persons though served did not respond. The assessing​​ officer came to the conclusion that deposits of 14 subscriber is from undisclosed source and thus intended to make addition under section 68. Further assessee pleaded that to prove his case and to verify the matter officer must co-operate with him and issue the summons under section 131 requiring the depositor to appear before him and prove the case. The officer has declined to exercise his powers under section 131. You are required to answer whether officer is justified in so doing or not.​​ 

​​ 

Question 2 (section 68,69 deemed incomes) (Revision ​​ / Home work) (ID 02)

The assessee is in the business of leasing, financing, hire purchase, dealing in shares and other financial activities. it acquired 1,00,000 equity shares of Rs. 10 each at par from the promoters’ quota out of total capital consisting of 10,00,000 shares of ITC Agro-Tech Ltd. The said shares were sold at Rs. 18.90 per share, resulting in a profit of Rs. 8,90,000. The assessee offered the whole of the profit to tax. The Assessing Officer took the view that the assessee had suppressed income, that there was no reason for the assessee, which was a trader, to sell the shares, when the procedure for listing was pending before the Calcutta Stock Exchange, that, the shares obtained were from the promoters’ quota and they were listed on the Calcutta Stock Exchange later on. Therefore, the Assessing Officer took the sale price at the rate of Rs. 54 per share and made an addition of Rs. 35.10 lakhs. You are required to answer whether the action of the officer​​ is justified or not.

Question 3 (section 68,69 deemed incomes) (Revision ​​ / Home work) (ID 03)

Mr. X carried on the business of supply of bamboo had taken loans amounting to Rs. 4,35,000 and Rs. 5 lakhs during the previous year. The amounts were paid by​​ cheques by the creditors to the assessee. The creditors received the said amount by way of loans from their sub-creditors by means of cheques. The Assessing Officer declined to treat the loan amount of Rs. 4,35,000 as genuine. As regards Rs. 5 lakhs he declined to treat the loan amount to the extent of Rs. 4,25,000 as genuine. The Assessing Officer added the two amounts to the total income of assessee as income from undisclosed sources. You are required to answer whether the action of the officer is justified or not.​​ 

Question: 01 (ID 01) (Revision ​​ / Home work)

Under a decree of court, X has to make an annual payment of Rs. 60,000 for maintenance of his wife and three sons. The annual payment is not charged on any of his property. X​​ claims that Rs. 60,000 is deductible while computing his taxable income, since it is diversion of income by overriding charge. Is he legally justified ?

Question: 02 (ID 02) (Revision ​​ / Home work)

X is appointed as managing director of a company on commission of 5 per cent of total sales made by the company. If in any year the net profits of company are not sufficient to declare 8 per cent dividend, X is bound to give up such portion of commission (not being more than one-third of usual commission) as may​​ be necessary to make up the deficiency. The agreement also provides that the commission is payable after March 31 and after account are passed by the general meeting of shareholders. On March 13, the board of directors of the company passes a resolution to the effect that X, the managing director, has agreed to charge a lower rate of commission for the accounting year ending March 31. Discuss whether the difference between commission receivable under the original contract and the commission under the modified contract is taxable in the hands of X. ​​ 

Question: 03 (ID 03) (Revision ​​ / Home work)

X, a leading advocate, who has been originally reluctant, agrees to defend certain accused persons in a criminal suit, on the conditions that he will be provided with Rs. 85,000 for a public ​​ charitable trust which he will create. X creates a public charitable trust on receipt of Rs. 85,000. Discuss whether the sum of Rs. 85,000 will form part of assessee’s taxable income.

Question 04 (ID 04) (Revision ​​ / Home work)

X is a dealer in garments and maintains his books of account on the basis of mercantile system. During the previous year ending March 31, X withdraws some garments for his personal use by crediting goods accounts by the cost price of the goods. The Assessing Officer, applying the principle laid down by the House of Lords in Sharkey v. Wernher [1956] 29 ITR 962, wants to include the difference between the market price and cost price of the goods withdrawn in the income of X. Is the Assessing Officer justified ?

Question: 05 (ID 05) (Revision ​​ / Home work)

The members of the X co-operative society are teachers. The assessee is getting text-books from the Government at concessional rates and selling them to any person who wants to purchase as also to its members at a discount. For the relevant assessment years, the assessee is of the view that since it has been formed for promoting the common interest of the members the profits earned from them has an element of mutuality and, therefore, its entire earning must​​ be dissected and those earned from members must be excluded and those earned from non-members may be taxed. Advise.

Question: 01 (ID 01) (Revision ​​ / Home work) (concept of mutuality)​​ 

XY Club Ltd., a social and sports club, conducts​​ horse races with amateur riders and charges fees for admission into the enclosure of the club at the time of races. A resolution is passed at a general meeting of the club for charging a surcharge, apart from regular admission fee, the proceeds of which are to go for local charities. Every entrant is issued two tickets – one, an admission ticket, for admission to the enclosure of the club and the other, a separate ticket in respect of surcharge for local charities. Discuss whether receipts on account of surcharge is to be treated as assessee’s income.

Question: 02 (ID 02) (Revision ​​ / Home work) (concept of mutuality)

XYZ Ltd., a public limited company, runs a club for its members. Its objects are to promote social intercourse among the members of the club,​​ their families and friends, provide them will a club house and accommodation. No income or property can be paid or transferred by way of dividend, bonus or otherwise by way of profit to the members. No remuneration or other monetary benefit can be given to any member excepting payment of out-of-pocket expenses, reasonable interest on money lent to the assessee-company and proper rent on premises let to the club. During the accounting year ending March 31, the assessee provided temporary accommodation to the members in its Madras property and realised a rent of Rs. 34,000. Treating this sum as income from house property, the Assessing Officer wants to tax it. The Assessing Officer thinks that the principle of mutuality does not apply to the income received from renting from renting out of premises to members. Discuss.

Question: 03 (ID 03) (Revision ​​ / Home work) (concept of mutuality)

XYZ, a co-operative society, registered under the Bombay Co-operative Societies Act, 1925, owns certain land. After the land​​ is fully developed by laying roads and making provisions for civil amenities, the society allots plots of land to its members on lease basis and collects certain amounts an execution of lease deed. The society further permits, in appropriate cases, disposition or devolution of the lease of any plot, including any building thereon, from an existing member to another prospective member, but the transferor is to pay the society half of the premium amount, if any, received by him from the purchaser.

For the assessment year, the assessee files a return showing certain amounts received on allotment of plots by lease to members and also those being half share of abovementioned premium amount, and contends that it is a mutual association and hence its income cannot​​ be taxed. The revenue, on the other hand, insists that since the impugned amounts, received by the society from its members, remain with the society and can be disposed of as it likes, the assessee-society cannot be treated as a mutual association. Decide.

Question: 04 (ID 04) (concept of mutuality)

A is an association governed by the provisions of Section 44A. The subscription receipts was Rs.60,000. The expenditure in the normal course of its activities was Rs.85,000. Its other income taxable under the​​ Income Tax Act works out to Rs. 75,000. On these facts you are consulted as to:

How A's taxable income will be determined?

In case the association did not have the other income taxable, will there be any difference in the computation of​​ its​​ income?

Question: 05 (ID 05) (Revision ​​ / Home work) (concept of mutuality)

The assessee, Pandey Co-operative Housing Society, is a registered co-operative housing society, formed with the objective of maintaining the property owned by it, to effect repairs and​​ maintenance of the common property of the members, and to confer to the members, the usual rights and privileges. For the assessment year 2010-11, the assessee has received Rs.3 lacs as transfer fees from the transferor members and like amount from the transferees, who at the time of transfer, were not member of the society. Discuss the exigibility to tax the aforesaid receipts in the hands of the assessee.

Question 1 (Tonnage Tax) (ID 02)

Tarun Shipping Co. Ltd., having its registered office in Mumbai, plies two ocean-going vessels which it owns. The registered tonnage of the two vessels are 47,549 tonnes and 800 kgs and 25,759 tonnes and 400 kgs respectively. In the accounting year 2011-12, the first vessel was operated for 360 days and the​​ second for 200 days.

The accounts of the company reveal the following results :

Profit from core shipping activity    ​​ 60.50 Lacs

Profit from incidental activity     ​​ 15,000

Compute the tax payable by the company, taking note of the provisions of the​​ law relating to taxation of income of shipping companies. Also indicate the specified conditions for the procedure.

List of Important Question to be glanced for Revision before exam.

Wishing You all the best for exams.