1. BB Ltd., an Indian company, receives the following dividend income during the P.Y. 2016-17 - (i) from shares held in BCD Inc., a Danish company, in which it holds 25% of nominal value of equity share capital ` 65,000; (ii) from shares held in EFG Inc., an English company, in which it holds 31% of nominal value of equity share capital ` 1,50,000. (iii) From shares held in HIJ Inc., a Dutch company, in which it holds 62% of the nominal value of equity share capital - ` 1,07,000 (iv) From shares held in Indian subsidiaries, on which dividend distribution tax has been paid by such subsidiaries ` 47,000. BB Ltd. has paid remuneration of ` 16,000 for realising dividend, the breakup of which is as follows (1) ` 4,000 (BCD Inc.); (2) ` 7,000 (EFG Inc.);(3) ` 5,000(Indian subsidiaries) The business income of BB Ltd. computed under the provisions of the Act is ` 48 lakh. Compute the total income and tax liability of BB Ltd., ignoring MAT. Assuming that BB Ltd. has distributed dividend of ` 4,20,000 in February, 2017, compute the additional income-tax payable by it under section 115-O. Ignore the provisions of double taxation avoidance agreement, if any, applicable in this regard. Solution: Computation of Total Income of BB Ltd. for A.Y.2017-18 Particulars Profits and gains of business or profession Income from other sources (See Note below) Total income ` 48,00,000 3,18,000 51,18,000 Particulars From BCD Inc., a Danish company, Net Dividend (i.e., ` 65,000 61,000 ` 4,000) is Taxable at Normal Rates From EFG Inc., an English company Gross Dividend is taxable @15% 1,50,000 under section 115BBD [No deduction is allowable in respect of any expenditure as per section 115BBD (2)] From HIJ Inc., a Dutch company gross dividend is taxable @ 15% 1,07,000 under section 115BBD [no deduction is allowable in respect of any expenditure as per section 115BBD (2)] From shares in Indian subsidiaries ` 47,000 exempt under section 10(34) since dividend distribution tax has been paid under section 115-O [As per section 14A, no deduction is allowable in respect of expenditure Incurred to earn exempt income] Nil ` 3,18,000 CA Bhanwar Borana (CA BB) Page 1
Computation of tax liability of BB Ltd. for the A.Y.2016-17 Particulars ` Tax @ 15% under section115bbdon ` 2,57,000(gross dividend) 38,550 Tax @ 30% on balance income of ` 48,61,000 14,58,300 14,96,850 Add: Education cess @ 2% and Secondary and higher education 44,906 cess @1% Taxliability 15,41,756 Computation of additional income- tax payable by BB Ltd. under section 115-O Particulars Amount distributed by way of dividend 4,20,000 Less: Dividend received from Indian subsidiaries, on which DDT payable under section115 O has been paid 47,000 Dividend received from foreign subsidiary, HIJ Inc., on which tax is payable under section 115BBD 1,07,000 1,54,000 2,66,000 Gross Dividend (266000/85*100) 3,12,941 ` Additional income-tax @ 15% 46,941 Add: Surcharge @ 12% 5,633 52,574 Add: Education cess @2% and Secondary and higher education 1,577 cess@1% Additional income-tax payable under section 115-O 54,151 2. Mr. Shakti purchased a residential house in March, 2002 for Rs. 22 Lakhs. He sold the house on 01st December, 2016 for Rs. 100 Lakhs. He paid brokerage at 2% on sale price. He invested Rs. 80 Lakhs in April 2017 in equity shares of Shakti Manufacturing Private Limited, a newly formed manufacturing company which qualifies to be a small enterprise under Micro, Small and Medium Enterprises Development Act, 2006. Mr. Shakti holds 80% of Share Capital of the Company. The Company utilized the sum of Rs. 80 Lakhs in the following manner: i) Purchase of new machinery during April 2017 Rs. 70 Lakhs (including Rs. 10 Lakhs for purchase of computers). ii) Deposit in specified bank on 25th September, 2017 Rs. 10 Lakhs The due date for filing return of income for Mr. Shakti for A.Y. 2017-18 is 30th September, 2017. Assume that he files the return on 28th September, 2017. Compute the taxable Capital Gain arising from the above transaction for A.Y. 2017-18 (CII : F.Y. 2001-02 426, F.Y. 2016-17 1125) CA Bhanwar Borana (CA BB) Page 2
Solution: Name of the Assessee: Mr. Shakti Previous Year: 2016-17 Assessment Year: 2017-18 Computation of Taxable Capital Gains Particulars Full Value of Consideration Less : Expenses on transfer (2% of sale consideration) Net Consideration Less : Indexed Cost of acquisition 1,00,00,000 (2,00,000) 98,00,000 (58,09,859) Rs. 22,00,000 * 1125 [F.Y.2016-17] 426 [F.Y.2001-02] Long Term Capital Gain Less : Exemption under section 54 GB (Note 1) 39,90,141 (28,50,101) Rs. 39,90,141 * Rs. 70,00,000 Rs. 98,00,000 Taxable Capital Gains 11,40,040 Deemed Cost of new plant and machinery for exemption u/s 54GB Particulars 1. Purchase cost of new P & M acquired in April 2017 Less : Cost of officer appliances i.e computers (which have been specifically excluded from the meaning of new plant and machinery) 70,00,000 (10,00,000) 60,00,000 2. Amount deposited in the specified bank before the due date of filing return 10,00,000 Deemed Cost of P & M (New)for exemption u/s 54GB 70,00,000 NOTES Exemption u/s 54GB can be availed on LTCG on transfer of a residential house, since all the conditions given are fulfilled by Mr. Shakti. CA Bhanwar Borana (CA BB) Page 3
i) The sales proceeds are used for subscription in the equity shares of an eligible company, being a newly incorporated manufacturing company which qualifies to be a small enterprise under the Micro, Small and Medium Enterprises Act, 2006. ii) Mr. Shakti holds more than 50% of the share capital in the said company. iii) Further, the amount of subscription as share capital has been utilized by the eligible company for purchase of new P & M within a period of one year from the date of subscription. 3. Mr. Ramesh received the following gifts during the P.Y.2016-17 from his from his friend Mr. Suresh (1) Cash gift of 1,01,000 on his marriage anniversary on 14/02/2017 (2) 75 shares of ABC Ltd., the FMV of which was 62,000, on his birthday, 30/09/2016. (3) 120 shares of XYZ Ltd., the FMV of which was 85,000 on the date of transfer. This gift was received on the occasion of Diwali. Mr. Suresh had originally purchased the shares on 02/04/2015 at a cost of 64,000. Further, on 5 th January, 2017, Mr. Ramesh purchased land from his grandfather s brother for 18,00,000. The stamp duty value of land was 25,00,000. On 3 rd March, 2017, he sold 120 shares of XYZ Ltd. for 1,15,000. Compute the income of Mr. Ramesh chargeable under the head Income from other sources and Capital Gains for A.Y. 2017-18. Solution: Computation of Income from Other Sources of Mr. Ramesh for the A.Y.17-18 Particulars (1) Where any sum of money received without consideration and the aggregate value exceeds 50,000, the whole of the aggregate value of such sum is taxable under section 56(2)(vii). Hence, cash gift of 1,01,000 received on 14/02/2017 from his friend is taxable under section 56(2)(vii). 1,01,000 CA Bhanwar Borana (CA BB) Page 4
(2) Fair market value of shares of ABC Ltd. received from a friend without consideration on 30/09/2016 is taxable under section 56(2)(vii) as shares are included within the definition of property and the aggregate fair market value exceeds 50,000. 62,000 (3) Fair market value of shares of XYZ Ltd. is taxable under the section 56(2)(vii) as shares are included within the definition of property and the aggregate fair market value exceeds 50,000. 85,000 (4) Purchase of land for inadequate consideration on 5/01/2017 would attract the provisions of section 56(2)(vii), since the 7,00,000 difference between stamp duty value and actual consideration exceeds 50,000. The difference between stamp duty value and the consideration is 7,00,000 (i.e., 25,00,000-18,00,000), which is chargeable to tax under the section 56(2)(vii). Grandfather s brother is not a relative within the meaning of section 56(2)(vii) Income From Other Sources 9,48,000 Computation of Capital Gains of Mr. Ramesh for the A.Y. 2017-18 Sales Consideration (03/03/2017) Particulars 1,15,000 Less: Cost of Acquisition [deemed to be the fair market value charged to tax under section 56(2)(vii)] [ as per section 49(4)] SHORT TERM CAPITAL GAINS 85,000 30,000 Note The period of holding of the previous owner, Suresh, is not to be considered for determining whether capital gains is long-term or short-term, since in this case is covered under section 49(4) and not under section 49(1). CA Bhanwar Borana (CA BB) Page 5
4. A partnership firm consisting of three partners X, Y and Z is engaged in the business of manufacturing and selling toys. Turnover of the business for the year ended 31 st March, 2017 amounts to Rs.175 lakh. Bad debts written off in the books are Rs.75,000. Interest at 12% is provided to partner Z on his capital of Rs.6 lakh as authorized by the partnership deed. The firm had business loss of Rs.50,000 and unabsorbed depreciation of Rs. 1,50,000 carried forward from Assessment Year 2016-17. The firm did not pay tax under presumptive tax system in assessment year 2016-17. The firm opts for presumptive taxation under section 44AD for Assessment Year 2017-18. (i) Compute the income of the firm chargeable under the head Profits and gains of business or profession. (ii) What would be the liability for interest under sections 234B and 234C, if the firm has not paid any advance tax? Solution: Computation of income of the firm chargeable under the head PGBP Particulars Rs. Presumptive income under section 44AD (8% of Rs.175 lakh) [See 14,00,000 Less: Brought forward business loss under section 72 [See Note 4] 50,000 Income of the firm chargeable under the head Profits and Gains of business or profession 13,50,000 Tax liability at @ 30.9% 4,17,150 Notes: 1. A partnership firm falls within the definition of eligible assessee under section 44AD. The threshold limit of turnover for applicability of presumptive taxation scheme under section 44AD is Rs.200 lakh. In this case, since the turnover of the business of the firm is Rs.175 lakh, it falls within the definition of eligible business and therefore, the firm is eligible to opt for presumptive taxation under section 44AD. 8% of the total turnover would be deemed to be the business income of the firm. 2. As per section 44AD(2), all deductions allowable under sections 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed. Accordingly, no deduction shall be allowed for bad debts since the same is deductible under section 36(1)(vii) and similarly unabsorbed depreciation is not deductible since the same is deductible under section 32(2). 3. Due to omission of proviso to section 44AD(2), interest on capital and working partner salary are also not deductible while computing the presumptive income of a partnership firm from the assessment year 2017-18 onwards. CA Bhanwar Borana (CA BB) Page 6
4. However, business loss of previous year 2015-16 can be set-off against current year business income as per section 72. 5. Since the partnership firm has opted for computation of income on presumptive basis under section 44AD, it must pay the whole amount of advance tax in one installment on or before 15.03.2017. Further, any amount paid by way of advance tax on or before 31 st March shall also be treated as advance tax paid during each financial year on or before 15 th March. In case the firm has not paid advance tax or has paid advance tax less than the whole amount, then it has to pay interest under section 234C at 1% on the short fall in payment of advance tax attributable to the month of March, 2017. it has to pay interest under section 234B @1% per month or part of a month on the short fall in payment of advance tax from 1 st April, 2017 to the date of determination of total income under section 143(1) and where regular assessment is made, to the date of regular assessment. 5. Mr. BB, a CA, aged 58 years, Gross Receipts from profession for AY 17-18 is ` 8,24,000. Income of Mr. BB from other sources is Rs. 21,000. He pays medical insurance premium of Rs. 31,000 for insuring the health of his non-dependant parents who are senior citizens; Rs. 26,000 for self and spouse and Rs. 4,000 for his sister. He incurs expenditure of Rs. 25,000 on medical treatment of his dependant mentally retarded (severe disability) brother in an approved hospital duly certified. He pays rent of Rs. 4,000 per month. Calculate his total income for the AY 2017-18. Assume assessee opted presumption basis taxation for PGBP. Computation of total Income of Mr. BB for the A.Y. 2017-18 Particulars Professional Income (824000*50%) 44ADA [Note : 1] Income from other sources Gross Total Income Less: Deduction Under Chapter VI-A Medical insurance premium paid under section 80D (Rs. 25,000 + Rs. 30,000) [See Note 2] Expenditure for dependant mentally retarded section 80DD [See Note 3] Rent Paid Under 80GG [See Note 4] - Least of the following is eligible for deduction 1) Excess of rent paid over 10% of Adj. total income (Rs. 48,000 Rs. 25,300) = Rs. 22,700 Amount (Rs.) 55,000 1,25,000 Amount (Rs.) 4,12,000 21,000 4,33,000 CA Bhanwar Borana (CA BB) Page 7
2) 25% of total income = Rs. 63,250 3) Ceiling limit Rs. 5,000 p.m. = Rs. 60,000 Total Income 22,700 (2,02,700) 2,30,300 Notes: 1. In case of resident assessee, engaged in Profession & Gross receipts is upto 50lacs can opt section 44ADA. As per section 44ADA PGBP shall be 50% of Gross Receipts. 2. Medical insurance premium paid for self and spouse would qualify for deduction under section 80D subject to a maximum of Rs. 25,000. Mediclaim insurance premium paid for parents shall qualify for additional deduction under section 80D, subject to a maximum of Rs. 30,000 (since they are senior citizens), irrespective of whether they are dependent or non - dependent on Mr. BB. Medical insurance premium paid for insuring the health of sister does not qualify for deduction under section 80D, since sister does not fall within the definition of family. 3. Deduction under section 80DD is a flat amount of Rs. 1,25,000, irrespective of the actual expenditure incurred in respect of a dependent, who is a person with severe disability. It is assumed that Mr. BB has furnished a copy of the certificate issued by the medical authority, in the prescribed form and manner, along with the return of income under section 139 in respect of A.Y. 2017-18. 4. It is presumed that all the conditions for claim of deduction under section 80GG have been fulfilled by Mr. BB. Adj. Total income for the purpose of section 80GG would be - Amount (Rs.) Gross Total Income Less : Deduction under sections 80D & 80DD Adj. Total income 4,33,000 1,80,000 2,53,000 CA Bhanwar Borana (CA BB) Page 8
6. Rajesh has commenced the business of manufacture of paper on 1.4.2016. He employed 162 new employees during the P.Y.2016-17, the details of whom are as follows No. of Employees Date of employment Regular/ Contractual Total monthly emoluments per employee (`) I 42 1.4.2016 Regular 22,500 Ii 37 1.6.2016 Regular 25,500 Iii 55 1.8.2016 Contractual 25,500 Iv 28 1.10.2016 Regular 22,500 The regular employees participate in recognized provident fund while the contractual employees do not. (i) Compute the deduction, if any, available to Mr. Rajesh for A.Y.2017-18, if the profits and gains derived from manufacture of paper that year is ` 82 lakh and his total turnover is ` 2.01 crore. (ii) Would your answer change if Mr. Rajesh has commenced the business of manufacturing of apparel (and not paper) on 1.4.2016 and the above particulars related to such business? Solution: (i) Case 1 : Where Mr. Rajesh has commenced the business of manufacture of paper on 1.4.2016 Mr. Rajesh is eligible for deduction under section 80JJAA since he is subject to tax audit under section 44AB for A.Y.2017-18, as his total turnover from business exceeds ` 1 crore and he has employed additional employees during the P.Y.2016-17. Since this is the first year of his new business, emoluments paid or payable to employees employed during this year shal l be deemed to be the additional employee cost. Deemed additional employee cost = ` 22,500 12 42 [See Working Note below] = ` 1,13,40,000 Deduction under section 80JJAA = 30% of ` 1,13,40,000 = ` 34,02,000. Working Note: Number of additional employees Particulars Total number of employees employed during the year Less: Contractual employees employed on 1.8.2016, since they do not participate in recognized provident fund and their total monthly emoluments exceed ` 25,000 No. of Regular employees employed on 1.6.2016, since 37 their total monthly emoluments exceed ` 25,000 55 162 CA Bhanwar Borana (CA BB) Page 9
Regular employees employed on 1.10.2016 since they have been employed for less than 240 days in 28 120 the P.Y.2016-17. Number of additional employees 42 Note - Since contractual employees do not participate in recognized provident fund, they do not qualify as additional employees. In any case, their total monthly emoluments exceed ` 25,000, and hence do not qualify as additional employees. Further, 37 regular employees employed on 1.6.2016 also do not qualify as additional employees since their monthly emoluments exceed ` 25,000. Also, 28 regular employees employed on 1.10.2016 do not qualify as additional employees for the P.Y.2016-17, since they are employed for less than 240 days in that year. Therefore, only 42 employees employed on 1.4.2016 qualify as additional employees, and the total emoluments paid or payable to them during the P.Y.2016-17 is deemed to be the additional employee cost. (ii) Case 2: Where Mr. Rajesh has commenced the business of manufacture of apparel on 1.4.2016 Yes, the answer would change, since in the case of an assessee engaged in the business of manufacture of apparel, the requirement of minimum period of employment of 240 days in the previous year to qualify as an additional employee for the purpose of deduction under section 80JJAA has been relaxed due to the seasonal nature of business of manufacture of apparel. The minimum period of employment required in case of this industry, to qualify as an additional employee for the purpose of deduction under section 80JJAA, is 150 days. Therefore, the 28 regular employees employed on 1.10.2016 would qualify as additional employees and the deemed additional employee cost pertaining to these employees would also be eligible for deduction under section 80JJAA. Deemed Additional Employee Cost = ` 1,13,40,000 (as calculated in (i) above) + ` 37,80,000 (28 employees ` 22,500 6 months) = ` 1,51,20,000 Deduction under section 80JJAA = 30% ` 1,51,20,000 = ` 45,36,000 CA Bhanwar Borana (CA BB) Page 10
7. M/s. XYZ is a firm liable to tax@30%. The following are the particulars furnished by the firm for A.Y.2017-18: Particulars of total income (1) As per the return of income furnished u/s 139(1) 50,00,000 (2) Determined under section 143(1)(a) 60,00,000 (3) Assessed under section 143(3) 75,00,000 (4) Reassessed under section 147 95,00,000 Rs Can penalty be levied under section 270A on M/s. XYZ? If the answer is in the affirmative, compute the penalty leviable under section 270A. Solution: M/s. XYZ is deemed to have under-reported its income since: (1) its income assessed under 143(3) exceeds its income determined in a return processed under section 143(1)(a); and (2) the income reassessed under section 147 exceeds the income assessed under section 143(3). Therefore, penalty is leviable under section 270A for under-reporting of income. Computation of penalty leviable under section 270A Particulars Assessment under section 143(3) Under-reported income: Total income assessed under section 143(3) 75,00,000 (-) Total income determined u/s 143(1)(a) 60,00,000 Tax payable on under-reported income: Tax on under-reported income of ` 15 lakhs plus tax on total income of ` 60 lakhs determined u/s 143(1)(a) [30% of 75 lakh + EC & SHEC@3%] Less: Tax on total income determined u/s 143(1)(a) [30% of 60 lakh + EC & SHEC@3%] Penalty leviable@50% of tax payable 15,00,000 23,17,500 18,54,000 4,63,500 2,31,750 Reassessment under section 147 Underreported income: Total income reassessed under section 147 95,00,000 CA Bhanwar Borana (CA BB) Page 11
(-) Total income assessed under section 143(3) 75,00,000 20,00,000 Tax payable on under-reported income: Tax on under-reported income of 20 lakhs plus tax on total income of 75 lakhs assessed u/s 143(3) [30% of 95 lakh + EC & SHEC@3%] Less: Tax on total income assessed u/s 143(3) [30% of 75 lakh + EC & SHEC@3%] 29,35,500 23,17,500 6,18,000 Penalty leviable@50% of tax payable 3,09,000 Note The following assumptions have been made - (1) None of the additions or disallowances made in assessment or reassessment qualifies under section 270A(6); and (2) The under-reported income is not on account of misreporting. 8. Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of income for A.Y.2017-18. However, the total income assessed in respect of such year under section 143(3) is 12 lakh. Is penalty under section 270A attracted in this case, and if so, what is the quantum of penalty leviable? Solution: Mr. Ram is deemed to have under-reported his income since he has not filed his return of income and his assessed income exceeds the basic exemption limit of 2,50,000. Hence, penalty under section 270A is leviable in his case. Computation of penalty leviable under section 270A Particulars Assessment under section 143(3) Under-reported income: Total income assessed under section 143(3) 12,00,000 (-) Basic exemption limit 2,50,000 9,50,000 Tax payable on under-reported income as increased by 1,85,000 the basic exemption limit [30% of 2 lakhs + 1,25,000] Add: EC & SHEC@3% 5,550 1,90,550 Penalty leviable@50% of tax payable 95,275 Note It is assumed that the under-reported income is not on account of misreporting. CA Bhanwar Borana (CA BB) Page 12
9. ABC Ltd. is a domestic company liable to tax@30%. The following are the particulars furnished by the company for A.Y.2017-18: Particulars of total income (1) As per the return of income furnished u/s 139(1) (15,00,000) (2) Determined under section 143(1)(a) (8,00,000) (3) Assessed under section 143(3) (5,00,000) (4) Reassessed under section 147 4,00,000 Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum of penalty? Solution: ABC Ltd. is deemed to have under-reported its income since: (1) the assessment under 143(3) has the effect of reducing the loss determined in a return processed under section 143(1)(a); and (2) the reassessment under section 147 has the effect of converting the loss assessed under section 143(3) into income. Therefore, penalty is leviable under section 270A for under-reporting of income. Computation of penalty leviable under section 270A Particulars Assessment under section 143(3) Underreported income: Loss assessed u/s 143(3) (5,00,000) (-) Loss determined under section 143(1)(a) (8,00,000) 3,00,000 Tax payable on under-reported income@30% 90,000 Add: EC & SHEC@3% 2,700 92,700 Penalty leviable@50% of tax payable 46,350 Re-Assessment under section 147 Under-reported income: Total income reassessed under section 147 4,00,000 (-) Loss assessed under section 143(3) (5,00,000) 9,00,000 Tax payable on under-reported income@30% 2,70,000 Add: EC & SHEC@3% 8,100 2,78,100 Penalty leviable@50% of tax payable 1,39,050 Note The following assumptions have been made - (1) None of the additions or disallowances made in assessment or reassessment qualifies under section 270A(6); and (2) The under-reported income is not on account of misreporting. CA Bhanwar Borana (CA BB) Page 13
10. Discuss the correctness or otherwise of the following statements: (i) The provisions of minimum alternate tax under section 115JB are not applicable to all foreign companies. (ii) Units set up in an International Financial Services Centre are entitled to special tax concessions. Solution: (i) The statement is not correct. The Finance Act, 2016 has inserted Explanation 4 to section 115JB with retrospective effect from 1.4.2001 to provide for non-applicability of levy of MAT under section 115JB on foreign companies subject to satisfaction of certain conditions : Where the foreign company is a resident of a country or a specified territory with which India has a DTAA under section 90(1) or the Central Government has adopted any agreement between specified associations for double taxation relief under section 90A(1), it should not have a permanent establishment in India in accordance with the provisions of such Agreement; Where the foreign company is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above, it should not be required to seek registration under any law for the time being in force relating to companies. The provisions of MAT under section 115JB would not be attracted in case of such foreign companies satisfying these conditions. Further, in the case of any foreign company (not satisfying the above conditions for non-applicability of MAT), the amount of income accruing or arising from the capital gains arising on transactions in securities; or the interest, royalty or fees for technical services chargeable to tax at the rat e or rates specified in Chapter XII, If such income is credited to profit and loss account and the income -tax payable thereon in accordance with the provisions of this Act, other than the provisions of Chapter XII-B, is at a rate less than the rate of 18.5%, shall be reduced while computing book profit. Thus, since the non-applicability of MAT is either subject to fulfilment of the prescribed conditions, and in other cases (i.e., cases where MAT is applicable), non-applicability is restricted to only specified income, the statement that the provisions of section 115JB are not applicable in the case of all foreign companies is not correct. (ii) The statement is correct (1) Exemption from STT and CTT: With effect from 1.6.2016, securities transaction tax is not leviable in respect of taxable securities transactions CA Bhanwar Borana (CA BB) Page 14
entered into by any person on a recognised stock exchange located in an International Financial Services Centre (IFSC) where the consideration for such transaction is paid or payable in foreign currency. Likewise, commodities transaction tax is not leviable in respect of taxable commodities transactions entered into by any person on a recognised association located in unit of IFSC where the consideration for such transaction is paid or payable in foreign currency. (2) Exemption of LTCGs on sale of securities, even if STT is not paid : Long- term capital gains in respect of income arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre would be exempt under section 10(38) even though securities transaction tax is not paid in respect of such transaction. (3) Concessional rate of tax on short -term capital gains, even if STT is not paid: Short term capital gains arising from transaction undertaken in foreign currency on a recognised stock exchange located in an International Financial Services Centre would be taxable at a concessional rate of 15% under section 111A even though securities transaction tax is not paid in respect of such transaction. (4) Concessional rate of MAT: In case of a company, being a unit located in International Financial Services Centre and deriving its income solely in convertible foreign exchange, the minimum alternate tax under section 115JB shall be chargeable at the rate of 9% instead of 18.5%. (5) Exemption from tax on distributed profits: In case of a company being a unit located in International Financial Services Centre, deriving income solely in convertible foreign exchange, there would be no tax on any amount declared, distributed or paid by such company, by way of dividends (whether interim or otherwise) on or after 1st April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend. 11. ABC Ltd., a manufacturer of automobiles, sells high value cars (each of value exceeding `10 lakh) and the middle segment cars (each of value between `5 lakh to `10 lakh) to its dealers across the country. Discuss whether the manufacturers are liable to collect tax at source under section 206C. Also, discuss the liability, if any, of dealers to collect tax at source on sale of these cars to the retail customers, if no part of the consideration is received in cash? What would be your answer if part of the consideration is received in cash? Solution: Section 206C(1F) provides for collection of tax at source@1% by the seller from the buyer, at the time of receipt of consideration for sale of motor vehicle, the value of which exceeds ` 10 lakhs. CBDT Circular No.22/2016 dated 8.6.2016 clarifies that sub -section (1F) was inserted by the Finance Act, 2016 CA Bhanwar Borana (CA BB) Page 15
to cover all transactions of retail sales and accordingly, it will not apply to sale of motor vehicles by manufacturers to dealers. Hence, car manufacturers are not liable to collect tax at source under section 206C (1F). In respect of sale of high value cars (each of value exceeding ` 10 lakhs) by dealers to retail customers, tax has to be collected at source@1% under section 206C(1F), even if no part of the consideration is received in cash. As regards cars in the middle segment (each of value between ` 5 lakhs and ` 10 lakhs), no tax has to be collected at source if no part of the consideration is received in cash. However, if whole or part of the consideration is received in cash, tax has to be collected at source@1% under section 206C(1D) on the cash component of the sale consideration, if the same exceeds ` 2 lakhs. These clarifications have been given by the CBDT vide its Circulars 22/2016 dated 8.6.2016 and 23/2016 dated 24.6.2016. 12. A public charitable trust registered u/s 12AA runs a hospital and also a medical college. It furnishes you the following information for the year ended 31.03.2017 i) Gross receipt from hospital Rs. 425 Lakhs ii) Income from business incidental to main objects Rs. 2 Lakhs iii) Voluntary contributions received from public Rs. 32 Lakhs. It includes corpus donation of Rs. 3 Lakhs and anonymous donation of Rs. 5 Lakhs Note: Voluntary contributions are included in Gross receipt given in (1) above iv) Hospital operational expenses incurred Rs. 105 Lakhs (This does not include capital expenditures and depreciation) v) Income from Medical College (solely for education purpose) Rs. 10 Lakhs. Gross receipts of college for the year Rs. 90 Lakhs vi) Gross receipts given in (i) above includes a sum of Rs. 55 Lakhs which has accrued but not received. Further, a sum of Rs. 18 Lakhs was received only on 31.03.2017. vii) The trust set apart Rs. 80 lakhs for acquiring a building to expand its hospital. But the amount was paid in December, 2017 when sale deed was registered in it name. viii) In June 2016, the trust purchased and installed new computer software for Rs. 28 Lakhs. The rate of depreciation is 60% as per Income Tax Act, 1961 ix) The trust incurred Rs. 35 Lakhs towards purchase of laptop computers and printers for the hospital x) It repaid loan of Rs. 15 Lakhs taken earlier for construction of hospital building Computer the total income of the trust for the A.Y. 2017-18 in order to avail maximum benefits within the four comers of law. CA Bhanwar Borana (CA BB) Page 16
Solution: Computation of total income of the trust for A.Y. 2017-18 in Lakhs Particulars Gross Receipts from Hospital (425 3 3.4) (Excluding corpus and anonymous donation taxable under section 115BBC) Less: Hospital Operational Expenses 418.60 105.00 313.30 Add: Income from business incidental to main object 2.00 315.60 Less: 15% of income eligible for accumulation or being set apart without any condition u/s 11(1)(a) 47.34 268.26 Less: Deemed application as per Explanation 2 to Section 11(1) i) Amount accrued but not received during the previous year ii) Income received on 31.03.2017 55.00 18.00 73.00 195.26 Less: Amount applied for the purposes of hospital (Note 2) - Cost of new computer software - Cost of laptops, computers and printers purchased for the hospital - Repayment of loan taken earlier for construction of hospital building Less: Amount set apart for acquisition of a building to expand its hospital (Note3) (The amount spent in December 2017 in the immediately following year can be treated as application in the F.Y. 2016-17, provided the statement in prescribed form (i.e. Form 10) is given to the A.O. on or before the due date u/s 139(1)) Income of Rs. 10 Lakhs from Medical College (Exempt u/s 10(23C)(iiiad) as gross receipts do not exceed Rs. 1 Crore) Taxable Income (Other than anonymous donation taxable u/s 115BBC) 28.00 35.00 15.00 78.00 117.26 80.00 37.26 NIL 37.26 CA Bhanwar Borana (CA BB) Page 17
Add: Anonymous donation taxable @ 30% 3.40 Total Income of the Trust 40.66 Notes 1) As per section 115BBC(1), the anonymous donations in excess of the higher of the following would be subject to tax @ 30% 2) Anonymous Donation Received 5,00,000 Less: i) 5% of Rs. 32,00,000 = Rs. 1,60,000 ii) Rs. 1,00,000 = Rs. 1,00,000 1,60,000 Taxable @ 30% 3,40,000 3) As per Section 11(6), where the cost of assets is claimed as application, no deduction for depreciation on such assets would be allowed in determining income for the purposes of application. Therefore, since cost of new computer software, laptops, computers and printers purchased for the hospital has been claimed as application of income, no depreciation would be allowed on these assets while determining income for the purposes of application. 4) In order to minimize and/or reduce the tax liability, the trustees may give a notice in writing to the A.O. in the prescribed manner about their intention to accumulate minimum of Rs. 34.76 Lakhs (Rs. 37.26 Lakhs Rs. 2.50 Lakhs (basic exemption)) specifying the period and the purpose for which the accumulation is proposed to be made and invest such sum in the modes specified u/s 11(5). This accumulation would be in compliance with Section 11(2) and in such a case, no tax will be payable on the total income (other than anonymous donations taxable @ 30% u/s 115BBC) of Rs. 37.26 Lakhs. 13. State with reasons whether return of income is to be filed in the following cases for the Assessment Year 2017-18: (i) Mr. X, a resident individual, aged 80 years, has a total income of ` 2,85,000. He has claimed deduction of ` 1,50,000 under section 80C and exemption of ` 1,20,000 under section 10(38). (ii) ABC, a partnership firm, has a loss of ` 10,000 during the previous year 2016-17. (iii) A registered association, eligible for exemption under section 10(23B), has income from house property of ` 2,60,000. (iv) Mr. Y, aged 45 years, has a total income of ` 10,000. He has claimed exemption u/s 10(38) of ` 3,50,000. (v) Mr. Hari, aged 65 years, is a resident and ordinarily resident in India for the A.Y.2017-18. He owns a house property in Dubai, which he purchased on 30.4.2007. His total income is ` 10,000 for AY 17-18 CA Bhanwar Borana (CA BB) Page 18
Solution: S.NO Return Filing Required? Reason (i) Yes As per the provisions of section 139(1), every person, whose total income without giving effect to the provisions of, Chapter VI-A and exemption under section 10(38) exceeds the basic exemption, is required to furnish the return of income for the relevant assessment year on or before the due date. The gross total income of Mr. X before giving effect to the exemption of ` 1,20,000 under section 10(38) and deduction of ` 1,50,000 under section 80C is ` 5,55,000, which exceeds the basic exemption limit of ` 5,00,000 applicable to an individual aged 80 years or more. Therefore, Mr. X has to furnish his return of income for the A.Y. 2017-18. (ii) Yes As per section 139(1), it is mandatory for a firm & company to furnish its return of income or loss on or before the specified due date. Therefore, M/s ABC has to furnish its return of loss for the A.Y. 2017-18 on or before the due date. (iii) Yes As per section 139(4C), every institution referred to, inter alia, in section 10(23B), whose total income without giving effect to the provisions of section 10 exceeds the maximum amount not chargeable to tax, is required to furnish the return of income for the relevant assessment year on or before the due date. In the above case, the registered association has income from house property of ` 2,60,000 before exemption under section 10, which exceeds the basic exemption limit of ` 2,50,000. Therefore, it is under an obligation to furnish its return of income for the A.Y. 2017-18. (iv) Yes Before claiming exemption u/s 10(38) Total income is more than basic exemption. (v) Yes Section 139(1) requires every resident other than not ordinarily resident, who at any time during the previous year, holds as a beneficial owner or otherwise, any asset (including financial interest in any entity) located outside India or has signing authority in any account located outside India or is a beneficiary of any asset located outside India, to file a return of income compulsorily whether or not he has income chargeable to tax. CA Bhanwar Borana (CA BB) Page 19
14. Does the Assessing Officer have power to make any adjustment to income disclosed by the Assessee in the return of income in course of processing the return under section 143(1)? Solution: The procedure to be followed for summary assessment is contained in section 143(1). As per section 143(1), the total income or loss of an Assessee shall be computed after making the following adjustments to the returned income: (i) any arithmetical error in the return; or (ii) an incorrect claim, if such incorrect claim is apparent from any information in the return. (iii) disallowance of loss claimed, if return is filed beyond due date u/s 139(1) (iv) disallowance of expenditure indicated in the audit report but not taken into account in computing the total income in the return (v) disallowance of deduction claimed under section u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if return is filed beyond due date u/s 139(1) (vi) addition of income appearing in Form 26AS or Form 16A/16 which has not been included in computing the total income in the return No such adjustment shall be made unless as intimation is given to the Assessee of such adjustment either in writing or electronic mode. Further, Assessing Officer shall make any adjustment after considering the response received from the Assessee, if any. Where no response is received with 30 days of the issue of such notice, the above adjustment can be made. For the purpose of section 143(1), an incorrect claim apparent from any information in the return means such claim on the basis of an entry, in the return of income: (a) of an item, which is inconsistent with another entry of the same or some other item in such return; (b) in respect of which, the information required to be furnished under the Income-tax Act, 1961 to substantiate such entry, has not been so furnished; in respect of a deduction, where such deduction exceeds specified statutory limit which may be expressed as monetary amount or percentage or ratio or fraction. 15. The following are the particulars of investments and payments made by Mr. Bhuvan, aged 52 years, employed with Omicron Ltd., during the previous year 2016-17: - Deposited ` 1,35,000 in public provident fund - Paid life insurance premium of ` 25,000 on the policy taken on 1.7.2012 to insure his life (Sum assured ` 2,00,000). - Deposited ` 50,000 in a five year term deposit with bank. - Paid mediclaim premium of ` 27,000 to insure his health and that of his spouse. - Paid mediclaim premium of ` 23,000 to insure the health of his mother aged 73 years and incurred medical expenses of ` 28,000 on his father, aged 81 years, in respect of whom he was unable to take a mediclaim policy. CA Bhanwar Borana (CA BB) Page 20
- Contributed ` 50,000 to Clean Ganga Fund and ` 25,000 Swacch Bharat Kosh. - Contributed ` 2,25,000, being 15% of his salary, to the NPS of the Central Government. A matching contribution was made by Omicron Ltd. Compute the total income of Mr. Bhuvan for A.Y.2016-17, assuming that his gross total income is ` 20 lakh [comprising of income from salaries computed (including all taxable allowances and perquisites) ` 19,88,000 and interest on savings bank account ` 12,000]. Solution (i) Computation of total income of Mr. Bhuvan for the A.Y. 2017-18 Particulars ` Salaries (Computed) 19,88,000 Income from other sources [Interest on savings bank account] 12,000 Gross Total Income 20,00,000 Less: Deduction under Chapter VIA [See Working Note below] 4,90,000 Total Income 15,10,000 Working Note: Deduction available to Mr. Bhuvan under Chapter VI-A for A.Y. 17-18 Section Particulars ` ` 80C Deposit in public provident fund 1,35,000 Life insurance premium paid ` 20,000 25,000 (deduction restricted to ` 20,000, being 10% of ` 2,00,000, being sum assured, since the policy was taken after 31.3.2012) Five year term deposit with bank 50,000 2,05,000 Restricted to 1,50,000 80CCD(1) Contribution to NPS of the Central Government, ` 1,75,000 [` 2,25,000 ` 50,000, being deduction under section 80CCD(1B)], restricted to 10% of salary [` 2,25,000 x 10/15] [See Note 1] 1,50,000 3,00,000 80CCE Aggregate deduction under sections 80C and 80CCD(1), ` 3,00,000, but restricted to 1,50,000 80CCD(1B) ` 50,000 would be eligible for deduction in respect of contribution 50,000 to NPS of the Central Government 80CCD(2) Employer contribution to NPS, restricted to 10% of salary [See Note 1,50,000 2] [` 2,25,000 10/15] CA Bhanwar Borana (CA BB) Page 21
80D 80G 80TTA Medical insurance premium of self and spouse ` 27,000, restricted to 25,000 Mediclaim premium of mother, being a senior citizen 23,000 Medical expenses of father, being a very senior citizen 28,000 51,000 Restricted to 30,000 55,000 Contribution to Clean Ganga Fund 50,000 (100% deduction without qualifying limit) Contribution to Swachh Bharat Kosh 25,000 75,000 (100% deduction without qualifying limit) Interest on savings bank account ` 12,000, restricted to 10,000 Deduction under Chapter VI-A 4,90,000 Notes: (1) The deduction under section 80CCD(1B) would not be subject to overall limit of ` 1.50 lakh under section 80CCE. Therefore, it is more beneficial for Mr. Bhuvan to claim deduction of ` 50,000 under section 80CCD(1B) first in respect of contribution to NPS. Thereafter, the remaining amount of ` 1,75,000 can be claimed as deduction under section 80CCD(1), subject to a maximum of 10% of salary. (2) The entire employer s contribution to notified pension scheme has to be first included under the head Salaries while computing gross total income and thereafter, deduction under section 80CCD(2) would be allowed, subject to a maximum of 10% of salary. (3) Under section 80D, deduction for medical insurance premium paid for self and spouse is restricted to a maximum of ` 25,000. Further, medical insurance premium paid for mother, who is a resident senior citizen, and medical expenses incurred for father, who is a resident and very senior citizen, in respect of whom no mediclaim policy has been taken, would be restricted to ` 30,000. (4) Contribution to Clean Ganga Fund and Swachh Bharat Kosh would qualify for 100% deduction under section 80G with effect from A.Y.2017-18. (5) Though income computed under the head Salaries is ` 19,88,000 (which includes all taxable allowances and perquisites), but for computation of deduction under section 80CCD, salary only includes dearness allowance, if the terms of employment so provide. It excludes all other allowances and perquisites. In this case, salary for the purpose of computation of deduction under section 80CCD would be ` 15,00,000 [i.e., ` 2,25,000/15%]. 16. The net profit of Phi Ltd. as per profit and loss account for the previous year 2016-17 is ` 200 lakhs after debiting/crediting the following items: (i) Provision for income-tax: ` 17 lakhs CA Bhanwar Borana (CA BB) Page 22
(ii) Dividend Distribution tax: ` 3 lakhs (iii) Securities transaction tax: ` 2 lakh (iv) Transfer to General Reserve: ` 5 lakhs (v) Provision for deferred tax: ` 12 lakhs (vi) Proposed Dividend: ` 6 lakhs (vii) Preference Dividend: ` 4 lakhs (viii) Provision for permanent diminution in value of investments: ` 3 lakhs (ix) Provision for gratuity based on actuarial valuation: ` 7 lakhs (x) Depreciation debited to Profit & Loss Account is ` 22 lakhs. This includes depreciation on revaluation of assets to the tune of ` 6 lakhs. (xi) Agricultural income: ` 4 lakhs (Expenditure to earn agricultural income : ` 1 lakh) (xii) Long term capital gains exempt under section 10(38) : ` 7 lakhs (Expenditure to earn long-term capital gains : ` 1 lakh) (xiii) Transfer from Special Reserve: ` 2 lakhs (xiv) Transfer from Revaluation Reserve: ` 7 lakhs Brought forward business losses and unabsorbed depreciation as per books of the company are as follows: Previous year Brought forward business loss (` in lakhs) Unabsorbed Depreciation (` in lakhs) 2013-14 4 3 2014-15 3-2015-16 6 2 Compute the book profit of Phi Ltd. under section 115JB for the A.Y. 2017-18. Compute the tax liability of the company for the A.Y.2017-18, if the total income computed as per the provisions of the Income-tax Act, 1961 is ` 130 lakhs. Solution: CA Bhanwar Borana (CA BB) Page 23
Computation of Book Profit of Phi Ltd. under section 115JB for A.Y.16-17 Particulars ` ` Net Profit as per Profit & Loss Account 2,00,00,000 Add: Net Profit to be increased by the following amounts as per Explanation 1 to section 115JB Income-tax paid or payable or provision therefor Provision for income-tax ` 17,00,000 Dividend distribution tax ` 3,00,000 20,00,000 Provision for deferred tax 12,00,000 Transfer to General Reserve 5,00,000 Provision for diminution in the value of investment Dividend paid or proposed Proposed dividend ` 6,00,000 Preference dividend ` 4,00,000 3,00,000 10,00,000 Expenditure to earn income exempt u/s 10 [except section 10(38)] Expenditure to earn agricultural income [Exempt 1,00,000 u/s 10(1)] Depreciation 22,00,000 73,00,000 Less: Net Profit to be reduced by the following amounts as per Explanation 1 to section 115JB Amount credited to profit and loss account from Special Reserve 2,00,000 2,73,00,000 Depreciation (excluding depreciation on account of revaluation of fixed assets) (i.e., ` 22,00,000 ` 16,00,000 6,00,000) Amount credited to profit and loss account from 6,00,000 revaluation reserve (to the extent of depreciation on revaluation) Brought forward business loss or unabsorbed 5,00,000 deprecation as per books of account, whichever is less taken on cumulative basis Income exempt u/s 10 [except section 10(38)] Agricultural Income [since it is exempt under 4,00,000 33,00,000 section 10(1)] Book Profit 2,40,00,000 Computation of tax liability of Phi Ltd. for A.Y.2017-18 18.5% of book profit Add: Surcharge@7% (since total income > ` 1 crore but less than ` 10 crore) 44,40,000 3,10,800 47,50,800 Add: Education cess @ 2% 95,016 Secondary and higher education cess @ 47,508 1,42,524 CA Bhanwar Borana (CA BB) Page 24
1% Tax liability on book profit under section 115JB Total income computed as per the provisions of the Income-tax Act, 1961 1,30,00,000 48,93,324 Tax payable @ 30% 39,00,000 Add: Surcharge@7% Add: Education cess @ 2% 83,460 Secondary and higher education cess @ 1% Tax Payable as per the Income-tax Act, 1961 _2,73,000 41,73,000 41,730 1,25,190 42,98,190 In case of a company, it has been provided that where income-tax payable on total income computed as per the provisions of the Act is less than 18.5% of book profit, the book profit shall be deemed as the total income and the tax payable on such total income shall be 18.5% thereof plus surcharge, if applicable, plus education cess @2% and secondary and higher education cess @1%. Accordingly, in this case, since income-tax payable on total income computed as per the provisions of the Act is less than 18.5% of book profit, the book profit of ` 2,40,00,000 is deemed to be the total income and income-tax is payable @ 18.5% thereof plus surcharge@7% plus education cess @2% and secondary and higher education cess @1%. The tax liability, therefore, works out to ` 48,93,324. Section 115JAA provides that where tax is paid in any assessment year in relation to the deemed income under section 115JB(1), the excess of tax so paid, over and above the tax payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent years. The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and the tax payable on the total income computed in accordance with the other provisions of the Act. Particulars Tax on book profit under section 115JB 48,93,324 Less: Tax on total income computed as per the other provisions of the Act Tax credit to be carried forward ` 42,98,190 5,95,134 This tax credit is allowed to be carried forward for ten assessment years succeeding the assessment year in which the credit became allowable. Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than section 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year. Notes: (1) Securities transaction tax does not form part of income-tax and hence, should not be added back to net profit for computing book profit. (2) Provision for gratuity based on actuarial valuation is a provision for meeting an ascertained liability. Therefore, it should not be added back for computing book profit. CA Bhanwar Borana (CA BB) Page 25
(3) Long-term capital gains on sale of equity shares through a recognized stock exchange on which securities transaction tax (STT) is paid is exempt under section 10(38). One of the adjustments to the book profit is that exempt income under section 10, which is credited to profit and loss account, would be deducted in arriving at the book profit. However, deduction of such long-term capital gains is not allowed for computing book profit. Consequently, expenditure to earn such income should not be added back to arrive at the book profit. Section 10(38) also provides that such long term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB. 17. The details given hereunder relate to US citizens, Mr. Fredrick Trotiville (aged 28), a US football player and his sister, Ms. Susan Trotiville (aged 22), a singer, for the A.Y. 2017-18 Particulars Mr. Fredrick Trotiville (1) Participation in football tournaments in ` 25 lakhs India (2) Winnings from lotteries in India (net) ` 69,100 Ms. Susan Trotiville (3) Contribution of an article relating to the ` 21,000 sport of football in a sports magazine in India (4) Performance in a music show in India ` 3 lakhs With reference to the provisions of the Income-tax Act, 1961, you are required to (i) Compute the total tax liability of Mr. Frederick Trotiville and Ms. Susan Trotiville for the A.Y.2017-18, assuming that both of them are nonresidents. (ii) Discuss whether the above income are subject to deduction of tax at source. (iii) Explain whether it is necessary for them to file their return of income for A.Y.2017-18 Solution: Computation of tax liability of Mr. Frederick Trotiville for the A.Y.2017-18 Particulars ` ` Income taxable under section 115BBA Income from participation in football tournaments in India Contribution of article in a magazine in India Tax@20% under section 115BBA on ` 25,21,000 25,00,000 21,000 25,21,000 5,04,200 Tax@30% under section 115BB on income of ` 1,00,000 (` 69,100 + ` 30,900) by way of winnings from lotteries 30,000 5,34,200 CA Bhanwar Borana (CA BB) Page 26