DIRECT TAX QUESTION BANK

DIRECT TAX QUESTION BANK Compiled by CA. Gaurav Rajaram P a g e 1

Table of contents Sl No Topic Name Page Number 1 Business and Profession 2 Capital Gains 3 Income from Other Sources 4 Clubbing of incomes 5 Minimum Alternate Tax 6 Assessment Procedures 7 Advance Tax and RoI 8 International Taxation P a g e 2

Questions on Profits and Gains from Business & Profession 1. X & Co. Diagnostic Centre P. Ltd. has claimed referral fee paid to doctors as revenue expenditure for the AY 2018-19. However, TDS has been deducted under section 194H of the Income Tax Act, 1961 on the said payments. The Assessing Officer proposes to disallow such expenditure. Examine the correctness of the action of the Assessing Officer. As per Explanation to section 37(1), if any expenditure is incurred for a purpose, which is an offence or prohibited by law, such expenditure is not deemed to have been incurred wholly and exclusively for the purpose of business or profession and accordingly, the same shall be disallowed. The Indian Medical Council Regulations prohibits a physician from receiving any gift or gratuity or commission or bonus for referring patients for medical treatment. Therefore, payment of any commission or referral fee by any diagnostic centre to a doctor for referring patients to such centre is prohibited by law. Deduction of tax at source from such payments under section 194-H from referral fee does not come to the aid of the assessee. Therefore, the referral fee paid by the company to the doctors for referring patients is not allowable as business expenditure in view of the Explanation to section 37(1). This view is laid down in CBDT Circular. 2. Examine the taxability or otherwise in the following cases while computing income under the head Profits and Gains from Business or Profession to be declared in the return of income for the AY 2018-19: (i) Amount received towards power subsidy with a stipulation that the same is to be adjusted in the electricity bills. (ii) Donations received by a person in the course of carrying on vocation, from his followers. (iii) Profit derived by an assessee engaged in carrying the business as dealers in shares, on exchange of the shares held as stock in trade of one company with the shares of other company. (iv) The amount of Margin money forfeited by a bank of the failure of its constituents of not taking the delivery of the shares purchased by such bank on their behalf. (i) Power subsidy received by the assessee is revenue in nature as it goes towards reduction of electricity bills. Therefore, the subsidy is taxable as business income as per section 2(24)(xviii). (ii) Donation received by a person from his followers in the course of carrying on vocation for furtherance of the objects of his vocation were receipts arising from the carrying of his vocation. The Supreme Court in Dr. K. George Thomas Vs. CIT (1985), held that such donations are taxable as a business income as there is direct nexus between the vocation carried on by the assessee and the receipt of such donation. (iii) The facts of the case are similar to Supreme Court judgement in Orient Trading Company, the facts of which are as under: In case of ORIENT TRADING CO. LTD. (SUPREME COURT), it is held that the exchange of shares amount to transfer and results in capital gains in the hands of the shareholder. However, if shares are held as stock-in-trade by the assessee, then income under the head P/G/B/P shall arise. The P a g e 3

assessee company was a dealer in Shares and held 14,500 shares of Acetylene Ltd. which were purchased at face value of Rs 10 each. The stock of shares of Acetylene Ltd. was recorded in the books at Rs 1,45,000. A new company Oxygen Ltd. formed in January, 2018 made an offer to the assessee company to obtain 14,500 shares of Acetylene Ltd. in exchange of allotment of its own shares amounting to 55,100 Shares of Rs 10 each. The assessee company exchanged 14,500 shares of Acetylene Ltd., with 55,100 shares of Rs 10 each of Oxygen Ltd. The assessee continued showing 55,100 shares of Oxygen Ltd. at the cost of Rs 1,45,000 and contends that there is no transfer. The Assessing Officer argues that since Oxygen Ltd. is a new company, the market value of its shares is Rs 10 each. According to the Assessing Officer, the assessee has made transfer of shares of? The Supreme Court held that having taken the shares in the Oxygen Ltd. in exchange of the shares of Acetylene Ltd., the assessee company has made realisation of the value of the shares of Acetylene Ltd. and difference between the price of the Shares i.e. Rs 4,06,000 has to be treated as profits of the assessee. The cost of acquisition of shares of Oxygen Ltd. shall now be Rs 5,51,000. (iv) The facts of the case are similar to Supreme Court judgement in Lakshmi Vilas Bank Ltd. wherein the court held as under: Where assessee-bank in course of its business, purchased securities for its constituents on receiving certain percentage of face value called margin money in deposit and as constituents failed to pay balance amount of purchase value of securities at stipulated date fixed for that, margin money was forfeited and securities became property of assessee, margin money so forfeited was to be assessed as business income of assessee. 3. XYZ Ltd. is engaged in the business of manufacturing plastic bottles. Its Profit & Loss Account shows a net profit of Rs 60 lakhs for the year ended 31st March 2018 after debiting/crediting the following items: (i) Rs 5 lakhs, being expenses incurred on the travelling of the wife of Managing Director, who accompanied him on tour to Beijing on invitation of Trade & Commerce Chamber, China. (ii) Rs 8,000, Rs 9,000 & Rs 8,000 paid in cash on 15.10.2017 by three separate vouchers to contractor who carried out certain repair work in the office premises. (iii) One-time license fee of Rs 10 lakh paid to a foreign company for obtaining franchise on 1st July 2017. (iv) Rs 5 lakhs paid to S Ltd. towards feasibility study conducted for examining proposal for technological advancement relating to existing business, where the project abandoned without creating a new asset. (v) Dividend of Rs 3,50,000 received from a foreign company, in which XYZ Ltd. holds 28% in nominal value of equity share capital of the company, Rs 25,000 spent on earning this income. (vi) Depreciation of tangible fixed assets Rs 1,50,000. (vii) 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. (viii) Provision for gratuity based on actuarial valuation Rs 5,00,000. Actual gratuity paid Rs 1,50,000 was debited to provision for gratuity account. (ix) The opening & closing stock of the year were Rs 18,00,000 & Rs 18,72,000, respectively, and were undervalued by 10% on cost. P a g e 4

Additional Information: (a) Provision for audit fee of Rs 1,00,000 was made in the books for the year ending 31.3.2017 without deducting tax at source. Such fee was paid to the auditors in September, 2017, after deducting tax under section 194J and the tax so deducted was deposited on 7th October 2017. (b) 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. (c) Depreciation on tangible fixed assets as per Income-tax Rules: Rs 1.75 lakhs. (d) A debt of Rs 8 lakhs was claimed as bad debt in the PY 2016-17 But the Assessing Officer allowed only Rs 4 lakhs as bad debt. In PY 2017-18, Rs 3 lakhs was recovered ultimately in respect of the debt. The effect of recovery of bad debt was not given in books of account. Compute the total income and tax payable by XYZ Ltd. Giving the reasons for treatment of each item, for AY 2018-19. Ignore MAT provisions. Computation of Total Income of XYZ Ltd. AY 2018-19 Particulars Amount Amount ( Rs ) ( Rs ) Profits and Gains of Business or Profession 60,00,000 Add: Items debited to Profit & Loss Account but not allowable as deduction Cash payments exceeding Rs 10,000 in aggregate in a day to a contractor for repair work (Rs 8,000 + Rs 9,000 + Rs 8,000) (Note-2) License fee for obtaining franchise Rs 10,00,000 less 25,000 7,50,000 Depreciation thereon of Rs 2,50,000 (Note-3) Provision for gratuity ( Rs 5,00,000- Rs 1,50,000) (Note-8) 3,50,000 11,25,000 71,25,000 Add: Difference on account of stock valuation (Note-9) 8,000 71,33,000 Less: Items credited to Profit & Loss Account but not taxable or taxable under a different head of income Dividend received from foreign company less expenditure incurred to earn divided ( Rs 3,50,000-25,000) Note 5 3,25,000 Waiver of Interest on bank loan (Note-7) 1,50,000 (4,75,000) 66,58,000 P a g e 5

Less: Items not debited to Profit & Loss Account but allowance as deduction Provision for audit fees (Note-10) (30,000) 66,28,000 Less: Depreciation on assets ( Rs 1,50,000 - Rs 1,75,000) (Note-6) (25,000) Income from Business and Profession 66,03,000 Income from Other Sources Dividend from specified foreign company (Note-12) 3,50,000 Shares of closely-held company purchased for inadequate consideration (Note-13) 1,00,000 4,50,000 Gross Total Income 70,53,000 Less: Deduction under Chapter VI A Nil Total Income 70,53,000 Particulars Amount Rs Tax @ 15% on dividend of 3,50,000 from specified foreign company 52,500 Tax@ 30% on the balance total income of 67,03,000 20,10,900 20,63,400 Add: Education cess @ 2% and Secondary and higher education cess @ 1% 61,902 Total tax liability 21,25,302 Notes: (1) Expense on travelling of wife of Managing Director to Beijing on the invitation of Trade and Commerce Chamber, China, is an allowable expense on the grounds of commercial expediency and business consideration. Hence, disallowance is not attracted. (2) Disallowance under section 40A(3) would be attracted in respect of cash payments of Rs 8,000, Rs 9,000 and Rs 8,000 to a contractor, since the aggregate cash payments to him in a day exceeds the limit of Rs 10,000. (3) Franchise is in the nature of an intangible asset eligible for depreciation @ 25%. Since one-time licence fees of Rs 10 lakh paid to a foreign company for obtaining franchise has been debited to profit and loss account, the same has to be added back. Depreciation @ 25% has to be provided in respect of the intangible asset, since it has been used for more than 180 days during the year. P a g e 6

(4) The issue is whether payment of Rs 5 lakhs to S Ltd. towards feasibility study conducted for examining proposals for technological advancement relating to the existing business, where the project was abandoned without creating a new asset, is allowable as revenue expenditure. In this case, since the feasibility study was conducted by XYZ Ltd. for the existing business and the study was abandoned without creating a new asset, the expenses were of revenue nature. Since the expenditure of Rs 5 lakhs has already been debited to Profit & Loss Account, therefore, no further adjustment is required. (5) Dividend of Rs 3,50,000 received from foreign company is to be taxed under the head Income from other sources. Since the same has been credited to profit and loss account, it has to be deducted while computing business income. Consequently, expenditure of Rs 25,000 relating to the same which has been debited to profit and loss account has to be added back. In effect, the net amount of Rs 3,25,000 has to be deducted. (6) Depreciation of Rs 1,50,000 on tangible fixed assets debited in the books of accounts has to be added back. Depreciation of Rs 1,75,000 computed as per Income-tax Rules, 1962 is allowable. Therefore, the net amount of Rs 25,000 has to be deducted while computing business income. (7) Waiver of principal amount of loan taken for trading activity is a benefit in respect of a tradingliability by way of remission or cessation thereof and is, hence, taxable under section 41(1) [Solid Containers (Bom.)] Since the loan is for meeting working capital requirement, it is logical to assume that is taken for trading activity. Since the loan waiver has already been credited to profit and loss account, no adjustment is required. However, as per section 43B, since interest is allowable only on actual payment, deduction in respect of interest due on loan would not have been allowed as deduction in any PY. Therefore, such interest cannot be brought to tax by invoking section 41(1). Since such interest has now been credited to profit and loss account, the same has to be deducted while computing business income. However, as per definition of Income, the waiver of such interest is also taxable, but in the answer we have taken as not taxable since it was disallowed earlier. (8) As per section 40A(7), any provision made for payment of gratuity to employees on their retirement or on termination of employment for any reason is disallowed. However, any provision made for the purpose of payment of a sum by way of any contribution to an approved gratuity fund or for the purpose of payment of gratuity which has become payable during the PY shall be allowed as deduction. The question does not mention that the provision of Rs 5,00,000 is for the purpose of contribution to an approved gratuity fund. Therefore, only gratuity of Rs 1,50,000 paid to the retired employees is allowable as deduction. Hence, the balance provision of Rs 3,50,000 (is Rs 5,00,000 - Rs 1,50,000) is to be added back. (9) Difference on account of undervaluation of opening stock and closing stock by 10% of cost to be deducted and added, respectively. Therefore, the net amount of Rs 8,000 ( Rs 72,000 x 10/90) has to be added. (10) Provision for audit fees for the year ended 31.3.2017 for which tax was not deducted in the F.Y. 2016-17 but was deducted and paid in F.Y. 2017-18 is allowable as deduction in the AY 2018-19 as per the proviso to section 40(a)(ia). 30% of such fees as allowable as deduction. (11) It is assumed that bad debt recovered is out of the bad debt disallowed by A.O. Hence no adjustment. (12) Under section 115BBD, dividend received by an Indian company from a foreign company in which it holds 26% or more in nominal value of the equity share capital of the company, would be P a g e 7

subject to a concessional tax rate of 15% as against the tax rate of 30% applicable to other income of a domestic company. This rate of 15% would be applied on gross dividend, in the sense, that no expenditure would be allowable in respect of such dividend. Therefore, dividend of Rs 3,50,000 received by XYZ Ltd. from a foreign company, in which it holds 28% in nominal value of equity share capital of the company, would be subject to tax @15% under section 115BBD. Such dividend would be taxable under the head Income from other sources. No deduction is allowable in respect of Rs 25,000 expended on earning this income. (13) Difference between the aggregate fair market value of shares of a company and the consideration paid for purchase of such shares is deemed as income in the hands of the purchasing company under section 56(2)(x). Since the difference exceeds Rs. 50,000, the entire sum is taxable. Therefore, Rs 1,00,000 [5,000 x ( Rs 40 Rs 20)] is taxable. 4. PQR Ltd., a non-banking finance company was engaged in the business of leasing and hire purchase. It purchased motor cars from Ramaha motors and leased out these vehicles to its customers. The lease agreement with the customer stated that PQR Ltd. was empowered to repossess the vehicle, in case the lessee committed a default. Registration of the vehicle in the name of lessee, during the period of lease is mandatory as per the Motor Vehicles Act, 1988. PQR Ltd. Claimed Rs 5,00,000 as depreciation on the vehicles leased out for the year ending 31.3.2018. The claim was rejected by the Assessing Officer on the ground that the assessee had merely financed the purchase of motor cars and was neither the owner nor the user of these assets. Is the action of the Assessing Officer valid? Discuss. The issue under consideration in this case is whether depreciation on leased vehicles can be denied to the lessor i.e., PQR Ltd., on the ground that the vehicles are registered in the name of the lessee and that the lessor is not the actual user of vehicles. This issue came up before the Supreme Court in I.C.D.S. Ltd. The Court observed that section 32 imposes a twin requirement of ownership and usage for business as conditions for claim of depreciation there under. As far as usage of the asset is concerned, the section requires that the asset must be used in the course of business. It does not mandate actual usage by the assessee itself. In this case, PQR Ltd. did use the vehicles in the course of its leasing business. Hence, the requirement of section 32 has been fulfilled, notwithstanding the fact the PQR Ltd. was not the actual user of the vehicles. In I.C.D.S. Ltd. s case, the Supreme Court further observed that the Motor Vehicle Act, 1988 contains a deeming provision which creates a legal fiction of ownership in favour of the lessee only for that Act and not for the purpose of law in general. No inference could be drawn from the registration certificate as to ownership of the vehicles, since registration in the name of the lessee during the period of lease is mandatory as per the Motor Vehicles Act, 1988. Therefore, as long as the lessor has a right to retain the legal title against the rest of the world, it would be the owner of the asset in the eyes of law. In this case, PQR Ltd., the lessor, is the exclusive owner of the vehicle at all points of time as he is empowered to repossess the vehicle, in the case the lessee committed a default. The proof of ownership lies in the lease agreement itself, which clearly points in favour of PQR Ltd. P a g e 8

Applying the rationale of the Supreme Court ruling in I.C.D.S. Ltd. s case, the action of the Assessing Officer in this case denying the depreciation claim of PQR Ltd. is not valid. 5. G Ltd. is engaged in the business of growing and manufacturing tea in India. For the PY ending on 31.03.2017 its composite business profits before allowing deduction under section 33AB is Rs 60,00,000. On 01.09.2017 it deposited a sum of Rs 11,00,000 in the Tea Development Account. During the PY 2015-16 G Ltd. had incurred a business loss of Rs 14,00,000 which has been carried forward. On 25.01.2018, it withdraws Rs 10 lakhs, from deposit account which is utilized as under: (a) (b) Rs 6,00,000 for purchase of non-depreciable asset as per the scheme specified. Rs 3,00,000 for purchase of machinery to be installed in the office premises. (c) Rs 1,00,000 was spent for the purpose of scheme on 5.4.2018. (i) You are required to determine business income of G Ltd. and the tax consequences that may arise from the above transactions in the relevant AY. (ii) What will be the consequence if the asset which was purchased for Rs 6,00,000 is sold for Rs 8,00,000 in April, 2018. (i) Computation of Business Income of G Ltd, for the AY 2018-19 Particulars Amount ( Rs ) Rs 10,00,000 being the amount withdrawn from Tea Development Account has to be utilized in the prescribed manner, otherwise, the withdrawn amount would be chargeable to tax as business income. In the given case, the taxability of withdrawal amount based on their utilization is as follow: (a) Rs 6,00,000, out of the amount withdrawn from the deposit account, utilized for purchase of non-depreciable asset as per the specified scheme. Not taxable (b) Rs 3,00,000, being the amount utilized for purchase of machinery to be installed in the office premises is not a permissible utilization. Hence, the amount would be deemed as profits and gains of business of the PY 2017-18 as per section 33AB. 3,00,000 (c) Rs 1,00,000 was spent for the purpose of scheme on 05.04.2018 as per section 33AB this amount would be taxable since the same is not utilized during the same PY (i.e. PY 2017-18) in which the amount is withdrawn from the deposit account. 1,00,000 The entire amount of Rs 10 lakh (forming part of Rs 11 lakhs deposited in Tea Development Account) was deducted in the AY 2017-18 before segregation of agricultural and non-agricultural income. Therefore, when any part of such amount becomes taxable, the agricultural and non-agricultural portions of income must be segregated. P a g e 9

Accordingly, Rs 1,60,000, being 40% of Rs 4,00,000 ( Rs 3,00,000 + Rs 1,00,000) would be chargeable to tax as business income and the balance Rs 2,40,000, being 60% of Rs 4,00,000 would be agricultural income exempt from tax. Working Note: Computation of Business Income of G Ltd, for the AY 2017-18 Particulars Amount ( Rs) Composite business profits before allowing deduction under section 33AB 60,00,000 Less: Deduction under Section 33AB(1) would be the lower of: (i) [Amount deposited in Tea Development Account on or before 30.09.2017 i.e., Rs 11,00,000] (ii) 40% of profit of such business [i.e., Rs 24,00,000 being 40% of Rs 60,00,000] Less: 60% of Rs 49,00,000, being agricultural income [as per Rule 8] Business Income Less: Brought forward business loss of AY 2016-17 set-off (11,00,000) 49,00,000 (29,40,000) 19,60,000 (14,00,000) Business Income Chargeable to Tax 5,60,000 (ii) Consequences, if asset purchased out of deposit account is sold during the PY 2018-19. As per section 33AB(8), if the asset is sold before the expiry of eight years from the end of the PY in which it was acquired, then, the cost of such asset shall be deemed to be the profits and gains from business or profession of the PY in which asset is sold. Therefore, Rs 6,00,000 would be deemed to be the business income (composite) for the AY 2019-20. However, since the full cost of the asset was deducted in AY 2017-18 (being part of Rs 11 lakh deposited in Tea Development Account) before segregation of agricultural income and nonagricultural income, the agricultural and non-agricultural portions of income should be segregated in the year in which such amount becomes taxable on account of sale of asset before the expiry of eight years. Therefore Rs 3,60,000, being 60% of Rs 6,00,000 would represent agricultural income. The balance Rs 2,40,000 being 40% of Rs 6,00,000 would be chargeable to tax as business income. Moreover, the difference between the sale consideration and purchase price of the asset would be chargeable to tax as Short term capital gains, which is computed as follows: Sales consideration Rs 8,00,000 Less: Cost of acquisition Rs 6,00,000 Short Term Capital Gains Rs 2,00,000 P a g e 10

6. Moon India Ltd. engaged in manufacturing activity furnishes the following details: Net Profit as per Profit and Loss Account Rs 50,00,000. (i) The company took a loan of Rs 12,00,000 in the financial year 2013-14 for the purpose of relocation of its office premises. The lender waived Rs 8,00,000 in the PY 2017-18 and it is credited in the profit and loss account. (ii) Depreciation charged to profit and loss account is Rs 16,00,000. Depreciation as per Income tax Act, 1961 amounts to Rs 28,00,000 which includes the following: Depreciation rate meant for computers have been adopted for (i) accessories like printers and scanners; and (ii) EPABX. The written down value of these as on 1-4-2017 is given below: (a) Printers and Scanners Rs 50,000 (b) EPABX Rs 2,00,000 Assume that there were no additions during the year (iii) It incurred Rs 2,50,000 as expenditure for public issue of shares, The public issue could not materialise on account of non- clearance by SEBL. This amount is charged to Profit and Loss Account. (iv) It incurred expenditure of Rs 2,00,000 towards issue of debentures. This amount has been capitalised in the books. (v) The company paid Rs 1,00,000 as compounding fee for violations in the pollution control regulations. This has been charged as revenue expenditure. (vi) The company lost cash of Rs 25,00,000 when it was withdrawn from bank and taken to administrative office. It is not insured and hence, fully charged as revenue expenditure. (vii) Rs 5,00,000 was spent during the year towards permitted CSR activities as per section 135 of the Companies Act, 2013. This is charged to Profit and Loss Account. (viii) It paid Rs 2,00,000 to share broker for transacting shares listed in stock exchange and Rs 1,00,000 to commodity broker for commodity transactions at MCX. Both the amounts are debited to Profit and Loss Account and no tax was deducted at source on these payments. (ix) The company during the year employed 115 new workers in the factory which was 20% of the existing workforce and 18 employees in the registered office which was equal to 10% of the existing employee strength. It paid Rs 12,00,000 and Rs 8,00,000 respectively, as additional wages and salary. (x) It paid Rs 50,000 to an electoral trust by cash and Rs I,00,000 by cheque to a Registered political party. Both these are debited to Profit and Loss Account. Compute the total income of the company for the AY 2018-19. Give reasons in brief for treatment of each of the above items. Ignore MAT provisions. P a g e 11

Computation of Total Income of Moon India Ltd, for the AY 2018-19 Particulars Amount ( Rs ) Profits and Gains from Business and Profession 50,00,000 Net Profit as per profit and loss account Add: Items debited but to be considered separately/ disallowed Depreciation as per books of account (Note-1) 16,00,000 Expenditure on public issue of shares which could not materialise due to non-clearance by SEBI (Note-2) 2,50,000 Compounding fee paid for violating regulations (Note-3) 1,00,000 Loss of cash in transit from bank to administrative office on account of theft (Note-4) Expenditure towards permitted CSR activities as per135 of the Companies Act, 2014 (Note-5) 5,00,000 Payment to share-broker without deducting tax (Note-6) Payment to commodity broker without deducting tax (Note-6) 30,000 Donation to electoral trust and registered Political party (Note-7) 1,50,000 26,30,000 Less: Items credited but to be considered separately/ Expenditure to be allowed Depreciation allowable under Income Tax Act, 1961 (Note-1) 27,50,000 76,30,000 Waiver of Loan taken for relocation of office premises (Note-8) Nil Expenditure on issue of debentures (Note-9) 2,00,000 (29,50,000) Gross Total Income 46,80,000 Less: Deduction under Chapter VI-A Under Section 80GGB [Donation to registered PP - Note 7 1,00,000 Under Section 80JJAA (Note-10) 6,00,000 (7,00,000) Total Income 39,80,000 Notes: (1) Depreciation as per books of account charged to Profit and Loss Account (i.e., Rs 16 Lakhs) has to be added back and depreciation calculated as per Income-Tax Rules, 1962 (i.e. Rs 27.50 Lakhs) is allowable as deduction under Section 32. Computer accessories and peripherals like printer and scanner form an integral part of the computer system and they cannot be used without the computer, they are eligible for depreciation @ 40%. [CIT vs BSES Yamuna Powers Ltd.] P a g e 12

However, EPABX is not a computer and is, hence, not entitled to higher depreciation @ 40% [Federal Bank Ltd.] Therefore, depreciation as per Income-Tax Act, 1961 would be is 27.50 lakhs as shown below Particulars Depreciation computed as per Income-tax Act, 1961 Less: Depreciation @ 40% wrongly provided in respect of EPABX = 40% of Rs 2,00,000 Rs 28,00,000 80,000 27,20,000 Add: Depreciation @ 15% on EPABX = 15% of Rs 2,00,000 Correct Depreciation as per Income-Tax Act, 1961 30,000 27,50,000 (2) Share issue expenses incurred by the company constitute a capital expenditure, even though it could not go in for public issue on account of non-clearance by SEBI. Though the efforts were aborted, the fact remains that the expenditure incurred was only for the purpose of expansion of the capital base. Since the expenditure has been charged to profit and loss account, the same has to be added back. (3) The amount paid for compounding an offence is inevitably a penalty and the mere fact that it has been described as compounding fee cannot, in any way, alter the character of the payment, which is in the nature of penalty. Hence, he same is not allowable as revenue expenditure. (4) In order to determine whether any loss from theft, dacoity, embezzlement, etc. is deductible or not, what is material is whether the loss incurred by theft, dacoity, etc., is incidental to the carrying on of the business. It does not make much difference whether such act is committed by the employees of the assessee or by strangers. In this case the loss due to theft took place when cash was withdrawn from the bank and taken to administrative office. Hence, it is incidental to business and thus, allowable as revenue expenditure. Since the same has already been charged as revenue expenditure, no further adjustment is required. (5) Any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in Section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and hence, shall not be allowed as deduction under section 37. Since the expenditure has been charged to profit and loss account, the same has to be added back for computing business income. It is assumed that the CSR expenditure is not of the nature described in Section 30 to 36 of Income Tax Act, 1961, and hence, does not qualify for deductions under those sections. (6 The payments to share broker and commodity broker are in the nature of commission. However, payment for transaction in securities has been particularly excluded from the scope of Section 194H. Hence, payment of Rs 2 Lakh to a share broker for transacting shares listed in stock exchange (which falls within the meaning of securities) would not be disallowed for non-deduction of tax at source.* However, payment of Rs 1 Lakh to commodity broker for commodity transactions at MCX would attract disallowance @ 30% under section 40(a)(ia), due to non-deduction of tax at source under section 194H. *Since the income from transacting in shares has not been separately mentioned in the question, it is assumed that such income is included in the net profit of Rs 50 lacs in the profit and loss account and therefore, commission paid to share broker has been allowed as deduction from such income. P a g e 13

(7) Donation to an electoral trust and a registered political party is not an allowable expenditure under section 37 since it is not laid out wholly or exclusively for the purposes of business or profession. Hence, the same has to be added back while computing business income. However, donation made by a company to an electoral trust or registered political party is allowable deduction under section 80GGB from gross total income, subject to the condition that payment is made otherwise than by way of cash. Since the donation to electoral trust is made in cash, the same does not qualify for deduction under section 80GGB. However, donation of Rs 1 lakh by cheque to a registered political party would be eligible for deduction under section 80GGB. (8) Waiver of loan is an income under section 2(24) (xviii). Since the same has been credited to profit and loss account, no treatment is required. (9) The expenditure on issue of debentures is not in the nature of capital expenditure and is laid out or expended wholly and exclusively for the purpose of the assessee's business and is therefore, allowable as a deduction. Since the said expenditure has been capitalized in the books of account, the same has to be deducted to compute business income. (10) Deduction of 30% of additional wages paid to the new regular employees employed by the assessee is allowable under section 80JJAA. Deduction is therefore 30% of Rs 20,00,000 i.e. Rs 6,00,000 7. A & Co. Ltd., a property developer and builder, disclosed unsold flats as stock in trade in its books of account. 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. The facts and decision of Chennai Properties & Investments Ltd. (Supreme Court) are as under: Facts: The appellant-assessee is a company incorporated under the Indian Companies Act. Its main objective, as stated in the Memorandum of Association, is to acquire the properties in the city of Chennai and to let out those properties. The assessee had rented out such properties and the rental income received there from was shown as income from business in the return filed by the assessee. The Assessing Officer, However refused to tax the same as business income. According to the Assessing Officer, since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, held that it would be treated as income from house property and taxed the same accordingly under that Head. Decision: The Supreme Court distinguished its earlier judgment in East India Housing and Land Development Trust Ltd.'s. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was: whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that P a g e 14

the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties. In the circumstances of the present case we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property'. If the business of the assessee is acquiring the properties and letting them on hire, then, the rental income shall be assessed as business income. Therefore, in view of the decision of the Supreme Court in the above-mentioned case, rental income from properties of Company shall be taxable under the head Income from House Property. Therefore, the Assessing Officer is not justified in treating the income as business income. The said income was rightly shown by the assessee as Income from House Property. 8. Parik Hospitality Limited is engaged in the business of running of hotels of 3-star category. The Company s Statement of profit and Loss for the PY ended year ended 31st March, 2018 shows a net profit of Rs 152 lakhs after debiting or crediting the following items: (a) Payment of Rs 0.25 lakhs and Rs 0.30 lakhs in cash on 3rd December, 2017 and 10th December 2017 respectively for purchase of crab, lobster and squid to Mr. Raja, a fisherman, and Mr. Khalid, a middleman for these products, respectively. (b) Contribution towards employees pension scheme notified by the Central Government under section 80CCD for a sum of Rs 3 lakhs calculated at 12% of basic salary and Dearness Allowance payable to the employees. (c) Payment of Rs 6.50 lakhs towards transportation of various materials procured by one of its hotels to M/s Bansal Transport, a partnership firm, without deduction of tax at source. The firm has furnished its Permanent Account Number in the tender document. (d) Profit of Rs 12 lakhs on sale of a plot of land to Avimunya Limited, a domestic company, the entire shares of which are held by the assessee company. The plot was acquired by Parik Hospitality Limited on 1st June, 2015. (e) Contribution of Rs 5 lakhs to Indian Institute of Technology with a specific direction for use of the amount for scientific research program approved by the prescribed authority. (f) Expense of Rs 10 lakhs on foreign travel of two directors for a collaboration agreement with a foreign company for a brewery project to be set up. The negotiation did not succeed and the project was abandoned. (g) Fees of Rs l lakh paid to independent directors for attending Board meeting without deduction of tax at source under section 194J. (h) Depreciation charged Rs 10 lakhs. (i) Rs 10 lakhs being the additional compensation received from the State Government pursuant to an interim order of Court in respect of land acquired by the State Government in the PY 2013-14. (j) Dividend received from a foreign company Rs 5 lakhs. Additional information: (i) As a corporate debt restructuring, the bank has converted unpaid interest of Rs 10 lakhs upto 31st March, 2017 into a new loan account repayable in five equal annual instalments. The first instalment of Rs 2 lakhs was paid in March, 2018 by debiting new loan account. P a g e 15

(ii) Depreciation as per Income- tax Act, 1961 Rs 15 lakhs. (iii) The company received a bill Rs 2 lakhs on 31st March 2018 from a supplier of vegetables for Supply made in March, 2018. The bill was omitted to be recorded in the books in March, 2018. The bill was paid in April, 2018 and the necessary entry was made in the books then. Compute total income of Parik Hospitality Limited for the AY 2018-19 indicating the reasons for treatment of each item. Ignore the provisions to minimum alternate tax. Computation of Total Income of Parik Hospitality Ltd. for the AY 2018-19 Particulars Amount ( Rs ) Profits and Gains from Business and Profession Net profit as per Profit & Loss Account 1,52,00,000 Add: Items debited but to be considered separately or to be disallowed (a) (b) (c) Payment to middleman for purchase of crab etc. in an amount exceeding Rs 10,000 [Under section 40A(3), disallowance is attracted in respect of expenditure for which cash payment exceeding Rs 10,000 is made on a day to a person. Payment of Rs 25,000 to fishermen for purchase of crab etc. is covered by exception under Rule 6DD. However, payment of Rs 30,000 to middleman for purchase of crab etc. is not covered by the exceptions given in Rule 6DD - CBDT Circular] Contribution towards Employees Pension Scheme in excess of 10% of salary disallowed under section 40A(9) [Contribution to the extent of 10% of salary (Basic salary + Dearness allowance, if it forms part of pay for retirement benefits) is allowable as deduction under section 36(1)(iva). In this case it is presumed that Dearness allowance forms part of retirement benefits.] Payment to transport contractor without deduction of tax at source. (No tax is required to be deducted at source under section 194C in respect of payment to transport contractor if the contractor does not own more than10 goods carriage at any time during the PY and furnishes a declaration to this effect and his Permanent Account Number. In this case It is presumed that contractor has given the above declaration & PAN and therefore, no tax is required to be deducted in respect of payment of Rs 6.50 lakhs made for transport of materials. Hence, no disallowance under section 40(a)(ia) would be attracted in this case for non-deduction of tax at source). 30,000 50,000 P a g e 16

(d) Expenses on foreign travel of two directors for a collaboration agreement which failed to materialize. (Where such expenditure is incurred for a project not related to the existing business and the project was abandoned without creating a new asset, the expense is capital in nature. Brewery project is not related to the existing business of running three star hotels) 10,00,000 (e) Fees paid to directors without deducting tax at source (30% of Rs 1 lakh) 30,000 11,10,000 (Disallowance @ 30% would be attracted under section 40(a)(ia) for non-deduction of tax source from director s remuneration on which tax is deductible under section 194J) 1,63,10,000 Less: Items credited but to be considered separately / expenditure to be allowed (a) Profit on sale of plot of land to 100% subsidiary company 12,00,000 [Short-term capital gains arises on sale of plot of land held for less than 24 months However In this case since the transfer is to a 100% subsidiary company and the subsidiary company is an Indian company, the same would not constitute a transfer for levy of capital gains tax as per section 47(iv). Since this amount has been credited to the statement of profit and loss, the same has to be deducted for computing business income] (b) (c) (d) Contribution to IIT for scientific research [Contribution to IIT for scientific research programme approved by the prescribed authority qualifies for weighted deduction @ 150% under section 35(2AA). Since 100% of contribution has already been debited to the statement of profit and loss, the balance 50% has to be deducted while Computing business income] Deprecation (Deprecation allowable under the Income-tax Act, 1961 is Rs 15 lakhs whereas the depreciation as per books of account debited to the statement of profit and loss is Rs 10 lakhs. Hence, the additional amount of Rs 5 lakhs has to be deducted while computing business income) Additional compensation received from state Government. (Since the additional compensation has been received pursuant to an interim order of the Court, the same would be deemed as Income chargeable to tax under the head Capital Gain in the year of final order as per section 45(5). Since the compensation has been credited to the statement of profit and loss, the same has be deducted while computing business income) 2,50,000 5,00,000 10,00,000 P a g e 17

(e) (f) Dividend received from foreign company (Dividend received from foreign company is taxable under the head Income from other sources. Since the said dividend has been credited to the statement of profit and loss, the same has be to deducted while computing business Income) Interest paid during the year (Conversion of unpaid interest into loan shall not be construed as payment of interest for the purpose section 43B. The amount of unpaid interest converted into a new loan will be allowable as deduction only in the year in which such converted loan is actually paid. Since Rs 2 lakhs has been paid in the PY 2017-18, the same is allowable as deduction) 5,00,000 2,00,000 (g) Purchase omitted to be recorded in the books. 2,00,000 38,50,000 (Since the purchase is made in March, 2018 (i.e., PY 2017-18) in respect of which bill of Rs 2 lakhs received on 31.3.2018 has been omitted to be recorded in the books in that year, it has to be deducted to compute the business income. It is logical to assume that the company is following mercantile system of accounting). Profits and Gains of Business or Profession 1,24,60,000 Income from Other Sources Dividend received from foreign company 5,00,000 Gross Total Income 1,29,60,000 Less: Deduction under Chapter VI A Nil Total Income 1,29,60,000 P a g e 18

9. XYZ Ltd. is engaged in the manufacture of fertilizers since 01-04-2010. Its Statement of Profit & Loss shows a net profit of Rs 700 lakhs after debit/credit of the following items: (1) Depreciation calculated on the basis of useful life of assets as per provisions of the Companies Act, 2013 is Rs 50 lakhs. (2) Normal Depreciation calculated as per Income-tax Rules is Rs 80 lakhs. (3) Employer's contribution to EPF of Rs 2 lakhs together with the Employees' contribution of Rs 2 lakhs for the month of March, 2018 was remitted on 8th May 2018. (4) The company appended a note to its Income Statement that industrial power tariff concession of Rs 2.5 lakhs was received from the State Government and treated the same as capital receipt. (5) The company had provided an amount of Rs 25 lakhs being sum estimated as payable to workers based on agreement to be entered with the workers union towards periodical wage revision once in 3 years. The provision is based on a fair estimation on wage and probable revision. (6) The company had made a provision of 10% of its debtors towards bad and doubtful debts. Total sundry debtors of the company as on 31-03-2018 was Rs 200 lakhs. (7) A debtor who owed the company an amount of Rs 40 crores was declared insolvent and hence, was written off. (8) Sundry creditors include an amount of Rs 50 lakhs payable to A & Co, towards supply of raw materials, which remained unpaid due to quality issues. An agreement has been made on 31-03-2018, to settle the amount at a discount of 75% of the outstanding. (9) The opening and closing stock for the year were Rs 200 lakhs and Rs 250 lakhs, respectively. They were overvalued by 10%. (10) Provision for gratuity based on actuarial valuation was Rs 5 crores. Actual gratuity paid was Rs 3 crores. (11) Commission of Rs 1 lakhs paid to a recovery agent for realization of a debt. Tax has been deducted and remitted as per Chapter XVIIB of the Act (12) The company has purchased 500 tons of industrial paper as packing material at a price of Rs 30,000/ton from PQR, a firm in which majority of the directors are partners. PQR's normal selling price in the market for the same material is Rs 28,000/ton. Additional Information: (1) There was an addition to Plant & Machinery amounting to Rs 50 lakhs on 10.06.2017. (2) The company had credited a sub-contractor an amount of Rs 8 lakhs on 31.03.2017 towards repairing a machinery component. The tax so deducted was remitted on 31-10-2017. (3) The company has collected Rs 10 lakhs as sales tax from its customers and paid the same on the due dates. However, on an appeal made, the High Court directed the Sales Tax Department to refund Rs 3 lakhs to the company. The company in turn refunded Rs 2 lakhs to the customers from whom the amount was collected and the balance of Rs 1 lakh is still lying under the head "Current Liabilities'. Compute total income and tax payable. Ignore MAT provisions. P a g e 19

Computation of Total Income of XYZ Ltd, for the AY 2018-19 Particulars Amount ( Rs ) Net profit as per profit and loss account 7,00,00,000 Add: Items debited but to be considered separately or to be disallowed Depreciation as per Companies Act, 2013 disallowed 50,00,000 Employees contribution to EPF NIL [As per Delhi High Court in AIMIL, employees contribution is allowable as deduction if the same has been paid on or before the due date of filing of return under section 139(1)]. Employers contribution to EPF NIL [As per section 43B, employers' contribution to EPF is allowable as deduction since the same has been deposited on or before the 'due date of filing of return under section 139(1). Since the same has been debited to profit and loss account, no further adjustment is necessary Industrial power tariff concession received from State Government 2,50,000 [Any assistance in the form of, inter alia, concession received from the Central or State Government would be treated as income as per section 2(24)(xviii). Since the same has not been credited to profit and loss account, adjustment is required. Provision for wages payable to workers NIL [There has been wage revision every three years. The company was formed in 1999. Since the provision is based on a fair estimation of wages and probable revision, the same can be recognized for the purpose of income computation (CIT v. BHEL Ltd. (2013) 352 ITR 88 (Del)]. As the provision has been debited to profit and loss account, no adjustment is required while computing business income] Provision for doubtful debts [10% of Rs 200 lakhs] 20,00,000 [Provision for doubtful debts is allowable as deduction under section 36(l)(viia) only in case of banks, public financial institutions, state financial corporations and state industrial investment corporations and NBFCs. Such provision is not allowable as deduction in the case of a manufacturing company. Since the same has been debited to profit and loss account, it has to be added back for computing business income] Bad debts written off NIL [Bad debts written off in the books of account is allowable as deduction under section 36(l)(vii). Since the same has already been P a g e 20

debited to profit and loss account, no further adjustment is required] Discount given by Sundry Creditors for supply of raw materials 37,50,000 [Discount of 75% given by Sundry Creditors for supply of raw materials is taxable under section 41(1). Since the same has not been credited to profit and loss account, adjustment is required] Provision for gratuity 2,00,00,000 [Provision of Rs 500 lakhs for gratuity based on actuarial valuation is not allowable as deduction as per section 40A(7). However, actual gratuity of Rs 300 lakhs paid is allowable as deduction. Hence, the difference has to be added back] Commission paid to recovery agent for realization of a debt. NIL [Commission of Rs 1 lakh paid to a recovery agent for realisation of a debt is an allowable expense under section 37. Since the same has been debited to profit and loss account, no further adjustment is required] Purchase of paper at a price higher than the fair market value 10,00,000 [As per section 40A(2), the difference between the purchase price ( Rs 30,000 per ton) and the fair market value ( Rs 28,000 per ton) multiplied by the quantity purchased (500 tons) has to be added back since the purchase is from a related party, a firm in which majority of the directors are partners, at a price higher than the fair market value] Sales tax not refunded to customers out of sales tax refund 1,00,000 3,21,00,000 [The amount of sales tax refunded to the company by the Government is a revenue receipt chargeable to tax under section 41(1). Deduction can be claimed of amount refunded to customers. Hence, the net amount of Rs 1,00,000 (i.e., Rs 3,00,000 minus Rs 2,00,000) would be chargeable to tax] 10,21,00,000 Less: items credited but to be considered separately/ permissible expenditure and allowances Depreciation as per Income-tax Act,1961 80,00,000 Over-valuation of stock [ Rs 50 lakhs x 10/110] 4,54,545 [The amount by which stock is over-valued has to be reduced for computing business income. Rs 50 lakhs, being the difference between closing and opening stock, has to be adjusted to remove the effect of over-valuation] Additional Depreciation 10,00,000 P a g e 21