Tax Planning/Tax Management/Tax Evasion

Model Test Paper - 1 CA Final Group- II Paper - 7 Direct Tax Laws May - 2017 1. (a) Specify with reason, whether the following acts can be considered as (I) tax planning or (ii) tax management or (iii) tax evasion. (I) An individual tax payer making tax saver deposit of ` 1,00,000 in a nationalised bank. (ii) A partnership firm obtaining declaration from lenders/depositors Form No. 15G/15H and forwarding the same to income-tax authorities. (iii) A company installed an air-conditioner cost ` 75,000 at the residence of a director as per terms of his appointment but treats if as fitted in quality control section in the factory. This is with the objective to treat it as plant for the purpose of computing depreciation. (iv) RR Ltd. issued a credit note for ` 80,000 as brokerage payable to Mr. Ramana who is the son of the managing director of the company. The purpose is to increase the total income of Mr. Ramana from ` 4,00,000 to ` 4,80,000 & reduce the income of RR Ltd. correspondingly. (v) A company remitted provident fund contribution of both its own contribution and employee s contribution on monthly basis before due date. (5 marks) Tax Planning/Tax Management/Tax Evasion Answer Reason 1. Tax Planning Making a tax saver deposit of ` 1,00,000 in a Nationalized Bank for claiming deduction u/s 80C by an individual is a permitted tax planning measure under the provisions of income-tax law. 2. Tax Management Obtaining declaration from lenders or depositors in Form No. 15G/15H by a partnership firm and forwarding the same to Income-Tax authorities is 1

7.2 O Solved Scanner CA Final Group-II Paper - 7 in the nature of compliance of statutory obligation under the Income-Tax Act, 1961. 3. Tax Evasion An air conditioner fitted at the residence of a director as per the terms of his appointment would be a furniture qualifying for depreciation @ 10%, whereas an air-conditioner fitted in a factory would be a plant qualifying for a higher depreciation @ 15%. The wrong treatment unjustifiably increases the amount of depreciation & consequently, reduces profit and consequent tax liability. Treatment of air-conditioner fitted at the residence of a Director as a plant fitted at factory would tantamount to furnishing of false particulars with an attempt to evade tax. 4. Tax Evasion Issuance of a credit note for ` 80,000 by RR Ltd. as brokerage payable to Mr. Ramana, the son of the Managing Director, to increase his total income from ` 4 lakh to ` 4.80 lakh and to correspondingly reduce the company s total income is a method of reducing the tax liability to the company by recording a fictitious transaction. The company is liable to tax at a flat rate of 30% whereas Mr. Ramana is liable to pay tax @ 10% above the basic exemption limit of ` 2,50,000, since his total income does not exceed ` 5,00,000. Further Mr. Ramana would also eligible for rebate of ` 2,000 under sec. 87A. Reducing tax liability by recording a fictitious transaction would tantamount to tax evasion. 5. Tax Management Remitting of own contribution to providing fund and employees contribution to provident fund on a monthly basis before due date is proper compliance of the statutory obligations.

Model Test Paper O 7.3 1. (b) Hari has acquired a residential house property in Delhi on 1 st April, 2002 for ` 10,00,000 and decided to sell the same on 3 rd May, 2005 to Mr. Pari and an advance of ` 25,000 was taken from her. The balance money was not paid by Mr. Pari & Hari has forfeited the entire advance sum. On 3 rd June, 2016 he has sold this house to Mr. Suri for ` 35,00,000. In the meantime on 4 th April, 2017, he had purchased a residential house in Delhi for ` 8,00,000 where he was staying with his family on rent for the last 5 years and paid the full amount as per the purchase agreement. However Hari does not possess any legal title till 31 st March, 2017, as such transfer was not registered with the registration authority. Hari has purchased another old house in Chennai on 14 th October 2017, from Mr. X an Indian resident by paying ` 5,00,000 & purchase was registered with appropriate authority. Determine the taxable capital gain arising from above transactions in the hands of Hari for Assessment Year 2017-18. (5 marks) Computation of Taxable Capital Gain Mr. Hari A.Y. 2017-18 Particulars Sale Consideration 35,00,000 Less: Indexed Cost of Acquisition = 9,75,000 1,125/447 (24,53,859) Capital Gain 10,46,141 Less: Exemption u/s 54-Residential Property in Delhi In Respect of House acquired in Chennai (8,00,000) Taxable Capital Gain 2,46,141 Working Note: 1. As per Sec. 51 of the Act where any capital asset was on any previous occasion the subject of negotiations for its transfer, any advance or other money received & retired by the assessee in respect of such negotiations shall be deducted from the cost for which the asset was acquired or the written down value or the fair market value, as the case may be in computing the cost of acquisition. `

7.4 O Solved Scanner CA Final Group-II Paper - 7 Therefore, in the given case, forfeited amount of ` 25,000 is reduced from the cost of acquisition of ` 10,00,000 before indexing. 2. Exemption u/s 54 of the Act is available in respect of Delhi House also, as all the prescribed conditions u/s 54 is complied with. The said section does not provide that holding of legal title is necessary. If the taxpayer pays full consideration or substantial portion of it, in terms of purchase agreement, within the prescribed period, the exemption u/s 54 is available. 1. (c) The penal provisions have been made more & more stringent for levy of penalty on undisclosed income found during the course of search initiated on or after 1 st July, 2012. Explain. (5 marks) The statement is correct. Sec. 271AAB interested by the Finance Act, 2012 has made the penal provisions on undisclosed more stringent in respect of undisclosed income found during a search initiated on or after 1.7.12, u/s 271AAB in case where search has been initiated u/s 132 on or after 1.7.13, the A may direct that the assessee shall pay as penalty. (a) 10% of the undisclosed income of the specified previous year, if such assessees satisfies the following conditions: (i) in the course of the search, in a statement u/s 132(4) admits the undisclosed incomes and specifies the manner in which such income has been derived; (ii) substantiates the manner in which the undisclosed income was derived; and (iii) on or before the specified date, pays the tax, together with interest if any, in respect of the undisclosed income & furnishes the return of income for the specified previous year declaring such undisclosed income therein.

Model Test Paper O 7.5 (b) 20% of the undisclosed income of the specified previous year, if such assessee satisfies the following conditions: (i) in the course of the search, in a statement u/s 132(4) does not admit the undisclosed income; and (ii) on or before the specified date, declares such income in the return of income furnished for the specified previous year and pays the tax, together with interest, if any, in respect of the undisclosed income. (c) not less than 30% and upto 60% of the undisclosed income of the specified previous year and if it is not covered by the provisions of above mentioned clauses (a) and (b). 1. (d) Ms. Madhvi, a resident individual and self-employed industrial designer, furnished the following particulars for the year ended 31.03.2017. (i) Gross total income 5,00,000 ` (ii) Housing loan principal repayment. The property is under construction at Jaipur as on 31.3.17 (iii) Principal repayment of housing loan from a relative. This property is self-occupied situated at Jodhpur (iv) Contribution to Public provident fund in the name of her mother 1,10,000 50,000 70,000 (v) She deposited ` 5,000 per month in her account under a pension scheme notified by the Central Govt. Compute total income of Ms. Madhvi for Assessment Year 2017-18 stating reasons for the deduction eligible under appropriate provisions of chapter-vi-a (5 marks)

7.6 O Solved Scanner CA Final Group-II Paper - 7 Assessee: Ms. Madhvi Computation of Total Income Particulars A.Y. 2017-18 P.Y. 2016-17 Amount (`) Gross Total Income 5,00,000 Less: Deductions under chapter - VI - A [80CCD(1) & 80CCD(1B)] Contribution to Notified Pension Scheme 60,000 Total Income 4,40,000 Notes: 1. Under sec. 80C, the assessee can not get claim for repayment of housing loan (principal), if the house is under construction and the important point is that the income of house property must be assessed under the Head House Property. 2. Any contribution made by an assessee, other than an employee assessee, towards pension scheme notified by the Central Government is allowed as deduction subject of a limit of 10% of the gross total income u/s 80CCD. In the given case, though the assessee contributed ` 60,000 the deduction shall be restricted to ` 60,000, being 10% of ` 4,40,000. A new sub-section 80CCD(1B) has been instructed to provide additional deduction of ` 50,000 to an individual on payment in excess of 10%. 3. Since the loan is borrowed from a relative, repayment of principal is not eligible for deduction u/s 80C. 4. The individual can avail deduction towards contribution to PPF only if the payment is made in the name of the assessee or the spouse or children. In the given case, as the contribution is made in the name of the mother, no deduction shall be allowed u/s 80C.

Model Test Paper O 7.7 2. (a) The following are the particulars of income earned by Miss Vivitha, a resident aged 25, for the assessment year 2017-18. (` in lacs) Income from playing snooker matches in country L 12 Tax paid in country L 1.8 Income from playing snooker tournaments in India 19.2 Life Insurance Premium paid 1.2 Medical Insurance pre paid for her father aged 62 years (paid through credit card) 0.25 Compute her total income & tax payable by her for the assessment year 2017-18. There is no Double Taxation Avoidance Agreement between India & Country L. (8 marks) Computation of total income & tax liability of Miss Vivitha for the A.Y. 2017-18 Particulars ` ` Indian Income (Income from playing snooker tournaments in India) 19,20,000 Foreign Income (income from playing snooker matches in country L) 12,00,000 Gross Total Income 31,20,000 Less: Deduction under chapter - VI - A Deduction under section 80C Life Insurance premium of ` 1,20,000 paid during the previous year 1,20,000 Deduction under section 80D Medical insurance premium of ` 25,000 paid for her father aged 62 years. Since her father is a senior citizen. The deduction is allowable to a maximum of ` 30,000 (assuming that her father is also a resident in India). Further, deduction is allowable where payment is made by any mode other than cash.

7.8 O Solved Scanner CA Final Group-II Paper - 7 Here payment is made by credit card hence, eligible for deduction. 25,000 1,45,000 Total Income 29,75,000 Tax on total income Income Tax 7,17,500 Add: Education Cess @ 2% 14,350 Add: Secondary and higher education cess @ 1% Average rate of tax in India 7,175 7,39,025 (i.e. ` 7,39,025 / ` 29,75,000 100) = 24.84% Average rate of tax in foreign country (i.e. ` 1,80,000 / ` 12,00,000 100) = 15.00% Rebate under section 91 on ` 12 lakh @ 15% (lower of average India-tax rate or average foreign tax rate) 1,80,000 Tax payable in India 5,59,025 (7,39,025-1,80,000) Note: Miss Vivitha shall be allowed deduction under sec. 91, since the following conditions are fulfilled: (a) She is a resident in India during the relevant previous year. (b) The income accrues or arises to he outside India during that previous year and such income is not deemed to accrue or arise in India during the previous year. (c) The income in question has been subjected to income-tax in the foreign country L in her, hands and she has paid tax on such income in the foreign country L. (d) There are no agreement under section 90 for the relief or avoidance of double taxation between India and Country L where the income has accrued or arisen.

Model Test Paper O 7.9 2. (b) Nandita, an individual resident retired employee of the Prasar Bharati aged 60 years, is a well-known dramatist income of ` 1,10,000 from theatrical works played abroad. Tax of 11000 was deducted in the country where the plays were performed. India does not have any Double Tax Avoidance Agreement under section 90 of the Income Tax Act with that country. Her income in India amounted to ` 5,10,000. In view of tax planning, she has deposited ` 70,000 in Public Provident Fund and paid contribution to approved pension fund of LIC ` 32,000. She also contributed ` 18,000 to Central Government Health Scheme during the previous year & gave payment of medical insurance premium of ` 21,000 to insure the health of his father, a non-resident aged 76 years who is not dependent on her, tax liability of Nandita for the Assessment Year 2017-18. (8 marks) Computation of tax liability of Nandita for the A.Y. 2017-18 Particulars (Amount in `) Indian Income 5,10,000 Foreign Income 1,10,000 Gross Total Income 6,20,000 Less: Deduction under section 80C Deposit in PPF 70,000 Deduction under section 80CCC Contribution to approved pension fund LIC 32,000 1,02,000 Deduction under section 80D Central Government Health Scheme ` 18,000 (Max 25,000) 18,000 Medical Insurance premium of ` 21,000 paid for father (NR) aged 76 years. (Max ` 30,000) 21,000 Taxable Income 4,79,000

7.10 O Solved Scanner CA Final Group-II Paper - 7 Computation of Tax on Total Income Income Tax 17,900 Rebate u/s 87A 5,000 12,900 Add: Education cess @ 2% 258 Add: SHEC @ 1% 129 13,287 Average rate of tax in India (13,287/4,79,000) 100 = 2.774% Average rate of tax in foreign country (11,000/1,10,000) 100 = 10% Rebate under section 91 on ` 1,10,000 @ 2.774% tax rate 3,051 Tax Payable (Net) 10,236 3. (a) The net profit for the year ended on 31.3.2017 of India Biotech Ltd. engaged in the business of Biotechnology works out at ` 45 lacs after debit/credit of the following items: (i) Profit of ` 2,50,000 from a hedging contract entered into for meeting out the loss in foreign currency payments towards an imported machinery of ` 80 lacs installed on 1.2.17. (ii) Incidental charges of ` 20 lacs paid to a financial institution for taking short term loan of ` 25 crores repayable in 18 months. (iii) Commission of ` 25,000 paid to a recovery agent for getting realisation of an old outstanding. (iv) Registration fees of ` 20,000 & Listing fees of ` 30,000 paid to the Register of Companies & the stock exchange respectively on the issue of bonus shares. (v) Amount of ` 1,00,000 towards carry forward losses for Assessment Year 2004-05 of X Ltd., which got merged with the company during the Financial Year 2010-11. (vi) Interest received from banks of ` 90,000 net of TDS of ` 10,000.

Model Test Paper O 7.11 (vii) Amount of ` 1,50,000 incurred towards reconditioning of generator. (viii) Employees share to the PF for the month of March, 2016 of ` 40,000. The amount was deposited with the PF commissioner on 22.4.17. Compute the total income of the company for Assessment Year 2017-18 and give brief reasons for the treatment given to each of the items. (13 marks) Assessee: India Biotech Ltd. Computation of Taxable Income Particulars ` Net Profit as per profit & loss account 45,00,000 Less: Profit on hedging contract for import of machinery (2,50,000) Add: Depreciation on machinery 43,750 Add: Commission paid to agent Add: Registration fees for issue of bonus shares Add: Brought forward loss of amalgamating company Add: Interest received from bank (amount chargeable to tax is ` 1,00,000 since only ` 90,000 is credited to profit & loss account, the difference is added back) 10,000 Add: Expenditure towards reconditioning of generator (it is for the purpose of preserve & maintain an already existing asset) Add: Employee share of PF contribution 40,000 Business Income 43,43,750 Gross Total Income 43,43,750 (-) Deduction u/s 80JJA Nil Net Income 43,43,750

7.12 O Solved Scanner CA Final Group-II Paper - 7 3. (b) Discuss the correctness or otherwise statements with reference to the provisions of the Income Tax Act: (i) An appeal before Income tax Appellate Tribunal cannot be decided in the event of difference of opinion between the Judicial member and the Accountant Member on a particular ground. (ii) A High Court does not have an inherent power to review an earlier order passed by it on merits. (3 marks) (i) (ii) If in any case the members of ITAT differ in opinion or any matter, then the point shall be decided according to the opinion of the majority. If members are equally divided then they shall state points on which they differ and the case shall be referred by the president for hearing by one or more of the other members, of the Appellate Tribunal. Such point or points shall thereafter be decided according to the opinion of majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it. Thus the statement in question is incorrect. The High Court having pronounced an order derives power to review the same where the act specifically providing so. In the absence of any explicit provision under the Income-Tax Act, the High Court does not derive an inherent power to review an earlier order passed by it, thus, the statement in the question is correct. 4. (a) The net profit as per profit and loss account of XYZ Ltd., a resident company for the year ended 31.03.17 is ` 190 lacs arrived at after following adjustments: (i) Depreciation on Assets ` 100 Lacs (ii) Reserve for currency exchange fluctuation ` 50 Lacs (iii) Provision for tax ` 40 Lacs (iv) Proposed dividend ` 120 Lacs Following further information are also provided by the company: (a) Net profit includes ` 10 lacs received from a subsidiary company.

Model Test Paper O 7.13 (b) Provision for tax includes ` 16 lacs of tax payable on distribution of profit & of ` 2 lacs of interest payable on income tax. (c) Depreciation includes ` 40 lacs towards revaluation of assets. (d) Amount of ` 50 lacs credited to P&L account was drawn from revaluation reserve. (e) Balance of profit & loss account shown in Balance Sheet at the asset side as at 31.3.16 was ` 30 lacs representing unabsorbed depreciation. Compute the income of the company for the year ended 31.3.17 liable to tax under MAT. (7 marks) Computation of income of XYZ Ltd. liable to tax under MAT for the year ended 31.3.17 Particulars Net Profit as per P&L Account 1,90,00,000 Add: Depreciation 1,00,00,000 Reserve for currency exchange fluctuation, since the amount credited to any reserve, by whatever name called has to be added back 50,00,000 Provision for tax 40,00,000 Proposed Dividend 1,20,00,000 Less: Depreciation other than dep. on revaluation of assets ` 5,00,00,000 (100 lacs - 40 lacs) (60,00,000) Withdrawal from revaluation reserve restricted to the extent of depreciation on account of revaluation of assets (50 lacs or 40 lacs, whichever is less) (40,00,000) Unabsorbed depreciation or brought forward business loss, whichever is less, as per the books of account (` 30 lacs or Nil) Nil

7.14 O Solved Scanner CA Final Group-II Paper - 7 Dividend Income [Since the same is exempt under sec. 10(34)] (10,00,000) Income under MAT (Liable to tax) 3,90,00,000 Note: 1. For the purpose of Sec. 115JB, Book profit means the net profit as per the Companies Act, as adjusted by certain additions/deductions as specified. One of the adjustments is to add back income-tax paid or payable and the provision therefore. The Finance Act, 2008 has inserted explanation 2 after sub-sec. (2) of Sec. 115JB to clarify that income tax includes, inter alia, dividend distribution tax/tax on distributed income/interest. Therefore, the entire provision of ` 40 lacs for incometax has to be added back for computing book profit for levy of MAT. 2. It is presumed that the amount of ` 10 lacs received from subsidiary company represents dividend income. 4. (b) The Net profit of ABP Ltd. as per Profit & Loss Account for the pervious year 2016-17 is ` 100 lakhs after debiting/crediting the following items: (i) Provisions for income tax : ` 15 lacs (ii) Provisions for deferred tax : ` 8 lacs (iii) Proposed Dividend : ` 20 lacs (iv) Depreciation debited to Profit & Loss Account is ` 12 lacs. This includes depreciation on revaluation of asset to the tune of ` 2 lacs (v) Profit from unit established in Special Economic Zone : 30 lacs (vi) Provision for permanent diminution in value of investments: ` 2 lakhs

Model Test Paper O 7.15 Brought forward losses and unabsorbed depreciation as per books of the company are as follows: Previous year Brought forward Unabsorbed Depreciation Loss (` in lacs) (` in lacs) 2013-14 2 5 2014-15 3 2015-16 10 2 Compute book profit of the company under section 115JB for Assessment Year 2017-18. (9 marks) Computation of Book Profit of ABP Ltd. u/s 115JB A.Y. 2017-18 Particulars ` in lacs ` in lacs Net profit as per Profit & Loss Account 100 Add: (i) Provision for Income Tax 15 (ii) Proposed Dividend 20 (iii) Depreciation debited to P&L Account 12 (iv) Provision for Deferred Tax 8 (v) Provision of permanent Diminution in value of investment 2 57 Less: (i) Depreciation debited to P&L Account excluding dep. on revaluation of assets (10) (ii) Profit from unit established in SEZ (See Note) (iii) Amount of loss brought forward or unabsorbed depreciation whichever is less as per books of accounts. (10) (20) Book Profit 137

7.16 O Solved Scanner CA Final Group-II Paper - 7 Note: Year Loss Brought forward Unabsorbed Depreciation 2013-14 2 5 2014-15 3 2015-16 10 2 Total Loss as per books of Accounts 12 10 Lower amount is 10 lakhs in respect of unabsorbed depreciation which shall be deducted from net profit to determine book profit. It is also pointed out that total business loss and unabsorbed depreciation as per books of accounts is required to be taken into consideration & not losses/unabsorbed depreciation per year is required to be taken into consideration for negative adjustments to Book Profit. Therefore, total unabsorbed depreciation of ` 10 lacs which is less than business losses or ` 12 lacs is taken into consideration for negative adjustment to determine book profit. Working Note: A sanset clause has been inserted by Finance Act, 2011 to remove MAT exemption to SEZ units & developers with effect from A.Y. 2012-13. Therefore, profit from units established in SEZ can t be excluded for computation of book profit. 5. (a) What are the Specified domestic transaction which are subject to transfer pricing provisions? (6 marks) The specified domestic transactions, which are subject to transfer pricing provisions means any of the following transactions, not being an international transaction, namely: (1) Any expenditure in respect of which payment has been made or is to be made to related person referred to in Sec. 40A(2)(b).

Model Test Paper O 7.17 (2) Any transaction referred to in Sec. 80A i.e., inter unit transfer of goods and services by an undertaking or unit or enterprise or eligible business to other business carried on by the assessee or vice-versa, for consideration not corresponding to the market value on the date of transfer. (3) Any transfer of goods or services referred to in Sec. 80-1A(8) i.e., inter unit transfer of goods or services, between eligible business & other business, where the consideration for transfer does not correspond with the market value of goods & services. (4) Any business transacted between the assessee carrying on eligible business & other person as referred to Sec. 80-1A(10). (5) Any transaction, referred to in any other section under chapter - VI - A or Sec. 10AA, to which provisions of Sec. 80-1A(8) or Sec. 80-1A(10) are applicable or, (6) Any other transaction as may be prescribed. However, the above mentioned shall not be treated as specified domestic transaction in case the aggregate of such transactions entered into by the assessee in the previous year does not exceed a sum of ` 5 crore. 5. (b) PQR Ltd. has two units-one engaged in manufacturer of computer hardware & the other involved in developing software. As a restructuring drive, the company has divided to sell its software unit as a going concern by way of slump sale for ` 385 lakh to a new company called S Ltd., in which it holds 74% equity shares. The balance sheet of PQR Ltd. as on 31 st March, 2017 being the date on which software unit has been transferred is given hereunder: Balance Sheet as on 31.3.17 Liabilities ` in lakh Assets ` in lakh Paid up share capital 300 Fixed Assets General Reserve 150 Hardware Unit 170 Share Premium 50 Software Unit 200 Revaluation Reserve 120 Debtors Current Liabilities Hardware Unit 140

7.18 O Solved Scanner CA Final Group-II Paper - 7 Hardware Unit 40 Software Unit 110 Software Unit 90 Inventories Hardware Unit 95 Software Unit 35 750 750 Following additional information are furnished by the management: (i) The software unit is in existence since May 2008. (ii) Fixed assets of software unit includes at ` 60 lakh as on March, 31, 2017. (iii) Fixed assets of software unit mirrored at ` 140 lakh (` 200 lakh minus land value ` 60 lakh) is written down value of depreciation assets as per books of account. However, the written down value of these assets under Sec. 43(6) of the Income-tax Act is ` 90 lakh. (a) Ascertain the tax liability, which would arise from slump sale to PQR Ltd. (b) What would be your advice as a tax consultant to make the restructuring plan of the company more tax-savy without changing the amount of sale consideration? (10 marks) According to Sec. 50B, any profits & gains arising from the slump sale effected in the, previous year shall be chargeable to income-tax under the head capital gains. If the holding period of undertaking is more than 36 months before slump sale, the capital gain shall be deemed to be long-term capital gain. Under slump sale indexation benefit is not available.

Assessee: PQR Ltd. Computation of Capital Gain Particulars Model Test Paper O 7.19 A.Y. 2017-18 P.Y. 2016-17 (` in lakh) Sale consideration 385 Less: Cost of acquisition (net worth of software unit) 185 Long term capital gains arising on slump sale 200 Tax liability on LTCG U/s 112 @ 20% on ` 200 lakhs 40.00 Add: Surcharge 7% 2.8 Add: Education Cess @ 2% & SHEC @ 1% i.e., totalling 3% 1.28 Tax on LTCG 44.08 Working Note: 1 Computation of net worth of software unit (1) Book value of non-depreciable assets 40 (i) Land 110 (ii) Debtors 35 (iii) Inventories 90 275 (2) WDV of Depreciable Assets: Less: Current liabilities of software unit 90 Net worth of depreciable assets 185 Tax consultancy: In this case, the company PQR Ltd. has an option to get the tax benefits if PQR Ltd. holds 100% shares in S Ltd. Company PQR Ltd. already hold 76% shares in S Ltd. now before executing the plan of slump sale if PQR Ltd. acquire rest 24% shares of S Ltd. then it would become 100% holding company and in this case transfer would get exemption u/s 74 & resultant tax would be zero.

7.20 O Solved Scanner CA Final Group-II Paper - 7 6. HSP, a partnership firm engaged in the business of running a heritage hotel approved by the competent authority provides the following information relating to the year ended on 31.3.17. (a) Net profit as per P&L Account of ` 200 lacs was arrived at after charge of the following: (i) Depreciation on Hotel Building having WDV on 1.4.16 of ` 500 lacs was charged by treating the same as Plant & Machinery. (ii) Expenses of ` 1,00,000 incurred for the purpose of promoting family planning among its employees. (iii) Payment of ` 50,000 for an advertisement published in the souvenir released on 15 th August by BJP. (iv) Compensation of ` 1,00,000 paid to the suppliers of automatic kitchen appliances because of termination of the contract after receipt of 50% of appliances. (v) Wines & Liquor imported in F.Y. 2015-16 for ` 20 lacs & were available in the stocks on 1.4.16 for ` 5 lacs were confiscated by the government authority & therefore were written off. (vi) Expenses of ` 20 lacs incurred on replacement of carpets in the foyer, lounge & bar. (b) Amount of ` 4 lacs equal to UK 5000 was remitted & paid to a travel agent resident of UK as commission for the booking of international tourists in the hotel. Tax at source was not deductable out of such payment. (c) Amount of ` 40,000 each was paid in cash to the suppliers of vegetables, milk products & eggs on 11.2.17 because of suspension of banking operations due to strike of bank employees. (d) Amount of 5 lacs written off in the F.Y. 2013-14 as irrecoverable from a travel agent, an amount of ` 2 lacs out of it was recovered on 13.3.17 and credited to a reserve account. Compute the income chargeable to tax Assessment Year 2017-18 & give reasons in brief for treatment given to each of the items. (16 marks)

Model Test Paper O 7.21 Assessee: M/s HSP (Partnership Firm) Assessment Year 2017-18 Computation of Taxable Income (Lakh) ` Net Profit as per P/L A/c 200 Excess depreciation [disallowed @ 5% of ` 500 lakh] 25 Family Planning expenses [allowable incase corporate assessee only] Advertisement in souvenir of a political party [disallowed under sec. 37 (2B)] Compensation to the supplier of kitchen appliances [disallowed as per Swadeshi Cotton Mills Co. Ltd. (SC)] Confiscation of liquor [allowable as deduction] Expenditure on replacement of carpet Commission paid to a travel agent resident of UK without tax deduction at source Amount paid in cash or bank strike day recovery of debt already written off [Chargeable to tax under sec. 41(4)] Bad debts recovered (deemed income) 2 1 0.5 Total Income 229.50 Working Notes: 1. Expenditure incurred on replacements of carpets in hotel business is an allowable deduction. 2. Under Rule 6DD, payment made by cash on a day. On which the banks were closed either on account of holiday or strike is not subject to provision of Sec. 40A(3). So 1,20,000 (40,000 3) is deductible. 3. Deduction u/s 801B for income derived from the business of running hotels approved by the competent authority is available only for companies, so firm cannot claim for this. 1

7.22 O Solved Scanner CA Final Group-II Paper - 7 4. Payment in foreign currency to a Non-resident out side India without deduction of tax at source is a allowable expense by means of Circular No. 7 of 2009 dated 22.10.09 as no income assured or arose to the Nonresident in India. It is assumed that compliance with Section 195(6) is made in this case.