Master of Business Administration- MBA Semester 3 MF0012 Taxation Management - 4 Credits (Book ID: B1210) Assignment Set- 1 (60

0 Marks)
Q1. What are the factors that are helpful for effective tax planning?

Ans:- The term 'House property' consists of buildings or land appurtenant to such buildings. Income from letting out of vacant plots of land when there is no adjoining building will not be taxed under this head (but will be taxed as income from other sources). The existence of a building is, therefore, an essential prerequisite for taxation of income from house property. 'Building' will include residential house (whether let out or self-occupied), office building, factory building, godowns, flats etc. But, the purpose for which the building is used by the tenant is also immaterial. It does not make any difference at all if the property is owned by a limited company or a firm. However, if the building or part thereof is used by the owner himself for the purpose of his own business then there will be no income from such portion of the house property. Under the Income-tax Act, the basis of calculating income from House property is the 'Annual Value'. This is the inherent capacity of the property to earn income and it has been defined as the sum for which the property might reasonably be expected to let from year to year. Where the actual rent received is more than the reasonable return, it has been specifically provided that the actual rent will be the annual value. Where, however, the actual rent is less than the reasonable rent , the latter will be the annual value. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner shall be subjected to Income Tax under the head 'Income from property' after claiming deductions (under section 24) provided such property, or any portion of such property is not used by the assessee for the purposes of any business or profession, carried on by him, the profits of which are chargeable to income tax. PROPERTY INCOMES EXEMPT FROM TAX Some incomes from house property are exempt from tax. They are neither taxable nor included in the total income of the assessee for the rate purposes. These are: i. ii. iii. iv. Income from any farmhouse forming part of agricultural income; Annual value of any one palace in the occupation of an ex-ruler; Property Income of a local authority; Property Income of an authority, constituted for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.); Property income of any registered trade union; Property income of a member of a Scheduled Tribe;

v. vi.

vii.

viii. ix. x.

xi. xii. xiii. xiv.

Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both; Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group; Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both; Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities; Property income of an institution for the development of Khadi and village Industries;' Self-occupied house property of an assessee, which has not been rented throughout the previous year; Income form house property held for any charitable purposes; Property Income of any political party.

Imp .. Q2. Define the term tax holidays. What are the different tax incentives for new units established in SEZ? Ans:- A tax holiday is a temporary reduction or elimination of a tax. Governments usually create tax holidays as incentives for business investment. The taxes that are most commonly reduced by national and local governments are sales taxes. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting Foreign Direct Investment or stimulating growth in selected industries.. The tax holiday has been often used by developing and transition countries. It is directed to new firms and is not available to existing operations. With a tax holiday, new firms are allowed a period of time when they are exempt from the burden of income taxation. Sometimes, this grace period is extended to a subsequent period of taxation at a reduced rate. For transition countries, one advantage of tax holidays is that they provide a simple regime for foreign investors because there is no need to calculate taxes in the early years of operation, at a time when the tax systems are not yet fully developed. This view is certainly not valid for long-term investors, for whom the tax treatment after the holiday has expired is as important as the treatment during the holiday in determining the after-tax profitability of the investment. In addition, the tax treatment of the initial capital expenditures made before and during the holiday period must be determined so that appropriate records will be available for the calculation of depreciation when the holiday ends. A number of technical issues are important in determining the impact of tax holidays on the return on investments. The first issue is determining when the holiday starts. It could be when production starts, the first year in which the firm makes a profit, or the first year that the firm

achieves a positive cumulative profit on its operations. For large projects in particular, losses are usually generated in the early years of production, when the highest capital costs are incurred, including special costs that are linked to the start-up period, training the workforce, and developing the local market. For such projects, a tax holiday that starts when production occurs may actually increase the taxes paid over the life of the project and so act as a disincentive for investment. If losses are experienced during the holiday period they may not be allowed to be carried forward beyond the holiday period (it would be overly generous to allow losses to be carried forward from a year in which income would not have been subject to tax). Thus, the holiday may occur when no taxes would have been paid in any event and taxes may be increased following the holiday because no losses are available to offset the profits. A similar situation can occur if the holiday starts when profits are first generated. Income may be sheltered that would have been eliminated in any case by the use of the tax losses. This may result in an overall increase in taxation in circumstances when the loss-carryforward period is short or the use of losses is restricted in some way. Tax laws usually specify that the holiday commences when profits first occur. However, they are often ambiguous as to whether this means the first year that is in itself profitable or the first year that cumulative net profits are positive.6 A related question is the treatment of depreciation during the holiday period. Should it be deducted during the holiday period or can it be deferred until after the holiday has terminated? Depreciation represents a cost in the calculation of income, and so its deduction is necessary to accurately measure the amount of income that should be subject to the holiday. Allowing a deferral of the deduction effectively overestimates the costs associated with the postholiday period and so leads to a further reduction in tax, which can result in a very generous incentive. The issue is more complicated if some form of accelerated depreciation is also offered with respect to the investment. Forcing the use of the accelerated deductions during the holiday period at the least reduces their value and can actually increase the level of taxation relative to the situation where no incentives are provided. A complete deferral of the deduction, however, can again lead to a generous incentive and an effective tax holiday that is much longer than intended. Another design question is the length of the holiday. Most of the holidays offered in transition countries have been of short duration, and, as discussed below, are of little benefit to long-term capital-intensive projects. Longer holidays would be of greater benefit; for example, there is some evidence in Asia and Hungary that the longer holidays succeeded in attracting some longterm investment.7 However, the longer the holiday, the higher the revenue cost and the greater the vulnerability to tax planning schemes.8 The opposite problem arises when a tax holiday provision providing a lengthy tax-free period is repealed. Because an existing company can continue to take advantage of the holiday for which it qualified, new investment can be structured so as to use the corporate form of these existing companies, sometimes by bringing new investors in or even by selling the holiday company to new investors planning a substantial investment. It is therefore desirable, on repeal of a tax holiday, to stipulate that companies currently taking advantage of a tax holiday will cease to quality if a substantial change in the ownership of the company takes place. Such a provision would prevent at least the most flagrant abuses. Tax incentives for new units established in SEZ:

As per circular Epces circular no. 39 dated 28-2-2007, issued by EXPORT PROMOTION COUNCIL FOR EOUs & SEZ UNITS (Ministry of Commerce & Industry, Government of India) SEZ units are provided exemption from Income Tax under Section 10AA of the Income Tax Act, as given in the 2nd Schedule of the SEZ Act, 2005. Section 10AA of the Income Tax Act, as given in 2nd Schedule of the SEZ Act, 2005 has been amended by the Finance Bill, 2007. The Finance Bill, 2007, Accordingly, Tax benefit has been provided only for new units in Special Economic Zones : Sections 10AA of the Income-tax Act, provides that in computing the total income of an entrepreneur, from his unit in the special economic zone, the following deduction shall be allowed: Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. Exemption from minimum alternate tax under section 115JB of the Income Tax Act. External Commercial Borrowing by SEZ units up to US $ 12500 billion in a year without any maturity restriction through recognized banking channels. Exemption from Central Sales Tax. Exemption from Service Tax. Single window clearance for Central and State level approvals. Exemption from State sales tax and other levies as extended by the respective State Governments.

The major incentives and facilities available to SEZ developers include: Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA. Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act. Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act. Exemption from dividend distribution tax under Section 115O of the Income Tax Act. Exemption from Central Sales Tax (CST). Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Q3. What are the key steps to calculate the tax liability of an individual ? Ans:- Steps to calculate the tax liability of an individual are: Determine residential status- First of all to determine the residential status of the assessee. The incomes are taxed according to residential status i.e. Resident in India, Not Ordinarily resident, or Non resident. Calculation of gross total income- For the calculation of the gross total income we should have to calculate the income of five heads according to the provisions of Income Tax Act. Exempted Incomes- While calculating the incomes of the different heads, the incomes which are exempted will not be included. Income of other persons to be included in the income of assessee- Few incomes of other persons (Sec. 64) includes in the income of assessee. Set-off of losses- If there is negative income in a particular head then it is to be set off according to the provisions of Income Tax Act. Deductions u/s 80- After the above steps, the aggregate amount of income is known as Gross Total Income. From the gross total income few deductions which are provided under section 80 of income tax act will be deducted. After deductions, the balance of income is known as Total Income or Taxable Income. The list of deductions available to an individual are as follows: 1. 2. 3. 4. 5. Investments and deposits (sec 80C) Contribution to certain pension funds (sec 80CCC) Contribution of new pension scheme (sec 80CCD) Payment to medical insurance premium (sec 80D) Medical treatment of handicapped dependents and amount deposited for maintenance of handicapped dependents (sec 80DD) 6. Expenditure on medical treatment of certain diseases (sec 80DDB) 7. Repayment of loan and interest thereon taken for higher education (sec 80E) 8. Donations to certain funds/charitable institutions etc. (sec 80G) 9. Deductions in respect of rent paid (sec 80GG) 10. Donations for scientific research and rural development (sec 80GGA) 11. Contribution to political parties (80GGC) 12. Profit and gain of new industrial undertaking set up for infrastructure development (sec 80IA) 13. Profit and gains of new industrial undertakings (sec 80IB) 14. profit and specific industrial undertakings establish in specific states (sec 80IC) 15. Deduction in respect of profits and gains from business of collecting and processing of bio gradable waste (sec 80JJA) 16. Deduction in respect of certain incomes of offshore banking unit (sec 80LA) 17. Deduction in respect of royalty income to authors (80QQB) 18. Deduction in respect of royalty on patent (sec 80RRB)

19. Deduction in case of person with disability (sec 80U) Total Income rounded off in the multiple of 10 The total income calculated will rounded off in multiple of Rs. 10. For this rupee five or more than Rs. 5 will be treated as Rs. 10 and less than Rs. 5 will be deleted.

Key steps to calculate the tax liability of an individual 1. 2. 3. 4. 5. Income from salaries Income from house property Profits and gains of business or profession Income from Capital gainst Income from other sources Total(1+2+3+4+5) Less:adjustment for set off and carry forward of losses Gross total income Less: Deductions under Sec.80C to 80u (Chapter VI A) Total Income (Rounded off to the nearest Rs.10) xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx xxxxxxx

Q 4. What are the tax provisions for assessment of firms?

Ans:- Treatment of remuneration and interest to a partner as business income : Clause (v) of section 28 Section 28(v) provides that interest and remuneration received by a partner from his LLP shall be chargeable to income-tax as profits and gains of business. The proviso clarifies that where the remuneration, interest, etc., is in excess of the ceiling fixed under the new section 40(b) and is disallowed in part for that reason then the income under the head referred to in section 28(v) shall be adjusted to the extent of the amount not so allowed to be deducted. Any expenditure incurred in order to earn such income can be claimed as a deduction from such income. For example, if a partner borrows money to make his capital contribution to the LLP and he is paid interest on his capital contribution, the amount of such interest will be taxed under the head Profits and gains of business or profession, but the interest paid by him on the borrowed money will have to allowed as a deduction. If the whole or a part of salary/interest is not allowed as deduction in the hands of the LLP, than the whole or that part of salary/ interest is not taxable in the hands of the partners. In other words, in the hands of partners the entire remuneration/

interest (excluding the amount disallowed under section 40(b) and/or section184 of the Act) is chargeable to tax. Ceiling as to remuneration payable to working partners and interest to partners : Section 40(b) Section 40(b) is a disallowance provision and disallows remuneration, interest, etc., received by the partners from the firm provided the same exceeds the ceiling prescribed in the same provision. It also specifies as to how the matter of deductibility of interest and remuneration is to be dealt with where a partner is a partner in representative capacity. The Explanation 3 defines the term book profit which is relevant for computing the upper ceiling of remuneration payable to all the working partners put together. The Explanation 4 defines working partners who alone are made entitled to remuneration if the deductibility of the related amount in the hands of the LLP is not to be barred by section 40(b). Limits of Remuneration to Partners: The Income Tax Act prescribes the ceiling limit upto which any payment of salary, bonus, commission or remuneration will be allowed as deduction for income of LLP, the limits of remuneration as proposed by budget are outlined below: On First Rs 3,00,000 of book profit or in case of loss

Rs 1,50,000 or at the rate of 90% of the book-profit, whichever is more

On the balance of book profit

at the rate of 60%

Signing of Income tax Return: The designated partner shall be responsible for signing the income tax return of LLP, where for unavoidable reasons, such designated partner is not able to sign the same or where there is no designated partner, any partner will sign the return.

No capital gain on conversion LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gain will apply.

Q 5. Detail death cum retirement gratuity under Sec 17(1)iii of IT Act. Is commutation of
pension a viable option in terms of tax planning?

Ans:- Loss in common parlance is understood as excess of expenses over income. The Income-Tax Act, 1961, allows set-off and carry-forward of the loss incurred by any assessee subject to some restrictions. Let us see the relevant provisions relating to setoff of losses under the different heads of income: Provision relating to carry forward and set-off losses: Loss from Business/profession [Sec 72] Any loss under the head, profit and gain of business, other than speculation loss and depreciation can be set off against any other business income or any other head of income, except salary income, in the same assessment year. After such setting off, if the resultant figure is yet a loss (business loss): If the loss in greater than income from any other business or income from any other head, then such loss can be carried forward up to eight assessment years. On carrying forward to subsequent years, this loss can be set off only against business income and not against any other head of income. Speculation loss can be set off only against speculation profit in the same assessment year. But even after such setting off if the resultant figure is a loss, then it can be carried forward for set off in subsequent years up to four assessment years. From assessment year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for eight assessment year. In subsequent years, setting-off of the loss is allowed only against speculation profit [Section 73].

Transactions in derivatives entered into on recognised stock exchange through a broker or a Securities and Exchange Board of India (Sebi)-recognised intermediary and supported by a timestamped contract note is excluded from the definition of speculative transaction [Section 43(5)(d)]. Thus, such loss is to be treated in the same manner as non speculative business loss. Speculative business loss can be set off against only speculative business income. But nonspeculative business loss can be set off against any business income (whether speculative or non speculative).

Depreciation can be set off in the same assessment year as well as in the subsequent assessment years against business income or any other head of income except salary income. Further, depreciation can be carried forward indefinitely for set-off in subsequent years [Section 32(2)]. As unabsorbed depreciation can be carried forward for any number of years. In subsequent years, one must first set off current years depreciation, then brought forward business loss and then the unabsorbed depreciation. Continuity of business is now not necessary for the purpose of set-off and carry-forward.

Loss from a house property [Sec 71B] Loss arising from a house property can be set off against income from any other house property or income from any other head in the same assessment year. If income from house property is negative even after such set-off, then such loss can be carried forward up to eight assessment years for set-off. But in subsequent years, it can be set off only against income from house property.

Loss from capital gains (Section 70 & 74) Short-term capital loss can be set off against any capital gain income, long term or short term, in the same assessment year. It should be noted that such loss can be set off only against capital gain income and not against any other head of income. Balance short-term capital loss if any can be carried forward up to eight assessments years. In the subsequent years also, it can be set off against any capital-gain income. Long-term capital loss Long-term capital loss arising on sale of capital asset other than equity shares and units of equity-oriented mutual fund which are subject to securities transaction tax (STT) can be set off in the same assessment year as well as in subsequent assessment years (in case of carry-forward) only against long-term capital gain income. Carry-forward of loss is allowed up to eight assessment years. Long-term capital loss arising on sale of equity shares and units of equity-oriented mutual fund, which is subject to securities transaction tax (STT), is not allowed to be either set off or carried forward (as income from such source is exempt from tax) [Section 14A].

Loss under the head Other sources (Section 71) : Any loss under the head, Other sources can be set off in the same assessment year against income from any other source or income from any other head. Salary, business/profession. The loss cannot be carried forward for set-off in future. Loss from owning and maintaining race horses [Section 74A] : Any loss arising from owning and maintaining race horses can be set off against income from such activity only in the same assessment year or in subsequent assessment years (in case of carry- forward). In case of this loss, it is allowed to be carried forward up to four assessment years.

Loss under any head can be set off against speculative income, capital gain income, income from maintaining race horses. But the reverse is not possible. Loss from speculation, loss under capital gain and loss from maintaining race horses can be set off only against the respective specific income. In other words, loss from speculation can be set off only against speculation income. Loss from capital gain can be set off only against capital gains income and so on. A loss from any source cannot be set off against winnings from lotteries, crossword puzzles, races (including horse races), card games, other games or any sort of gambling or betting. Loss on bonus stripping/dividend stripping cannot be set off against any income. Return of loss must be filed within due date of filing of return or else carry-forward of loss to the subsequent year is not allowed. However, this condition does not apply in case of house property loss and unabsorbed depreciation.

Q 6. What is meant by Full value of consideration? How short term capital gains and long

term capital gains are computed using full value of consideration?

Ans:- The various provisions of the Income-tax Act of 1961 regarding set-off losses

i) Speculation loss Speculation loss can be set off only against speculation profit in the same assessment year. But even after such setting off if the resultant figure is a loss, then it can be carried forward for set off in subsequent years up to four assessment years. From assessment year 2006-07 up to assessment year 2005-06 such loss could be carried-forward for eight assessment year. In subsequent years, settingoff of the loss is allowed only against speculation profit [Section 73]. Speculative business loss can be set off against only speculative business income. But non-speculative business loss can be set off against any business income

ii) Short term capital loss: Short-term capital loss can be set off against any capital gain income, long term or short term, in the same assessment year. It should be noted that such loss can be set off only against capital gain income and not against any other head of income. Balance short-term capital loss if any can be carried forward up to eight assessments years. In the subsequent years also, it can be set off against any capital-gain income.

iii) Long term capital loss Long-term capital loss arising on sale of capital asset other than equity shares and units of equity-

oriented mutual fund which are subject to securities transaction tax (STT) can be set off in the same assessment year as well as in subsequent assessment years (in case of carry-forward) only against long-term capital gain income. Carry-forward of loss is allowed up to eight assessment years. iv) Losses from horse race, gambling and cross word puzzles Losses from cross word puzzles, lotteries, gambling, card games races including horse races, etc. cannot be set off either against the income from the same source or against the income under any other head of income. This is because each of these specified sources is regarded as separate from others (i.e, other sources).