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Legal And Tax Aspects Of Business

Q2) Mr B the commercial assistant went for a meeting to his Lawyer to discuss some case: He was confused by certain terms the lawyer was using: Kindly explain the meaning of terms in 1-2 sentences to him a) b) c) d) e) f) Rescindation Novation Mens Rea Doctrine of Estoppel Prima facie Resident but not ordinarily resident

Solution:

a) Rescindation:
To Rescind is to revoke, to abrogate, to annul, to repeal. To abrogate (a contract or transaction) by mutualagreement, judicial decree, or unilateral declaration because of fraud mistake, misrepresentation. Illegality, a breach, or another sufficient ground with both parties restored to their positions before the contract was made rescind the contract compare or to Cancel or terminate.

b) Novation:
In contract law and business law, novation is the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party For example, if there exists a contract where Dan will give a TV to Alex, and another contract where Alex will give a TV to Becky, then, it is possible to novate both contracts and replace them with a single contract wherein Dan agrees to give a TV to Becky. The substitution of a new contract for an old one; or the substitution of one party in a Contract with another party.

c) Mens Rea:
Mens Rea is Latin for "guilty mind. In criminal law, it is viewed as one of the necessary elements of a crime. The standard common law test of criminal liability is usually expressed in the Latin phrase; actus non facit reum nisi mens sit Rea, which means "the act does not make a person guilty unless the mind is also guilty". Mens Rea, a person's awareness of the fact that his or her conduct is criminal, is the mental element, and actus reus, the act itself, is the physical element.

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d) Doctrine of Estoppel:
An estoppel is preclusion, in law, which prevents a man from alleging or denying a fact, in consequence of his own previous act, allegation or denial of a contrary tenor. Estoppel could arise in a situation where a creditor informs a debtor that a debt is forgiven, but then later insists upon repayment.

e) Prima facie:
Prima facie is used to describe the apparent nature of something upon initial observation. In legal practice the term generally is used to describe two things the presentation of sufficient evidence by a civil claimant to support the legal claim (a prima facie case), or a piece of evidence itself (prima facie evidence).

f) Resident but not ordinarily resident:

According to Section (6)1 of the income tax act, an individual is said to be resident in India in any previous year, if he satisfies any one of the following basic conditions: (a) He has been in India during the previous year, for a period amounting in all to 182 days or more (b) During 4 years preceding the previous year, he has been in India for a period or periods amounting in all to 365 days and more has been in India or days or more in the previous year.

Q4) A) what are legal rules for Consideration? Solution: Consideration must move at the desire of the promisor-The act or forbearance must be done at the desire or request of the promisor. If it is done without his request or at the request of a third party it will not be a valid consideration. Consideration need not be adequate but must be sufficient-It is not necessary that there must be full return for the promise. There must be something rather than nothing. The law has left the quantum of consideration to be decided by the respective parties. Thus, the law will not object to the inadequacy of consideration. The law will not enforce a promise even if it is without consideration. Past consideration is not consideration Forbearance to sue may be good consideration Performance of existing duties. A person who has not provided consideration cannot sue to enforce a promise.

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Legal And Tax Aspects Of Business

B) What are the privileges of holder in due course? A holder, to be a holder in due course must not only have acquired the bill, note or cheque for a valid consideration but should have acquired the cheque without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title. This condition requires that he should act in good faith and with reasonable caution. However, mere failure to prove bona fide or absence of negligence on his part would not negative his claim. But in a given case it is left to the court to decide whether the negligence on part of the holder is so gross an extraordinary as to presume that he had sufficient cause to believe that such title was defective Holder in due course can file a suit in his own name against the parties liable to pay. He is deemed prima facie to be holder in due course (Sec 118) The holder is due course gets a good title even though the instruments were originally stamped but was an inchoate instrument (Sec 20). Every prior party to the instruments is liable to a holder in due course until the instrument is duly satisfied (Sec 36).

Q6) A) Please explain the special deduction under income tax Act chapter VIA for a disabled person? Sec 80DD : Deduction of Rs.40000- in respect of expenditure incurred on medical treatment (including nursing) training and rehabilitation of handicapped dependant relative. Payment or deposit to specified scheme for maintenance of dependant handicapped relative. W.e.f. 01.04.2004 the deduction under this section has been enhanced to Rs.50,000/ Further, if the dependant is a person with severe disability a deduction of Rs.1,00,000/- shall be available under this section. The handicapped dependant should be a dependant relative suffering from a permanent disability (including blindness) or mentally retarded, as certified by a specified physician or psychiatrist

A person with severe disability means a person with 80% or more than one or more disabilities

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Legal And Tax Aspects Of Business

80DDB: Deduction of Rs.40, 000 in respect of medical expenditure incurred. W.e.f. 01.04.2004, deduction under this section shall be available to the extent of Rs.40, 000/- or the amount actually paid, whichever is less. In case of senior citizens, a deduction up to Rs.60, 000/- shall be available under this Section. Expenditure must be actually incurred by resident assessed on himself or dependent relative for medical treatment of specified disease or ailment.

The diseases have been specified in Rule 11DD. A certificate in form 10 I is to be furnished by the assesse from a specialist working in a Government hospital.

b) What is Cost Inflation Index? It is a measure of inflation that finds application in tax law, when computing long-term capital gains on sale of assets. Section 48 of the Income-Tax Act defines the index as what is notified by the Central Government every year, having regard to 75 per cent of average rise in the consumer price index (CPI) for urban non-manual employees for the immediately preceding previous year. Therefore, if we consider that price of a capital asset has risen in tandem with base price rise, and then if one want to sell an asset and replace it, the cost allowed even after indexation will be lesser than the price payable for new asset.

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Legal And Tax Aspects Of Business

Q8) A) what are duties of an Agent towards his principal Solution:

Duties of an Agent towards his principal:

An agent owes certain duties towards his/her principal and a principal owes certain duties towards his/her agent. The scope of an agents duty to the principal is determined by: The terms of the agreement between the parties Extent of the authority conferred and the obligations of loyalty to the interests of the principal.

An agents primary duties are:

act on behalf of and be subject to the control of the principal; act within the scope of authority or power delegated by the principal; discharge his/her duties with appropriate care and diligence; and avoid conflict between his/her personal interests Agent's duties include: act on behalf of and be subject the control of the principal act within the scope or power delegated by the principal discharge his or her duties with appropriate care and diligence, avoid conflict between his or her personal interests and those of the principal, and Promptly hand over to the principal all monies collected on principals behalf.

B) liabilities of an Auditor:
Civil Liabilities: Civil liabilities arise when there are dispute between two parties for a loss caused to one due to the act of another. In this case, the auditor is called upon to pay damages as decided by the court. These may be of the following types Liability of Negligence: Negligence means acting carelessly or failing to perform a duty enjoyed upon a person. An auditor is expected to perform his duties as an agent of the shareholders by exercising care and diligence in the implementation of statutory requirements for the maintenance and presentation of the financial statement. Auditor must be kept himself up to date with the information if he commits some negligence the purpose of audit is failed. Liability of Liable In the report the auditor may criticize any person. If it is based on the fact there is no liability of the auditor. On the other hand the auditor is liable in order to avoid this liability the auditor should take care that the report is based on facts and is prepare with good intention.

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Liability of the Third Party: The auditor is expert in finding out the errors and frauds and is aware how to check the books of accounts. Many third parties as the shareholders, investors, tax authorities, creditors and government rely upon his reports. So if he makes any type of error or fraud, he is liable to pay the damages. Misstatement in Prospectus : According to section 59 The civil liability of an auditor arises due to misstatement in prospectus. Where a prospectus invites person to subscribe for shares or debentures of a company, the auditor shall be liable to pay compensation to every person who subscribe for a purchase any shares or debentures on the faith of the prospectus for any loss or damage be may reason of any untrue statements.

Breach of Contract: If the auditor fails to fulfill the term of the contract the civil liability arises of an audited. In case if he omits the all or some conditions of contract, if he cannot make the secrecy, if fails to provide the true and fair view to the owner, he is liable to pay to the owner if sustain any financial loss.

Q10) Write a short note on following? a) Inchoate Instrument b) Finder of goods c) Rights of unpaid seller d) Bouncing of cheques Solution: Inchoate Instrument: Unregistered (unrecorded) instrument that must, by law, be properly registered to be effective. Where the drawer of an instrument that is signed, but is otherwise wanting in a material particular necessary for the instrument to be, on its face, a complete cheque, delivers the instrument to another person in order that the instrument may be filled up as a complete cheque, any person in possession of the instrument shall be presumed, unless the contrary is proved, to have authority to fill up the instrument as a complete cheque in any way the person sees fit. Subject to subsection (4), an instrument to which subsection (1) applies is not enforceable against the drawer or a person who becomes an endorser of the instrument before the instrument is filled up as a complete cheque unless the instrument is filled up within a reasonable time and strictly in accordance with the authority given.

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Finder of goods: The finder of goods has no right to sue the owner for com-pensation for trouble and expense voluntarily incurred by him to preserve the goods and to find out the owner; but he may retain the goods against the owner until he receives such compensation; and, where the owner has offered a specific reward for the return of goods lost, the finder may sue for such reward, and may retain the goods until he receives it. A person, who find goods belonging to another and takes them into his custody, is subject to the responsibility of taking due care of them and trying to find out the real owner of the goods. It is also to be remembered that the finder has a good title over the things found and that his right is enforceable against all except the real owner. In the words of section 71 A person who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee.

Rights of unpaid seller:

Against the goods

a) property in the goods has passed (i) Right of lines (ii) Right of stoppage of goods in transit (iii) Right of re-sale

b) When property in the goods has not passed (i) Right of withholding delivery.

Against the buyer personally (i) Right to use for price (ii) Right to sue for damages (iii) Right to sue for interest.

Bouncing of cheques:
A check that your bank won't honor because you don't have sufficient funds in your account. Whoever you wrote the check to have to find another way to collect from you. These can come back to haunt you through Chex Systems. Is also known as Rubber check, bad check.

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Legal And Tax Aspects Of Business

Q12) A, is entitled to a basic salary of `5,000 p.m. and dearness allowance of `1,000p.m., 40% of which forms part of retirement benefits. He is also entitled to HRA of `2,000 p.m. He actually pays `2,000 p.m. as rent for a house in Delhi. Compute the taxable HRA. Details of Mr A are as under:

Particulars Basic Salary Dearness Allowance HRA Actual Rent paid

Rs.(p.m.) 5,000 1,000 2,000 2,000

Exemption of HRA allowance u/s 10(13A)is restricted to the least of the following: 1. Excess of rent paid over 10% of salary Basic Salary Dearness Allowance 60,000 12,000 72,000 10% of the above amount 2. 50% of salary Basic Salary Dearness Allowance 60,000 12,000 72,000 50% of the above amount

7,200

36,000

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3. actual allowance received HRA 24,000

Thus exemption is available to the least of the above i.e. Rs. 7200/Taxable HRA is as under: HRA 24,000 Less: Exemption u/s 10 (13A) 7,200 Taxable HRA 16,800

Assumptions: It is presumed that Mr A is employed throughout the year and he's occupied the rented property Throughout the year.

b) Explain the term gratuity How much of the same is tax free? Solution: Explain the term gratuity How much of the same is tax free? Gratuity is one of the least understood components of salary. Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job.

An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement. Gratuity received during the period of service is always taxable When gratuity is received by an employee from 2 or more employers in the same previous year then the aggregate amount of gratuity exempt from tax cannot exceed the above limit prescribed.

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Legal And Tax Aspects Of Business

In case where the employee has received gratuity in any earlier year from his former employer and also receives gratuity from another employer in a later year, the limit of Rs.10 lakhs will be reduced by the amount of gratuity exempt from tax in any earlier year.

Q14a) K. power Projects is a power generating unit. On 1.4.2008, it purchased a plant of ` 50, 00,000, eligible for depreciation @15% on SLM. Compute balancing charge or terminal deprecation assuming the plant is sold on 21.4.2010 for: (a) ` 8, 50,000 (b) ` 32, 00,000 (c) ` 45, 00,000 (d) ` 52, 00,000

a) sales price is Rs.8,50,000/particulars Original cost as on 1.4.08 Accumulated depreciation

(Rs.) 50,00,000 15,00,000

WDV as on 1.4.10

35,00,000 less: sales proceeds 8,50,000 Terminal depreciation u/s 32(1) 26,50,000 Since the sales consideration is less than the WDV as on 1.4.10, the shortfall is allowed To be W/off u/s 32. The same is termed as terminal depreciation.

b) sales price is Rs.32,00,000/particulars Original cost as on 1.4.08 Accumulated depreciation

(Rs.) 50,00,000 15,00,000

WDV as on 1.4.10

35,00,000 less: sales proceeds 32,00,000 Terminal depreciation u/s 32(1) 3,00,000 Since the sales consideration is less than the WDV as on 1.4.10, the shortfall is allowed To be W/off u/s 32. The same is termed as terminal depreciation.

c) sales price is Rs.45,00,000/-

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(Rs.) 50,00,000 15,00,000

particulars Original cost as on 1.4.08 Accumulated depreciation

WDV as on 1.4.10

35,00,000 less: sales proceeds 45,00,000 Balancing charge u/s 41(2) -10,00,000 Since the sales consideration is more than the WDV as on 1.4.10 but less than the Actual cost, the surplus shall be assessed to tax u/s 41(2). The same is termed as Balancing Charge. d) sales price is Rs.52,00,000/particulars Original cost as on 1.4.08 Accumulated depreciation

(Rs.) 50,00,000 15,00,000

WDV as on 1.4.10

35,00,000 less: sales proceeds 52,00,000 -17,00,000 Balancing charge u/s 41(2) -15,00,000 Capital gains -2,00,000 Since the sales consideration is more than the WDV as on 1.4.10 the surplus to The extent Of actual cost shall be assessed to tax u/s 41(2) as Balancing Charge. Excess above the cost Shall be assessed to capital gains.

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Q14b) what is a Resolution Requiring Special Notice According to section 153 by this Act special notice is required of a resolution, The resolution shall not be effective unless notice of the intention to move it has been given to the company not less than twenty-eight days before the meeting at which it is moved And the company shall give its members notice of any such resolution at the same time and in the same manner as it gives notice of the meeting or, if that is not practicable, shall give them notice thereof, in any manner allowed by the articles, not less than fourteen days before the meeting But if after notice of the intention to move such a resolution has been given to the company, a meeting is called for a date twenty-eight days or less after the notice has been given, the notice, although not given to the company within the time required by this section, shall be deemed to be properly given.

Q16) Please reply for following situations: a) A, a tradesman, leaves goods at Bs house by mistake, B treats the goods as his own is B bound to pay A ? B being the bailee shouldnt have treated the goods as his own so B should pay A for claiming the ownership of the goods. Instead B could have retained possession of such goods against the whole world except the true owner. Further B could have claim for compensation for any expenses for preserving or storing the goods from A.

b)A saves Bs property from fire. Is A entitled to any compensation from-B? Yes A is entitled for any compensation from B but he cannot sue B if he fails to pay him. As property being immovable he cannot retain the possession of the same. c) A, in consideration of Bs discounting, at As request, bills of exchange for C, guarantees to B, for twelve Months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to the extent Of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. Does this revocation Discharges A from all liability to B for any subsequent discount? Is A liable to B for the 2,000 rupees, on? Default of C. Yes, A is liable to pay B Rs.2000 on default of C because according to the section 130 revocation of a continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

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(d) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. Is A Liable? Yes, A is liable to pay B Rs.10000 on default of C because according to the section 130 revocation of a continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

Q18) A) what are the rates of Short Term Capital Gain Tax and Long Term Gains to various types of assesses? Capital Gain: As per Indian Income Tax laws, a capital gain tax is a voluntary tax payable on the sale of assets, investments, capital accumulation, and productivity. Capital Gain can be divided into two parts with its name suggests one is capital and second is gain. Capital investment: It is generally income earned from sale of Capital Investment; these investments may be as house or farmhouse, any stock, bond or shares and securities etc. Gain: - Gain is generally the difference between sale and purchase price of the capital investment.

Capital Gain is of two types:1) Short term capital gain 2) Long term capital gain Short term capital gain: if any assets are sold within three years to the date of purchase, it will be treated as short term capital gain. But in the contest of shares and securities the duration of short term is one year Taxability of short term capital gain on shares and securities: section 111A of the income tax act 1961 provides that if the shares, bonds etc. are sold within 1 year to the purchase date, income derived from that sale will be treated as short term capital gain. The rate of income tax on short term capital gain on share is 10% up to assessment year 2008-09 and 15% from the assessment year 2009-10. The short term capital gains other than those u/s 111A shall be added to the income of the assesses and no such benefit is available on short term capital gains arising in other cases and they will be taxed normally at slab rates applicable to the assesses.

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If someone does the business of selling and purchasing shares or securities, he/she cannot take the advantage of Section 111A of the income tax act and the income of the assesses will be treated as business income and will be taxed accordingly.

E.g.: If an assets like a house or farmhouse is sold with 36 months from the date of purchase, income generated from this sale will be short term capital gain and will be taxed according to tax slabs of an assesses and will include in business income. Capital gain also arises in case of the depreciable assets such like building or machinery etc. which reduces the value because of wear and tear or use. In this case capital gain will be calculated to the sale value of the assets minus the book value of the assets after deducting depreciation according to Section 50 of Income Tax Act.

LONG TERM CAPITAL GAIN: Long-term capital gains are usually taxed at a lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy If assets are sold more than 3 years from the date of purchase, the gain of that sale will be called Long term capital gain. In the case of share of securities the tenure is more than 1 year after which the gain will be called long term capital gain. Long term capital gain is calculated after deducting from the net sale of assets the indexed cost of acquisition and the indexed cost of the improvement of the assets.

Q18) b) what is an Unfair Trade practice? "Unfair trade practice" means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provisions of any services, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely :

The practice of making any statement, whether orally or in writing or by visible representation which, Falsely represents that the goods are of a particular standard, quality, quantity, grade, composition, style or model. falsely represents that the services are of a particular standard, quality or grade; falsely represents any re-built, second-hand, renovated, reconditioned or old goods as new goods;

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represents that the goods or services have sponsorships, approval, performance, characteristics, accessories, uses or benefits which such goods or services do not have; represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller or supplier does not have; makes a false or misleading representation concerning the need for, or the usefulness of, any goods or services; gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof : provided that where a defence is raised to the effect that such warranty or guarantee is based on adequate or proper test, the burden of proof of such defence shall lie on the person raising such defence; Makes to the public a representation in a form that purports to be - a warranty or guarantee of a product or of any goods or services; or a promise to replace, maintain or repair an article or any part thereof or to repeat or continue a service until it has achieved a specified result. if such purported warranty or guarantee or promise is materially misleading or if there is no reasonable prospect that such warranty, guarantee or promise will be carried out; materially misleading the public concerning the price at which a product or like products or goods or services, have been, or are, ordinarily sold or provided, and, for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold by sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or services have been provided by the person by whom or on whose behalf the representation is made. Gives false or misleading facts disparaging the goods, services or trade of another person. Doing any act of cheating or confusing in any transaction of goods and services.

Selling goods or services at a price above the price affixed to the goods or the price posted in the business premise. Unduly favouring one consumer over the other. Subjecting the consumer to purchase a good or service not desired in order to sell another good or service. Cheating in balance or measurements or any other measurement contrary to the lawful ones. Making false or misleading statements of price reduction.

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Q20) a) When is Communication said to be complete? The communication of an offer is complete when it comes to the knowledge of the person to whom it is made. Example: A proposes, by a letter, to sell a house to B at a certain price. The letter is posted on 10 th July. It reaches B on 12 th July. The communication of the offer is complete when B receives the letter, i.e., on 12th July.

Q20 b) When is a Revocation said to be complete? Communication of revocation m e a n s t a k i n g b a c k , r e c a l l i n g o r withdrawal. I t m a y b e a revocation of offer or acceptance. The communication of revocation is complete as against the person who makes it, when it is put into a course of transmission to t h e p e r s o n t o w h o m i t i s m a d e , s o a s t o b e o u t o f t h e r e a c h o f t h e p o w e r o f t h e person who makes it. As against the person to whom it is made, when it comes to his knowledge. Time for revocation of offer and acceptance o f p r o p o s a l : a p r o p o s a l m a y b e revoked at any time before the communication of its acceptance is c o m p l e t e a s a g a i n s t t h e p r o p o s e r , b u t n o t afterwards. Revocation of acceptance: an acceptance may be revoked at any time before the c o m m u n i c a t i o n o f t h e a c c e p t a n c e i s c o m p l e t e a s a g a i n s t the acceptor, but not afterwards. E.g.: a proposes by a letter sent by post to sell his house to b. the letter is posted on the 1st day of the month, accepts the proposal by a letter as against the acceptor, but not afterwards.

c) Explain what you mean by Agreements in restraint of trade? Restraint of trade means, in anti-trust law, any activity (including agreements among competitors or companies doing business with each other) which tends to limit trade, sales and transportation in interstate commerce or has a substantial impact on interstate commerce. Most of these actions are illegal under the various anti-trust statutes. Some state laws also outlaw local restraints on competitive business activity.

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A restraint of trade is an agreement by which someone is restricted in his or her freedom to carry on his or her trade, profession, business or other economic activity. A contract in restraint of trade is one in which a party (the covenanter) agrees with any other party (the convenantee) to restrict his or her liberty in the future to carry on trade with other persons not party to the contract in such manner as he or she chooses. A contract in restraint of trade is one that prevents an employee from exercising his or her trade, profession or calling, or engaging in the same business venture as the employer for a specified period, and within a specified area after leaving employment.

d) What business is transacted at an A.G.M of a Company? The Annual General Meeting must be held by every type of company whether public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year. Annual general meeting shall be called for a time during business hours, on a day that is not a public holiday, and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. In case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exemption of business that are deemed ordinary. In case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exemption of business relating to matters which are deemed ordinary. In every AGM, the following matters must be discussed and decided. Since such matters are discussed at every AGM, they are known as ordinary business The following matters constitute ordinary business at an AGM: Consideration of annual accounts, directors report and the auditors report . Declaration of dividend. Appointment of directors in the place of those retiring Appointment of and the fixing of the remuneration of the statutory auditors.

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list of items of Business for the Agenda for the First Annual General Meeting: To note the certificate of incorporation of the company, issued by the registrar. To take note of the Memorandum and Articles of Association of the company as registered To adopt Common Seal of the company. To note the situation of the registered office of the company. To confirm/note the appointment of first directors of the company. To read and record notices of disclosure of interest given by directors. To consider the Appointment of Additional Directors To fix financial year of the company To appoint bankers and open bank accounts of the company To authorise printing of share certificate. To authorise the issue of share certificates to subscribers of Memorandum and Articles of Association. To approve preliminary expenses and preliminary contracts.

Q22) What Is DISALLOWANCE OF CASH EXPENDITURE EXCEEDING ` 20,000 [Sec. 40A (3), RULE 6DD] B) What Do We Mean By Deemed Profit / Deemed Income? C) Explain Sec 44AB Of The Income Tax Act? Payments Disallowed u/s 40A(3) & 40A(3A): As per section 40A(3) w.e.f 2009-10, where the assesse incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than account payee cheque or account payee bank draft, exceeds Rs.20000, no deduction shall be allowed in respect of such expenditure. However such limit of Rs.20000 has been increased to Rs.35000 w.e.f 01-10-2009 in case the payment is made for plying, hiring or leasing of goods carriage. Section 40A (3A) further provides (w.e.f asst. year 2009-10) that in case an allowance is made in the assessment for any year on the basis of incurred liability, but in the subsequent year or years, assesse makes a payment exceeding Rs.20000 in a day, otherwise than by an account payee cheque or account payee bank draft, in respect of such liability, then the payment so made shall be deemed to be the profit of the year in which such payment is made.[The limit of Rs.35000 in case of plying, hiring or leasing of goods carriage is also applicable to section 40A(3A)] Thus payment in excess of Rs.20000 in a day in respect of any expenditure incurred in the current year or in the previous years otherwise than by an account payee cheque or account payee bank draft will be disallowed while calculating profits of an assesse.

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After the amendment w.e.f 2009-10 if a person makes more than one different purchases for cash from same person in excess of Rs.20000 in a single day even though on separate cash memos, such aggregate payment will be disallowed u/s 40A(3). For example if A makes three purchases of Rs.8000 each from the same person during different time of the day and obtains three different cash memos, yet the transaction will be covered by section 40A(3) and such expenditure will be disallowed. Exceptions under Rule 6DD: Proviso to section 40A(3A) provides that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this subsection[Section 40A(3A)] where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors

Q22 b) what do we mean by Deemed Profit / Deemed Income? Income which is considered to be available for use by an individual regardless of actual receipt. Income is deemed from: Parent to child; Spouse to spouse; and Sponsor to alien.

The government deems it fit to see income even when there might be none. At present 22 such provisions exist in the Income Tax Act In case of a seller; if a person has sold a flat for 22 lakhs but the fair value assessed by the authorities comes to 24 lakhs, the extra 2 lakhs would be added to the taxable income and deemed to be received In case of a buyer, if the purchase price is seen to be below the value taken for stamp duty in case of immovable property, even if it is not registered, the difference is added to the income The provisions apply only to Individuals and Hindu Undivided families, and are thus discriminatory The registering authorities are neither qualified engineers nor valuers and often go by street rates or thumb rule No proper inspection of properties are done to check whether it is in a good shape or dilapidated, hence distorting the value.

Some Deals Deemed as Taxable Income

Loans/advances taken by shareholder with 10 per cent stake Transfer of assets by firm, or even assets to sons wife

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Money, jewellery, income of spouse, investments not fully disclosed Aircraft operation for passengers/cargo, goods transport Civil construction work by Indian and foreign firms.

Q22 c) Explain Sec 44AB of the Income Tax Act? Every person, Carrying on business, if his total sales, turnover 711 or gross receipts, as the case may be, in business exceed or exceeds forty lakh rupees in any previous year, or Carrying on profession shall, if his gross receipts in profession exceed ten lakh rupees in any previous year, or Carrying on the business shall, if the profits and gains from the business are deemed to be the profits and gains of such person under section 44AD or section 44AE or section 44AF, as the case may be, And he has claimed his income to be lower than the profits or gains so deemed to be the profits and gains of his business, as the case may be, in any previous year, get his accounts of such previous year audited by an accountant before the specified date and furnished by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed 714 : Provided that this section shall not apply to the person, who derives income of the nature referred to in section 44B or section 44BB or section 44BBA or section 44BBB, on and from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later . Provided further that in a case where such person is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this section if such person gets the accounts of such business or profession audited under such law before the specified date and furnished by that date the report of the audit as required under such other law and a further report in the form prescribed under this section. 716 For the purposes of this section, (i) "Accountant" shall have the same meaning as in the Explanation below subsection(2) of section 288; (ii) "Specified date", in relation to the accounts of the previous year relevant to an assessment year means, - (a) Where the assesse is a company, the 30th day of November of the assessment year (b) In any other case, the 31st day of October of the assessment year.

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Q24) a) A company engaged in pharmaceuticals manufacturing, debited to its profit and loss account a sum of ` 50,000, being the interest on loan of ` 5, 00,000 taken for financing its expansion scheme. The plant and machinery purchased for the project with the loan were not received during the year and those were still in transit at the end of the year. A sum of ` 4,000 were paid to a broker who arranged the loan. Discuss the admissibility of the interest. Solution: As the loan is taken for expansion purpose interest of Rs.50, 000 for funding the purchase of machinery should not be debited to the P&L account. The same should be capitalised along with the cost of asset. Depreciation can be claimed of the above amount over the useful life of the asset.

24 b) Define the term Assesse, Previous year and income? Assesse Income Tax Act 1961 (Act no. 43) defines 'assesse' as a person by whom any tax or any other sum of money is payable under this Act, and includes

Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or the amount of refund due to him or to such other person; Every person who is deemed to be an assessed under any provision of this Act; Every person who is deemed to be an assessed in default under any provision of this Act;

Income
There is no specific definition of income but for statutory purposes there are certain items which are listed under the head income. These items include those heads also which normally will not be termed as income but for taxation we consider them as income. These items are included under section 2(24) of the income tax act, 1961. As per the definition in section 2(24), the term income means and includes:

profits and gains dividends voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes the value of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17 of the act any special allowance or benefit, other than those included above

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any allowance granted to the assesse either to meet his personal expenses at the place where the duties of his office or employment of profits are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living capital gains any sum chargeable to income tax under section 28 of the income tax act any winnings from lotteries, crossword puzzles, races, including horse races, card games and games of any sort or from gambling or betting of any form or nature whatsoever any received as contribution to the assesses provident fund or superannuation fund or any fund for the welfare of employees or any other fund set up under the provisions of the employees state insurance act Profits on sale of a licence granted under the imports (control) order, 1955 made under the imports and exports (control) act, 1947.

Previous year The Financial Year in which the income is earned is known as the previous year. Any financial year begins from 1st of April and ends on subsequent 31st March. The financial year beginning on 1st of April 2003 and ending on 31st March 2004 is the previous year for the assessment year 2004-2005.

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