Master of Business Administration MBA Semester 3 MF0003 Taxation Management Assignment Set 2

Q1. Give any twenty important examples of admissible general deductions under Sec37 of Income tax Act. Ans: The following are the few examples of admissible general deduction under Sec 37 of income tax act: 1. Expenses incurred in the purchase, manufacture and sale of goods. 2. General expenses incurred in the day to day running to the business. 3. Expenses incurred in defending a case for damages for breach of contract. 4. Amount of sales-tax paid and expenses incurred in connection with sales-tax proceedings including appeals. 5. Compensation paid to an undesirable employee for the retrenchment of his services or to a director to get rid of his services. 6. Contribution made to provident fund maintained for the benefit of employees under an act and with the previous approval of a state government may not be allowable u/s 36(1) (iv) but allowable u/s 37(1). 7. Commission, etc paid for securing orders for the business. 8. Compensation paid to employees in connection with injury sustained by them or accident met by them while on duty. 9. Royalties paid in connection with mines. 10. Insurance premium paid under a policy ensuring its employees against injury or against liability for compensation in respect of accident to its workmen. 11. Reasonable expenses incurred on the occasion of Dussehra, Diwali, commencement of the business, etc. 12. Compulsory subscription or a subscription given to an association in the interest of the business. 13. Legal expenses incurred in connection with the business or profession.
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14. Interest on unpaid purchase price of any business assets purchased by an assessee and put to use will be allowed. 15. Expenditure incurred to oppose nationalization or to prevent extinction of business. 16. Under executive instructions, cost of installing new telephone. 17. Normal advertisement expenditure incurred to maintain the sales. 18. Penalty paid by the assessee for saving from confiscation the good which he purchased from a third party without knowing that they had been illegally imported. 19. Welfare expenditure incurred by the assessee. 20. Payment of excise duty.

Q2. Ans:

What is unabsorbed depreciation? Mention the tax planning on depreciation.

Unabsorbed Depreciation: Depreciation allowance for a particular previous year is first deductible from the profits and gains of the business or profession. If the profits and gains of the same business or profession are insufficient for this purpose, the balance of the amount of current depreciation allowance is deductible from the profits of any other business or profession of the assessee. If the profits of any other business or profession are also unable to absorb the whole amount of depreciation allowance, the balance of such allowance which remains unabsorbed can be set-off against any other taxable income of the same year. If still, the whole amount of current depreciation allowance is not deductible on account of the insufficiency of the other taxable income, the remaining unabsorbed amount is called Unabsorbed Depreciation. If unabsorbed depreciation cannot be wholly set-off, the amount of depreciation not set-off shall be carried forward to the following assessment year. The unabsorbed depreciation shall be added to the depreciation allowance for the following previous year or for the succeeding previous years till such time it is fully deducted. In other words the unabsorbed depreciation shall be treated as part of the current years depreciation.

Tax Planning on Depreciation: Capital assets may be purchased even on the last day to claim 50% of normal depreciation. Business assets if are to be purchased during September or October, one may see that it is used for a minimum period of 180 days to claim full depreciation allowance. Since no depreciation on the assets sold during the previous year is allowed, the sale of the asset may be postponed to the beginning of the next year.

Q3. Mr. AMAR purchased a house on 1.4.2000 for Rs.250000. On 1.7.2002 he incurred Rs.50000 towards improvements. He sold the above house on 30.7.2006. Compute the indexed cost of acquisition and indexed cost of improvement? [CII; 2000-2001 406, 2002-2003- 447, 2007- 2008 551] Ans: i) Indexed cost of acquisition = Actual cost of acquisition*C.I.I of sale year/C.I.I of purchase year = 2,50,000*551/406 = 3,39,286 ii) Indexed cost of improvement = Actual cost of Improv. *C.I.I of sale year/ C.I.I of improvement = 50,000*551/447 = 61,633

Q4. Ans:

Explain different types of securities.

Securities are of four types: i. Tax free Government Securities. These securities are those, the interest on which is fully exempt from tax under section 10(15). Interest on such securities is neither included in total income nor it is taxed.
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ii.

Government Securities. Such securities are issued either by the Central Government or a State Government. These are taxable securities but no tax is deducted at source on such securities. Hence, the interest on such securities will not be grossed up. The amount received or due as the case may be shall be included in the total income.

iii.

Tax-free Commercial Securities. These are issued by a local authority or statutory corporation or a company, in the form of debentures or bonds. Really speaking their interest not tax-free, because tax due on this interest is payable by the company, or local authority or corporation concerned. These are called tax-free, because the assessee has not to pay tax on it from his own pocket. The tax paid by the company(10.2% in case of listed securities, 20.4% in case of unlisted securities) on this interest is deemed to have been paid on behalf of the assessee, hence the amount of tax paid on any interest due to an assessee added to his interest income. i.e., the interest due to an assessee is grossed up and then this grossed up amount is included in his total income. The amount of tax paid by the company on this interest is deducted from the total tax payable by the assessee.For example, if a company has issued 10% Taf-free Debentures, the debenture-holder will receive the entire amount of interest calculated at 10% but the amount to be included in the total income of the debenture holder will be the amount actually received by him as interest pius income tax thereon paid by the company. Less-Tax Commercial Securities. These may be called Taxable Securities. In the case of these securities, income tax is deducted at source on the amount of interest calculated at the percentage stated on the securities and balance of the amount of interest calculated at the percentage stated on the securities and balance of the amount of interest left after deduction of the aforesaid income tax is paid to the security-holder. (The rate of tax deducted at source is 10.2% in case of listed securities, 20.4% in case of unlisted securities) if the rate percent of interest is given it is not grossed up as it is already the gross amount of interest, and income tax is to be deducted there from. If in the case of these securities, the net amount of interest received is given, it has got to be grossed up. In any case, it is the gross amount of interest that is included in the total income of an assessee.

iv.

Q5. From the following particulars of SHRI MAHESH compute his income from other sources: Ground rent of Rs.5000 Following interest received a. On fixed deposits from bank Rs.400 b. From POSB A/c Rs.300 c. Interest on deposit with a firm Rs.600 Income from subletting of house taken on rent Rs.5000. Rent paid Rs.3000,Gift from brother in law 30000, Gift from other persons 40000,Spent Rs.400 for collecting the rent of the house Ans: Income from other sources of SHRI MAHESH is Rs.7900/Calculation of Income from other sources of Shri Mahesh: Rs. Ground Rent Interest Received: On Fixed Deposits from Bank From POSB A/c Interest on Deposit with a Firm Income from Subletting of House: Rent Received Less: Expenses Rent Paid Collection Charges Gift: Gift from brother in law (Gift from relative is not taxable) Gift from Other Person Total As it not exceeds Rs 50000/- not chargeable to tax Income from Other Sources Nil 40000 40000 Nil 7900
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Rs. 5000

400 300 600 1300

5000

3000 400 1600

Q6. Ans:

What is Minimum Alternative Tax (MAT)? How to compute tax as provisions of MAT?

Minimum Alternative Tax (w.e.f. A.Y. 2001-02) Where in the case of company the income-tax payable on its total income in respect of any previous year relevant to assessment year is less than 10% (plus surcharge, if any + Education cess) of its book profit, such book-profit shall be deemed to be the total income and the tax payable on such total income shall be the amount of income-tax @ 10% (plus surcharge, if any + Education cess) of such book profit. MAT (Sec 115 JB) under this tax payable by a company for any A.Y. cannot be less than 10% of book profit. How to compute tax as provisions of MAT: (A) Find out Normal Tax Liability (ignoring MAT) (B) MAT 1. Find out Book Profit 2. Find out MAT Tax at 10% If (A) is more MAT is not applicable. If (B) is more MAT is applicable. Points to be kept in mind while computing the profit:The profit and loss account shall be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956.