Edrona Exams | Complete examination management system

Direct tax and International Taxation

 

Final – DIRECT TAX LAWS AND INTERNATIONAL TAXATION

 

 

Q-1: Anand was the Karta of HUF. He died leaving behind his major son Prem, his widow, his grandmother and brother’s wife. Can the HUF retain its status as such or the surviving persons would become co-owners?

Ans:- In the case of Gowli Buddanna v. CIT (1966) (SC), the Supreme Court has made it clear that there need not be more than one male member to form a HUF as a taxable entity under the Income-tax Act, 1961. The expression “Hindu Undivided family” in the Act is used in the sense in which it is understood under the personal law of the Hindus.

Under the Hindu system of law, a joint family may consist of a single male member and the widows of the deceased male members and the Income-tax Act, 1961 does not mandate that it should consist of at least two male members. Therefore, property of a joint Hindu family does not cease to belong to the family merely because the family is represented by a single co- parcener who possesses the right which an owner of property may possess.

Therefore, the HUF would retain its status as such.

 

Q-2: Mr. Bhargava, a leading advocate on corporate law, decided to reduce his practice and to accept briefs only for paying his taxes and making charities with the fees received on such briefs. In a particular case, he agreed to appear to defend one company in the Supreme Court on the condition that he would be provided with Rs. 5 lacs for a public charitable trust that he would create. He defended the company and was paid the sum by the company. He created a trust of that sum by executing a trust deed. Decide whether the amount received by Mr. Bhargava is assessable in his hands as income from profession.

Ans:- In the instant case, the trust was created by Mr. Bhargava himself out of his professional income. The client did not create the trust. The client did not impose any obligation in the nature of a trust binding on Mr. Bhargava. Thus, there is no diversion of the money to the trust before it became professional income in the hands of Mr. Bhargava. This case is one of application of professional income and not of diversion of income by overriding title. Therefore, the amount received by Mr. Bhargava is chargeable to tax under the head “Profits and gains of business or profession”.

 

Q-3: The Assessing Officer found, during the course of assessment of a firm, that it had paid rent in respect of its business premises amounting to Rs. 60,000, which was not debited in the books of account for the year ending 31.3.2022. The firm did not explain the source for payment of rent. The Assessing Officer proposes to make an addition of Rs. 60,000 in the hands of the firm for the assessment year 2022-23. The firm claims that even if the addition is made, the sum of Rs. 60,000 should be allowed as deduction while computing its business income since it has been expended for purposes of its business. Examine the claim of the firm.

Ans:- The claim of the firm for deduction of the sum of Rs. 60,000 in computing its business income is not tenable. The action of the Assessing Officer in making the addition of Rs. 60,000, being the payment of rent not debited in the books of account (for which the firm failed to explain the source of payment) is correct in law since the same is an unexplained expenditure under section 69C. The proviso to section 69C states that such unexplained expenditure, which is deemed to be the income of the assessee, shall not be allowed as a deduction under any head of income. Therefore, the claim of the firm is not tenable.

 

Q-4: Mr. Anand is an Indian citizen and a member of the crew of a Singapore bound Indian ship engaged in carriage of passengers in international traffic departing from Chennai port on 6th June, 2021. From the following details for the P.Y. 2021-22, determine the residential status of Mr. Anand for A.Y. 2022-23, assuming that his stay in India in the last 4 previous years (preceding P.Y. 2021-22) is 400 days and last seven previous years (preceding P.Y. 2021-22) is 750 days:

 Particulars

 Date

 Date entered into the Continuous Discharge Certificate in respect of joining the ship by Mr. Anand 

 6th June, 2021

 Date entered into the Continuous Discharge Certificate in respect of

 signing off the ship by Mr. Anand

 9th December, 2021

Ans:- In this case, the voyage is undertaken by an Indian ship engaged in the carriage of passengers in international traffic, originating from a port in India (i.e., the Chennai port) and having its destination at a port outside India (i.e., the Singapore port). Hence, the voyage is an eligible voyage for the purposes of section 6(1).

Therefore, the period beginning from 6th June, 2021 and ending on 9th December, 2021, being the dates entered into the Continuous Discharge Certificate in respect of joining the ship and signing off from the ship by Mr. Anand, an Indian citizen who is a member of the crew of the ship, has to be excluded for computing the period of his stay in India.

Accordingly, 187 days [25+31+31+30+31+30+9] have to be excluded from the period of his stay in India. Consequently, Mr. Anand’s period of stay in India during the P.Y.2021-22 would be 178 days [i.e., 365 days – 187 days]. Since his period of stay in India during the P.Y.2021-22 is less than 182 days, he is a non-resident for A.Y.2022-23.

Note –

  1. Since the residential status of Mr. Anand is “non-resident” for A.Y.2022-23 consequent to his number of days of stay in P.Y.2021-22 being less than 182 days, his period of stay in the earlier previous years become irrelevant.
  2. However, if he is not liable to tax in another country by reason of his domicile, residence or any other similar criteria and his income from sources other than foreign sources is more than Rs.15,00,000, then he is deemed to be resident & not ordinary resident [Sec 6(1A)]. (Finance Act 2020).

 

Q-5: Poulomi, a chartered accountant, is presently working in a firm in India. She has received an offer for the post of Chief Financial Officer from a company at Singapore. As per the offer letter, she should join the company at any time between 1st September 2021 and 31st October, 2021. She approaches you for your advice on the following issues to mitigate her tax liability in India:

i) Date by which she should leave India to join the company;

ii) Direct credit of part of her salary to her bank account in Kolkata maintained jointly with her mother to meet requirement of her family

iii) Period for which she should stay in India when she comes on leave.

Ans:- The following category of individual will be treated as resident in India only if the period of their stay in India during the relevant previous year is 182 days or more:-

a) Indian citizens, who leave India in any previous year, inter alia, for purposes of employment outside India, or

b)Indian citizen or person of Indian origin engaged outside India, who comes on a visit to India in any previous year.

 

(There are some significant amendments made by Finance Act 2020 w.r.t point (b). In this part it is not relevant to mention those amendments.)

(i) Since Poulomi (assuming Indian Citizen) is leaving India for the purpose of employment outside India, she will be treated as resident only if the period of her stay during the previous year amounts to 182 days or more. Therefore, Poulomi should leave India on or before 28th September 2021, in which case, her stay in India during the previous year would be less than 182 days and she would become non-resident for the purpose of taxability in India. In such a case, only the income which accrues or arises in India or which is deemed to accrue or arise in India or received or deemed to be received in India shall be taxable.

The income earned by her in Singapore would not be chargeable to tax in India for A.Y. 2022- 23, if she leaves India on or before 28th September, 2021.

Note: However, if she is an Indian Citizen and not “liable to tax” in another country by reason of her domicile, residence or any other similar criteria and her income from sources other than foreign sources is more than Rs.15,00,000, then she is deemed to be resident & not ordinary resident [Sec 6(1A)]. (Finance Act 2020)

The term liable to tax is now defined by Finance Act 2021 u/s 2(29A).

(ii) If any part of Poulomi’s salary will be credited directly to her bank account in Kolkata then, that part of her salary would be considered as income received in India during the previous year under section 5 and would be chargeable to tax under Income-tax Act, 1961, even if she is a non-resident. Therefore, Poulomi should receive her entire salary in Singapore and then remit the required amount to her bank account in Kolkata in which case, the salary earned by her in Singapore would not be subject to tax in India.

Note: However, if she is an Indian Citizen and not liable to tax in another country by reason of her domicile, residence or any other similar criteria and her income from sources other than foreign sources is more than Rs.15,00,000, then she is deemed to be resident & not ordinary resident [Sec 6(1A)]. (Finance Act 2020)

The term liable to tax is now defined by Finance Act 2021 u/s 2(29A).

(iii) In case Poulomi visits India after taking up employment outside India, she would be covered in the exception provided in (b) above and she will be treated as resident only if the period of her stay during the relevant previous year amounts to 182 days or more.

Therefore, when Poulomi comes India on leave, she should stay in India for less than 182 days during the relevant previous year so that her status remains as a nonresident for the relevant previous year. Moreover, she should not visit India again during the current previous year i.e. P.Y. 2021-22.

Further, if she (assuming Indian Citizen or Person of Indian Origin) visits India and stays for 120 days or more but less than 182 days in the PY and more than 365 days in last 4 PY’s and her income from sources other than foreign sources is exceeding Rs, 15,00,000 then she is deemed to be Resident & not Ordinary resident. [Finance Act 2020]

 

Q-6: X is an Indian citizen. Currently, he is in employment with a multinational company and posted in Singapore. During the previous year 2021-22, he comes to India for a visit of 145 days. In earlier 4 years, he is in India for more than 1200 days. X wants to know his residential status for the assessment years 2022-23. His annual income is as follows –

     PY 2021-22

Rs.

 Income from salary, rent, consultancy and interest income earned and received in Singapore

  (a)    29,00,000

 Income from business (accrued and received outside India, controlled from Singapore)

  (b)  21,00,000

Income from another business (accrued and received outside India,

controlled from India)

 (c)

 8,00,000

 Interest on bank fixed deposits in India

 (d)

 11,00,000

 Any other income in India or outside India

 (e)

 Nil

 Life insurance premium paid in India

 (f)

 2,60,000

Would it make any difference, if X is a foreign citizen but his maternal grandfather was born in a village near Karachi in 1946?

Ans:- Explanation 1(b) to section 6(1) is applicable in the case of an Indian citizen or a person of Indian origin. If grandfather of X was born in undivided India, X is a person of Indian origin (even if he is a foreign citizen). Consequently, in the given case, it does not make any difference whether X is an Indian citizen or a foreign citizen.

Previous year 2021-22 (assessment year 2022-23) – In the previous year 2021-22, X is in India for 145 days. Total income of X (other than income from foreign sources) is Rs. 17,50,000 (i.e., Rs. 8,00,000 + Rs. 11,00,000 – deduction under section 80C: Rs. 1,50,000). X satisfies 4 conditions given by Explanation 1 (b) to section 6(1) [read with sub-clause (c) of section 6(6)] as follows –

  1. X is an Indian citizen or a person of Indian origin;
  2. total income of X (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year;
  3. he comes to India on a visit during the previous year 2021-22, and
  4. he is in India for 145 days (i.e., his Indian visit is for 120 days or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.

Consequently, for the previous year 2021-22, X is resident but not ordinarily resident in India.

 

Q-7: Ankur, the owner of a land situated in Kerala used for growing thereon different types of fruits, paddy, vegetables and flowers, received from Yahoo Movies Ltd., Chennai, Rs. 5 lacs as rent towards the use of this land for shooting of a film. The amount so received was accounted by him in the books as revenue derived from land and claimed to be exempt under section 10(1). He now wants to confirm from you whether the amount has been correctly treated by him as agricultural income.

Ans:- The income received by Mr. Ankur from a filmmaker for allowing them to shoot a film in the agricultural land owned by him is not in the nature of agricultural income because it was neither received by him against the sale of agricultural produce obtained nor for carrying out the normal agricultural operations on the land. The amount paid was only for the purpose of shooting of a film on such land.

To claim exemption in respect of agricultural income under section 10(1), the conditions contained in section 2(1A)(a) to (c) have to be first complied with/fulfilled by the assessee. The Madras High Court in the case of B. Nagi Reddi v. CIT (2002), following the judgment of Apex Court in the case of CIT v Raja Benoy Kumar Sahas Roy (1957), has held, on identical facts, that the income derived for allowing a shooting of film in the agricultural land cannot be treated as agricultural income, as it has no nexus with the land, except that it was carried out on agricultural land.

 

Q-8: A company has unit in SEZ and qualifies for exemption u/s 10AA and PY 31/3/2021 is the third year of operation. The following information is given to you:-

P & L A/c of unit A 31/3/21

  Salaries

 200L  Exports  500L  

 Admin Exps

 150L   Domestic sales  40L

 

 

CCS

10L

 NP

 225L

 Duty Drawback

 20L

 

 575L

 Profit on sale of Import licence.

 5L

Expenses of Rs. 5L are disallowable u/s 43B and foreign exchange received into India by 30thSept 2021 amounts to 400L. Export of Rs. 500L includes insurance and freight of Rs. 50L.

Export realization of Rs. 400L includes includes insurance and freight of Rs. 40L

Compute the Total Income of the assesse.

Ans:- Income under the head PGBP Deduction u/s 10AA

1) Export T/O = 400L (Realisation) – 40L (Insurance & freight)

= 360 L

The FOB value of exports realization has to be included in export T/O further insurance & freight shall be excluded.

 

2) Total T/O = F.O.B value of Export + Domestic sales.

= 450 + 40 = 490L

[(500 – 50) = 450]

3) Profits of Business = 230L – 10L – 20L – 5L = 195L [225 + 5 = 230]

As per the Supreme Court judgement of ‘Liberty India’ CCS, Duty drawback and profit on sale of import license are not profits derived from eligible undertaking therefore it shall be excluded.

Deduction u/s 10AA = 195L x(360/490)

= 143.26L

 

Q-9: X Ltd has an undertaking (X unit) in SEZ and another undertaking (unit Y) in free trade zone for manufacturing of computer software. It furnishes the following particulars of its 2nd year of operation ending on 31/3/2021

 

 Unit X (in lacs)

 Unit Y (in lacs)

 Total sales

 180

 120

 Export sales (inclusive of onsite development of software

outside India) by unit X

 120

 10

 Profit earned (after claim of Bad debts u/s – 36 (1) (vii) in unit X)

 63

 36

Plant & Mach used in the business has been depreciated at 15% on SLM and dep. of Rs. 9L debited in P&L in the proportion of sales during the year 31.03.2021. Rs. 100L were realized out of Export sales in time and balance Rs. 20L becomes irrecoverable due to bankruptcy of one of the foreign buyers of unit X.

Ans:- Depreciation of 2nd year on SLM at 15% is 9L

Actual cost of plant & Machinery = 60L = \(9l\over.15\)

 

Dep u/s 32 will be calculated as follows:-

 

Actual cost of P&M acquired during

 PY 19 – 20

 60,00,000

 Less: Depreciation for 19 – 20

 9,00,000

 [It is assumed that additional depreciation is N.A]

 Depreciated value of Block on 1/4/20

 51,00,000

 Less: Dep for 20 – 21* to be divided in the ratio of 3:2  (765000)
 Depreciated of Block value on 1/4/21  4335000

 

 Particulars

 Unit x

 Unit y  

 Profit earned

 63L

 36L

 Add: Dep debited to P/L

 5.4L

 3.6L

 (9L in the ratio 3:2)

 

 

 Less: Dep u/s 32

 (4.59)

 (3.06)

(7.65L in the ratio of 3:2)

 

 

 Balance

 63.81

 36.54

 Less: Ded u/s 10AA

 (35.45)

-

  [63.81 × \(100\over 180\) ]

 

 

 NET INCOME

 28.36

 36.54

 

Q-10: Mr. X is a Member of Legislative Assembly. He underwent an open- heart surgery abroad in respect of which he received Rs. 5 Lacs from the State Government towards reimbursement of his medical expenses. The Assessing Officer contended that such amount is taxable as a perquisite under section 17. Examine the correctness of the contention of the Assessing Officer.

Ans:- The facts of this case are similar to the facts in CIT v. Shiv Charan Mathur (2008) (Raj.). In the instant case, the High Court observed that MPs and MLAs do not fall within the meaning of “employees”. They are elected by the public, their election constituencies and it is consequent upon such election that they acquire constitutional position and are in charge of constitutional functions and obligations. The remuneration received by them, after swearing in, cannot be said to be salary within the meaning of section 15, since the basic ingredient of employer- employee relationship is missing in such cases.

Therefore, the remuneration received by MPs and MLAs is taxable under the head “Income from Other Sources” and not under the head “Salaries”. When the provisions of section 15 are not attracted to the remuneration received by MPs and MLAs, the provisions of section 17 also would not apply as section 17 only extends the definition of salary by providing that certain items mentioned therein would be included in salary as “perquisites”. Thus, reimbursement of medical expenditure (incurred for open heart surgery abroad) to an MLA cannot be taxed as a perquisite under section 17.

Applying the above ruling to the case on hand, the contention of the Assessing Officer is not correct.

 

Q-11: Examine the correctness or otherwise of the following case in the context of provisions contained in the Income-tax Act, 1961 relevant/applicable for the assessment year 2022-23:

(i) Nargis, working as Regional Area Sales Manager of Pincer Marketing Ltd., was paid salary and a commission based as a percentage on the volume of sales effected by her. Nargis claimed the expenses incurred by her for earning the commission in the return of income, which were disallowed by the Assessing Officer.

(ii) An amount of Rs. 12,50,000 paid by XYZ Ltd., after approval by the board, to a hospital in UK for the heart surgery of its managing director was charged under medical expenses. The Assessing Officer, while completing the assessment of the company, taxed the amount so paid by the company as a perquisite in the hands of its Managing Director.

Ans:- (i) The facts of this case are similar to the case decided by the Madras High Court in CIT v.

R. Rajendran (2003), where it was held that since the assessee was employed as a regional sales manager and the commission paid to him is based on the volume of sales effected, such commission was obviously paid to the employee as an encouragement to effect a higher level of sales. The commission paid in addition to what the employee was getting as a fixed salary would also constitute/ form part of salary. When the commission is chargeable as salary, then no deduction is allowable in respect of any expenditure incurred to earn the commission.

Therefore, in this case, the claim made by Nargis is not valid and the expenses incurred for earning commission are not allowable as deduction while computing her salary income.

(ii) A Managing Director generally occupies the dual capacity of being a director as well as an employee of the company. In this case, assuming that the Managing Director is also an employee of XYZ Ltd., clause (vi) of the proviso to section 17(2) would get attracted. Clause (vi) of the proviso to section 17(2) provides that any expenditure incurred by the employer on medical treatment of the employee outside India shall be excluded from perquisite only to the extent permitted by RBI. Therefore, the expenditure on medical treatment of the Managing Director outside India shall be excluded from perquisite to the extent permitted by RBI as per clause (vi) of the proviso to section 17(2). If it is assumed that the entire amount is permitted by RBI, there would be no perquisite chargeable in the hands of the Managing Director. Therefore, in such a case, the action of the Assessing Officer in taxing the entire amount paid by the company as a perquisite in the hands of the Managing Director is incorrect.

This question can also be answered by applying the rationale of the Allahabad High Court ruling in CIT v. D.P. Kanodia (2008). In that case, the High Court observed that the reimbursement by the company of medical expenditure incurred outside India by the director cannot be considered as an amenity or benefit provided by the company to its director, and therefore the provisions of section 17(2)(iii)(a) would not be attracted. Therefore, such reimbursement was not a perquisite within the meaning of section 17(2)(iii)(a).

Hence, applying the rationale of the above case to the facts of this case, the action of the Assessing Officer in taxing the amount paid by the company as a perquisite in the hands of the Managing Director is incorrect.

 

Q-12: Mr. Kadam is entitled to a salary of Rs. 40,000 per month. He is given an option by his employer either to take house rent allowance or a rent free accommodation which is owned by the company. The HRA amount payable was Rs. 7,000 per month. The rent for the hired accommodation was Rs. 6,000 per month at New Delhi. Advice Mr. Kadam whether it would be beneficial for him to avail HRA or Rent Free Accommodation. Give your advice on the basis of “Net Take Home Cash benefits”.

Ans:- Computation of tax liability of Kadam under both the options

 Particulars

 Option I – HRA

 (Rs.)

 Option II – RFA

 (Rs.)

Basic Salary (Rs. 40,000 x 12 Months)

 4,80,000

 4,80,000

 Perquisite value of rent-free accommodation (15% of Rs.   4,80,000)

 N.A.

 72,000

 House rent Allowance (Rs. 7,000 x 12 Months) Rs. 84,000

 

 

 Less: Exempt u/s 10(13A) – least of the following -

 

 

 - 50% of Basic Salary Rs. 2,40,000

 

 

 

 - Actual HRA received Rs. 84,000

 

 

 

 - Rent less 10% of salary Rs. 24,000

 Rs. 24,000

 60,000

 

 Gross Salary

 

 5,40,000

 5,52,000

 Less: Standard deduction u/s 16(ia)

 

 50,000

 50,000

 Net Salary

 

 4,90,000

 5,02,000

 Less: Deduction under Chapter VI-A

 

-

-

 Total Income

 

 4,90,000

 5,02,000

 Tax on total income

 

 12,000

 12,900

 Less: Rebate u/s 87A  – Lower  of  Rs.12,500   or income-tax of Rs. 12,000, since total

 income does not exceed Rs. 5,00,000

 

 12,000

 Nil

 

    Nil   12,900

 Add: Health and Education cess@4%

    Nil  516

 Total tax payable

    Nil  13,416

 Tax Payable (Rounded off) 

    Nil   13,420

 

Cash Flow Statement

Particulars

Option I – HRA

(Rs.)

Option II – RFA

(Rs.)

 Inflow: Salary

 5,64,000

 4,80,000

 Less: Outflow: Rent paid

(72,000)

-

 Tax on total income

 Nil

 (13,420)

 Net Inflow

 4,92,000

 4,66,580

Since the net cash inflow under option I (HRA) is higher than in Option II (RFA), it is beneficial for Mr. Kadam to avail Option I, i.e., House Rent Allowance.

 

Q-13: Rajesh owns a house in Hyderabad. During the previous year 2021-22, 3/4th portion of the house was self-occupied and 1/4th portion was let out for residential purposes at a rent of Rs. 12,000 p.m. The tenant vacated the property on February 29th 2022. The property was vacant during March, 2022. Rent for the months of January 2022 and February 2022 could not be realised in spite of the owner’s efforts. All the conditions prescribed under Rule 4 are satisfied.

Municipal value of the property is Rs. 4,00,000 p.a., fair rent is Rs. 4,40,000 p.a. and standard rent is Rs. 4,80,000. He paid municipal taxes @10% of municipal value during the year. A loan of Rs. 30,00,000 was taken by him during the year 2010 for acquiring the property. Interest on loan paid during the previous year 2021-22 was Rs. 1,48,000. Compute Rajesh’s income from house property for the A.Y. 2022-23.

Ans:- There are two units of the house. Unit I with 3/4th area is used by Rajesh for self occupation throughout the year and no benefit is derived from that unit, hence, it will be treated as self- occupied and its annual value will be nil. Unit 2 with 1/4th area is let-out during the previous year and its annual value has to be determined as per section 23(1).

Computation of Income from house property of Mr. Rajesh for the A.Y. 2022-23

 Particulars

 Rs.

 Unit I (3/4th area – self-occupied)

 

 

 Annual Value

 

 Nil

 Less: Deduction under section 24(b) 3/4th of Rs. 1,48,000

 

 1,11,000

 Income from Unit I (self-occupied)

 

 (1,11,000)

 Unit II (1/4th area – let out)

 

 

 Computation of GAV

 

 

 Step 1 – Computation of Expected Rent (ER)

 

 

ER = Higher of municipal valuation (MV) and fair rent (FR), but restricted to standard rent (SR).

However, in this case, standard rent of Rs. 1,20,000 (1/4th of Rs. 4,80,000) is more than the

higher of MV of Rs. 1,00,000 (1/4th of Rs. 4,00,000) and FR of Rs. 1,10,000 (1/4th of Rs. 4,40,000).   

Hence the higher of MV and FR is the ER. In this case, it is the fair rent.

 1,10,000

 

Step 2 – Computation of actual rent received/ receivable Rs. 12,000 x 9 = 1,08,000

[The property was let-out for 11 months. However, rent for 2  months i.e., January and February,

2022 could not be realized. As per Explanation to section 23(1), actual rent should not include

any amount of rent which is not capable of being realized.

Therefore, actual rent has been computed for 9 months]

1,08,000

 

Step 3 – GAV is the higher of ER and actual rent received/receivable. However, as per section

23(1)(c), where the let-out property is vacant for part of the year and owing to vacancy, the actual

rent is lower than the ER, then the actual rent received would be the GAV of the property. In this

case, the actual rent is lower than the ER owing to vacancy, since had the property not been

vacant in March 2022, the actual rent would have been Rs. 1,20,000 (i.e. Rs. 1,08,000 + Rs. 12,000),

which is higher than the ER of Rs. 1,10,000. Therefore, in this case, section 23(1)(c) would apply

 and the actual rent of Rs. 1,08,000 would be the GAV, since it is lower than the ER owing to vacancy.

 1,08,000

 

 Gross Annual Value (GAV)

 

 1,08,000  

Less: Municipal taxes paid by the owner during the previous year relating to let-out portion 1/4th of

(10% of Rs. 4,00,000) =Rs. 40000/4 = Rs.10,000

 

 10,000

 Net Annual Value(NAV)

 

 98,000

 Less: Deductions under section 24

 

 

 (a) 30% of NAV = 30% of Rs. 98,000

 29,400

 

 (b) Interest paid on borrowed capital (relating to let out portion)

 [1/4th of Rs. 1,48,000]

 37,000

 66,400

 Income from Unit II (let-out)

 

 31,600

 Loss under the head "Income from house property" (-1,11,000 + 31,600)

 -79,400

 

 

Q-14: In the following cases, examine under which head of income the receipt would be assessed-

a) Anirudh let out his property to Abhinav. Abhinav sublets it. How is sub-letting receipt to be assessed in the hands of Abhinav?

b) Anish has built a house on a leasehold land. He has let-out the above property and has considered the rent from such property under the head "Income from other sources" and deducted expenses on repairs, security charges, insurance and collection charges in all amounting to 50% of receipts.

Ans:- (a) Sub-letting receipt is to be assessed as “Income from Other Sources” or as “Profits and gains of business or profession” in hands of Mr. Abhinav, depending upon the facts and circumstances of each case. It is not assessable as income from house property, since one of the conditions for assessing an income under this head is that the assessee should be the owner of the property i.e. owner of the building and the land appurtenant thereto. In this case, since Abhinav is not the owner of the house property, sub-letting receipt cannot be assessed under the head “Income from house property”.

(b) Since Anish is the owner of the property (building), in this case, the receipt would be assessable as “Income from house property”. The ownership of land is not a pre requisite for assessment of income under this head. 30% of Net Annual Value is allowed as a deduction under section 24.

 

Q-15: People Housing Ltd. is engaged in the business of constructing residential and commercial properties. One of the building properties was included in the closing stock in the Balance Sheet. The said building was let out for a monthly rent as suitable buyers could not be found. All other buildings had been sold by the company. Examine with reasons whether the income by way of rent from the unsold property is assessable as income from business or income from house property.

What would be your answer, if the main objective of the company was to hold properties and earn income by letting out of these properties?

Ans:- (a) Under section 22, the charging section for “Income from house property”, the only exception provided is the income derived from property used/occupied by the assessee for his own business. Therefore, income derived from letting out of house property will be taxable under the head “Income from house property”. It will be so taxable even if property is held by the assessee as stock-in-trade of his business.

As per section 23(5), income from house property held as stock-in-trade would be exempt for a period of two years from the end of the financial year in which certificate of completion was obtained from the competent authority. However, for availing such exemption, the property should not be let out during the said period. Section 23(5) provides for exemption in respect of house property held as stock-in-trade for a certain period subject to fulfilment of the condition stated therein. It implies that income from house property held as stock-in-trade –

  1. beyond the said period; or
  2. not eligible for such exemption even during the said period due to non-fulfilment of the stated condition, would be taxable under the same head of income i.e., “Income from house property”.

In effect, where exemption provisions are provided under a particular head of income, it can be inferred that the income, but for such exemption, would be taxable only under that head of income.

Note – In the case of New Delhi Hotels Ltd. v. ACIT (2014), the Delhi High Court followed its own decision in the case of CIT vs. Discovery Estates Pvt. Ltd/CIT vs. Discovery Holding Pvt. Ltd., wherein it was held in the case of rental income derived from unsold flats which were shown as stock-in trade in the books of the assessee should be assessed under the head “Income from house property” and not under the head “Profits and gains from business and profession”.

This decision is in sync with the intent of the provisions of section 22 and 23(5) discussed above.

(b) The Supreme Court, in Chennai Properties and Investments Ltd. v. CIT (2015), held that where holding of properties and earning income by letting out of these properties is the main objective of the company as laid out in its Memorandum of Association and the entire income of the company as per its return of income accepted by the Assessing Officer comprises of income from letting out of such properties, such income would be assessable as “Profits and gains of business or profession.”

Further, in case of Rayala Corporation (P) Ltd. v. Asstt. CIT (2016), the Supreme Court held that since the business of the company is to lease out its property and earn rent therefrom, the rental income earned by the company is chargeable to tax as its business income and not income from house property.

Applying the rationale of above rulings if the main objective of the company is to hold the properties and earn income by letting out of the properties, the income from letting out of properties would be chargeable to tax as “Profits and gains of business or profession”.

 

Q-16: The trading and profit and loss account of Pingu Trading Pvt. Ltd. having business of agricultural produce, consumer items and other products for the year ended 31.03.2022 is as under:

Trading Account

 Particulars  Rs.   Particulars  Rs.

Opening Stock

3,75,000

Sales

1,55,50,000

Purchases

 1,25,75,000 

Closing Stock

4,50,000

Freight & Cartage

1,26,000

 

 

Gross profit

 29,24,000

 

 

 

 1,60,00,000

 

1,60,00,000

 

Profit and Loss Account

Particulars

Rs.

Particulars

Rs.

 Bonus to staff

 47,500

 Gross profit

 29,24,000

 Rent of premises

 53,500

 Income-tax refund

 20,000

 Advertisement

 5,000

 Warehousing charges

 15,00,000

 Bad Debts

 75,000

 

 

 Interest on loans

 1,67,500

 

 

 Depreciation

 71,500

 

 

 Goods and Services tax demand   paid

 1,08,350

 

 

 Miscellaneous expenses

 5,25,650

 

 

 Net profit of the year

 33,90,000 

 

 

 

 44,44,000

 

 44,44,000

On scrutiny of records, the following further information and details were extracted/gathered:

(i) There was a survey under section 133A on the business premises on 31.3.2022 in which it was revealed that the value of closing stocks of 31.3.2021 was Rs. 8,75,000 and a sale of Rs. 75,000 made on 13.3.2022 was not recorded in the books. The value of closing stocks after considering these facts and on the basis of inventory prepared by the department as on 31.3.2022 worked out at Rs. 12,50,000, which was accepted to be correct and not disputed.

(ii) Income-tax refund includes amount of Rs. 4,570 of interest allowed thereon.

(iii) Bonus to staff includes an amount of Rs. 7,500 paid in the month of December 2021, which was provided in the books on 31.03.2021.

(iv) Rent of premises includes an amount of Rs. 5,500 incurred on repairs. The assessee was under no obligation to incur such expenses as per rent agreement.

(v) Advertisement expenses include an amount of Rs. 2,500 paid for advertisement published in the souvenir issued by a political party. The payment is made by way of an account payee cheque.

(vi) Miscellaneous expenses include:

  1. amount of Rs. 15,000 paid towards penalty for non-fulfillment of delivery conditions of a contract of sale for the reasons beyond control,
  2. amount of Rs. 1,00,000 paid to the wife of a director, who is working as junior lawyer for taking an opinion on a disputed matter. The junior advocate of High Courts normally charge only Rs. 25,000 for the same opinion,
  3. amount of Rs. 1,00,000 paid to an Electoral Trust by cheque.

(vii) Goods and Services Tax demand paid includes an amount of Rs. 5,300 charged as penalty for delayed filing of returns and Rs. 12,750 towards interest for delay in deposit of tax.

(viii) The company had made an investment of Rs. 25 lacs on the construction of a warehouse in rural area for the purpose of storage of agricultural produce. This was made available for use from 15.09.2021 and the income from this activity is credited in the Profit and Loss account under the head “Warehousing charges”.

(ix) Depreciation under the Income-tax Act, 1961 works out at Rs. 65,000.

(x) Interest on loans includes an amount of Rs. 80,000 on which tax was not deducted.

Compute the income chargeable to tax for assessment year 2022-23 of Pingu Trading Pvt. Ltd, ignoring MAT. Support your answer with working notes.

Ans:- Computation of Income of Pingu Trading Pvt. Ltd. chargeable to tax for the A.Y. 2022 -23

 Particulars

 Rs.

 Net profit as per profit and loss account

 33,90,000

 Add: Difference in the value of stocks detected on survey under section

 133A on 31.03.2022 chargeable as income (See Note 1)

 3,75,000

 

37,65,000

 Less: Income-tax refund credited in the profit and loss account, out of which

interest  is to be considered separately under the head “Income from other

 sources”

 20,000

 

 37,45,000 

 Add: Expenses either  not allowable or  to be considered separately but

charged in the profit & loss account

 

 Repair expenses on rented premises where assessee is under no obligation

 to incur such expenses are not allowable as per section 30(a)(i). However,

if such expenses are required for carrying on the business  efficiently,

the same are allowable under section 37. In this case, assuming that such

expenses are required for carrying on business efficiently, the same are

allowable under section 37.

 

 Advertisement in the souvenir of political party not allowable as per section

 37(2B) (See Note 3)

 2,500

 Payment made to the wife of a director examined as per section 40A(2) and

 the excess payment made to be disallowed (See Note 5)

 75,000

 Payment made to electoral trust by cheque (See Note 6)

 1,00,000

 Penalty levied by the Goods and Services tax department for delayed filing

 of returns not allowable as being paid for infraction of law (See Note 7)

 5,300

Depreciation as per books

 71,500

 30% of  interest  paid  on  loan  without  deduction  of  tax  at  source  not

 allowable as per section 40(a)(ia)

 24,000

 

 40,23,300

 Less: Depreciation allowable as per Income-tax Act, 1961

 65,000

 

 39,58,300

 Less: Income from specified business (warehousing charges) credited to

 profit and loss account, to be considered separately (See Note 8)

 15,00,000

 Income from business (other than specified business)

 24,58,300

Computation of income / loss from specified business (See Note 8)

 

 Income from specified business Rs. 15,00,000

 

 Less: Deduction under section 35AD @ 100% of Rs. 25 lakhs Rs. 25,00,000

 

 Loss from  specified  business  to  be  carried  forward  as  per  section  73A

 (10,00,000)

 

 Income from Other Sources

 

 Interest on income-tax refund

 4,570

 Gross Total Income

 24,62,870

 Less: Deduction under section 80GGB

 

 Contribution to political party (See Note 3) Rs. 2,500

 

 Contribution to an Electoral trust (See Note 7) Rs. 1,00,000

 1,02,500

 Total Income

 23,60,370

 

Notes:

1) The business premises were surveyed and differences in the figures of opening and closing stocks and sales were found which have not been disputed and accepted by the assessee. Therefore, the trading account for the year is to be recasted to arrive at the correct amount of the gross profit/ net profit for the purpose of return of income to be filed for the previous year ended on 31.3.2022.

Revised Trading Account

 Particular

 Rs.

 Particular

 Rs.

Opening Stock

8,75,000

Sales (Rs.1,55,50,000 +Rs.75,000)

1,56,25,000

 Purchases

 1,25,75,000

 Closing Stock

 12,50,000

 Freight and Cartage

 1,26,000

 

 

 Gross Profit

 32,99,000

 

 

 

 1,68,75,000

 

 1,68,75,000

The difference of gross profit of Rs. 32,99,000 - Rs. 29,24,000 = Rs. 3,75,000 is to be added as income of the business for the year.

2) Bonus for the previous year 2020-21 paid after the due date for filing return for that year would have been disallowed under section 43B for the P.Y.2020-21. However, when the same has been paid in December 2021, it should be allowed as deduction in the P.Y.2021-22(A.Y. 2022-23). Since it is already included in the figure of bonus to staff debited to profit and loss account of this year, no further adjustment is required.

3) The amount of Rs. 2,500 paid for advertisement in the souvenir issued by a political party attracts disallowance under section 37(2B). However, such expenditure falls within the meaning assigned to “contribute” under section 293A of the Companies Act, 1956, and is hence, eligible for deduction under section 80GGB. Any contribution to the political party or electoral trust made by way of cash is not allowed as deduction under section 80GGB. Since in the present case, the payment to the political party is made by way of an account payee cheque, it is allowed as deduction under section 80GGB.

4) The penalty of Rs. 15,000 paid for non-fulfilment of delivery conditions of a contract for reasons beyond control is not for the breach of law but was paid for breach of contractual obligations and therefore, is an allowable expense.

5) It has been assumed that Rs. 25,000 is the reasonable payment for the wife of Director, working as a junior lawyer, since junior advocates of High Courts normally charge only Rs. 25,000 for the same opinion and therefore, the balance Rs. 75,000 has been disallowed.

6) Payment to an electoral trust qualifies for deduction under section 80GGB since the payment is made by way of a cheque. However, since the amount has been debited to profit and loss account, the same has to be added back for computing business income.

7) The interest of Rs. 12,750 paid on the delayed deposit of goods and services tax is for breach of contract and hence, is allowable as deduction. However, penalty of Rs. 5,300 for delay in filing of returns is not allowable since it is for breach of law.

8) Deduction @ 100% of the capital expenditure is available under section 35AD in respect of specified business of setting up and operating a warehouse facility for storage of agricultural produce which commences operation on or after 1.04.2012.

It is presumed that Rs. 25 lacs does not include expenditure on acquisition of any land.

The loss from specified business under section 35AD (warehousing) should be segregated from the income from other businesses, since, as per section 73A(1), any loss computed in respect of any specified business referred to in section 35AD shall not be set off except against profits and gains, if any, of any other specified business.

In view of the provisions of section 73A(1), the loss of Rs. 10 lacs from the specified business cannot be set-off against income from other businesses. Such loss has to be carried forward to be set-off against profit from specified business in the next assessment year. The return should be filed on or before the due date under section 139(1) for carry forward of such losses.

 

Q-17: (A) Examine the taxability and/or allowability of the following receipts or expenditures under the provisions of the Income-tax Act, 1961, for the assessment year 2022-23:

(i) S Ltd. receives a sum of Rs. 10 lakhs from K Ltd. on 3rd January, 2022 for agreeing not to carry on any business relating to computer software in India for the next three years.

(ii) Secret commission was paid during the previous year 2021-22.

(iii) P Ltd. paid dollars equivalent to Rs. 50 lakhs as sales commission for the year ended 31.03.2022, without deducting tax at source, to Mr. Rodrigues, a citizen of UK and non-resident who acted as agent for booking orders, from various customers who are outside India.

(B) Can the following transactions be covered under section 43B for disallowance?

  1. A bank guarantee given by a company towards disputed tax liabilities.
  2. Interest payable to Goods and Services Tax Department but not paid before the due date specified in section 139(1).

Ans:- (A)

(i)  As per section 28(va), any sum received under an agreement for not carrying out any activity in relation to any business / profession (i.e., non-compete fee) is chargeable to income-tax under the head “Profits and gains of business or profession”.

Accordingly, Rs. 10 lakhs received by S Ltd. from K Ltd. for agreeing not to carry on any business relating to computer software in India for the next three years is chargeable to income-tax under the head “Profits and gains of business or profession”.

The amount shall be allowed as deduction in the hands of K Ltd. provided tax has been deducted at source under section 194J on the payment so made to S Ltd. If tax is not deducted at source, 30% of the expenditure shall be disallowed under section 40(a)(ia).

(ii) Secret commission is one of the forms of commission payment generally made by business organizations. Secret commission is a payment for obtaining business orders or contracts from parties and /or customers and paid to employees and / or officials of those parties and / or customers or companies from whom business orders are obtained by the assessee.

Explanation 1 below section 37(1) of Income-tax Act, 1961 provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made in respect of such expenditure. In view of the Explanation, any expenditure incurred for a purpose which is an offence and prohibited by law cannot be allowed as expenditure. Therefore, if secret commission payment could be established as a payment for an offence prohibited by law, the same cannot be allowed as deduction.

(iii) A foreign agent of an Indian exporter operates in his own country and no part of his income accrues or arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. The commission paid to the non-resident agent for services rendered outside India is, thus, not chargeable to tax in India.

Since commission income for booking orders by non-resident who remains outside India is not subject to tax in India, disallowance under section 40(a)(i) is not attracted in respect of payment of commission to such nonresident outside India even though tax has not been deducted at source. Thus, the amount of Rs. 50 lakhs remitted to Mr. Rodrigues outside India in foreign currency towards commission would not attract disallowance under section 40(a)(i) for non- deduction of tax at source.

 

(B) (i) For claiming deduction of any expense enumerated under section 43B, the requirement is, the actual payment and not deemed payment. Furnishing of bank guarantee cannot be equated with actual payment. Actual payment requires that money must flow from the assessee to the public exchequer as specified in section 43B. Therefore, deduction of an expense covered under section 43B cannot be claimed by merely furnishing a bank guarantee [CIT v. McDowell & Co Ltd (2009) (SC)]

(ii) Interest payable to Goods and Services Tax department is part of Goods and Services Tax. Therefore, interest payable to Goods and Services Tax department, which is not paid before the “due date” of filing of return of income, would attract disallowance under section 43B [Mewar Motors v. CIT (2003)(Raj)]

 

Q-18: Mr. A commenced operations of the businesses of setting up a warehousing facility for storage of food grains, sugar and edible oil on 1.4.2021. He incurred capital expenditure of Rs. 80 lakh, Rs. 60 lakh and Rs. 50 lakh, respectively, on purchase of land and building during the period January, 2021 to March, 2021 exclusively for the above businesses, and capitalized the same in its books of account as on 1st April, 2021. The cost of land included in the above figures are Rs. 50 lakh, Rs. 40 lakh and Rs. 30 lakh, respectively. Further, during the P.Y.2021-22, he incurred capital expenditure of Rs. 20 lakh, Rs. 15 lakh & Rs. 10 lakh, respectively, for extension/ reconstruction of the building purchased and used exclusively for the above businesses.

The profits from the business of setting up a warehousing facility for storage of food grains, sugar and edible oil (before claiming deduction under section 35AD and section 32) for the A.Y. 2022-23 is Rs. 16 lakhs, Rs. 14 lakhs and Rs. 31 lakhs, respectively.

Compute the income under the head “Profits and gains of business or profession” for the A.Y.2022-23 and the loss to be carried forward, assuming that Mr. A has fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the heading “C. – Deductions in respect of certain incomes”. Assume in respect of expenditure incurred, the payments are made by account payee cheque or use of ECS through bank account.

Ans:- Computation of profits and gains of business or profession for A.Y. 2022-23

 Particulars  Rs. (in lakhs)

 Profit from business of setting up of warehouse for storage of edible oil

 (before providing for depreciation under section 32)

 31

 Less: Depreciation under section 32

 

10% of Rs. 30 lakhs, being (Rs. 50 lakhs – Rs. 30 lakhs + Rs. 10 lakhs)

 3

Income chargeable under “Profits and gains from business or profession”

 28

 

Computation of income/loss from specified business under section 35AD

Particulars

Food

Grains

Sugar

Total

 

Rs. (in lakhs)

(A) Profits from the specified business of setting up a warehousing facility (before providing deduction under

section 35AD)

16

14

30

 Less: Deduction under section 35AD

 

 

 

(B) Capital expenditure incurred prior to 1.4.2021 (i.e., prior to commencement of business) and capitalized

in the books of account as on 1.4.2021 (excluding the expenditure incurred on acquisition of land)

= Rs. 30 lakh (Rs. 80 lakh – Rs. 50 lakh) and Rs. 20 lakh (Rs. 60 lakh – Rs. 40 lakh)

 30

 20

 50

 (C) Capital expenditure incurred during the P.Y. 2021-22

 20

 15

 35

 (D) Total capital expenditure (B + C)

 50

 35

 85

 (E) Deduction under section 35AD

 

 

 

 100% of capital expenditure

 50

 35

 85

Total deduction u/s 35AD for A.Y. 2022-23

 50

 35

 85

(F) Loss from the specified business of setting up and operating a warehousing facility (after providing

 for deduction under section 35AD) to be carried forward as per section 73A (A-E)

 (34)

 (21)

 (55)

Notes:

  1. Deduction of 100% of the capital expenditure is available under section 35AD for A.Y.2022- 23 in respect of specified business of setting up and operating a warehousing facility for storage of sugar and setting up and operating a warehousing facility for storage of agricultural produce where operations are commenced on or after 01.04.2012 or on or after 01.04.2009, respectively.
  2. However, since setting up and operating a warehousing facility for storage of edible oils is not a specified business, Mr. A is not eligible for deduction under section 35AD in respect of capital expenditure incurred in respect of such business.
  3. Mr. A can, however, claim depreciation@10% under section 32 in respect of the capital expenditure incurred on buildings. It is presumed that the buildings were put to use for more than 180 days during the P.Y. 2021-22.
  4. Loss from a specified business can be set-off only against profits from another specified business. Therefore, the loss of Rs. 55 lakh from the specified businesses of setting up and operating a warehousing facility for storage of food grains and sugar cannot be set-off against the profits of Rs. 28 lakh from the business of setting and operating a warehousing facility for storage of edible oils, since the same is not a specified business. Such loss can, however, be carried forward indefinitely for set-off against profits of the same or any other specified business.

 

Q-19: Rao & Jain, a partnership firm consisting of two partners, reports a net profit of Rs. 7,00,000 before deduction of the following items:

  1. Salary of Rs. 20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership).
  2. Depreciation on plant and machinery under section 32 (computed) Rs. 1,50,000.
  3. Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest Rs. 5,00,000.

Compute:

(i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961.

(ii) Allowable working partner salary for the assessment year 2022-23 as per section 40(b).

Ans:- (i) As per Explanation 3 to section 40(b), “book profit” shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm if the same has been already deducted while computing the net profit.

In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest on capital of partners and salary to the working partners. Therefore, the book profit shall be as follows:

Computation of Book Profit of the firm under section 40(b)

Particulars

Rs.

Rs.

Net Profit (before deduction  of  depreciation, salary and

interest)

 

7,00,000

Less: Depreciation under section 32

1,50,000

 

Interest @ 12%  p.a. [being the maximum  allowable  as  per

section 40(b)] (Rs. 5,00,000 × 12%)

60,000

2,10,000

Book Profit

 

 4,90,000 

 

(ii) Salary actually paid to working partners = Rs. 20,000 × 2 × 12 = Rs. 4,80,000.

As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits –

 On the first Rs. 3,00,000 of book profit or in case of loss 

 Rs 1,50,000 or 90% of book profit, whichever

is more

 On the balance of book profit

 60% of the balance book profit

 

Therefore, the maximum allowable working partners’ salary for the A.Y. 2022-23 in this case would be:

 Particulars

 Rs.

On the first Rs. 3,00,000 of book profit [(Rs. 1,50,000 or 90% of Rs. 3,00,000)

whichever is more]

 2,70,000 

 On the balance of book profit [60% of (Rs. 4,90,000 - Rs. 3,00,000)]

 1,14,000

 Maximum allowable partners’ salary

 3,84,000

Hence, allowable working partners’ salary for the A.Y. 2022-23 as per the provisions of section 40(b)(v) is Rs. 3,84,000.

 

Q-20: The proprietary firm of "Mr. Amolak" a practicing Chartered Accountant, was converted into partnership on 01.09.2021 when his son joined him in the firm for 50% share. All the assets and liabilities of the erstwhile proprietary firm were transferred into the newly constituted partnership firm.

"Mr. Amolak" was credited and paid an amount of Rs. 5 lacs in his account from the firm.

Explain as to chargeability of this amount of Rs. 5 lacs in the hands of "Mr. Amolak" when it stands paid for:

(i) transfer of business into partnership;

(ii) goodwill by the incoming partner.

Ans:- (i) If the amount was paid for transfer of business / profession to partnership

As per section 45(3), the profits and gains arising from the transfer of a capital asset by a person to the firm in which he becomes a partner shall be chargeable to tax as the income of the previous year which such transfer takes place. The amount recorded in the books of account of the firm would be deemed to be the full value of consideration received or accruing as a result of transfer of the capital asset.

Since in this case, consideration of Rs. 5 lacs is received for such transfer, profit or gain accrues to the transferor for the purposes of section 45. The amount of Rs. 5 lacs would be the full value of consideration received as a result of transfer and the capital gains resulting from this transfer would be chargeable to tax.

(ii) If the amount is paid by the incoming partner for Goodwill

The Supreme Court, in CIT v. B.C. Srinivasa Setty (1981), observed that the income chargeable to capital gains tax is to be computed by deducting from the full value of consideration “the cost of acquisition of the capital asset”. If it is not possible to ascertain the cost of acquisition, then, transfer of such asset is not chargeable to tax.

Section 55(2)(a) provides that the cost of acquisition of certain self-generated assets, including goodwill of a business or profession, is Nil. Therefore, in respect of these self-generated assets covered under section 55(2)(a), the decision of the Supreme Court in B.C. Srinivasa Setty’s case would not apply.

Therefore, in this case, since the consideration of Rs. 5 lakhs is paid towards goodwill of a profession, whose cost is to be taken as ‘Nil’ since it is covered under section 55(2)(a), the liability to capital gains tax will arise.

 

Q-21: Gama Ltd, located within the corporation limits, in December, 2021 decided to shift its industrial undertaking to non-urban area. The company sold some of the assets and acquired new assets in the process of shifting. The relevant details are as follows:

 (Rs. in lacs)

 

 Particulars

 Land

 Building

Plant &

Machinery

Furniture

 (i)

 Sale proceeds (sale effected in March, 2022)

 8

 18

 16

 3

 (ii)

 Indexed cost of acquisition

 4

 10

 12

 2

 (iii) 

 Cost of acquisition in terms of section 50

 --

 4

 5

 2

 (iv)

 Cost of new assets purchased in July,

 2022 for the purpose of business in the new place

 4

 7

 17

 2

Compute the capital gains of Gama Ltd for the assessment year 2022-23.

Ans:- Section 54G deals with deduction in respect of any capital gain that may arise from the transfer of an industrial undertaking situated in an urban area in the course of or in consequence of shifting to a non-urban area.

If the assessee purchases new machinery or plant or acquires a building or land or constructs a new building or shifts the original asset and transfers the establishment to the new area, within 1 year before or 3 years after the date on which the transfer takes place, then, instead of the capital gain being charged to tax, it shall be dealt with as under:

  1. If the capital gain is greater than the cost of the new asset, the difference between the capital gain and the cost of the new asset shall be chargeable as income ‘under section 45’.
  2. If the total gain is equal to or less than the cost of the new asset, section 45 is not to be applied.

The capital assets referred to in section 54G are machinery or plant or land or building or any rights in building or land. Capital gain arising on transfer of furniture does not qualify for exemption under section 54G. No exemption is therefore available under section 54G in respect of investment of Rs. 2 lacs in acquiring furniture.

The first step therefore is to determine the capital gain arising out of the transfer and thereafter apply the provisions of section 54G.

 

 Particulars

 Rs.

 (a)

 Land – Sale proceeds (Non-depreciable asset)

 8,00,000

 

 Less: Indexed cost of acquisition

 4,00,000

 

 Long term capital gain

 4,00,000

 

 Less: Cost of new assets purchased within three year after the date of

 transfer (under section 54G)

 3,00,000

 

 Taxable Long term capital gain

 1,00,000

 (b)

 Building – sale proceeds (depreciable assets)

 18,00,000

 

 Less: W.D.V. is deemed as cost of acquisition under section 50

 4,00,000

 

 Short term capital gain

 14,00,000

 (c)

Plant & machinery- sale proceeds (depreciable asset)

16,00,000

 

Less: WDV is deemed cost under section 50

5,00,000

 

Short term capital gain

11,00,000

(d)

Furniture - sale proceeds (depreciable asset)

3,00,000

 

Less: WDV is deemed cost under section 50

2,00,000

 

Short term capital gain (A)

1,00,000

 

 

Summary

 

Short term capital gain: Building

14,00,000

Short term capital gain: Plant & machinery

11,00,000

 

 25,00,000

 Less: Section 54G [New assets purchased] (See Note below)   25,00,000 
 Net short term capital gain (B)   Nil
 Total short term capital gain (A)+(B) = Rs. 1 lac  

Note – Total exemption available under section 54G is Rs. 28 lacs (Rs. 4 lacs + Rs. 7 lacs + Rs. 17 lacs). The exemption should first be exhausted against short term capital gain as the incidence of tax in case of short-term capital gain is more than in case of long term capital gain. Therefore, Rs. 25 lacs is exhausted against short term capital gain and the balance of Rs. 3 lacs against long term capital gain.

The taxable capital gains would be:

 Long term capital gains

Rs.1,00,000 (taxable @ 20% under section 112)

 Short term capital gains (furniture) 

Rs.1,00,000 (taxable @30%/25%, as the case may be)

 

Rs. 2,00,000

 

Q-22: Neerja was carrying on the textile business under a proprietorship concern, Neerja Textiles. On 21.07.2021 the business of Neerja Textiles was succeeded by New Look Textile Private Limited and all the assets and liabilities of Neerja Textiles on that date became the assets and liabilities of New Look Textile Private Limited and Neerja was given 52% share in the share capital of the company. No other consideration was given to Neerja on account of this succession.

The assets and liabilities of Neerja Textiles transferred to the company included an urban land which was acquired by Neerja on 19.7.2013 for Rs. 9,80,000. The company sold the same on 30.03.2022 for Rs. 15,00,000.

Examine the tax implication of the above-mentioned transaction and compute the income chargeable to tax in such case(s).

Cost Inflation Index: F.Y. 2013-14: 220; F.Y. 2021-22: 317

Ans:- Taxability in case of succession of Neerja Textiles by New Look Textile Private Limited

As per provisions of section 47(xiv), in case a proprietorship concern is succeeded by a company in the business carried by it and as a result of which any capital asset is transferred to the company, then the same shall not be treated as transfer and will not be chargeable to capital gain tax in case the following conditions are satisfied:

  1. all the assets and liabilities of sole proprietary concern becomes the assets and liabilities of the company.
  2. the shareholding of the sole proprietor in the company is not less than 50% of the total voting power of the company and continues to remain as such for a period of 5 years from the date of succession.
  3. the sole proprietor does not receive any consideration or benefit in any form from the company other than by way of allotment of shares in the company.

In the present case, all the conditions mentioned above are satisfied therefore, the transfer of capital asset by Neerja Textiles to New Look Textiles Private Limited shall not attract capital gain tax provided Neerja continues to hold 50% or more of voting power of New Look Textiles Private Limited for a minimum period of 5 years.

Taxability in case of transfer of land by New Look Textiles Private Limited

As per the provisions of section 49(1) and Explanation 1 to section 2(42A), in case a capital asset is transferred in the circumstances mentioned in section 47(xiv), the cost of the asset in the hands of the company shall be the cost of the asset in the hands of the sole proprietor. Consequently, for the determining the period of holding of the asset, the period for which the asset is held by the sole proprietor shall also be considered.

Therefore, in the present case, the urban land shall be a long-term capital asset since it is held for more than 24 months by New Look Textile Private Limited and Neerja Textiles taken together. Cost of acquisition of land in the hands of the company shall be Rs. 9,80,000 i.e., the purchase cost of the land in the hands of Neerja.

Computation of capital gain chargeable to tax in the hands of New Look Textile Private Ltd.

 Particulars

Rs.

 Net Sale Consideration

 15,00,000 

 Less: Indexed cost of acquisition 9,80,000 × 317/317 (Refer Note below) 

 9,80,000

 Long-term capital gain

 5,20,000

Note: The year of transfer and the year in which the company first held the asset are the same in this case, which is the reason why the numerator and the denominator for calculating the indexed cost of acquisition would remain the same. Therefore, in effect, there is no benefit of indexation in this case.

However, as per the view expressed by Bombay High Court in CIT v. Manjula J. Shah, in case the cost of acquisition of the capital asset in the hands of the assessee is taken to be cost of such asset in the hands of the previous owner, the indexation benefit would be available from the year in which the capital asset is acquired by the previous owner. If this view is considered, the indexed cost of acquisition would have to be calculated by taking the CII of F.Y.2013-14 i.e., 220, being the year in which the capital asset was acquired by the previous owner, Neerja, as the denominator, in which case, the capital gains chargeable to tax would undergo a change. The long-term capital gains in such a case would be Rs. 87,909 [Rs. 15,00,000 - Rs. 14,12,090 (9,80,000 x Rs. 317/220)].

 

Q-23: Calculate the income-tax liability for the assessment year 2022-23 in the following cases:

 

 Mr. A 

 (age 45)

   Mrs. B

  (age62)

   Mr. C

   (age 81)

  Mr. D

 (age 82)

 Status

 Resident

 Non- resident

 Resident

 Non- resident 

Total income  other  than  long-

term capital gain

 2,40,000

 2,80,000

 5,90,000

 4,80,000

Long-term capital gain

 15,000

 from sale of vacant site

 10,000 from sale of listed shares (STT paid 

 on sale and purchase of shares)

 60,000 from sale of agricultural land in rural area

Nil

 

Ans:- Computation of income-tax liability for the A.Y.2022-23

Particulars

Mr. A

(age 45)

Mrs. B (age

62)

Mr. C

(age 81)

Mr. D

(age 82)

Residential Status

Resident

Non- resident

Resident

Non- resident

Applicable      basic      exemption

limit

Rs. 2,50,000

Rs. 2,50,000

Rs. 5,00,000

Rs. 2,50,000

Asset sold

 Vacant site

 Listed shares

(STT paid at both sale and purchase of shares)

 Rural agricultural land

-

 Long-term capital gain (on sale of   above asset)

Rs. 15,000

[Taxable@20% u/s 112]

[Exempt u/s 112A since it is less than Rs. 1,00,000]

Rs. 60,000

[Exempt – not a capital asset)

-

Other income

 Rs. 2,40,000                 

 Rs. 2,80,000                                                            

 Rs. 5,90,000                          

 Rs. 4,80,000  

Tax liability

 

 

 

 

On      LTCG  (after adjusting   unexhausted

basic limit of Rs. 10,000) i.e., 20% x Rs. 5,000    

 Rs. 1,000

-

-

-

 On Other income

 Nil

 Rs. 1,500

 Rs. 18,000

 Rs. 11,500

 Less: Rebate u/s 87A

 Rs. 1,000

 Rs. 1,000

 Rs. 1,500

 Rs. 18,000

 Rs. 11,500

 

-

-

-

 

 Nil

 Rs. 60

 Rs. 720

 Rs. 460

Add:  Health  and  education cess @4%

 

 

 

 

Total tax liability

 Nil

Rs. 1,560

Rs. 18,720

Rs. 11,960

Notes:

  1. Since Mrs. B and Mr. D are non-residents, they cannot avail the higher basic exemption limit of Rs. 3,00,000 and Rs. 5,00,000 for persons over the age of 60 years and 80 years, respectively.
  2. Since Mr. A is a resident whose total income does not exceed Rs. 5 lakhs, he is eligible for rebate of Rs. 12,500 or the actual tax payable, whichever is lower, under section 87A.

 

Q-24: An enterprise engaged in manufacturing of steel balls discontinued its activities and decided to lease out its factory building, plant and machinery and furniture from 1.4.2021 on a consolidated lease rent of Rs. 50,000 per month. Compute the income for Assessment Year 2022-23 of the assessee from following information:

 (i)   Interest received on deposits  1,00,000
 (ii)  Brokerage paid on hundi loan taken  2,000

(iii)

 Interest paid on hundi and other loans which were given as deposits on

 interest to others

 50,000

 (iv)

 Expenses incurred on repairs of building, plant and machinery

15,000

(v)

Fire insurance premium of plant and machinery and furniture

12,000

(vi)

Depreciation for the year

1,47,500

 (vii)

 Legal fees paid to an advocate for drafting and registering the lease agreement

 1,500

 (viii)

 Factory licence fees paid for the year

 1,000

 (ix)

 There is unabsorbed depreciation of Rs. 2,75,000 of the Assessment Years 2020-21 and 2021-22.

 (x)

Interest paid includes an amount of Rs. 25,000 remitted to a non-resident outside India

on which tax was not deducted at source.

Ans:- The income derived from leased assets shall be chargeable to tax as 'Income from other sources' under section 56(2)(iii) but the computation thereof shall be made after allowing deductions specified under sections 30, 31 and 32 subject to section 38. This is as per the provisions of section 57(ii) and 57(iii).

Computation of income under the head “Income from other sources”

Particulars

Rs.

Rs.

(A) Lease Rent for 12 months @ Rs. 50,000 p.m.

 

6,00,000

Less: Expenses and deductions allowable

under section 57(ii)

& 57(iii):

 

 

Repairs

15,000

 

Fire Insurance Premium

12,000

 

Legal expenses for drafting of lease agreement

1,500

 

Factory Licence fee

1,000

 

Depreciation for the year

1,47,500

 

Unabsorbed depreciation of earlier assessment

years – eligible for deduction (Note 1)

 2,75,000

4,52,000

 

 

1,48,000

(B) Interest on Deposits

 1,00,000

 

Less: Expenses allowable under section 57(i):

 

 

Brokerage

Rs. 2,000

 

 

Interest on hundi loans (Note 2)

Rs. 50,000

52,000

48,000

Total Income

 

 

1,96,000

Note:

  1. Unabsorbed depreciation of Rs. 2,75,000 pertains to earlier assessment years. The unabsorbed depreciation shall form part of the current year depreciation and can be set off against any other head of income. Accordingly, the amount of Rs. 2,75,000 is adjustable / allowed to be set off against 'Income from other sources'.
  2. Since deposits are made by investing amount received on hundi and other loans, the interest on hundi and other loans would be eligible for deduction from the income arising on such deposits.

However, interest paid to non-resident is not eligible for deduction as the tax has not been deducted at source.

 

Q-25: For the previous year 2021-22, X gives the following information –

 

Dividend from domestic companies

Rs.

Interest on units of different

mutual funds

Rs.

Income (net of TDS under section 194/194K)

 45,000

 67,500

 Expenditure on  collection  of  dividend  income  /  units  of

 mutual fund

 2,500

 3,400

Interest on capital borrowed for investment in shares / units

of mutual fund (from which dividend is received during the previous year)

 8,000

 1,500

Interest on capital borrowed for investment in shares / units of mutual fund

 (from which no dividend is received during the previous year)

 21,000

 2,000

X wants to know income under the head “Income from other sources”.

Ans:- Computation of income of X under the head “Income from other sources” –

 

Rs.

Gross dividend on shares of domestic companies (Rs. 45,000 ÷ 0.9)

50,000

Gross income from mutual fund units (Rs. 67,500 ÷ 0.9)

75,000

Dividend on shares / interest on units (not yielded any dividend / interest

during the previous year)

Nil

Gross income

 1,25,000   

Expenditure on collection (not deductible by virtue of proviso to section 57)

 Nil

Interest expenditure [aggregate expenditure: Rs. 32,500 (i.e., Rs. 8,000 + Rs.

21,000* + Rs. 1,500 + Rs. 2,000*), not to exceed 20% of Rs. 1,25,000]

25,000

Income under the head “Income from Other Sources”

1,00,000

 

Q-26: Mr. Harish entered into an agreement to sell a building and land appurtenant thereto to Mr. Kushal on 1.1.2021 for Rs. 50 Lakhs. Mr. Kushal made an advance payment through Account Payee cheque of Rs. 5 lakhs on 1.1.2021. The stamp duty value on the date of agreement was Rs. 58 Lakhs. Mr. Harish purchased this property on 1.1.2019 for Rs. 10 Lakh.

Mr. Kushal makes the balance payment of Rs. 45 lakhs on 30.6.2021 and gets the property registered in his name on that date when the stamp duty value has been increased to Rs . 70 Lakhs. Possession of the property was also handed over to him on 30.6.2021.

Mr. Kushal sold the property on 31.12.2021 for Rs. 100 lakhs.

Examine the taxability of the transaction in the hands of Mr. Harish and Mr. Kushal, if:

i) Both Mr. Harish and Mr. Kushal treat it as capital asset.

ii) Both Mr. Harish and Mr. Kushal treat it as stock in trade.

iii) Mr. Harish treats it as capital asset but Mr. Kushal treats it as stock in trade.

iv) Mr. Harish treats it as stock in trade but Mr. Kushal treats it as capital asset.

Ans:-

Case -1: Both Mr. Harish and Mr. Kushal treat it as capital asset

In the hands of Mr. Harish

Assessment Year 2022-23

Income under the Head Capital Gains

Period of Holding

1.1.2019 to 29.6.2021

Long Term

Sale Consideration (As per section 50C)

 

Rs. 58 Lakhs

Less: Cost of Acquisition (Subject to indexation)

 

Rs. 10 Lakhs

Long Term Capital Gain

 

Rs.48Lakhs

 

In the hands of Mr. Kushal

Assessment Year 2022-23

Income from Other Sources

 

Income from other sources [Section 56(2)(x)]

Rs. 8 Lakhs

Cost of Acquisition as per section 49(4) shall be Rs. 58 Lakhs.

 

Income under the Head Capital Gains

 

Period of Holding

30.6.2021 to 30.12.2021

Short Term

Sale Consideration

 

Rs. 100 Lakhs

Less: Cost of Acquisition

 

Rs. 58 Lakhs

Short Term Capital Gain

 

Rs. 42 Lakhs

 

Case -2: Both Mr. Harish and Mr. Kushal treat it as stock-in-trade

In the hands of Mr. Harish

Assessment Year 2022-23

Income under the Head PGBP

 

Sale Consideration (As per section 43CA)

Rs. 58 Lakhs

Less: Cost of Acquisition

Rs. 10 Lakhs

PGBP

Rs.48 Lakhs

 

In the hands of Mr. Kushal

Assessment Year 2022-23

Income from Other Sources

Income from other sources [Section 56(2)(x)] shall be taken as Nil since he purchased it as stock-in-trade and not as capital asset.

Cost of stock shall be Rs. 50 Lakhs.

Income under the Head PGBP

 

Sale Consideration

100 Lakhs

Less: Cost of Acquisition

50 Lakhs

PGBP

50 Lakhs

 

Case 3: Mr. Harish treats it as capital asset but Mr. Kushal treats it as stock in trade.

In the hands of Mr. Harish Assessment Year 2022-23

Income under the Head Capital Gains

Period of Holding

 1.1.2019 to 29.6.2021 

Long Term

Sale  Consideration   (As   per

section 50C)

 

 Rs.58 Lakhs

 Less:  Cost of Acquisition

(Subject to Indexation)

 

 Rs.10 Lakhs

 Long Term Capital Gain

 

 Rs.48 Lakhs

 

In the hands of Mr. Kushal

Assessment Year 2022-23

Income from Other Sources

Income from other sources [Section 56(2)(x)] shall be taken as Nil since he purchased it as stock-in-trade and not as capital asset.

Cost of stock shall be Rs. 50 Lakh.

 

Income under the Head PGBP

 

Sale Consideration

100 Lakhs

Less: Cost of Acquisition

50 Lakhs

 PGBP  50 Lakhs

 

Case 4: Mr. Harish treats it as stock in trade but Mr. Kushal treats it as capital asset.

In the hands of Mr. Harish

Assessment Year 2022-23

Income under the Head PGBP

Sale Consideration (As per section 43CA)

 Rs. 58 Lakhs 

Less: Cost of Acquisition

Rs. 10 Lakhs

PGBP

Rs. 48 Lakhs

 

In the hands of Mr. Kushal

Assessment Year 2022-23

Income from Other Sources

Income from other sources [Section 56(2)(x)]

Rs. 8 Lakhs

Cost of Acquisition as per section 49(4) shall be Rs. 58 Lakh.

 

Income under the Head Capital Gains

 

Period of Holding           30.6.2021 to 30.12.2021

Short Term

Sale Consideration

Rs. 100 Lakhs

Less: Cost of Acquisition

Rs. 58 Lakhs

Short Term Capital Gain

Rs. 42 Lakhs

 

Q-27: Mr. A has gifted a house property valued at Rs. 50 lakhs to his wife, Mrs. B, who in turn has gifted the same to Mrs. C, their daughter-in-law. The house was let out at Rs. 25,000 per month throughout the year. Compute the total income of Mr. A and Mrs. C.

Will your answer be different if the said property was gifted to his son, husband of Mrs. C?

Ans:- As per section 27(i), an individual who transfers otherwise than for adequate consideration any house property to his spouse, not being a transfer in connection with an agreement to live apart, shall be deemed to be the owner of the house property so transferred.

Therefore, in this case, Mr. A would be the deemed owner of the house property transferred to his wife Mrs. B without consideration.

As per section 64(1)(vi), income arising to the son’s wife from assets transferred, directly or indirectly, to her by an individual otherwise than for adequate consideration would be included in the total income of such individual.

Income from let-out property is Rs. 2,10,000 [i.e., Rs. 3,00,000, being the actual rent calculated at Rs. 25,000 per month less Rs. 90,000, being deduction under section 24 @30% of Rs. 3,00,000]

In this case, income of Rs. 2,10,000 from let-out property arising to Mrs. C, being Mr. A’s son’s wife, would be included in the income of Mr. A, applying the provisions of section 27(i) and section 64(1)(vi). Such income would, therefore, not be taxable in the hands of Mrs. C.

In case the property was gifted to Mr. A’s son, the clubbing provisions under section 64 would not apply, since the son is not a minor child. Therefore, the income of Rs. 2,10,000 from letting out of property gifted to the son would be taxable in the hands of the son.

It may be noted that the provisions of section 56(2)(x) would not be attracted in the hands of the recipient of house property, since the receipt of property in each case was from a “relative” of such individual. Therefore, the stamp duty value of house property would not be chargeable to tax in the hands of the recipient of immovable property, even though the house property was received by her or him without consideration.

Note - The first part of the question can also be answered by applying the provisions of section 64(1)(vi) directly to include the income of Rs. 2,10,000 arising to Mrs. C in the hands of Mr. A. [without first applying the provisions of section 27(i) to deem Mr. A as the owner of the house property transferred to his wife Mrs. B without consideration], since section 64(1)(vi) speaks of clubbing of income arising to son’s wife from indirect transfer of assets to her by her husband’s parent, without consideration. Gift of house property by Mr. A to Mrs. C, via Mrs. B, can be viewed as an indirect transfer by Mr. A to Mrs. C.

 

Q-28: Mrs. E, wife of Mr. F, is a partner in a firm. Her capital contribution to the firm as on 01- 04-2021 was Rs. 5 lacs, out of which Rs. 3 lacs was contributed out of her own sources and Rs. 2 lacs was contributed out of gift from her husband.

As further capital was needed by the firm, she further invested Rs. 2 lacs on 01.05.2021 out of the funds gifted by her husband. The firm paid interest on capital of Rs. 80,000 and share of profit of Rs. 60,000 for the financial year 2021-22.

Advise Mr. F as to the applicability of the provisions of section 64(1)(iv) and the manner thereof in respect of the above referred transactions.

Ans:- As per section 64(1)(iv), in computing the total income of any individual, there shall be included all such income as arises, directly or indirectly, subject to the provisions of section 27(i), to the spouse of such individual from assets transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.

In this instant case, Mr. F has gifted money to his wife, Mrs. E. Mrs. E, in turn, invested such gifted money in the capital of a partnership firm, of which she is a partner. Mrs. E has also contributed a sum of Rs. 3 lacs out of her own resources to the capital of the firm.

As per Explanation 3 to section 64(1), for the purpose of clubbing under section 64(1)(iv), where the assets transferred, directly or indirectly, by an individual to his spouse are invested by the transferee in the nature of contribution of capital as a partner in a firm, proportionate interest on capital will be clubbed with the income of the transferor. Such proportion has to be computed by taking into account the value of the aforesaid investment as on the first day of the previous year to the total investment by way of capital contribution as a partner in the firm as on that day.

In view of the above provision, interest received by Mrs. E from the firm shall be included in total income of Mr. F to the extent of Rs. 32,000 i.e., Rs. 80,000 ´ Rs. 2,00,000/ Rs. 5,00,000.

Share of profit amounting to Rs. 60,000 is exempt from income-tax under the provisions of section 10(2A). The provisions of section 64 will not apply, if the income from the transferred asset itself is exempt from tax.

Note: It is assumed that rate of interest on capital contributed by Mrs. E does not exceed 12% p.a.

 

Q-29: Naresh is a fashion designer having lucrative business. His wife is a model. Naresh pays her monthly salary of Rs. 10,000. The Assessing Officer while admitting that the salary is an admissible deduction, in computing the total income of Naresh had applied the provisions of section 64(1) and had clubbed the income (salary) of his wife in Naresh hands.

Discuss the correctness of the action of the Assessing Officer.

Ans:- This question is based on the principles laid down by Madras High Court in the case of CIT

Smt. R. Bharati (1999) where the interpretation of the terms “professional qualifications” and “knowledge” came up for consideration as per proviso to section 64(1).

These words do not necessarily connote a qualification conferred by a recognized university after examining the candidate who has undergone a course of study in a technical subject or course of study preparing him for a profession of law, accountancy etc. Accordingly, the term “qualification” must be given a wide meaning as referring to the qualities which are required to be possessed by a person performing the work that he does, so long as that work is capable of being regarded as technical or professional.

The word “professional” is a term capable of very broad meaning and would encompass a variety of occupations. A large number of occupations are being practiced which form a source of livelihood and are capable of being regarded, as professions as long as they require certain degree of skill. A person having skill, experience and competence in a line of work can be regarded as professionally qualified for the purpose of section 64(1)(ii).

Applying the rationale of the Madras High Court ruling, a model, having skill, competence and experience in her line can be considered as a professional. Hence, the action of the Assessing Officer is not correct.

 

Q-30: ABC Limited was amalgamated with XYZ Limited on 01.04.2021. All the conditions of section 2(1B) were satisfied.

ABC Limited has the following carried forward losses as assessed till the Assessment Year 2021- 22:

   Particulars  Rs. (in lacs)
 (i)  Speculative Loss  4

 (ii)

 Unabsorbed Depreciation

18

 (iii) 

 Unabsorbed expenditure of capital nature on scientific research 

 2

 (iv)

Business Loss

120

XYZ Limited has computed a profit of Rs. 140 lacs for the financial year 2021-22 before setting off the eligible losses of ABC Limited but after providing depreciation at 15% per annum on Rs. 150 lacs, being the consideration at which plant and machinery were transferred to XYZ Limited. The written down value as per income-tax record of ABC Limited as on 31st March, 2021 was Rs. 100 lacs.

The above profit of XYZ Limited includes speculative profit of Rs. 10 lacs.

Compute the total income of XYZ Limited for Assessment Year 2022-23 and indicate the losses/other allowances to be carried forward by it.

Ans:- Computation of total income of XYZ Limited for the A.Y. 2022-23

Particulars

Rs. (in lacs)

Business income

 

 

Business income before setting-off brought forward losses of ABC Ltd.

 

140.00

Add: Excess depreciation claimed in the scheme of amalgamation of

ABC Limited with XYZ Limited.

 

 

Value at which assets are transferred by ABC Ltd.

150  

 

WDV in the books of ABC Ltd.

100

 

Excess accounted

50

 

Excess depreciation claimed in computing taxable income of XYZ Ltd.

[Rs. 50 lacs × 15 %] [Explanation 2 to section 43(6)]

 

7.50

 

 

147.50

 Set-off of brought forward business loss of ABC Ltd. (See Notes 2 & 4) 

 

(120.00) 

 Set-off of unabsorbed depreciation under section 32(2) read with

section 72A (See Notes 2 & 4)

   
 Set-off of unabsorbed capital expenditure under section 35(1)(iv)

read with section 35(4) (See Note 5)

   

 Business income

   7.50

 

Notes:

  1. It is presumed that the amalgamation is within the meaning of section 72A of the Income-tax Act, 1961.
  2. In the case of amalgamation of companies, the unabsorbed losses and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected and such business loss and unabsorbed depreciation shall be carried forward and set-off by the amalgamated company for a period of 8 years and indefinitely, respectively.
  3. As per section 72A(7), the accumulated loss to be carried forward specifically excludes loss sustained in a speculative business. Therefore, speculative loss of Rs. 4 lacs of ABC Ltd. cannot be carried forward by XYZ Ltd.
  4. Section 72(2) provides that where any allowance or part thereof unabsorbed under section 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed scientific research capital expenditure) is to be carried forward, effect has to be first given to brought forward business losses under section 72.
  5. Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in respect of capital expenditure on scientific research related to the business carried on by the assessee. Therefore, unabsorbed capital expenditure on scientific research can be set-off and carried forward in the same manner as unabsorbed depreciation.
  6. The restriction contained in section 73 is only regarding set-off of loss computed in respect of speculative business. Such a loss can be set-off only against profits of another speculation business and not non-speculation business. However, there is no restriction under the Income- tax Act, 1961 regarding set-off of normal business losses against speculative income. Therefore, normal business losses can be set-off against profits of a speculative business.

Consequently, there is no loss or allowance to be carried forward by XYZ Ltd. to the F.Y. 2022- 23.

 

Q-31: An assessee sustained a loss under the head “Income from house property” in the previous year relevant to the assessment year 2021-22, which could not be set off against income from any other head in that assessment year. The assessee did not furnish the return of loss within the time allowed under section 139(1) in respect of the relevant assessment year. However, the assessee filed the return within the time allowed under section 139(4). Can the assessee carry forward such loss for set off against income from house property of the assessment year 2022-23?

Ans:- Section 139(3) stipulates that an assessee claiming carry forward of loss under the heads “Profits and gains of business or profession” or “Capital gains” should furnish the return of loss within the time stipulated under section 139(1). There is no reference to loss under the head “Income from house property” in section 139(3). The assessee, in the instant case, has filed the return showing loss from property within the time prescribed under section 139(4). The assessee is, therefore, entitled to carry forward such loss for set off against the income from house property of the subsequent assessment year.

 

Q-32: Mr. B, a resident individual, furnishes the following particulars for the P.Y.2021-22:

 Particulars

 Rs.

 Income from salary (Net)

 45,000

 Income from house property

 (24,000) 

 Income from business – non-speculative

 (22,000)

 Income from speculative business

 (4,000)

 Short-term capital losses

 (25,000)

 Long-term capital gains u/s 112

 19,000

What is the total income chargeable to tax for the A.Y.2022-23?

Ans:- Total income of Mr. B for the A.Y. 2022-23

Particulars

Amount 

(Rs.)

Amount 

(Rs.)

Income from salaries

45,000

 

Income from house property

(24,000)

21,000

Profits and gains of business and profession

 

 

Business loss to be carried forward [Note 1]

(22,000)

 

Speculative loss to be carried forward [Note 2]

(4,000)

 

Capital Gains

 

 

Long term capital gain

19,000

 

Short term capital loss

(25,000)

 

Short term capital loss to be carried forward [Note 3]

(6,000)

-

Taxable income

 

21,000

Note 1: Business loss cannot be set-off against salary income. Therefore, loss of Rs. 22,000 from the non-speculative business cannot be set off against the income from salaries. Hence, such loss has to be carried forward to the next year for set-off against business profits, if any.

Note 2: Loss of Rs. 4,000 from the speculative business can be set off only against the income from the speculative business. Hence, such loss has to be carried forward.

Note 3: Short term capital loss can be set off against both short term capital gain and long term capital gain. Therefore, short term capital loss of Rs. 25,000 can be set-off against long- term capital gains to the extent of Rs. 19,000. The balance short term capital loss of Rs. 6,000 cannot be set-off against any other income and has to be carried forward to the next year for set-off against capital gains, if any.

 

Q-33: From the following details, compute the total income of Mr. A, Mr. B and Mr. C for A.Y.2022-23 –

Particulars

Mr. A

Mr. B

Mr. C

 

 

 Rs.

Rs.

Rs.

(i)

Salary (computed)

9,25,000  

 10,45,000  

11,15,000 

(ii)  

Interest income (on fixed deposits)

75,000

85,000

95,000

 

The particulars of their other investments/ payments made during the P.Y.2021-22 are given hereunder –

 

Particulars

Rs.

(1) 

Deposit in Public Provident Fund (PPF) by Mr. A

1,50,000 

(2)

Life insurance premium paid by Mr. C, the details of which are as follows–

 

 

Date of issue of policy

Person insured  

Actual capital sum           

assured

(Rs.)

Insurance premium paid during 2021-

22 (Rs.)

 

 

31/3/2012

Self

1,48,000

15,000

 

 

11/6/2016

Spouse

1,25,000

15,000

 

 

31/7/2017                      

Handicapped son

(Section 80U

disability

2,00,000                             

32,000                                                     

 

(3) 

Payment of medical insurance premium by the

following persons to insure their health:

 

 

Payer

Amount in Rs.

Mode of payment

 

 

Mr. A (aged 55 years)

30,000

Account payee cheque

 

 

Mr. B (aged 52 years)

15,000

Cash

 

 

Mr. C (aged 48 years)

20,000

Crossed cheque

 

(4)

Mr. B paid interest on loan taken for the purchase of house in which he currently resides.

He is claiming benefit of self-occupation under section 23(2) in respect of this house.

He does not own any other house.

 2,20,000

(5)

Contribution by Mr. A by cheque to National Children’s Fund during theyear.

30,000

(6)

Mr. B makes the following donations during the P.Y. 2021-22 -

 

 

Donation to BJP by crossed cheque

50,000

 

Donation to Electoral trust by cash

50,000

 

Ans:- Computation of total income for A.Y.2022-23

 

Particulars

Mr. A

Mr. B

Mr. C

 

 

Rs.

Rs.

Rs.

 

 

 

 

 (A) 

Salary

9,25,000

10,45,000

11,15,000

Income from house property [See Note 4]

 

(2,00,000)

 

Income from other sources (Interest)

75,000

85,000

95,000

Gross total income

10,00,000

9,30,000

12,10,000

 

Less: Deductions under Chapter VIA

 

 

 

Under section 80C

 

 

 

Deposit in PPF (See Note 3)

1,50,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 (B)

LIC premium paid [See Note 1]

 

 

57,500

Principal repayment of housing loan

 

1,50,000

 

(restricted to Rs. 1,50,000) [See Note 4]

 

 

 

Under section 80D

 

 

 

Medical insurance premium [See Note 2]

 25,000

Nil

20,000

Under section 80G

 

 

 

Contribution to National Children’s Fund

30,000

 

 

[See Note 5]

 

 

 

Under section 80GGC [See Note 6]

 

 

 

Donation to BJP by crossed cheque

 

50,000

 

Cash donation to Electoral Trust

 

Nil

 

Total deduction under Chapter VIA

 2,05,000

 2,00,000 

 77,500

 (C) 

Total Income (A) – (B)

 7,95,000 

 7,30,000

 11,32,500

 

Notes:

(1)

Deduction u/s 80C in respect of life insurance premium paid by Mr. C

 

Date of issue of policy

Person insured

Actual capital sum

assured

Insurance premium paid during

2021-22

Restricted to % of sum assured

Deduction u/s 80C

 

31/3/2012

Self

1,48,000

15,000

20%

15,000

 

11/6/2016

Spouse

1,25,000

15,000

10%

12,500

 

31/7/2017

Handicapped

Son (section 80U disability)

2,00,000

32,000

15%

30,000

 

Total

57,500

(2)

Medical Insurance Premium

  1. Medical insurance premium of Rs. 30,000 paid by account payee cheque by Mr. A is allowed as a deduction under section 80D, subject to a maximum of Rs. 25,000.
  2. Medical insurance premium paid by cash is not allowable as deduction. Hence, Mr. B is not eligible for deduction under section 80D in respect of medical insurance premium of Rs. 15,000 paid in cash.
  3. Mr. C is eligible for deduction of Rs. 20,000 under section 80D in respect of medical insurance premium paid by crossed cheque.
(3)  

The maximum amount eligible for deduction under section 80C shall not exceed Rs.

1,50,000. Since Mr. A has no other investment under section 80C during the P.Y. 2021- 22, Mr. A would be eligible for deduction of Rs. 1,50,000 in respect of PPF.

(4)  Deduction in respect of interest and principal repayment of housing loan

Mr. B is eligible for a maximum deduction of Rs. 2,00,000 under section 24 in respect of interest on housing loan taken in respect of a self-occupied property,

for which he is claiming benefit of “Nil” annual value. Therefore, Rs. 2,00,000 would represent his loss from house property.

Further, the maximum amount eligible for deduction under section 80C should not exceed Rs. 1,50,000. Since, Mr. B has no other investment under

 section 80C during the previous year 2021-22, he would be eligible for deduction of Rs.1,50,000 in respect of principal repayment of housing loan.

(5)  Contribution to National Children’s Fund qualifies for 100% deduction under section

80G. Therefore, Mr. A is entitled to 100% deduction of the sum of Rs. 30,000 contributed by him by way of cheque to National Children’s Fund.

(6)  Mr. B is eligible for deduction under section 80GGC in respect of donation to a political party made otherwise than by way of cash. However, cash donations to electoral trust

do not qualify for deduction under section 80GGC.

 

 

Q-34: Following issues have been raised by Navi Limited in connection with its eligibility for claiming deduction under section 80-IB for your consideration and advice for the assessment year 2022-23:

(i) It operates two separate industrial units. One unit is eligible for deduction under section 80- IB, while the other unit is not eligible for such deduction. If the eligible unit has profit and the other unit has loss, should it claim deduction after setting off the loss of the other unit against profit of the eligible unit?

(ii) Its profit from one unit includes sale of import entitlement, duty drawback and interest from customers for delayed payment. Is it permissible to claim deduction on these items of income?

Ans:- (i) Section 80-IB(13) provides that the provisions contained in section 80-IA(5) shall, so far as may be, apply to the eligible business under section 80-IB. Accordingly, for the purpose of computing the deduction under section 80-IB, the profits and gains of an eligible business shall be computed as if such eligible business was the only source of income of the assessee.

Therefore, Navi Limited should claim deduction under section 80-IB on profit from the eligible unit without setting off loss suffered in the other unit. It may be noted that the aggregate deduction under Chapter VI-A, however, cannot exceed the gross total income of the assessee.

(ii) Under section 80-IB, where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking referred to in the section, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains at the specified percentage and for such number of years as specified in the section. In CIT vs. Sterling Foods (1999) (SC) and Liberty India vs. CIT (2009)(SC), it was held that sale of import entitlement and duty drawback cannot be construed as income derived from industrial undertaking. Therefore, such income cannot be included in computing income for the purpose of deduction under section 80-IB.

Interest income derived by an undertaking on delayed collection of sale proceeds shall be treated as income derived from the industrial undertaking, and therefore, the same would be eligible for deduction under section 80-IB. [Phatela Cotgin Industries Private Limited vs CIT (2008) (P & H)].

 

Q-35: PQR Co-operative Bank, a co-operative society, having its area of operation confined to Gubbi Taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities, has received the following amounts during the year ending 31.3.2022:

  1. Interest amounting to Rs. 1,00,000 from its members on loans advanced to them.
  2. Interest amounting to Rs. 1,50,000 on deposits with other co-operative societies.
  3. Rent amounting to Rs. 2,00,000 from letting out its godowns for storage of commodities.

PQR Co-operative Bank seeks your advice in the matter of taxability of the above amounts and the eligibility for deduction, if any, in respect thereof for the assessment year 2022-23.

Ans:- Sub-clause (viia) to section 2(24) includes within the scope of definition of income, the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members. Hence, the interest of Rs. 1,00,000 received by PQR Co- operative Bank on loans advanced to its members constitutes its income.

Further, interest received amounting to Rs. 1,50,000 on deposits with other co-operative societies and rent amounting to Rs. 2,00,000 received from letting out its godowns for storage of commodities also constitute the income of the co-operative bank.

Sub-section (4) of section 80P provides that section 80P shall not apply to any cooperative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Explanation to section 80P(4) defines a primary co-operative agricultural and rural development bank to mean a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.

PQR Co-operative Bank is a primary co-operative agricultural and rural development bank as defined in the said Explanation since it is a co-operative society having its area of operation confined to Gubbi Taluk and its principal object is to provide long term credit for agricultural and rural development activities. Therefore, it is eligible for deduction under section 80P.

Interest of Rs. 1,00,000 received by the bank on loans advanced to its members is eligible for deduction in full under section 80P(2)(a)(i).

Interest of Rs. 1,50,000 received by the bank from deposits with other cooperative societies qualifies for deduction in full under section 80P(2)(d).

Rent of Rs. 2,00,000 received by the bank from letting out its godowns for storage of commodities is eligible for deduction in full under section 80P(2)(e).

 

Q-36: XYZ Ltd. is engaged in the manufacture of textile since 01-04-2009. Its Statement of Profit & Loss shows a profit of Rs. 700 lakhs after debit/credit of the following items:

  1. Depreciation calculated on the basis of useful life of assets as per provisions of the Companies Act, 2013 is Rs. 50 lakhs.
  2. Employer's contribution to EPF of Rs. 2 lakhs and Employees' contribution of Rs. 2 lakhs for the month of March, 2022 were remitted on 8th May 2022.
  3. The company appended a note to its Income Statement that industrial power tariff concession of Rs. 2.5 lakhs was received from the State Government and credited the same to Statement of P & L.
  4. The company had provided an amount of Rs. 25 lakhs being sum estimated as payable to workers based on agreement to be entered with the workers union towards periodical wage revision once in 3 years. The provision is based on a fair estimation on wage and reasonable certainty of revision once in 3 years.
  5. The company had made a provision of 10% of its debtors towards bad and doubtful debts. Total sundry debtors of the company as on 31-03-2022 was Rs. 200 lakhs.
  6. A debtor who owed the company an amount of Rs. 40 lakhs was declared insolvent and hence, was written off by debit to Statement of Profit and loss.
  7. Sundry creditors include an amount of Rs. 50 lakhs payable to A & Co, towards supply of raw materials, which remained unpaid due to quality issues. An agreement has been made on 31- 03-2022, to settle the amount at a discount of 75% of the outstanding. The amount waived is credited to Statement of Profit and Loss.
  8. The opening and closing stock for the year were Rs. 200 lakhs and Rs. 255 lakhs, respectively. They were overvalued by 10%.
  9. Provision for gratuity based on actuarial valuation was Rs. 500 lakhs. Actual gratuity paid debited to gratuity provision account was Rs. 300 lakhs.
  10. Commission of Rs. 1 lakh paid to a recovery agent for realization of a debt. Tax has been deducted and remitted as per Chapter XVIIB of the Act.
  11. The company has purchased 500 tons of industrial paper as packing material at a price of Rs. 30,000/ton from PQR, a firm in which majority of the directors are partners. PQR's normal selling price in the market for the same material is Rs. 28,000/ton.

Additional Information:

  1. There was an addition to Plant & Machinery amounting to Rs. 50 lakhs on 10-06-2021, which was used for more than 180 days during the year. Additional depreciation has not been adjusted in the books.
  2. Normal depreciation calculated as per income-tax rules is Rs. 80 lakhs.
  3. The company had credited a sub-contractor an amount of Rs. 10 lakhs on 31-03-2021 towards repairing a machinery component. The tax so deducted was remitted on 31-12-2021.
  4. The company has collected Rs. 7 lakhs as sales tax from its customers and paid the same on the due dates. However, on an appeal made, the High Court directed the Sales Tax Department to refund Rs. 3 lakhs to the company. The company in turn refunded Rs. 2 lakhs to the customers from whom the amount was collected and the balance of Rs. 1 lakh is still lying under the head “Current Liabilities”.

Compute total income and tax payable for A.Y. 2022-23. Ignore MAT provisions.

Note - The turnover of XYZ Ltd. for the P.Y.2019-20 was Rs. 405 crores.

Ans:- Computation of Total Income of XYZ Ltd. for the A.Y.2022-23

Particulars

 Amount (Rs.)

Profits and Gains from Business and Profession

 

 

Profit as per Statement of profit and loss account

 

7,00,00,000

 Add: Items debited but to be considered separately or to be disallowed

 

 

(a) Depreciation as per Companies Act, 2013

 50,00,000  

 

(b) Employees’ contribution to EPF [See Note 1 below]

2,00,000

 

 (b) Employees’ contribution to EPF [See Note 1 below]

[Since employees’ contribution to EPF has not been deposited on

or before the due date under the PF Act, the same is not allowable

as deduction as per section 36(1)(va). Since the same has been

debited to profit and loss account, it has to be added back for

computing business income].

 2,00,000

                   

(c) Employers contribution to EPF

[As per section 43B, employers’ contribution to EPF is allowable

as deduction since the same has been deposited on or before

the ‘due date’ of filing of return under section 139(1). Since

 the same has been debited to profit and loss

account, no further adjustment is necessary]

Nil

 

 (d) Provision for wages payable to workers

Nil

 

[The provision is based on fair estimate of wages and reasonable

certainty of revision, the provision is allowable as deduction,

since ICDS X requires ‘reasonable certainty for recognition

of a provision, which is present in this case. As the provision

has been debited to profit and loss  account, no adjustment

is required while computing business income] 

 

             

 (e) Provision for doubtful debts [10% of Rs. 200 lakhs] [Provision

for doubtful debts is allowable as deduction under section 36(1)

(viia) only in case of banks, public financial institutions, state financial

corporations, state industrial investment corporations and non-banking 

 financial corporations. Such provision is not allowable as deduction

in the case of a manufacturing company. Since the same has been

debited to profit and loss account, it has to be added back for

computing business income]

 20,00,000  

 

 (f) Bad debts written off

 [Bad debts write off in the book of account is allowable as

 deduction under section 36(1)(vii). Since the same has already been

 debited to profit and loss  account, no further

adjustment is required]

 

 

(g) Provision for gratuity

2,00,00,000

 

[Provision of Rs. 500 lakhs for gratuity based on actuarial valuation

is not allowable as deduction as per section 40A(7). However, actual

gratuity of Rs. 300 lakhs paid is allowable as deduction. Hence, the

 difference has to be added back]

 

 

(h) Commission paid to recovery agent for realization of a debt.

[Commission of Rs. 1 lakh paid to a recovery agent for realisation of

a debt is an allowable expense under section 37 as per DCIT v. Super

Tannery (India) Ltd. (2005) (All). Since the same has been debited

to profit and loss account, no furtheradjustment is required]

Nil

 

(i) Purchase of paper at a price higher than the fair market

value

10,00,000

 

[As per section 40A(2), the difference between the purchase price

(Rs.30,000 per ton) and the fair market value  (Rs. 28,000 per ton)

multiplied by the quantity purchased (500 tons) has to be added back

since the purchase is from a related party, a firm in which majority

of the directors are partners, at a price higher than the fair market

value]

 

 

(j) Sales tax not refunded to customers out of sales tax refund

1,00,000

 

[The amount of sales tax refunded to the company by the Government 

is a revenue receipt chargeable to tax under section 41(1). Deduction

can be claimed of amount refunde to customers [CIT v.

Thirumalaiswamy  Naidu & Sons (1998)

(SC)]. Hence, the net amount of Rs. 1,00,000 (i.e., Rs. 3,00,000

minus Rs. 2,00,000) would be chargeable to tax]

 

2,83,00,000

 

 

9,83,00,000

Less:  Items  credited  but  to  be  considered  separately/

permissible expenditure and allowances

 

 

(k) Industrial power tariff concession received from State Government

[Any assistance in the form of, inter alia, concession received from the

Central or State Government would be treated as income as per

section 2(24)(xviii). Since the same has been credited to Statement

of profit and loss, no adjustment is required.

Nil

 

(l) Discount given by Sundry Creditors for supply of raw materials

[Discount of 75% given by Sundry Creditors for supply of raw materials

is taxable under section 41(1). Since the same has already been

credited to Statement of profit and loss, no further adjustment is

required]

Nil

 

(m) Depreciation as per Income-tax Act, 1961

 80,00,000  

 

(n) Over-valuation of stock [Rs. 55 lakhs × 10/110]

5,00,000

 

[The amount by which stock is over-valued has to be reduced for

computing business income. Rs. 50 lakhs, being the difference

between closing and opening stock, has to be

adjusted to remove the effect of over-valuation]

 

 

(o) Additional Depreciation [See Note 2 below]

10,00,000

 

[Additional depreciation@20% is allowable on Rs. 50 lakhs, being

actual cost of new plant & machinery acquired on 10.06.2021, as

the same was put to use for more than 180 days in the P.Y.2021-22.]

 

 

(p) Payment to a sub-contractor where tax deducted last year was

remitted after the due date of filing of return [See Note 3 below]

 3,00,000    

 

[30% of Rs. 10 lakhs, being payment to a sub-contractor, would have

been disallowed under section 40(a)(ia) while computing the business  

income of A.Y.2021-22, since tax deducted was remitted after the due

date of filing of return. However, the same is allowable in A.Y.2022-23,

since the remittance has been made on 31.12.2021]

 

 

 

 

98,00,000

Total Income

 

8,85,00,000

 

Computation of tax liability of XYZ Ltd. for A.Y.2022-23

Particulars

Rs.

Tax @30% on the above total income (since the turnover exceeded Rs. 400

crores in the P.Y. 2019-20)

2,65,50,000

Add: Surcharge@7% (since total income exceeds Rs. 1 crore but less than Rs.10

crore)

18,58,500

 

2,84,08,500

Add: Health and Education cess@4%

11,36,340

Total tax liability

2,95,44,840

Notes:

  1. Employees contribution to PF deposited after the due date mentioned under the PF Act is not allowable as deduction as per section 36(1)(va). Further there is an amendment made by Finance Act 2021 u/s 36(1)(va) & 43B clarifying that employees contribution has to be paid till the due date of the fund and not till the due date of filing of return.
  2. Rs. 50 lakhs, being the addition to plant and machinery on 10.6.2021 qualifies for additional depreciation@20% under section 32(1)(iia). Since only the normal depreciation as per Income- tax Rules, 1962, has been debited to profit and loss account, additional depreciation of Rs. 10 lakhs (being 20% of Rs. 50 lakhs) has to be deducted while computing business income.
  3. Since the tax deducted during the P.Y.2020-21 was remitted only on 31.12.2021, i.e., after the due date of filing of return for A.Y.2021-22, Rs. 3,00,000, being 30% of Rs. 10 lakhs would have been disallowed while computing the business income of that year. Since the tax deducted has been remitted on 31.12.2021, Rs. 3,00,000 would be allowed as deduction while computing the business income of the A.Y.2022-23.

 

Q-37: Hyper Ltd., engaged in diversified activities, earned a profit of Rs. 14,25,000 after debit/credit of the following items to its statement of profit and loss account for the year ended on 31.3.2022:

 (a)

 Items debited to Statement of Profit and Loss Account

 Rs.

 

 Provision for loss of subsidiary

 70,000

 

 Provision for income-tax demand 

1,05,000

 

 Expenses on purchase/sale of equity shares

 15,000

 

 Depreciation

 3,60,000

 

Interest on deposit credited to buyers on 31.3.2022 for advance received from them,

on which TDS was deducted in April 2022 and was deposited on 31.7.2022

1,00,000 

(b) 

Items credited to Statement of Profit and Loss Account

 

 

Long term capital gain on sale of equity shares on which securities

transaction tax was paid at the time of acquisition and sale

 3,60,000

 

Income from units of UTI

75,000

The company provides the following additional information:

  1. Depreciation includes Rs. 1,50,000 on account of revaluation of fixed assets.
  2. Depreciation allowable as per Income-tax Rules is Rs. 2,80,000.
  3. Brought forward Business Loss/Unabsorbed Depreciation:

F.Y.

 Amount as per books

 Amount as per Income-tax

 

Loss

Rs.

Depreciation

Rs.

Loss

Rs.

Depreciation

Rs.

2017-2018 

2,50,000

3,00,000

2,00,000

2,50,000

2018-2019

Nil

2,70,000

1,00,000

1,80,000

2019-2020

3,50,000

3,15,000

1,20,000

2,10,000

You are required to:

  1. compute the total income of the company for the assessment year 2022 -23 giving the reasons for treatment of items and
  2. examine the applicability of section 115JB of the Income-tax Act, 1961, and compute book profit and the tax credit to be carried forward.

Assume the tax rate applicable to Hyper Ltd for the P.Y. 2021-22 is 30%. Ignore the provisions of section 115BAA.

Ans:- Computation of total income of M/s Hyper Ltd. for the A.Y. 2022-23

Particulars

Rs.

Rs.

Profit as per Statement of Profit & Loss Account

 

14,25,000

Add: Items disallowed /considered separately

 

 

Provision for  loss  of  subsidiary  [since  it  is  not  wholly  and

exclusively for the purpose of business of the assessee]

70,000

 

Provision for income-tax [disallowed under section 40(a)(ii)]

1,05,000

 

Expenses on transfer of shares

[not deductible from business income.

It is to be deducted from gross sale

consideration whilecomputing capital gains]

15,000

 

Interest on deposit credited on 31.3.2022 and

tax deducted in April 2022  which was deposited

on 31.7.2022 [not allowed under

section 40(a)(ia) @ 30%].

30,000

 

Depreciation debited to statement of profit and loss account

[only depreciation calculated as per the Income-tax Rules,

1962 is allowable as deduction]

3,60,000

5,80,000

 

 

20,05,000

Less: Items credited but not includible under

business income or are exempt under the

provisions of the Act

 

 

Long-term capital gain on sale of equity shares on which

securities transaction tax was paid, since it is not a business  

income.

3,60,000

 

Income from UTI, since it is not a business income.

75,000

4,35,000

 

 

15,70,000

Less: Depreciation

(allowable as per the Income-tax Rules,1962)

 

2,80,000

 

 

12,90,000

Less: Set-off of brought forward business loss and

unabsorbed depreciation

 

 

Brought forward business loss under section 72

4,20,000

 

Brought forward depreciation under section 32

6,40,000

10,60,000 

Income from business

 

2,30,000

Capital Gains

 

 

Long term capital gain on sale of equity shares

on which securities transaction tax was paid at

the time of acquisition and sale

 

3,60,000

Income from Other Sources

 

 

Income from units of UTI

              

75,000

Total Income

 

6,65,000

Tax on LTCG exceeding Rs. 1 lakh @10%

 

26,000

Tax on other income of Rs. 3,05,000 @30%

 

91,500

 

 

1,17,500   

Add: Health and Education cess @4%

 

4,700

Tax Payable as per the Income-tax Act, 1961                          

 

1,22,200

 

Computation of Book Profit under section 115JB

Particulars

Rs.

Rs.

Profit as per Statement of Profit & Loss Account

 

14,25,000

Add: Net Profit to be increased by the following amounts as per

Explanation 1 to section 115JB

 

 

Provision for loss of subsidiary

70,000

 

Provision for income-tax

1,05,000

 

Depreciation debited to profit and loss account

3,60,000

5,35,000

 

 

19,60,000

Less: Net Profit to be reduced by the following amounts as per

Explanation 1 to section 115JB

 

 

Depreciation debited to profit and loss account (excluding depreciation on account of revaluation of fixed assets)

(i.e., Rs.3,60,000 – Rs. 1,50,000)

2,10,000

 

Income from UTI [since it is not exempt]

NIL

 

Brought forward business loss or unabsorbed deprecation as per

books of account, whichever is less, taken on cumulative basis

6,00,000

 8,10,000

Book Profit

 

 11,50,000

15% of book profit

 

 1,72,500

Add: Health and Education cess @ 4%

 

 6,900

 

   1,79,400

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 15% of book profit, the book profit shall be deemed as the total income and the tax payable on such total income shall be 15% thereof plus health and education cess @4%.

Accordingly, in this case, since income-tax payable on total income computed as per the provisions of the Act is less than 15% of book profit, the book profit of Rs. 11,50,000 is deemed to be the total income and income-tax is payable @ 15% thereof plus health and education cess @4%. The tax liability, therefore, works out to be Rs. 1,79,400.

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. This tax credit is allowed to be carried forward for 15 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.

Particulars

Rs.

Tax on book profit under section 115JB

1,79,400

Less: Tax on total income computed as per the other provisions of the Act

1,22,200  

Tax credit to be carried forward under section 115JAA

57,200

 

Q-38: PQR LLP, a limited liability partnership set up a unit in Special Economic Zone (SEZ) in the financial year 2017-18 for production of washing machines. The unit fulfills all the conditions of section 10AA of the Income-tax Act, 1961. During the financial year 2020-21, it has also set up a warehousing facility in a district of Tamil Nadu for storage of agricultural produce. It fulfills all the conditions of section 35AD. Capital expenditure in respect of warehouse amounted to Rs. 75 lakhs (including cost of land Rs. 10 lakhs). The warehouse became operational with effect from 1st April, 2021 and the expenditure of Rs. 75 lakhs was capitalized in the books on that date.

Relevant details for the financial year 2021-22 are as follows:

Particulars

Rs.

Profit of unit located in SEZ

40,00,000

Export sales of above unit

80,00,000

Domestic sales of above unit

20,00,000

Profit from operation of warehousing facility (before considering deduction

under Section 35AD).

1,05,00,000

Compute income tax (including AMT under Section 115JC) payable by PQR LLP for Assessment Year 2022-23.

Ans:-

Computation of total income and tax liability of PQR LLP for A.Y.2022-23 (under the regular provisions of the Income-tax Act, 1961)

Particulars

Rs.

Rs.

Profits and gains of business or profession

 

 

Unit in SEZ

 40,00,000  

 

Less: Deduction under section 10AA [See Note (1) below]  

 32,00,000 

 

Business income of SEZ unit chargeable to tax

 

8,00,000  

Profit from operation of warehousing facility

1,05,00,000

 

Less: Deduction under section 35AD  [See Note (2) below]

Business income of warehousing facility chargeable to tax

65,00,000

40,00,000

Total Income

 

48,00,000

Computation of  tax  liability  (under  the  normal/regular

provisions)

 

 

Tax@30% on Rs. 48,00,000

 

14,40,000

Add: Education cess@4%

 

57,600

Total tax liability

 

14,97,600

 

Computation of adjusted total income of PQR LLP for levy of AMT

Particulars

Rs.

Rs.

Total Income (as computed above)

 

48,00,000

Add: Deduction under section 10AA

 

32,00,000

 

 

80,00,000

Add: Deduction under section 35AD

65,00,000

 

Less: Depreciation under section 32

 

 

On building @10% of Rs. 65 lakhs

6,50,000

58,50,000

Adjusted Total Income

 

1,38,50,000

Alternate Minimum Tax@18.5%

 

25,62,250

Add: Surcharge@12% (since adjusted total income > Rs. 1

crore)

 

3,07,470

 

 

28,69,720

Add: Health and Education cess @ 4%

 

1,14,789

 

 

29,84,509

Tax liability under section 115JC (rounded off)

 

29,84,510

 

Since the regular income-tax payable is less than the alternate minimum tax payable, the adjusted total income shall be deemed to be the total income and tax is leviable @18.5% thereof plus surcharge@12% and cess@4%. Therefore, the tax liability is Rs. 29,84,510.

AMT Credit to be carried forward under section 115JEE

Rs.

Tax liability under section 115JC

29,84,510

Less: Tax liability under the regular provisions of the Income-tax Act, 1961

14,97,600 

 

14,86,910

Notes:

  1. Deduction under section 10AA in respect of Unit in SEZ =

Profit of the Unit in SEZ × \(Export turnover of the unit in SEZ\over t???????????????? ???????????????????????????????? ???????? ????ℎ???? ???????????????? ???????? ????????Z \)

 

Rs.40,00,000 x\(????????.80,00,000\over????????.1,00,00,000 \)

 

= Rs. 32,00,000

 

2. Deduction @ 100% of the capital expenditure is available under section 35AD for A.Y.2022- 23 in respect of specified business of setting up and operating a warehousing facility for storage of agricultural produce which commences operation on or after 01.04.2012.

Further, the expenditure incurred, wholly and exclusively, for the purposes of such specified business, shall be allowed as deduction during the previous year in which he commences operations of his specified business if the expenditure is incurred prior to the commencement of its operations and the amount is capitalized in the books of account of the assessee on the date of commencement of its operations.

Deduction under section 35AD would, however, not be available on expenditure incurred on acquisition of land.

In this case, since the capital expenditure of Rs. 65 lakhs (i.e., Rs. 75 lakhs – Rs. 10 lakhs, being expenditure on acquisition of land) has been incurred in the F.Y.2020-21 and capitalized in the books of account on 1.4.2021, being the date when the warehouse became operational, Rs. 65,00,000, being 100% of Rs. 65 lakhs would qualify for deduction under section 35AD.

 

Q-39: Supporting the Girl Child, a charitable trust, is registered under section 12AB of the Act. On 1.4.2021, it got merged with M/s. Ananya P Ltd., which is a company engaged in manufacturing of stationery items. All the assets and liabilities of the erstwhile trust became the assets and liabilities of M/s. Ananya P Ltd who is not entitled for registration under section 12AB of the Act. The trust appointed a registered valuer for the valuation of its assets and liabilities. From the following particulars (including the valuation report), calculate the tax liability in the hands of the trust arising as a result of such merger:

  1. Stamp duty value of land held Rs. 15 lakhs. However, if this land is sold in the open market, it would ordinarily fetch Rs. 17 lakhs. The book value of the land is Rs. 20 lakhs.
  2. 75,000 equity shares in Idom Ltd. traded in Bombay Stock Exchange. The lowest price per share on 1.4.2021 was Rs. 75 and the highest price on that day was Rs. 85. The book value was Rs. 67 lakhs.
  3. 55,000 preference shares held in Niharika Ltd. The shares will fetch Rs. 44 lakhs, if they are sold in the open market on 1.4.2021 Book value was Rs. 25 Lakhs.
  4. Corpus fund as on 1.4.2021 Rs. 15 Lakhs.
  5. Outside liabilities Rs. 90 lakhs.
  6. Provision for taxation Rs. 5 lakhs.
  7. Liabilities in respect of payment of various utility bills of Rs. 6 lakhs.

Note: Give reasons for treatment of each item.

Ans:- As per section 115TD, the accreted income of “Supporting the Girl Child”, a charitable trust registered under section 12AB which is merged with M/s Ananya P Ltd., an entity not entitled for registration under section 12AB, would be chargeable to tax at maximum marginal rate @ 34.944% [30% plus surcharge @ 12% plus cess @ 4%.].

Computation of accreted income and tax liability in the hands of the trust arising as a result of merger with Ananya Pvt. Ltd. For A.Y. 2022-23

Particulars

Amount (Rs.)

Aggregate FMV of total assets as on 1.4.21, being the specified date (date

of merger)

1,21,00,000

[See Working Note 1]

 

Less: Total liability computed in accordance with the prescribed method of

valuation

 

[See Working Note 2]

96,00,000

Accreted Income

25,00,000

Tax Liability @ 34.944% of Rs. 25,00,000

8,73,600

Working Notes:

 

(1) Aggregate fair market value of total assets on the date of merger

 

- Land, being an immovable property

17,00,000

[The fair market value of land would be higher of Rs. 17 lakhs i.e., price

that the land would ordinarily fetch if sold in the open market and Rs.15

lakhs, being stamp duty value as on the specified date]

 

- Quoted equity shares in Idom Ltd. [75,000 × Rs. 80 per share]

60,00,000

[Rs. 80 per share, being the average of the lowest (Rs. 75) and highest

price (Rs. 85) of such shares on the date of merger]

 

- 55,000 preference shares of Niharika Ltd.

 

[The fair market value which it would fetch if sold in the open market on

the date of merger i.e. FMV on 1.4.2021]

44,00,000

 

1,21,00,00

(2) Total liability

 

- Outside liabilities

 90,00,000     

- Corpus Fund of Rs. 15 lakhs [not includible]

-

- Provision for taxation Rs. 5 lakhs [not includible]

-

- Liabilities in respect of payment of various utility bills [since this liability is 

an ascertained liability]

 6,00,000

 

 96,00,000

 

Q-40: Help All, a trust created on 1st January, 2022 for providing relief to the poor, applied for registration under section 12A on 1st March, 2022. On that date, its corpus fund comprised only of the initial contribution made by the trustees. The Commissioner denied registration solely on the ground that the trust had not commenced any charitable activity, due to which he could not satisfy himself about the genuineness of the trust. Is the ground for denial of registration by the Commissioner justified in this case? Discuss.

Ans:- The Karnataka High Court, in DIT (Exemptions) v. Meenakshi Amma Endowment Trust (2013), opined that an application under section 12A for registration of the trust can be sought even within a week of its formation. The activities carried on by the trust are to be seen in a case where the registration is sought much later after formation of the trust.

The High Court further observed that the corpus fund included contribution made by the trustees only, which indicated that the trustees were contributing the funds by themselves in a humble way and were intending to commence charitable activities. The assessee-trust had not also collected any donation for the activities of the trust, by the time its application came up for consideration before them. When the application for registration was made, the trust, therefore, did not have sufficient funds for commencement of its activities.

The High Court observed that, with the money available with the trust, it cannot be expected to carry out activity of charity immediately. Consequently, in such a case, it cannot be concluded that the trust has not intended to do any activity of charity. In such a situation, where application is made shortly after formation of the trust, the objects of the trust as mentioned in the trust deed have to be taken into consideration by the authorities for satisfying themselves about the genuineness of the trust and not the activities carried on by it. Later on, if it is found from the subsequent returns filed by the trust, that it is not carrying on any charitable activity, it would be open to the concerned authorities to withdraw the registration granted or cancel the registration as per the provisions of section 12AB.

Applying the rationale of the above ruling, the Commissioner cannot deny registration solely on the ground that the trust had not commenced any charitable activity in this case, since the trust has applied for registration under section 12A within two months after its formation and the corpus fund comprised only of contribution made by the trustees. The Commissioner has to take into consideration the objects of the trust as mentioned in the trust deed to satisfy itself about the genuineness of the trust.

 

Q-41: Helpage is a charitable trust set up on 1.4.2010 with the object of providing relief to the poor. Later on, in April, 2012, it changed its object to medical relief. It applied for registration on the basis of its new object, i.e., medical relief, on 1.9.2012 and was granted registration on 1.2.2013.

On 1.4.2021, Helpage got merged with M/s. Medicare (P) Ltd, a pharmaceutical company not entitled for registration under section 12AA. All the assets and liabilities of the erstwhile trust became the assets and liabilities of M/s. Medicare (P) Ltd. The trust appointed a registered valuer for the valuation of its assets and liabilities. From the following particulars (including the valuation report), calculate the tax liability in the hands of the trust arising as a result of such merger:

(i)Land

Location

Date of purchase

Stamp duty value on 1.4.2021

Value which the land would fetch, if sold in the open market

on 1.4.2021

Book Value on 1.4.2021

 

 

Rs.

Rs.

Rs.

Noida

1.9.2010

55 lakhs

58 lakhs

50 lakhs

Gurgaon

1.9.2013

100 lakhs

120 lakhs

110 lakhs

 

(ii) Shares

Type of shares

Date of purchase

Face value of each share

 Purchase price

 of each share

Price at which each share is quoted

on BSE as on 1.4.2021

Open market value as on

1.4.2021 #

 

 

 

 

 Highest price

 Lowest price

 

 

 

 Rs.

 Rs.

 Rs.

 Rs.

 Rs.

5000 quoted equity

shares of A Ltd.

1.5.2014

100

110

 320

 300

 

2000 Preference shares

of B Ltd.

1.9.2015

100

100

-

-

180

# on the basis of report of Merchant Banker

(iii)Liabilitie

Book value of liabilities on 1.4.2021 = Rs. 120 lakhs. This includes –

  1. Corpus fund Rs. 12 Lakhs.
  2. Provision for taxation Rs. 8 lakhs; and
  3. Reserves and Surplus Rs. 18 lakhs

Ans:- As per section 115TD, the accreted income of “Helpage”, a charitable trust, registered under section 12AA which is merged with M/s Medicare (P) Ltd., an entity not entitled for registration under section 12AA, would be chargeable to tax at the rate of 34.944% [30% plus surcharge @12% plus cess@4%].

Computation of accreted income and tax liability in the hands of the Helpage trust arising as a result of merger with M/s. Medicare (P) Ltd.

Particulars

Amount (Rs.)

Aggregate FMV of total assets as on 1.4.2021, being the specified date (date

of merger) [See Working Note 1]

1,39,10,000

Less: Total liability computed in accordance with the prescribed method of

valuation [See Working Note 2]

82,00,000

Accreted Income

57,10,000

Tax Liability @ 34.944% of Rs. 57,10,000 (rounded off)

19,95,300

Working Notes:

 

(1) Aggregate fair market value of total assets on the date of merger

 

- Land at Noida, being immovable property, purchased on 1.9.2010

 

Since the trust was registered only on 1.2.2013 and benefit of section 11 and 12 was available 

to the trust only from A.Y.2013-14, relevant to P.Y.2012-13, being the previous year in which

the application for registration is made, the  value of land purchased in P.Y.2010-11, in respect

 of which benefit under sections 11 and 12 was not availed, has to be ignored for computing

accretedincome.

 

- Land at Gurgaon, being an immovable property, purchased on 1.9.2013

1,20,00,000   

[The fair market value of land would be higher of Rs. 120 lakhs i.e., price that

the land would ordinarily fetch if sold in the open market and Rs. 100 lakhs, being stamp duty  

value as on the specified date, i.e.,1.4.2021]

 

- Quoted equity shares of A Ltd. [5,000 x Rs. 310 per share]

15,50,000

[Rs. 310 per share, being the average of the lowest (Rs. 300) and highest

price (Rs. 320) of such shares on the specified date]

 

- Preference shares of B Ltd. [2,000 x Rs. 180 per share]

 

[The fair market value which it would fetch if sold in the open market on the

specified date i.e. FMV on 1.4.2021]

3,60,000

 

1,39,10,000

(2) Total liability

 

- Reserves and Surplus Rs. 18 lakhs [not includible]

-

- Corpus Fund of Rs. 12 lakhs [not includible]

-

- Provision for taxation Rs. 8 lakhs [not includible]

-

- Other Liabilities

 

[Rs. 120 lakhs - Rs. 18 lakhs - Rs. 12 lakhs - Rs. 8 lakhs]

82,00,000

 

82,00,000

 

Q-42: Specify with reason, whether the following acts can be considered as (i) Tax planning; or

(ii) Tax management; or (iii) Tax evasion.

  1. Mr. P deposits Rs. 1,00,000 in PPF account so as to reduce his total income from Rs. 5,90,000 to Rs. 4,90,000.
  2. SQL Ltd. maintains register of tax deduction at source effected by it to enable timely compliance.
  3. An individual tax payer making tax saver deposit of Rs. 1,00,000 in a nationalized bank.
  4. A partnership firm obtaining declaration from lenders/depositors in Form No. 15G/15H and forwarding the same to income-tax authorities.
  5. A company installed an air-conditioner costing Rs. 75,000 at the residence of a director as per terms of his appointment but treats it as fitted in quality control section in the factory. This is with the objective to treat it as plant for the purpose of computing depreciation.
  6. RR Ltd. issued a credit note for Rs. 80,000 as brokerage payable to Mr. Ramana who is the son of the managing director of the company. The purpose is to increase the total income of Mr. Ramana from Rs. 4,20,000 to Rs. 5,00,000 and reduce the income of RR Ltd. correspondingly.
  7. A company remitted provident fund contribution of both its own contribution and employees' contribution on monthly basis before due date.

Ans:- Tax Planning / Tax Management / Tax Evasion

   Answer   Reason
 1  Tax planning 

 Depositing money  in  PPF  and  claiming  deduction  under section 80C is as

 per the provisions of law.

 2     Tax management 

  Maintaining register of payments subject to TDS helps in

  complying with the obligations under the Income-tax Act, 1961.

 3  

 Tax planning

Making a tax saver deposit of Rs.1,00,000 in a nationalized bank for claiming

deduction under section 80C by an individual is a permitted tax planning measure

 under the provisions of income-tax law.

 4.

Tax management

Obtaining declaration from lenders/depositors in Form No. 15G/15H by a partnership

 firm and forwarding the same to Income-tax authorities is in the nature of compliance of

statutory obligation under the Income-tax Act, 1961.

5.

Tax evasion

An air conditioner fitted at the residence of a director as per the terms of his appointment

would be a furniture qualifying for depreciation @10%, whereas an air conditioner fitted

 in a factory would be a plant qualifying for a higher depreciation @15%. The wrong

treatment unjustifiably increases the amount of depreciation and consequently, reduces

profit and consequent tax liability. Treatment of air-conditioner fitted at the residence of

a director as a plant fitted at the factory would tantamount to furnishing of false particulars

with an attempt to evade tax.

6.

Tax evasion

Issuance of a credit note for Rs. 80,000 by RR Ltd. as brokerage payable to Mr. Ramana,

the son of the Managing Director, to increase his total income from Rs. 4.2 lakh to Rs.

5.00 lakh and to correspondingly reduce the company’s total income is a method of reducing

the tax liability of the company by recording a fictitious transaction.

The company is liable to tax at a flat rate of 30%/25%, as the case may be, whereas

Mr. Ramana would not be liable to pay any tax, since his total income does not exceed

Rs. 5,00,000, consequent to which he would be eligible for tax rebate of Rs. 12,500

under section 87A. Reducing tax liability by recording a fictitious transaction would

tantamount to tax evasion.

 7.

Tax management

Remitting of own contribution to provident fund and employees contribution to provident

 fund on a monthly basis before due date is proper compliance of the statutory

obligations.

 

Q-43: M/s Global Architects Inc is a company incorporated in country F1. It is engaged in the business of providing architectural design services all over the world. It receives an offer from Lovely Resorts Pvt Ltd, an Indian company, for design and development of resorts all over India.

India-F1 tax treaty provides that architectural services are technical services and payment for the same to a company may be taxed in India. However, if such professional services are provided by a firm or individual, then payment for such services are taxable only if the firm has a fixed base in India or stay of partners/ employees in India exceed 180 days.

M/s Global Architects Inc forms a partnership firm with a third party (director of the company) having only a nominal share in the F1. The firm enters into an agreement to carry out the services in India. The company seconded its trained manpower to the firm. Thus, the partnership firm claimed the treaty benefit and no tax was paid in India. Can such an arrangement be examined under GAAR?

Ans:- It is obvious that there was no commercial necessity to create a separate firm except to obtain the tax benefit. The firm was only on paper as the manpower was drawn from the company. The firm did not have any commercial substance. Moreover, it is a case of treaty abuse. Hence, GAAR may be invoked to disregard the firm and tax payment for architectural services as fee for technical services. However, the rate of tax on such payment shall be as applicable under the treaty, if more beneficial.

 

Q-44: Mr. Gavaskar sought voluntary retirement from a Government of India Undertaking and received compensation of Rs. 40 lacs on 31st January, 2022. He is planning to use the money as capital for a business dealership in electronic goods. The manufacturer of the product requires a security deposit of Rs. 15 lacs, which would carry interest at 8% p.a. Gavaskar’s wife is a graduate and has worked as marketing manager in a multinational company for 15 years. She now looks for a change in employment. She is willing to join her husband in running the business. She expects an annual income of Rs. 5 lacs. Mr. Gavaskar would like to draw a monthly remuneration of Rs. 40,000 and also interest @10% p.a. on his capital in the business. Mr. Gavaskar has approached you for a tax efficient structure of the business.

Discuss the various issues, which are required to be considered for formulating your advice. Computation of income or tax liability is not required.

Ans:- The selection of the form of organisation to carry on any business activity is essential in view of the differential tax rates prescribed under the Income-tax Act, 1961 and specific concessions and deductions available under the Act in respect of different entities. For the purpose of formulating advice as to the tax efficient structure of the business, it is necessary for the tax consultant to consider the following issues:

(i) In the case of sole proprietary concern, interest on capital and remuneration paid to the proprietor is not allowable as deduction under section 37(1) as the expenditure is of personal nature. On the other hand, in the case of partnership firm, both interest on capital and remuneration payable to partners are allowable under section 37(1) subject to the conditions and limits laid down in section 40(b). Remuneration and interest should however, be authorised by the instrument of partnership and paid in accordance with such instrument. Such interest and salary shall be taxable in the hands of partners to the extent the same is allowed as deduction in the hands of the firm under section 40(b). Interest to partners can be allowed upto 12% on simple interest basis, while the limit for allowability for partners' remuneration is based on book profit under section 40(b). As per section 40(b)(v), partners’ remuneration shall be allowed to the extent of aggregate of -

(a) On the first Rs. 3,00,000 of book profit or in case of loss – Rs. 1,50,000 or at the rate of 90% of book profits, whichever is more

(b) On the balance of book profit – at the rate of 60%

Note – However, if the firm is eligible to opt for presumptive taxation under section 44AD, 8% of gross receipts or 6% of gross receipts, as the case may be, would be deemed as its income. All deductions under section 30 to 37 are deemed to be allowed. No deduction is allowable, including deduction for partner’s remuneration and interest on capital.

(ii) Partner's share in the profits of firm is not taxed in the hands of the partners by virtue of section 10(2A).

(iii) If a proprietary concern is formed, the salary of Mrs. Gavaskar shall be allowed as deduction under section 37(1).

(iv) The possibility of invoking section 40A(2) cannot be ruled out as salary is payable to a relative, who is an interested person within the meaning of section 40A(2). However, it can be argued successfully that salary of Rs. 5 lacs is justified in view of her long experience as marketing manager of a multinational company and the fair market value of services to be rendered by her to the concern.

(v) An issue arises as to whether remuneration of Mrs. Gavaskar would be includible in the total income of Mr. Gavaskar. Under section 64(1)(ii), remuneration of the spouse of an individual working in a concern in which the individual is having a substantial interest shall be included in the total income of the individual. However, the clubbing provision does not apply if the spouse possesses technical or professional qualification and the income is solely attributable to the application of his or her technical or professional knowledge and experience. Further, technical or professional qualification would not necessarily mean the qualifications obtained by degree or diploma of any recognized body [Batta Kalyani vs. CIT (1985) (AP)]. The experience of Mrs. Gavaskar as a marketing manager in a multinational company for 15 years may reasonably be considered as a professional qualification for this purpose.

(vi) If Mrs. Gavaskar joins the proprietary concern or partnership concern of her husband as employee, remuneration of Rs. 5 lacs shall be taxed in her hands under the head "salary".

(vii) lf she joins as partner in the business, remuneration shall be taxed in her hand as business income under section 28 to the extent such remuneration is allowed in the hands of the firm under section 40(b).

(viii) The tax rate applicable to an individual depends on the level of his/her income, whereas for partnership firms it is flat rate at 30%. Surcharge @ 12% would be attracted only if total income exceeds Rs. 1 crore. For individuals, the rate of tax is 5% on income exceeding Rs. 2.50 lakhs but not exceeding Rs. 5 lakhs; 20% for total income exceeding Rs. 5 lakhs but not exceeding Rs. 10 lakhs and @ 30% in respect of income exceeding Rs. 10 lakhs for the assessment year 2022-23. The surcharge for total income exceeding Rs. 50 lakhs but not exceeding Rs. 1 crore is 10% of tax payable; for total income exceeding Rs. 1 crore but not exceeding Rs. 2 crores is 15% of tax payable; for total income exceeding Rs. 2 crore but not exceeding Rs. 5 crores is 25% of tax payable and for total income exceeding Rs. 5 crores is 37% of tax payable. Health and Education cess @ 4% on income-tax plus surcharge, if applicable, is attracted in all the cases.

Further in case of individual & HUF one can also consider the new tax regime u/s 115BAC to lower the tax liability subject to some conditions.

 

Q-45: Examine whether tax has to be deducted at source under the provisions of the Income- tax Act, 1961 in the following situations, which have taken place during the year ended 31 -3- 2022:

(i) M/s. Jiva & Co., a partnership firm, pays a sum of Rs. 43,000 as interest on loan borrowed from an Indian branch of a foreign bank.

(ii) Above firm has paid Rs. 42,000 as interest on capital to partner Mr. A, a resident in India, and Rs. 44,000 as interest on capital to partner Mr. B, a non-resident.

(iii) The above firm paid Rs. 50,000 being share of profit of partner Mr. B, a non-resident.

Ans:- (i) Section 194A requires deduction of tax on any income by way of interest, other than interest on securities, credited or paid to a resident, at the rates in force.

However, it specifically excludes from its scope, income credited or paid to any banking company to which the Banking Regulation Act, 1949 applies.

An Indian branch of a foreign bank, transacting the business of banking in India, is a banking company to which the Banking Regulation Act, 1949 applies. Therefore, interest payment to such bank will not attract tax deduction under section 194A.

Consequently, no tax is required to be deducted at source under section 194A on interest of Rs. 43,000 paid by M/s. Jiva & Co., a partnership firm, on loan borrowed from an Indian branch of a foreign bank.

(ii) Section 194A requiring deduction of tax at source on any income by way of interest, other than interest on securities, credited or paid to a resident, excludes from its scope, income credited or paid by a firm to its partner. Therefore, no tax is required to be deducted at source under section 194A on interest on capital of Rs. 42,000 paid by the firm to Mr. A, a resident partner.

Section 195, which requires tax deduction at source on payments to non-residents, does not provide for any exclusion in respect of payment of interest by a firm to its non-resident partner. Therefore, tax has to be deducted under section 195 at the rates in force in respect of interest on capital of Rs. 44,000 paid to partner Mr. B, a nonresident.

(iii) As per section 10(2A), share of profit received by a partner from the total income of the firm is exempt from tax. Therefore, the share of profit paid to non-resident partner is not liable for tax deduction at source.

However, section 195(6) provides that the person responsible for paying any sum, whether or not chargeable to tax, to a non-corporate non-resident or to a foreign company, shall be required to furnish the information relating to payment of such sum in the prescribed form and manner.

 

Q-46: Mr. Harish, Vice President of ABC Bank, sold his house property in Chennai as well as his rural agricultural land for a consideration of Rs. 60 lakhs and Rs. 15 lakhs, respectively, to Mr. Suresh, a retail trader of garments, on 10.10.2021. Mr. Harish had purchased the house property and rural agricultural land in December 2019 for Rs. 40 lakhs and Rs. 10 lakhs, respectively. The stamp duty value on the date of transfer, i.e., 10.10.2021, is Rs. 85 lakhs and Rs. 20 lakhs for the house property and rural agricultural land, respectively.

(a) Determine the tax implications in the hands of Mr. Harish and Mr. Suresh, if the date of agreement for sale of house property and rural agricultural land is 1.7.2021 and the stamp duty value on the said date was Rs. 75 lakh and Rs. 15 lakh, respectively. On the said date, Mr. Suresh made payment of Rs. 5 lakhs by way of account payee cheque to Mr. Harish for purchase of house property. Also, discuss the TDS implications, if any, in the hands of Mr. Suresh, assuming that both Mr. Harish and Mr. Suresh are resident Indians.

(b) Would your answer be different if Mr. Harish is a property dealer and sold the house property in the course of his business?

Ans:- (a) Tax implications on sale of rural agricultural land and house property representing a capital asset in the hands of Mr. Harish, a salaried employee

 (i)

  Tax implications in the hands of Mr. Harish, a salaried employee

 

Since rural agricultural land is not a capital asset, the gains arising on sale of such land is not taxable in the hands of Mr. Harish. However, capital gains would arise on sale of house property, being a capital asset.

As per section 50C(1), the stamp duty value of house property on the date of agreement (i.e., Rs. 75 lakhs) would be deemed to be the full value of consideration arising on transfer of property. Therefore, Rs. 35 lakhs (i.e., Rs. 75 lakhs – Rs. 40 lakhs, being the purchase price) would be taxable as short-term capital gains in the A.Y.2022- 23.

It may be noted that under first and second proviso to section 50C(1), the stamp duty value on the date of agreement can be adopted, as the advance was received on the date of agreement through account payee cheque. As the date of agreement is different from the date of registration and part of the consideration was received on or before the date of agreement by way of account payee cheque, the stamp duty value on the date of agreement is to be adopted as the deemed sale consideration.

(ii)

Tax implications in the hands of the buyer – Mr.Suresh, a retail trader

 

The house property purchased would be a capital asset in the hands of Mr. Suresh, who is a retail trader of garments. The provisions of section 56(2)(x) is attracted in the hands of Mr. Suresh who has acquired the immovable property, being a capital asset, for inadequate consideration. For the purpose of section 56(2)(x), Mr. Suresh can take the stamp duty value on the date of agreement instead of the date of registration since he has paid a part of the consideration by account payee cheque on the date of agreement.

Therefore, Rs. 15 lakhs, being the difference between the stamp duty value of the property on the date of agreement (i.e., Rs. 75 lakhs) and the actual consideration (i.e., Rs. 60 lakhs) would be taxable as per section 56(2)(x) under the head “Income from other sources” in the hands of Mr. Suresh, since such difference exceeds the higher of Rs. 50,000 and 10% of consideration.

As rural agricultural land is not a capital asset, the provisions of section 56(2)(x) are not

attracted in respect of acquisition of agricultural land for inadequate

(iii)

TDS implications in the hands of the buyer, Mr.Suresh

 

Since the sale consideration of house property exceeded Rs. 50 lakhs, Mr. Suresh is required to deduct tax at source under section 194-IA. The tax deduction under

 section 194-IA would be Rs. 60,000, being 1% of Rs. 60 lakhs. TDS provisions under section 194-IA are not attracted in respect of transfer of rural agricultural land.

 

(b) Tax implications on sale of house property representing stock-in-trade in the hands of Mr. Harish, a property dealer:

 (i)  

Tax implications in the hands of Mr. Harish for A.Y.2022-23

 

If Mr. Harish is a property dealer who has sold the house property in the course of his business, the provisions of section 43CA would be attracted, since the house property represents his stock-in-trade and he has transferred the same for a consideration less than the stamp duty value.

For the purpose of section 43CA, Mr. Harish can take the stamp duty value on the date of agreement instead of the date of registration, since he has received part of the sale consideration by a mode other than cash on the date of agreement. Therefore, Rs. 35 lakhs, being the difference between the stamp duty value on the date of agreement (i.e., Rs. 75 lakhs) and the purchase price (i.e., Rs. 40 lakhs), would be chargeable as business income in the hands of Mr. Harish.

(ii)

TDS implications and taxability in the hands of Mr. Suresh for A.Y.2022-23

 

There would be no difference in the TDS implications or taxability in the hands of Mr. Suresh, whether Mr. Harish is a property dealer or a salaried employee.

Therefore, the provisions of section 56(2)(x) would be attracted in the hands of Mr. Suresh who has received house property, being a capital asset, for inadequate consideration. The TDS provisions under section 194-IA would also be attracted since the actual consideration for house property exceeds Rs. 50 lakhs.

 

Q-47: Mr. X sold his house property in Bangalore as well as his rural agricultural land for a consideration of Rs. 60 lakhs and Rs. 15 lakhs, respectively, to Mr. Y on 1.8.2021. He has purchased the house property and the land in the year 2020 for Rs. 40 lakhs and Rs. 10 lakhs, respectively. The stamp duty value on the date of transfer, i.e., 1.8.2021, is Rs. 85 lakhs and Rs. 20 lakhs for the house property and rural agricultural land, respectively. Determine the tax implications in the hands of Mr. X and Mr. Y and the TDS implications, if any, in the hands of Mr. Y, assuming that both Mr. X and Mr. Y are resident Indians.

Ans:-

(i)

Tax implications in the hands of Mr. X

 

 As per section 50C, the stamp duty value of house property (i.e. Rs. 85 lakhs) would be

 deemed to be the full value of consideration arising on transfer of property. Therefore,

 Rs. 45 lakhs (i.e., Rs. 85 lakhs – Rs. 40 lakhs, being the purchase price) would be taxable

 as short-term capital gains in the A.Y.2022-23. Since rural agricultural land is not a capital

 asset, the gains arising on sale of such land is not taxable in the hands of Mr. X.

(ii)

Tax implications in the hands of Mr. Y

 

 In case immovable property is received for inadequate consideration, the difference between

 the stamp value and actual consideration would be taxable under section 56(2)(x), if such

 difference exceeds higher of Rs. 50,000 and 10% of the consideration.

Therefore, in this case Rs. 25 lakhs (Rs. 85 lakhs – Rs. 60 lakhs) would be taxable in the

hands of Mr. Y under section 56(2)(x).

Since agricultural land is not a capital asset, the provisions of section 56(2)(x) are not attracted

in respect of receipt of agricultural land for inadequate consideration, since the definition of “property”

under section 56(2)(x) includes only capital assets specified thereunder.

(iii)

 TDS implications in the hands of Mr. Y

 

 Since the sale consideration of house property exceeds Rs. 50 lakhs, Mr. Y is required to

 deduct tax at source under section 194-IA. The tax to be deducted under section 194-IA  would be

 Rs. 60,000, being 1% of Rs. 60 lakhs.

 TDS provisions under section 194-IA are not attracted in respect of transfer of rural agricultural land. 

 

Q-48: An amount of Rs. 40,000 was paid to Mr. X on 1.7.2021 towards fees for professional services without deduction of tax at source. Subsequently, another payment of Rs. 50,000 was due to Mr. X on 28.2.2022, from which tax@7.5% (amounting to Rs. 6,750) on the entire amount of Rs. 90,000 was deducted. However, this tax of Rs. 6,750 was deposited only on 22.6.2022. Compute the interest chargeable under section 201(1A).

Ans:- (i) Interest under section 201(1A) would be computed as follows –

Particulars

 Rs.

1% on tax deductible but not deducted i.e., 1% on Rs. 3,000 for 8 months

 240

1½% on tax deducted but not deposited i.e. 1½% on Rs. 6,750 for 4 months 

 405  

 

 645

(ii) Such interest should be paid before furnishing the statements in accordance with section 200(3).

(iii) Where the payer fails to deduct the whole or any part of the tax on the amount credited or payment made to a payee and is not deemed to be an assessee-in-default under section 201(1) on account of payment of taxes by such payee, interest under section 201(1A)(i) i.e., @1% p.m. or part of month, shall be payable by the payer from the date on which such tax was deductible to the date of furnishing of return of income by such payee. The date of deduction and payment of taxes by the payer shall be deemed to be the date on which return of income has been furnished by the payee.

(iv) Where the tax has not been paid after it is deducted, the amount of the tax together with the amount of simple interest thereon shall be a charge upon all the assets of the person or the company, as the case may be.

 

Q-49: The Director General of Income Tax after getting the information that Mr. Mogambo is in possession of unaccounted cash of Rs. 50 lacs, issued orders by invoking powers vested in him as per section 131(1A), for its seizure. Is the order for seizure of cash issued by the Director General of Income Tax correct? If not, does the Director General of Income Tax have any other power to seize such cash?

Ans:- The powers under section 131(1A) deal with power of discovery and production of evidence. They do not confer the power of seizure of cash or any asset . The Director General, for the purposes of making an enquiry or investigation relating to any income concealed or likely to be concealed by any person or class of persons within his jurisdiction, shall be competent to exercise powers conferred under section 131(1), which confine to discovery and inspection, enforcing attendance, compelling the production of books of account and other documents and issuing commissions. Thus, the power of seizure of unaccounted cash is not one of the powers conferred on the Director General under section 131(1A).

However, under section 132(1), the Director General has the power to authorize any Additional Director or Additional Commissioner or Joint Director or Joint Commissioner etc. to seize money found as a result of search [Clause (iii) of section 132(1)], if he has reason to believe that any person is in possession of any money which represents wholly or partly income which has not been disclosed [Clause (c) of section 132(1)]. Therefore, the proper course open to the Director General is to exercise his power under section 132(1) and authorize the Officers concerned to enter the premises where the cash is kept by Mr. Mogambo and seize such unaccounted cash.

 

Q-50: In the course of search operations under section 132 in the month of July, 2021, a tax payer makes a declaration under section 132(4) on the earning of income not disclosed in respect of P.Y.2020-21. Can that statement save the tax payer from a levy of penalty, if he is yet to file his return of income for A.Y.2021-22?

Ans:- Since the return is yet to be filed for the P.Y. 2020-21 and the due date of filing of return for AY 2021-22 is also not expired, the penalty would be as follows:

  1. penalty@30%, if undisclosed income is admitted during the course of search in the statement furnished under section 132(4), and the assessee explains the manner in which such income was derived, pays the tax, together with interest if any, in respect of the undisclosed income, and furnishes the return of income for the specified previous year declaring such undisclosed income on or before the specified date (i.e., the due date of filing return of income or the date on which the period specified in the notice issued under section 153A expires, as the case may be).
  2. penalty@60% in any other case.

Therefore, even if the tax payer furnishes the statement under section 132(4), penalty@30% of undisclosed income of the specified previous year would be attracted under section 271AAB.

 

Q-51: The business premises of Ram Bharose Ltd. and the residence of two of its directors at Delhi were searched under section 132 by the DDI, Delhi. The search was concluded on 9.8.2021 and following were also seized besides other papers and records:

  1. Papers found in the drawer of an accountant relating to Shri Krishna Ltd., Mumbai indicating details of various business transactions. However, Ram Bharose Ltd. is not having any direct or indirect connection of any nature with these transactions and Shri Krishna Ltd., Mumbai and its directors.
  2. Jewellery worth Rs. 5 lacs from the bed room of one of the director, which was claimed by him to be of his married daughter.
  3. Papers recording certain transactions of income and expenses having direct nexus with the business of the company for the period from 16.4.2017 to date of search. It was admitted by the director that the transactions recorded in such papers have not been incorporated in the books.

You are required to answer on the basis of aforesaid and the provisions of Act, following questions:

(a) What action the DDI shall be taking in respect of the seized papers relating to Shri Krishna Ltd., Mumbai?

(b) Whether the contention raised by the director as to jewellery found from his bedroom will be acceptable?

(c) What presumption shall be drawn in respect of the papers which indicate transactions not recorded in the books?

 

Ans:- (a) The authorised officer being DDI, Delhi is not having any jurisdiction over Shri Krishna Ltd., Mumbai, and therefore as per section 132(9A), the papers seized relating to this company shall be handed over by him to the Assessing Officer having jurisdiction over Shri Krishna Ltd., Mumbai within a period of 60 days from the date on which the last of the authorisations for search was executed for taking further necessary action thereon.

(b) The contention raised by the Director will not be acceptable because as per the provisions of sub-section (4A)(i) of section 132, where any books of account, other documents, money, bullion, jewellery or other valuables are found in the possession or control of any person in the course of search, then, in respect thereof, it may be presumed that the same belongs to that person.

(c) As per section 132(4A), the presumptions in respect of the papers, indicating transactions not recorded in the books but having direct nexus with the business of the company, are that the same belong to the company, contents of such papers are true and the handwriting in which the same are written is/are of the persons(s) whose premises have been searched.

 

Q-52: State with reasons whether return of income is to be filed in the following cases for the Assessment Year 2022-23:

(i) Mr. X, a resident individual, aged 80 years, has a total income of Rs. 2,85,000. He has claimed deduction of Rs. 1,50,000 under section 80C. Long-term capital gains of Rs. 80,000 is not taxable by virtue of the exemption available up to specified threshold under section 112A.

Would your answer change if Mr. X has incurred Rs. 1,05,000 towards payment of electricity bills for F.Y.2021-22?

(ii) ABC, a partnership firm, has a loss of Rs. 10,000 during the previous year 2021-22.

(iii) A registered association, eligible for exemption under section 10(23B), has income from house property of Rs. 2,60,000.

(iv) Mr. Y, aged 45 years, an employee of ABC (P) Ltd, draws a salary of Rs. 4,90,000 and has income from fixed deposits with bank of Rs. 10,000.

Ans:-

 S. No.     Is filing of   return      required?      Reason

 (i) 

 

 As per the provisions of section 139(1), every person, whose total income without giving effect to

 the provisions of Chapter VI-A & exemptions u/s 54 to 54GB 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. The gross total income of Mr. X before giving effect to deduction of Rs.1,50,000

 under section 80C is Rs. 4,35,000, which is less than the basic exemption limit of Rs. 5,00,000

 applicable to an individual aged 80 years or more. Therefore, Mr. X need not furnish his return of

 income for the A.Y. 2022-23.

Note – Yes, the answer would change, since Mr. X has incurred expenditure of an amount exceeding

 Rs. 1 lakh towards consumption of electricity. Hence, he would have to file his return for A.Y.2022-23

  on or before the due date u/s 139(1)

 (ii)

Yes

As per section 139(1), it is mandatory for a firm 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. 2022-23

 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 Rs. 2,60,000

before exemption under section 10, which exceeds the basic exemption limit of Rs. 2,50,000.

 Therefore, it is under an obligation to furnish its return of income for the A.Y. 2022-23.

 (iv)

Yes

As per the provisions of section 139(1), every person, whose gross total income 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. Mr. Y’s salary income is Rs. 4,40,000

(i.e., Rs. 4,90,000 less standard deduction of Rs. 50,000). The gross total income of Mr. Y is

Rs.4,50,000  (Rs.4,40,000 + Rs.10,000)  which exceeds the basic exemption limit of Rs. 2,50,000

applicable to an individual. Therefore, Mr. Y has to furnish his return of income for the A.Y. 2022-23.

 

Q-53: For facilitating expeditious resolution of disputes relating to international transactions involving transfer pricing and foreign companies, the Income-tax Act, 1961, has provided for "alternate dispute resolution mechanism". In this context, you are required to answer the following:

(i) What meanings have been assigned to "dispute resolution panel” and the "eligible assessee" under this mechanism?

(ii) When can a grievance for resolution be filed by an assessee?

(iii) What evidences are being considered by the panel to redress the grievance of the assessee?

 

Ans:- (i) The term “Dispute Resolution Panel” has been defined to mean a collegiums comprising of three Principal Commissioners or Commissioners of Income-tax constituted by the Board for this purpose.

The term “Eligible Assessee” means Following assessee for dispute resolution panel:

  1. A foreign company or NR not being a Foreign Company.
  2. Any other assessee in whose case variation arises due to order of TPO and such variation are prejudicial to such assessee.

(ii) The Assessing Officer shall forward a draft of the proposed order of assessment to the eligible assessee and on receipt of such order, the eligible assessee shall, within thirty days of the receipt of the draft order, file his acceptance of the variations to the Assessing Officer or file his objections, if any, to such variation, with the Dispute Resolution Panel and the Assessing Officer.

(iii) The Dispute Resolution Panel shall, in a case where any objections are received, take into consideration:-

  1. the draft order
  2. the objections filed by the assessee
  3. the evidence furnished by the assessee
  4. the report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority
  5. the records relating to the draft order
  6. the evidence collected by, or caused to be collected by it
  7. the result of any enquiry made by or caused to be made by it,

and issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.

 

Q-54: The assessment of Mr. Hari for A.Y.2013-14 was made on 28.3.2015 making an addition of Rs. 3,25,000 for a certain income received during the P.Y.2012-13. The assessee contested the addition before Commissioner (Appeals) but lost the case. The Appellate Tribunal passed an order on 26.2.2020 holding that the said income was not taxable in the P.Y.2012-13 but the same was taxable in the year of accrual, being P.Y.2007-08 relevant to A.Y.2008-09. The Assessing Officer issued notice under section 148 for A.Y.2008-09 in March 2020 bringing to tax the sum of Rs. 3,25,000. Is the notice valid?

Would your answer change if in the said case, the assessment order for A.Y.2013-14 was made on 4.4.2015 instead of 28.3.2015?

Ans:- Section 149 requires issue of notice under section 148 within a period of 6 years from the end of the relevant assessment year, where income escaping assessment exceeds Rs. 1 lakh. Accordingly, in respect of A.Y.2013-14, notice can be issued upto 31.3.2020. Section 150(1) enables issue of notice at any time to give effect to a finding contained in an appellate order. However, this is subject to the provisions of section 150(2), which places a restriction that if on the date of passing of the order which was the subject-matter of appeal, no notice could have been issued, then, such notice cannot be issued by virtue of the enabling provision contained in section 150(1).

In this case, the income was taxable in the A.Y.2008-09 as per the order of the Appellate Tribunal. The six year time limit, in this case, expires on 31.3.2015. Since the original assessment in respect of such income was made on 28.3.2015, the notice issued under section 148 consequent to the Appellate Tribunal order is valid.

Had the assessment order for A.Y.2013-14 been made on 4.4.2015 (instead of 28.3.2015), then the same would have been outside the six year time limit from A.Y.2008-09. Hence, since notice could not have been issued at that point of time, it cannot be now issued invoking the provisions of section 150(1).

 

Q-55: Can a rectification order under section 254 of the Income-tax Act, 1961 be passed by the Income- tax Appellate Tribunal beyond 6 months from the end of the month in which the order sought to be rectified was passed?

Ans:- The issue as to whether a rectification order can be passed by the Income-tax Appellate Tribunal under section 254 beyond six months from the end of the month in which order sought to be rectified was passed, has been addressed in Sree Ayyanar Spinning and Weaving Mills Ltd. v. CIT (2008)(SC). Section 254(2), dealing with the power of the Appellate Tribunal to pass an order of rectification of mistakes, is in two parts. The first part refers to the suo motu exercise of the power of rectification by the Appellate Tribunal, whereas the second part refers to rectification on an application filed by the assessee or Assessing Officer bringing any mistake apparent from the record to the attention of the Appellate Tribunal.

If Income-tax Appellate Tribunal, suo moto, makes the rectification of its order, then the order has to be passed within 6 months from the end of the month in which the order sought to be rectified was passed. Where the application for rectification is made by the Assessing Officer or the assesse within 6 months from the end of the month in which the order sought to be rectified was passed, the Appellate Tribunal is bound to decide the application on merits and not on the ground of limitation i.e. order can be passed after expiry of 6 months from the end of the month in which the order sought to be rectified was passed. However, the application for rectification cannot be filed belatedly after 6 months from the end of the month in which the order sought to be rectified was passed. [Ajith Kumar Pitaliya vs ITO (2009) (M.P.)]

 

Q-56: An assessee who had been served with an order of assessment passed under section 143(3) on 1.1.2022 had filed an application against this order before the CIT as per section 264 on 11.1.2022. However, the CIT refused to entertain the application on the pretext of premature application. Assessee seeks your opinion.

Ans:- An assessee, who is aggrieved by the order of the Assessing Officer under section 143(3) passed on 1.1.2022, had moved an application for revision of order under section 264 on 11.1.2022. The order passed by the Assessing Officer under section 143(3) is an order appealable before the Commissioner (Appeals). The time limit for filing an appeal is 30 days from the date of order i.e., upto 31.1.2022. This time limit had not expired on 11.1.2022 and the assessee had also not waived his right of appeal while filing the application for revision on 11.1.2022 before the Commissioner of Income-tax. The application filed before the Commissioner of Income-tax for revision under section 264 by the assessee will only be considered when the conditions specified under section 264(4) have been complied with. One of the conditions is that the Commissioner shall not revise any order where an appeal against the order lies to the Commissioner (Appeals) or Appellate Tribunal and the time within which such appeal may be made has not expired, unless the assessee has waived his right of appeal. In the present case, the time limit had not expired on 11.1.2022 and the assessee had also not waived the right of appeal while filing the application for revision before the Commissioner of Income-tax on 11.1.2022 under section 264. Therefore, the Commissioner’s refusal to entertain such application is correct.

Note: In practical situations, the Commissioner could have kept the proceedings in abeyance till the expiry of the time prescribed for filing appeal by the assessee and thereafter, could have assumed jurisdiction for making revision besides taking an undertaking from the assessee for waiving his right of appeal. In reality, taxpayers usually will not prefer revision in such short time period nor would the Commissioner reject the application, the moment it is received by him.

 

Q-57: Examine the correctness or otherwise of the following propositions in the context of the Income-tax Act, 1961:

(a) The powers of the Commissioner of Income-tax (Appeals) to enhance the assessment are plenary and quite wide.

(b) At the time of hearing of rectification application, the Income-tax Appellate Tribunal can re- appreciate the evidence produced during the proceedings of the appeal hearing.

(c) The High Court cannot interfere with the factual finding recorded by the lower authorities and the Tribunal, without any valid reasons.

Ans:- (a) The proposition is correct in law. The Supreme Court has, in CIT vs. McMilan & Co. (1958) and CIT vs. Kanpur Coal Syndicate (1964), held that in disposing of an appeal before him, the appellate authority can travel over a whole range of the assessment order. The scope of his powers is co-terminus with that of the Assessing Officer. He can what the Assessing Officer can do and can also direct him to do, what he has failed to do. He can assess income from sources which have been considered by the Assessing Officer but not brought to tax. He can consider every aspect of the assessment order and give appropriate relief.

The Allahabad High Court has, in CIT v. Kashi Nath Chandiwala (2006), held that the appellate authority is empowered to consider and decide any matter arising out of the proceedings in which the order appealed against was passed notwithstanding the fact that such matter was not raised before him by the assessee. The Commissioner (Appeals) is entitled to direct additions in respect of items of income not considered by the Assessing Officer.

Further, the Apex Court has, in the case of Jute Corporation of India Ltd. vs. CIT (1991), held that the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter.

Thus, the powers of the Commissioner of Income-tax (Appeals) in enhancing the assessment are very wide and plenary.

(b) The proposition is not correct as per law. This is because section 254(2) specifically empowers the Appellate Tribunal to amend any order passed by it, either suo-moto or on an application made by the assessee or Assessing Officer, with a view to rectify any mistake apparent from record, at any time within 6 months from the end of the month of the order sought to be amended.

The powers of the Tribunal under section 254(2) relating to rectification of its order are very limited. Such powers are confined to rectifying any mistake apparent from the record. The mistake has to be such that for which no elaborate reasons or inquiry is necessary. Accordingly, the re-appreciation of evidence placed before the Tribunal during the course of the appeal hearing is not permitted. It cannot re-adjudicate the issue afresh under the garb of rectification [CIT vs. Vardhman Spinning (1997) (P & H), CIT v. Ballabh Prasad Agarwalla (1998) (Cal.) & Niranjan & Co. Ltd. v. ITAT (1980) (Cal.)]

(c) The proposition is correct in law. A finding of fact cannot be disturbed by the High Court in exercise of its powers under section 260A. The Income-tax Appellate Tribunal is the final fact finding authority and the findings of fact recorded by the Tribunal can be interfered with by the High Court under section 260A only on the ground that the same were without evidence or material, or if the finding is contrary to the evidence, or is perverse or there is no direct nexus between conclusion of fact and the primary fact upon which that conclusion is based.

In CIT vs. P. Mohanakala (2007) and M. Janardhana Rao v. Joint CIT (2005), the Apex Court observed that the High Court had set aside the factual findings of the lower authorities and the Tribunal without any valid reason. The Apex Court held that the findings of fact could not be interfered with by the High Court without carefully considering the facts on record, the surrounding circumstances and the material evidence. There is no scope for interference with the factual findings, unless the findings are per se without reason or basis, perverse and/or contrary to the material on record.

Hence, only if the issue gives rise to a substantial question of law, an appeal shall lie before the High Court.

 

Q-58: (a) Does the Settlement Commission have jurisdiction to entertain an application made under section 245C(1) in respect of a case covered by Chapter XIV-B (Search and seizure case).

(b) Discuss the power of the Settlement commission to grant immunity from prosecution and penalty.

Ans:- (a) Section 245A(b) defines the term ‘case’ to mean any proceeding for assessment under the Act of any person in respect of any assessment year or years which is pending before the Assessing Officer on the date on which an application is made to the Settlement Commission.

Search cases are eligible for settlement through the Settlement Commission. Explanation to section 245A(b), provides that in case of a person referred to in section 153A or section 153C, a proceeding for assessment or reassessment shall be deemed to have been commenced on the date of issue of notice initiating such proceeding for assessment under section 153A or section 153C and concluded on the date on which the assessment is made. During this period, application for settlement of the case could be filed by the assessees.

Further, section 245C provides that an application before the settlement commission in cases falling under section 153A and 153C can be made, where the additional amount of income- tax payable on income disclosed in the application exceeds Rs. 50 lakh, in respect of the tax payer who is the subject matter of search and Rs. 10 lakh, in respect of entities related to such a tax payer, who are also the subject matter of search.

Moreover, such tax and interest thereon, which would have been payable had such income been disclosed in the return of income before the Assessing Officer on the date of application, should be paid on or before the date of making the application.

Further, proof of such payment should be attached with the application.

(b) The power of Settlement Commission to grant immunity from prosecution and penalty is provided for in section 245H.

In respect of an application made on or after 1st June, 2007, the Settlement Commission’s power to grant immunity from prosecution is restricted to offences under the Income-tax Act, 1961. The Settlement Commission can also grant immunity from penalty imposed under the Income-tax Act, 1961. Such immunity from prosecution and penalty may be granted subject to conditions as it may think fit to impose.

However, the Settlement Commission may grant immunity only if the person who has made the application has co-operated with the Settlement Commission and made a full and true disclosure of his income and the manner in which it was derived. Further, the Settlement Commission while granting immunity to any person from prosecution shall record the reasons in writing in the order passed by it.

Also, the Settlement Commission cannot grant immunity if the prosecution proceeding for any such offence has been instituted before the date of receipt of application for settlement under section 245C.

 

Q-59: Explain the powers of Settlement Commission to amend its order.

Ans:- As per the section 245D(6B), the Settlement Commission may amend any order passed by it under section 245D(4) to rectify a mistake apparent from the record, within six months from the end of the month in which order was passed.

In case where an application for rectification is made by the Principal Commissioner or the Commissioner or the applicant within 6 months from the end of the month in which order under section 245D(4) was passed, the Settlement Commission may amend the order within six months from the end of the month in which an application for rectification has been made by the Principal Commissioner or Commissioner or the applicant.

However, an amendment which has the effect of modifying the liability of the applicant shall not be made unless the Settlement Commission –

  1. has given notice to the applicant and the Principal Commissioner or Commissioner of its intention to do so; and
  2. has allowed the applicant and the Principal Commissioner or Commissioner an opportunity of being heard.

 

Q-60: The business premises of Mr. Amit was subjected to a survey under section 133A of the Act. There were some incriminating materials found at the time of survey. The assessee apprehends reopening of assessments of the earlier years. He wants to know whether he can approach the Settlement Commission.

Explain briefly the basic conditions to be satisfied and the benefits that may accrue to Mr. Amit by approaching the Settlement Commission.

Ans:- An assessee may, at any stage of a case relating to him, make an application in the prescribed form and manner to the Settlement Commission under section 245C. “Case” means any proceeding for assessment which may be pending before an Assessing Officer on the date on which such application is made. Thus, the basic condition for making an application before the Settlement Commission under section 245C is that there must be a proceeding for assessment pending before an Assessing Officer on the date on which the application is made.
A proceeding for assessment or reassessment or recomputation under section 147 shall be deemed to have commenced from the date on which a notice under section 148 is issued. In this case, Mr. Amit cannot approach the Settlement Commission merely due to his apprehension that assessment of earlier years may be reopened, since there is no case pending before an Assessing Officer.

Therefore, he has to wait for the Assessing Officer to issue notice under section 148. Thereafter, he can make an application to the Settlement Commission under section 245C, since there would be a “case pending” before the Assessing Officer on that date.

Another basic condition to be satisfied for making an application is that the additional amount of income-tax payable on the income disclosed in the application should exceed Rs. 10 lakh, and such tax and interest thereon which would have been paid had the income disclosed in the application been declared in the return of income should be paid on or before the date of making the application and proof of such payment should be attached with the application.

If the Settlement Commission is satisfied that Mr. Amit has co-operated in the proceedings and made true and full disclosure of his income and the manner in which it has been derived, it may, subject to such conditions as it may think fit to impose, grant to Mr. Amit -

  1. immunity from prosecution for any offence under the Income-tax Act, 1961 /Wealth-tax Act, 1957, where the proceedings for such prosecution have been instituted on or after the date of receipt of application under section 245C; and
  2. immunity from imposition of penalty under the Income-tax Act, 1961, either wholly or in part, with respect to the case covered by the settlement.

This is the benefit that may accrue to Mr. Amit, if he approaches the Settlement Commission.

Note: Where a notice under section 148 is issued for any assessment year, a proceeding under section 147 shall be deemed to have commenced on the date of issue of such notice and the assessee can approach the Settlement Commission for other assessment years as well, even if notice under section 148 for such other assessment years has not been issued but could have been issued on date. However, a return of income for such other assessment years should have been furnished under section 139 or the response to notice under section 142.

 

Q-61: An assessee had credited a sum of Rs. 50,000 in cash in the account of Madan, said to represent a loan obtained from him. The Assessing Officer, having gone into the genuineness of the transaction, disbelieved the story of loan and treated the sum of Rs. 50,000 as the income of the assessee from undisclosed sources. He also started proceedings under section 271D and levied a penalty of Rs. 60,000 on the assessee for having accepted the loan in contravention of section 269SS. Examine the correctness of the levy.

Ans:- There are several flaws in the penalty levied by the Assessing Officer. Firstly, the penalty leviable under section 271D cannot exceed the sum equal to the loan taken. Hence, the maximum penalty leviable would be Rs. 50,000. Secondly, any penalty imposable under section 271D shall be imposed by the Joint Commissioner. Hence, unless the Assessing Officer happens to be a Joint Commissioner the levy of penalty will be invalid. Thirdly, the Assessing Officer cannot, on the one hand, treat the loan as undisclosed income of the assessee and on the other, treat it as a loan for the purpose of section 269SS read with section 271D. Such a treatment will be self-contradictory. The moment the amount of Rs. 50,000 is treated as undisclosed income, it ceases to bear the character of loan and therefore, the foundation for the levy of penalty under section 271D disappears. [Diwan Enterprises v. CIT and Others (2000)].

 

Q-62: What would be the penalty leviable under section 270A in case of the following assessees, if none of the additions or disallowances made in the assessment or reassessment qualify under section 270A(6) and the under-reported income is not on account of misreporting?

   Particulars of total income of A.Y.2022-23   M/s. Alpha, a 

resident firm

 Beta Ltd., an

Indian company

(1) 

 As per  the  return  of  income  furnished  u/s

139(1)

 35,00,000

 (12,00,000)

(2)

 Determined under section 143(1)(a)

 45,00,000

 (6,00,000)

(3)

 Assessed under section 143(3)

 62,00,000

 (2,00,000)

(4)

 Reassessed under section 147

`

 6,00,000

Note – Beta Ltd. is a trading company. The total turnover of Beta Ltd. for the P.Y.2019-20 was Rs. 401 crore and the company has not exercised option under section 115BAA.

Ans:- Penalty leviable under section 270A in case of M/s. Alpha, a resident firm

M/s. Alpha 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

Rs.

  Rs.      

Assessment under section 143(3)  Under-reported income:

 

 

Total income assessed under section 143(3)

62,00,000

 

(-) Total income determined u/s 143(1)(a)

45,00,000

 

 

17,00,000

 

Tax payable on under-reported income:

 

 

Tax on under-reported income of Rs. 17 lakhs plus total income of Rs.45 lakhs         

 determined u/s 143(1)(a) [30% of Rs. 62 lakh + HEC@4%]

19,34,400

 

Less: Tax on total income determined u/s 143(1)(a)

[30% of Rs. 45 lakh + HEC@4%]

14,04,000

 

 

5,30,400

 

Penalty leviable@50% of tax payable

Reassessment under section 147 Under-reported income:

 

2,65,200

Total income reassessed under section 147

81,00,000

 

(-) Total income assessed under section 143(3)

62,00,000

 

 

19,00,000

 

Tax payable on under-reported income:

 

 

Tax on under-reported income of Rs.19 lakhs plus

total income of Rs. 62 lakhs assessed u/s 143(3) [30% of Rs. 81 lakhs + HEC@4%]

25,27,200

 

Less: Tax on total income assessed u/s 143(3) [30% of

Rs. 62 lakh + HEC@4%]

19,34,400

 

 

5,92,800

 

Penalty leviable@50% of tax payable

 

2,96,400

Penalty leviable under section 270A in the case of Beta Ltd., an Indian company

Beta 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

Rs.

Rs.

Assessment under section 143(3)

Under-reported income:

 

 

Loss assessed u/s 143(3)

(2,00,000)

 

(-) Loss determined under section 143(1)(a)

(6,00,000)

 

 

4,00,000

 

Tax payable on under-reported income@30%

1,20,000

 

Add: EC & SHEC@4%

4,800

 

 

1,24,800

 

Penalty leviable@50% of tax payable

 

62,400

Reassessment under section 147

 

 

Under-reported income:

 

 

Total income reassessed under section 147

6,00,000

 

(-) Loss assessed under section 143(3)

(2,00,000)

 

 

8,00,000

 

Tax payable on under-reported income@30%

2,40,000

 

Add: EC & SHEC@4%

9,600

 

 

2,49,600

 

Penalty leviable@50% of tax payable

 

1,24,800

Note – The applicable rate of tax for Beta Ltd. for A.Y.2022-23 is 30%, since its turnover for the P.Y.2019-20 exceeded Rs. 400 crore.

 

Q-63: Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of income for A.Y.2022-23. However, the total income assessed in respect of such year under section 144 is Rs. 12 lakh. Is penalty under section 270A attracted in this case, and if so, what is the quantum of penalty leviable?

Ans:- 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 Rs. 2,50,000. Hence, penalty under section 270A is leviable in his case.

Computation of penalty leviable under section 270A

Particulars

Rs.

Rs.

Assessment under section 144:

Under-reported income:

 

 

Total income assessed under section 144

12,00,000

 

 (-) Basic exemption limit

 2,50,000

 

 

 9,50,000

 

Tax payable on under-reported income as increased by the

basic exemption limit [30% of Rs. 2 lakhs + Rs. 1,12,500]

 1,72,500

 

Add: HEC@4%

 6,900

 

 

1,79,400

 

Penalty leviable@50% of tax payable

 

 89,700 

Note – It is assumed that the under-reported income is not on account of misreporting.


Q-64: The Assessing Officer lodged a complaint against M/s. KLM, a firm, under section 276CC of the Income-tax Act, 1961 for failure to furnish its return of income for the A.Y.2022-23 within the due date under section 139(1). The tax payable on the assess ed income, as reduced by the advance tax paid and tax deducted at source, was Rs. 60,000. The appeal filed by the firm against the order of assessment was allowed by the Commissioner (Appeals). The Assessing Officer passed an order giving effect to the order of the Commissioner (Appeals). The tax payable by the firm as per the said order of the Assessing Officer was Rs. 2,900. The Assessing Officer has accepted the order of the Commissioner (Appeals) and has not preferred an appeal against it to the Income Tax Appellate Tribunal. The firm desires to know of the maintainability of the prosecution proceedings in the facts and circumstances of the case.

Would your answer change if the person against whom complaint was lodged was KLM Ltd., a company, instead of a firm?

Ans:- (i) Section 276CC provides for prosecution for wilful failure to furnish a return of income within the prescribed time, in a case where tax would have been evaded had the failure not been discovered. Since the amount of tax which would have been evaded does not exceed Rs. 25 lakhs, the imprisonment would be for a term of 3 months to 2 years. In addition, fine would also be attracted.

However, in a case where the return of income is not filed within the due date, prosecution proceedings will not be attracted if the tax payable by a person, other than a company, on the total income determined on regular assessment, as reduced by the advance tax, if any, paid and any tax deducted at source, does not exceed Rs. 3,000.

In this case, even though the tax liability of the firm as per the original order of assessment exceeded Rs. 3,000, however, as a result of the order of the Commissioner (Appeals), it got reduced to Rs. 2,900, which is less than Rs. 3,000. Therefore, since the tax liability of the firm on final assessment was determined at Rs. 2,900, the prosecution proceedings are not maintainable.

In Guru Nanak Enterprises v. ITO (2005), where the facts were similar, the Supreme Court held that prosecution was unwarranted.

(ii) Yes, in case of a company, the answer would be different and prosecution proceedings would be maintainable.

 

Q-65: Can prosecution be launched for each of the following actions or defaults committed? If yes, then explain the relevant provisions of the Act and the quantum of prescribed punishment.

(i) The assessee had restrained and not allowed the officer authorized as per section 132(1)(iib) of the Act to inspect the documents maintained in the form of electronic record and the books of accounts.

(ii) The assessee deliberately has failed to comply with the requirement of section 142(1) and/or 142(2A).

(iii) The assessee deliberately has failed to make the payment of the tax collected under section 206C.

Ans:- (i) Failure to afford facility to the officer authorized as per section 132(1)(iib) is a case for which prosecution can be launched under section 275B and such person shall be punishable with rigorous imprisonment for a term which may extend to two years and shall also be liable to fine.

(ii) Willful failure to produce books of account and documents as required under section 142(1) or willful failure to comply with a direction to get the accounts audited under section 142(2A) is a case for which prosecution can be launched under section 276D and such person shall be punishable with rigorous imprisonment for a term which may extend to one year and with fine.

(iii) Deliberate failure to deposit the tax collected under section 206C to the credit of the Central Government is a case for which prosecution can be launched under section 276BB and such person shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.

 

Q-66: Can the Department launch prosecution in a case where they have accepted the revised return filed by the assessee, rectifying a mistake in the original return of income?

Ans:- This question came up before the Karnataka High Court in K.E. Sunil Babu, Asst. CIT v. Steel Processors (2006). The High Court observed that si nce the Department had accepted the revised returns filed under section 139(5), it was clear that there was a bona fide mistake in the original return and there was no element of mens rea. Therefore, the High Court held that the Department cannot launch prosecution under sections 276C, 277 and 278.

 

Q-67: The directors of a private company are personally liable to pay the income tax due from the company but their liability does not extend towards interest and penalty payable by the company. Discuss.

Ans:- Section 179 contains the provisions relating to the liability of directors of a private company in liquidation in respect of tax due from the company. Where any tax due from a private company in respect of income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, then, every person who was a director of such company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax. However, the director shall not be so liable if he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Explanation to section 179 clarifies that the expression “tax due” includes penalty, interest or any other sum payable under the Act. Therefore, the directors liability is not confined to tax alone but extends to penalty, interest or any other sum payable by the company.

 

Q-68: “NEPTUNE” is a shipliner, used in carrying passengers and cargo, owned by M/s Thomas & Thomas of U.K. The ship carried the passengers and cargo in June, 2021 from Singapore to Chennai and vice versa and collected charges thereof amounting to Rs. 200 lacs. It left Chennai port on 15.6.2021 for its journey to Korea. No other journey to India was undertaken by any of the vessels of the company during the year ended on 31.3.2022. The non-resident company had authorized its Indian agent to comply with the income tax provisions.

You are consulted by the company to explain about the procedure as to return of income to be filed and the period within which the assessment thereof will be completed by the Assessing Officer.

Ans:- M/s. Thomas & Thomas of U.K shall be required to file the return of income in India for the journey of its ship before it leaves for onward journey to Korea.

However, as per the proviso to section 172(3), where the Assessing Officer is satisfied that it is not possible for the master of the ship to furnish the return before the departure of the ship from the port, and if satisfactory arrangements have been made for filing of return and payment of tax by the authorised agent in India, he may permit filing of return within 30 days of departure of the ship.

Section 172(4A) provides a time limit of 9 months for completion of assessment in such cases. The period of 9 months is reckoned from the end of the financial year in which the return under section 172(3) is furnished.

 

Q-69: In respect of the taxes due from a private limited company, which could not be recovered from it, the Tax Recovery Officer attached the properties of an erstwhile director for recovery thereof. It was contended by the director that a notice under section 156 had not been served on him and therefore, the proceedings for recovery were not valid. What is the correct legal position?

Ans:- The liability of a director of a private limited company for arrears due from the company is provided in section 179. There is no necessity to issue a notice to a director, because the position of a person on whom liability is fastened is equated to that of an ‘assessee’ in default. For the purpose of section 220(4), the person held liable under section 179 would be deemed to be an assessee-in-default. This may be contrasted with the arrears of a partnership firm which may be recovered from the erstwhile partners only after issue of a notice under section 156 and a default is committed by them.

Under section 179, every person who was a director of a private limited company at any time during the relevant previous year shall be jointly and severally liable for the payment of taxes which cannot be recovered from the company, unless he proves that the non-recovery cannot be attributed to any gross negligence, misfeasance or breach of duty on his part in relation to the affairs of the company.

 

Q-70: The proceedings before the Income-tax Authorities either can be attended by the assessee in person or through an authorized representative. Who can be treated as an authorized representative of the assessee?

Ans:- As per section 288, the proceedings before the income-tax authorities can be attended by an assessee in person or through an authorised representative, i.e., a person authorized by the assessee in writing to appear on his behalf, being -

  1. a person who is a relative or a regular employee of the assessee; or
  2. any officer of a Scheduled Bank in which the assessee maintains a current account or has other regular dealings; or
  3. a legal practitioner who is entitled to practise in any civil court in India; or
  4. a chartered accountant within the meaning of the Chartered Accountants Act, 1949 who hold a valid certificate of practice
  5. any person who has passed any accountancy examination recognized in this behalf by the CBDT for this purpose; or
  6. any person who has acquired such educational qualifications as prescribed by the CBDT; or
  7. any person who, before the coming into force of this Act in the Union territory of Dadra and Nagar Haveli, Goa, Daman and Diu, or Pondicherry, attended any proceedings before an income-tax authority in the said territory on behalf of any assessee otherwise than in the capacity of an employee or relative of that assessee
  8. any person who was actually practising as an income-tax practitioner, immediately before commencement of the Income-tax Act, 1961.

 

Q-71: "Tax Recovery Officer, can recover the arrear demands from the assessee in default out of sale proceeds of the property attached after making a proclamation". How can such proclamation be made under the Act?

Ans:- Manner of making a proclamation

Movable Property [Rules 38 & 39 of Schedule II to the Income-tax Act, 1961]

Where the Tax Recovery Officer orders sale of movable property, he should issue a proclamation in the language of the district, of the intended sale, specifying the time and place of sale and whether the sale is subject to confirmation or not.

The proclamation should be made by beat of drum or other customary mode, -

(i) in the case of property attached by actual seizure –

a) in the village in which the property was seized, or, if the property was seized in a town or city, then, in the locality in which it was seized; and

b) at such other places as the Tax Recovery Officer may direct;

(ii) in the case of property attached otherwise than by actual seizure, in such places, if any, as the Tax Recovery Officer may direct.

A copy of the proclamation should also be affixed in a conspicuous part of the office of the Tax Recovery Officer.

Immovable Property [Rule 54 of Schedule II to the Income-tax Act, 1961]

The Tax Recovery Officer shall make a proclamation for sale of immovable property at some place on or near such property by beat of drum or other customary mode. A copy of the proclamation shall be affixed on a conspicuous part of the property and also upon a conspicuous part of the office of the Tax Recovery Officer.

Where the Tax Recovery Officer directs, such proclamation shall also be published in the Official Gazette or in a local newspaper or in both, and the cost of such publication shall be deemed to be cost of the sale.

Where the property to be sold is divided into lots for the purpose of being sold separately, then it is not necessary to make a separate proclamation for each lot of property, unless in the opinion of the Tax Recovery Officer, proper notice of sale cannot otherwise be given.

Time limit for sale of attached immovable property [Rule 68B of Schedule II to the Income - tax Act, 1961]

The sale of immovable property attached has to be made on or before the expiry of 7 years from the end of the financial year in which the order giving rise to a demand of any tax, interest, fine, penalty or any other sum, for the recovery of which the immovable property has been attached,

  • has become conclusive under the provisions of section 245-I (where order of settlement under section 245D(4) is deemed to be conclusive as to the matters stated therein) or
  • has become final in terms of the provisions of Chapter XX (Appeals and Revision).

However, the CBDT may, for reasons to be recorded in writing, extend the aforesaid period for a further period not exceeding 3 years.

 

Q-72: How does the income of a person who is trying to alienate his assets with a view to avoid tax be dealt with under the Act?

Ans:- The income of a person who is trying to alienate his assets with a view to avoid tax will be dealt with as per the provisions of section 175.

Accordingly, if it appears to the Assessing Officer during any current assessment year that any person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets with a view to avoiding payment of any liability under the Income-tax Act, 1961, the total income of such person for the period from the expiry of the previous year to the date when the Assessing Officer commences proceedings under this section is chargeable to tax in that assessment year.

The total income of each completed year or part of any previous year included in such period shall be chargeable to tax at the rates in force in that assessment year and separate assessments will be made for each completed previous year or part of any previous year.

The Assessing Officer may estimate the income of such individual for such period or any part thereof, where it cannot be readily determined in the manner provided in the Act.

The tax chargeable under this section shall be in addition to tax, if any, chargeable under any other provision of the Act.

 

Q-73: Examine the consequences that would follow if the Assessing Officer makes adjustment to arm’s length price in international transactions of the assessee resulting in increase in taxable income. What are the remedies available to the assessee to dispute such adjustment?

Ans:- In case the Assessing Officer makes adjustment to arm’s length price in an international transaction which results in increase in taxable income of the assessee, the following consequences shall follow:-

  1. No deduction under section 10AA or Chapter VI-A shall be allowed from the income so increased.
  2. No corresponding adjustment would be made to the total income of the other associated enterprise (in respect of payment made by the assessee from which tax has been deducted or is deductible at source) on account of increase in the total income of the assessee on the basis of the arm’s length price so recomputed.

The remedies available to the assessee to dispute such an adjustment are:-

  1. In case the assessee is an eligible assessee under section 144C, he can file his objections to the variation made in the income within 30 days [of the receipt of draft order by him] to the Dispute Resolution Panel and Assessing Officer. Appeal against the order of the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel can be made to the Income-tax Appellate Tribunal.
  2. In any other case, he can file an appeal under section 246A to the Commissioner (Appeals) against the order of the Assessing Officer within 30 days of the date of service of notice of demand.
  3. The assessee can opt to file an application for revision of order of the Assessing Officer under section 264 within one year from the date on which the order sought to be revised is communicated, provided the time limit for appeal to the Commissioner (Appeals) or the Income-tax Appellate Tribunal has expired or the assessee has waived the right of such an appeal. The eligibility conditions stipulated in section 264 should be fulfilled.

 

Q-74: Anush Motors Ltd., an Indian company declared income of Rs. 300 crores computed in accordance with Chapter IV-D but before making any adjustments in respect of the following transactions for the year ended on 31.3.2022:

(i) 10,000 cars sold to Rida Ltd. which holds 30% shares in Anush Motors Ltd. at a price which is less by $ 200 each car than the price charged from Shingto Ltd.

(ii) Royalty of $ 1,20,00,000 was paid to Kyoto Ltd. for use of technical know-how in the manufacturing of car. However, Kyoto Ltd. had provided the same know-how to another Indian company for $ 90,00,000.

(iii) Loan of Euro 1000 crores carrying interest @ 10% p.a. advanced by Dorf Ltd., a German company, was outstanding on 31.3.2022. The total book value of assets of Anush Motors Ltd. on the date was Rs. 90,000 crores. The said German company had also advanced a loan of similar amount to another Indian company @ 9% p.a.

Total interest paid for the year was EURO 100 crores.

Explain in brief the provisions of the Act affecting all these transactions and compute the income of the company chargeable to tax for A.Y.2022-23 keeping in mind that the value of 1$ and of 1 EURO was Rs. 63 and Rs. 84, respectively, throughout the year.

Ans:- Any income arising from an international transaction, where two or more “associated enterprises” enter into a mutual agreement or arrangement, shall be computed having regard to arm’s length price as per the provisions of Chapter X of the Act.

Section 92A defines an “associated enterprise” and sub-section (2) of this section speaks of the situations when the two enterprises shall be deemed to associated enterprises. Applying the provisions of section 92A(2)(a) to (m) to the given facts, it is clear that “Anush Motors Ltd.” is associated with :-

(i) Rida Ltd. as per section 92A(2)(a), because this company holds shares carrying more than 26% of the voting power in Anush Motors Ltd.;

(ii) Kyoto Ltd. as per section 92A(2)(g), since this company is the sole owner of the technology used by Anush Motors Ltd. in its manufacturing process;

(iii) Dorf Ltd. as per section 92A(2)(c), since this company has financed an amount which is more than 51% of the book value of total assets of Anush Motors Ltd.

The transactions entered into by Anush Motors Ltd. with different companies are, therefore, to be adjusted accordingly to work out the income chargeable to tax for the A.Y. 2022-23.

 Particulars

 Rs. (in crores)

 Income of Anush Motors Ltd. as computed under Chapter IV-D, prior  to

 adjustments as per Chapter X

300.00

 Add: Difference  on  account  of  adjustment  in  the  value  of  international

 transactions:

 

 (i) Difference in price of car @ $ 200 each for 10,000 cars ($ 200 x 10,000 x

 Rs. 63)

 12.6

 (ii) Difference for excess payment of royalty of $ 30,00,000 ($ 30,00,000 x Rs.

 63) [See Note below]

 18.90

 (iii) Difference for excess interest paid on loan of EURO 1000 crores (Rs.

 84*1000*1/100)

 840.00

 Total Income

 1,171.50

The difference for excess payment of royalty has been added back presuming that the manufacture of cars by Anush Motors Ltd is wholly dependent on the use of know-how owned by Kyoto Ltd.

Note: It is presumed that Anush Motors Ltd. has not entered into an Advance Pricing Agreement or opted to be subject to Safe Harbour Rules.

 

Q-75: Mr. X, a non-resident individual, is due to receive interest of Rs. 5 lakhs during March 2022 from a notified infrastructure debt fund eligible for exemption under section 10(47). He incurred expenditure amounting to Rs. 10,000 for earning such income.

Assuming that Mr. X is a resident of a NJA, discuss the tax implications under section 94A, read with sections 115A and 194LB.

Ans:- The interest income received by Mr. X, a non-resident, from a notified infrastructure debt fund would be subject to a concessional tax rate of 5% under section 115A on the gross amount of such interest income. Therefore, the tax liability of Mr. X in respect of such income would be Rs. 26,000 (being 5% of Rs. 5 lakhs plus health and education cess@4%).

Under section 194LB, tax is deductible @5% (plus health and education cess@4%) on interest paid by such fund to a non-resident. However, since X is a resident of a NJA, tax would be deductible@30% (plus health and education cess@4%) as per section 94A, and not @5% specified under section 194LB. This is on account of the provisions of section 94A(5), which provides that “Notwithstanding anything contained in any other provision of this Act, where a person located in a NJA is entitled to receive any sum or income or amount on which tax is deductible under Chapter XVII-B, the tax shall be deducted at the highest of the following rates, namely–

  1. at the rate or rates in force;
  2. at the rate specified in the relevant provision of the Act;
  3. at the rate of thirty per cent.”

Mr. X can, however, claim refund of excess tax deducted along with interest.

 

Q-76: Atlant Italy, a company incorporated in France, was engaged in manufacture, trade and supply equipment and services for GSM Cellular Radio Telephones Systems. It supplied hardware and software to various entities in India. Software licensed by assessee embodied the process which is required to control and manage the specific set of activities involved in the business use of its customers, and also made available to its customers, who used it to carry out their business activities. The Assessing Officer contented that the consideration for supply of software embedded in hardware is 'royalty' under section 9(1)(vi)

Examine the correctness of the action of the Assessing Officer assuming that the software that was loaded on the hardware and embedded in the system does not have any independent existence.

Ans:- The issue under consideration in this case is whether consideration for supply of software embedded in hardware would tantamount to ‘royalty’ for attracting deemed accrual of income under section 9(1)(vi).

As per section 9(1)(vi), income by way of royalty payable by a person who is a non-resident would be deemed to accrue or arise in India, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.

For this purpose, ‘royalty’ includes transfer of all or any right for use or right to use a computer software irrespective of the medium through which such right is transferred.

The facts of the case are similar to the facts in CIT v. Alcatel Lucent Canada (2015), wherein the above issue came up before the Delhi High Court. The Court observed that the software supply is an integral part of GSM mobile telephone system and is used by the cellular operators for providing cellular services to its customers. Where payment is made for hardware in which the software is embedded and the software does not have independent functional existence, no amount could be attributed as ‘royalty’ for software in terms of section 9(1)(vi).

In this case, since the software that was loaded on the hardware and embedded in the system does not have any independent existence, there could not be any independent use of such software. Therefore, the rationale of the Delhi High Court ruling can be applied to the case on hand. Accordingly, the action of the Assessing Officer in treating the consideration for supply of software embedded in hardware as royalty under section 9(1)(vi) is not correct.

 

Q-77: Compute the total income in the hands of an individual, aged 55 years, being a resident and ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2022- 23:

 

 Particulars

 Amount 

  (Rs.)

 Interest on UK Development Bonds, 50% of interest received in India

 10,000

Income from a business in Chennai (50% is received in India)

20,000

Short term capital gains on sale of shares of an Indian company received in

London

20,000

Dividend from British company received in London

5,000

Long term capital gains on sale of plant at Germany, 50% of profits are

received in India

40,000

Income earned from business in Germany which is controlled from Delhi

(Rs. 40,000 is received in India)

70,000

Profits from a business in Delhi but managed entirely from London

15,000

Income from house property in London deposited in an Indian Bank at

London, brought to India (Computed)

50,000

Interest on debentures in an Indian company received in London

12,000

Fees for technical services rendered in India but received in London

8,000

Profits from a business in Bombay managed from London

26,000

Pension for services rendered in India but received in Burma

4,000

Income from property situated in Pakistan received there

16,000

Past foreign untaxed income brought to India during the previous year

5,000

Income from agricultural land in Nepal received there and then brought to

India

18,000

 Income from profession in Kenya which was set up in India, received there 

but spent in India

5,000

Gift received on the occasion of his wedding

 20,000   

Interest on savings bank deposit in State Bank of India

12,000

Income from a business in Russia, controlled from Russia

20,000

Dividend from Reliance Petroleum Limited, an Indian Compa ny

5,000

Agricultural income from a land in Rajasthan

15,000

 

Ans:- Computation of total income for the A.Y. 2022-23

Particulars

 Resident and ordinarily

 resident

Rs.

Resident but not

ordinarily resident

Rs.

Non-resident Rs.

Interest on UK Development Bonds, 50%

of interest received in India

10,000

5,000

5,000

Income from a business in Chennai (50% is

received in India)

20,000

20,000

20,000

Short term capital gains on sale of shares

of an Indian company received in London

20,000

20,000

20,000

Dividend from British company received in

London

5,000

-

-

Long term capital gain on sale of plant at Germany, 50% of profits are received in

India

40,000

20,000

20,000

 Income earned from business in Germany which is controlled from Delhi, out of

which Rs. 40,000 is received in India

 70,000                             

 70,000                   

 40,000                 

Profits from a business in Delhi but managed entirely from London

15,000

15,000

15,000

Income from property in London deposited in a Bank at London, later on

remitted to India

50,000

-

-

Interest on debentures in an Indian company received in London

12,000

12,000

12,000

Fees for  technical  services  rendered  in India but received in London

8,000

8,000

8,000

Profits from a business in Bombay managed from London

26,000

26,000

26,000

Pension for services rendered in India but received in Burma

4,000

4,000

4,000

Income from property situated in Pakistan received there

16,000

-

-

Past foreign  untaxed income  brought  to India during the previous year

-

-

-

Income from  agricultural  land  in  Nepal received there and then brought to India

18,000

-

-

Income from  profession  in  Kenya  which

was set up in India, received there but spent in India

5,000

5,000

-

Gift  received  on the occasion of his wedding [not taxable]

-

-

-

Interest on savings bank deposit in State Bank of India

12,000

12,000

12,000

Income from a business in Russia, controlled from Russia 

20,000

-

-

 Dividend from Reliance Petroleum Limited, an Indian Company [Now Taxable]  

5,000

5,000

5,000

 Agricultural income from a  land in Rajasthan [Exempt under section 10(1)]

 

 

 

Gross Total Income

Less: Deduction under section 80TTA

 3,51,000                           

 2,17,000                

 1,82,000              

[Interest on savings bank account subject to a maximum of Rs.10,000] 

10,000

10,000

10,000

Total Income

3,46,000

2,12,000

1,77,000

 

Q-78: John Butler Tex. Inc. is a company incorporated in Colombo, Sri Lanka. 60% of its shares are held by I Pvt. Ltd., a domestic company. John Butler Tex. Inc. has its presence in India also. The data relating to John Butler Tex. Inc., are as under:

Particulars

  India  

  Sri Lanka  

Fixed assets at depreciated values for tax purposes (Rs. in crores)

 90

 70

 Intangible assets (Rs. in crores)

 40

 180

 Other assets (Rs. in crores)

 30

 90

 Income from trading operations (Rs. in crores)

 15

 42

 Income from investments (Rs. in crores)

 30

 13

 Number of employees (Residents in respective countries)

 40

 60

For POEM purposes, state whether,

(i) The company shall be said to be engaged in 'active business outside India'.

(ii) Because of increased operations in India, more manpower is needed. 30 more employees may be required in this regard. The company can either take these employees directly in its roll or can outsource the increased operation to an external agency which will engage the 15 employees in its roll and finish the work for the company. Which choice will be better?

Note: If for any test, average figures are needed, the same may be ignored and the data as given above to the applicant may be used.

Ans:- For determining the POEM of a company, the important criteria is whether the company is engaged in active business outside India or not.

A company shall be said to be engaged in “Active Business Outside India” (ABOI) for POEM, if

  • the passive income is not more than 50% of its total income; and
  • less than 50% of its total assets are situated in India; and
  • less than 50% of total number of employees are situated in India or are resident in India; and
  • the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

John Butler Tex. Inc. shall be regarded as a company engaged in active business outside India for P.Y. 2021-22 for POEM purpose only if it satisfies all the four conditions cumulatively.

Condition 1: The passive income of John Butler Tex. Inc. should not be more than 50% of its total income

Total income of John Butler Tex. Inc. during the P.Y. 2021-22 is Rs. 100 crores [(Rs. 15 crores + Rs. 30 crores) + (Rs. 42 crores + Rs. 13 crores)]

Passive income is the aggregate of, -

(i) income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and

(ii) income by way of royalty, dividend, capital gains, interest or rental income;

Passive Income of John Butler Tex. Inc. is Rs. 43 crores, being income from investment of Rs. 30 Crores in India and Rs. 13 crores in Sri Lanka.

Percentage of passive income to total income = Rs. 43 crore/ Rs. 100 crore x 100 = 43%

Since passive income of John Butler Tex. Inc. is 43% i.e., is not more than 50% of its total income, the first condition is satisfied.

 

Condition 2: John Butler Tex. Inc. should have less than 50% of its total assets situated in India

Value of total assets of John Butler Tex. Inc. during the P.Y. 2021-22 is Rs. 500 crores [Rs. 160 crores, in India + Rs. 340 crores, in Sri Lanka].

Value of total assets of John Butler Tex. Inc. in India during the P.Y. 2021-22 is Rs. 160 crores.

Percentage of assets situated in India to total assets = Rs. 160 crores/Rs. 500 crores x 100 = 32%

Since the value of assets of John Butler Tex. Inc. situated in India is less than 50% of its total assets, the second condition for ABOI test is satisfied.

 

Condition 3: Less than 50% of the total number of employees of John Butler Tex. Inc. should be situated in India or should be resident in India

Number of employees situated in India or are resident in India is 40. Total number of employees of John Butler Tex. Inc. is 100 [40 + 60]

Percentage of employees situated in India or are resident in India to total number of employees is 40/100 x 100 = 40%.

Since employees situated in India or are residents in India of John Butler Tex. Inc. are less than 50% of its total employees, the third condition for ABOI test is satisfied.

 

Condition 4: The payroll expenses incurred on employees situated in India or residents in India should be less than 50% of its total payroll expenditure

Since the information pertaining to payroll expenditure of employees situated in India and situated outside India is not given in the question it is assumed that the condition pertaining to payroll expenditure is also satisfied by John Butler Tex. Inc.

Thus, since the John Butler Tex. Inc. has satisfied all the four conditions, the company would be said to be engaged in “active business outside India”.

Note: Since the information pertaining to payroll expenditure of employees situated in India and situated outside India is not given in the question it is also possible to assume that the condition pertaining to payroll expenditure is not satisfied by John Butler Tex. Inc.

In such case, the company would not be said to be engaged in “active business outside India”, since John Butler Tex. Inc. has not satisfied one of condition i.e., payroll expenditure out of the specified four conditions.

 

(ii) Option 1: 30 more employees employed in India for the increased operations

In case John Butler Tex. Inc. employed 30 more employees in India, then Percentage of employees situated in India or are resident in India to total number of employees would be 70/130 x 100 = 53.85%.

In such a case, one of the four conditions would not be satisfied and therefore, John Butler Tex. Inc. would not be considered to be engaged in ABOI.

It may be noted that place of effective management of a company passing the ABOI test would be presumed to be outside India, if majority of the board meetings are held outside India. Consequently, the global income of the company would not be subject to tax in India. However, such a presumption cannot be made if the company does not fulfil any of the four conditions for ABOI.

 

Option 2: Increased operations outsourced to external agency which will get the work done by engaging 15 employees in India

For the purpose of ABOI, employees shall include persons, who though not employed directly by the company, perform tasks similar to those performed by the employees.

Thus, 15 employees engaged by external agency have also to be included while determining the percentage of employees situated in India or are resident in India to the total number of employees.

In such a case, the percentage of employees situated in India or are resident in India to total number of employees would be 55/115 x 100 = 47.83%

In such a case, John Butler would continue to satisfy the four conditions for ABOI. Thus, it would be better to outsource the increased operation to an external agency.

 

Q-79: The following are the particulars of income earned by Miss Vivitha, a resident Indian aged 25, for the assessment year 2022-23:

 

(Rs. In lacs)

Income from playing snooker matches in country L

12.00

Tax paid in country L

1.80

Income from playing snooker tournaments in India

19.20

Life Insurance Premium paid

1.10

 Medical Insurance  Premium  paid  for  her  father  aged 62  years  (paid

through credit card)

 0.54

Compute her total income and tax liability for the assessment year 2022-23. There is no Double Taxation Avoidance Agreement between India and country L.

Ans:- Computation of total income and tax liability of Miss Vivitha for the A.Y. 2022-23

Particulars

Rs.

Rs.

Indian Income [Income from playing snooker tournaments in India]

 

19,20,000

Foreign Income [Income from playing snooker matches in country L]

 

12,00,000

Gross Total Income

 

31,20,000

Less: Deduction under Chapter VIA

 

 

Deduction under section 80C

 

 

Life insurance premium of Rs. 1,10,000 paid during the previous year

 deduction, is within the overall limit of Rs.1.5 lakh. Hence, fully

allowable as deduction

1,10,000

 

Deduction under section 80D

 

 

Medical insurance premium of Rs. 54,000 paid for her father aged 62 years.

Since her father is a senior citizen, the deduction is allowable to a maximum

of Rs. 50,000 (assuming that her father is also a resident in India). Further,

deduction is allowable where payment is made by any mode other than

cash. Here payment is made by credit card hence, eligible for deduction.

50,000

1,60,000

Total Income

 

29,60,000

Tax on Total Income

 

 

Income-tax

 

7,00,500

Add: Health and education cess @4%

 

28,020

 

 

 7,28,520 

Average rate of tax in India

(i.e. Rs. 7,28,520/Rs. 29,60,000 × 100)

 24.61%

 

Average rate of tax in foreign country (i.e. Rs. 1,80,000/Rs.12,00,000 ×100) 

 15.00%

 

Deduction under section 91 on Rs. 12 lakh @ 15% (lower of average

Indian-tax rate or average foreign tax rate)

 

1,80,000

Tax payable in India (Rs. 7,28,520 – Rs. 1,80,000)

 

5,48,520

Note: Miss Vivitha shall be allowed deduction under section 91, since the following conditions are fulfilled:-

  1. She is a resident in India during the relevant previous year.
  2. The income accrues or arises to her outside India during that previous year and such income is not deemed to accrue or arise in India during the previous year.
  3. The income in question has been subjected to income-tax in the foreign country L in her hands and she has paid tax on such income in the foreign country L.
  4. There is no agreement under section 90 for the relief or avoidance of double taxation between India and country L where the income has accrued or arisen.

Note: The optional tax rate u/s 115BAC is not opted here.

 

Q-80: Arif is a resident of both India and another foreign country in the previous year 2021-22. He owns immovable properties (including residential house) in both the countries. He earned income of Rs. 50 lacs from rubber estates in the foreign country during the financial year 2021-

22. He also sold some house property situated in foreign country resulting in short-term capital gain of Rs. 10 lacs during the year. Arif has no permanent establishment of business in India. However, he has derived rental income of Rs. 6 lacs from property let out in India and he has a house in Lucknow where he stays during his visit to India.

Article 4 of the Double Taxation Avoidance Agreement between India and the foreign country where Arif is a resident, provides that “where an individual is a resident of both the Contracting States, then he shall be deemed to be resident of the Contracting State in which he has permanent home available to him. If he has permanent home in both the Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests)”.

You are required to examine with reasons whether the business income of Arif arising in foreign country and the capital gains in respect of sale of the property situated in foreign country can be taxed in India.

Ans:- Section 90(1) of the Income-tax Act, 1961 empowers the Central Government to enter into an agreement with the Government of any country outside India for avoidance of double taxation of income under the Indian law and the corresponding law of that country. Section 90(2) provides that where the Central Government has entered into an agreement with the Government of any other country for granting relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of the Income-tax Act, 1961 shall apply to the extent they are more beneficial to that assessee.

Arif has residential houses both in India and foreign country. Thus, he has a permanent home in both the countries. However, he has no permanent establishment of business in India. The Double Taxation Avoidance Agreement (DTAA) with foreign country provides that where an individual is a resident of both the countries, he shall be deemed to be resident of that country in which he has a permanent home and if he has a permanent home in both the countries, he shall be deemed to be resident of that country, which is the centre of his vital interests i.e. the country with which he has closer personal and economic relations.

Arif owns rubber estates in a foreign country from which he derives business income. However, Arif has no permanent establishment of his business in India. Therefore his personal and economic relations with foreign country are closer, since foreign country is the place where –

  1. the property is located and
  2. the permanent establishment (PE) has been set-up

Therefore, he shall be deemed to be resident of the foreign country for A.Y. 2022-23. The fact of the case and issues arising therefrom are similar to that of CIT vs. P.V.A.L. Kulandagan Chettiar (2004), where the Supreme Court held that if an assessee is deemed to be a resident of a contracting State where his personal and economic relations are closer, then in such a case, the fact that he is a resident in India to be taxed in terms of sections 4 and 5 would become irrelevant, since the DTAA prevails over sections 4 and 5.

However, as per section 90(4), in order to claim relief under the agreement, Arif has to obtain a certificate [Tax Residency Certificate (TRC)] declaring his residence of the country outside India from the Government of that country. Further, he also has to provide such other documents and information, as may be prescribed.

Therefore, in this case, Arif is not liable to income tax in India for assessment year 2022-23 in respect of business income and capital gains arising in the foreign country provided he furnishes the Tax Residency Certificate and provides such other documents and information as may be prescribed.

 

Q-81: Nandita, an individual resident retired employee of the Prasar Bharati aged 60 years, is a well-known dramatist deriving income of Rs. 1,10,000 from theatrical works played abroad. Tax of Rs. 11,000 was deducted in the country where the plays were performed. India does not have any Double Tax Avoidance Agreement under section 90 of the Income-tax Act, 1961, with that country. Her income in India amounted to Rs. 6,10,000. In view of tax planning, she has deposited Rs. 1,50,000 in Public Provident Fund and paid contribution to approved Pension Fund of LIC Rs. 32,000. She also contributed Rs. 28,000 to Central Government Health Scheme during the previous year and gave payment of medical insurance premium of Rs. 26,000 to insure the health of her father, a non-resident aged 84 years, who is not dependent on her. Compute the tax liability of Nandita for the Assessment year 2022-23.

Ans:- Computation of tax liability of Nandita for the A.Y. 2022-23

Particulars

Rs.

Rs.

Indian Income

 

6,10,000

Foreign Income

 

1,10,000

Gross Total Income

 

7,20,000

Less: Deduction under section 80C

 

 

Deposit in PPF

1,50,000

 

Under section 80CCC

 

 

Contribution to approved Pension Fund of LIC

32,000

 

 

1,82,000

 

Under section 80CCE

 

 

The aggregate  deduction  under section  80C, 80CCC and

80CCD(1) has to be restricted to Rs. 1,50,000

1,50,000

 

Under section 80D

 

 

 Contribution to Central Government Health Scheme Rs. 28,000

 is also allowable as deduction under section 80D. Since she is

 a resident senior citizen, the deduction is allowable to a

maximum of Rs. 50,000 (See Note 1)

28,000

 

 Medical insurance premium of Rs. 26,000 paid for father aged

 84 years. Since the father is a non-resident in India, he will not

 be entitled for the higher deduction of Rs. 50,000 eligible for a

 senior citizen, who is resident in India. Hence, the deduction 

 will be restricted to maximum of Rs. 25,000.

25,000

2,03,000

Total Income

 

5,17,000

Tax on Total Income

 

 

Income-tax (See Note below)

 

13,400

Add: Health and Education Cess @4%

 

536

 

 

13,936

Average rate of tax in India

 

 

(i.e. Rs.13,936/ Rs. 5,17,000 × 100)

 2.696% 

 

Average rate of tax in foreign country

 

 

(i.e. Rs. 11,000/ Rs. 1,10,000 ×100)

10%

 

 Deduction under section 91 on Rs. 1,10,000 @ 2.696% (lower  

 of average Indian-tax rate or average foreign tax rate)

 

2,966

Tax payable in India (Rs. 13,936 – Rs. 2,966)

 

10,970

Notes:

  1. Section 80D allows a higher deduction of up to Rs. 50,000 in respect of the medical premium paid to insure the heath of a senior citizen. Therefore, Nandita will be allowed deduction of Rs. 28,000 under section 80D, since she is a resident Indian of the age of 60 years.
  2. The basic exemption limit for senior citizens is Rs. 3,00,000 and the age criterion for qualifying as a “senior citizen” for availing the higher basic exemption limit is 60 years. Accordingly, Nandita is eligible for the higher basic exemption limit of Rs. 3,00,000, since she is 60 years old.
  3. An assessee shall be allowed deduction under section 91 provided all the following conditions are fulfilled:-
  4. The assessee is a resident in India during the relevant previous year.
  5. The income accrues or arises to him outside India during that previous year.
  6. Such income is not deemed to accrue or arise in India during the previous year.
  7. The income in question has been subjected to income-tax in the foreign country in the hands of the assessee and the assessee has paid tax on such income in the foreign country.
  8. There is no agreement under section 90 for the relief or avoidance of double taxation between India and the other country where the income has accrued or arisen.

In this case, since all the above conditions are satisfied, Nandita is eligible for deduction under section 91.

Note: The optional tax rate u/s 115BAC is not opted here.

 

Q-82: Alpha Ltd., an Indian company, has made an application in April, 2021 to the Assessing Officer for determination of the tax rate applicable for the technical know-how payment to be made to Beta Inc., a Country B company. When this is pending, Beta Inc., has filed an application in June, 2021 before the AAR in respect of the same matter. Can the AAR reject the application of Beta Inc. on the ground that similar issue is pending before the Assessing Officer? Examine.

Ans:- This issue came up before the AAR in, Nuclear Power Corporation of India Ltd. In Re, [2012], wherein it was held that an advance ruling is not only applicant specific, but is also transaction specific. The advance ruling is on a transaction entered into or undertaken by the applicant. That is why section 245S specifies that a ruling is binding on the applicant, the transaction and the Principal Commissioner or Commissioner of Income-tax and those subordinate to him, and not only on the applicant.

What is barred by the first proviso to section 245R(2) of the Act in the context of clause (i) thereof is the allowing of an application under section 245R(2) of the Act where “the question raised in the application is already pending before any Income-tax authority, or Appellate Tribunal or any court”. The significance of the dropping of the words, “in the applicant’s case” with effect from June 1, 2000, cannot be wholly ignored.

On the basis of this view expressed by the AAR in the above case, explaining the impact of the dropping of the words “in the applicant’s case” with effect from 1.6.2000, a view can be taken that the AAR can reject the application made by Beta Inc before the AAR on the ground that similar issue is pending before the Assessing Officer in respect of the same transaction i.e., provision of technical know to Alpha Ltd.

Alternate Answer – The issue relates to the admission or rejection of the application filed before the Advance Rulings Authority on the grounds specified in clause (i) of the first proviso to sub- section (2) of section 245R of the Income-tax Act, 1961.

The first proviso to section 245R(2) has been substituted by the Finance Act, 2000 with effect from 1.6.2000. Clause (i) of the first proviso, prior to and post amendment, reads as follows:

 Prior to 1.6.2000

 On or After 1.6.2000

Provided that the Authority shall not allow the application except in the case of a resident applicant where the question raised in the application is already pending in the applicant’s case before any income-tax authority, the Appellate Tribunal or any court;

Provided that the Authority shall not allow the application where the question raised in the application is already pending before any income-tax authority or Appellate Tribunal or any court.

The words “except in the case of a resident applicant” and “in the applicant’s case” has been removed in clause (i) of the first proviso with effect from 1.6.2000. However, the Explanatory Memorandum to the Finance Act, 2000, explaining the impact of the substitution, reads as follows “It is proposed to substitute the proviso to provide that the Authority shall not allow the application when the question raised is already pending in the applicant’s case before any income-tax authority, Appellate Tribunal or any court in regard to a non-resident applicant and resident applicant in relation to a transaction with a non-resident”. Therefore, according to the intent expressed in the Explanatory Memorandum, the AAR shall not allow the application both in the case of resident and non-resident applicant if the question raised is already pending in the applicant’s case before any income-tax authority. Thus, as per the Explanatory Memorandum, it is possible to take a view that even post-amendment, the Authority shall not allow the application where a question is pending in the applicant’s case before any income-tax authority. Thus, an alternative view is possible on the basis of the AAR ruling in Ericsson Telephone Corporation India AB v. CIT (1997) 224 ITR 203, which continues to hold good even after the amendment, if we consider the intent expressed in the Explanatory Memorandum. Accordingly, based on this view, the AAR can allow the application made by Beta Inc., even if the question raised in the application is pending before the Assessing Officer in Alpha Ltd.’s case.

 

Q-83: What is the remedy available to an applicant who is aggrieved by the ruling of Board for Advance Rulings? Also, state the time limit within which he should exercise this remedy.

Ans:- An applicant who is aggrieved by any ruling pronounced by the Board for Advance Rulings may appeal to the High Court against such ruling or order of the Board of Advance Rulings. He has to do so within sixty days from the date of the communication of that ruling, in the prescribed form and manner.

However, where the High Court is satisfied, on an application made by the appellant in this behalf, that the appellant was prevented by sufficient cause from presenting the appeal within the 60 day period as specified above, it may grant further period of 30 days for filing such appeal.

 

Q-84: XYZ Ltd., an Indian company has entered into a technical knowhow agreement with ABC Inc., Country A. ABC Inc. has a sister concern, PQR LLC., Country A, which has obtained advance ruling on an identical technical know-how agreement with another Indian company, PQR Ltd. Can XYZ Ltd. make use of this advance ruling for its assessment proceeding in April, 2021? Examine.

Ans:- As per section 245S(1), the advance ruling pronounced under section 245R by the Authority for Advance Rulings shall be binding only on the applicant who had sought it and in respect of the transaction in relation to which advance ruling was sought. It shall also be binding on the Principal Commissioner/Commissioner and the income-tax authorities subordinate to him, in respect of the concerned applicant and the specific transaction. In view of the above provision, XYZ Ltd. cannot use the advance ruling, obtained on an identical issue by PQR LLC, a sister concern of ABC Inc., in its assessment proceedings.

Hence, the best course would be to file a fresh application for advance ruling in respect of this agreement between XYZ Ltd. and ABC Inc.

Note - The Madras High Court, in CIT v. P. Sekar Trust (2010), observed that though the advance ruling pronounced does not become a precedent, it has persuasive value where the facts warrant such reference to the rulings of AAR. There is no legitimate bar for relying on the reasoning in an advance ruling.

Accordingly, there is no legitimate bar on XYZ Ltd. relying on advance rulings obtained on an identical issue by PQR LLC in its assessment proceedings.

Therefore, based on the Madras High Court ruling, XYZ Ltd. may be advised to use the advance ruling pronounced in PQR LLC’s case in its assessment proceedings.

 

Q-85: ABC Ltd., an Indian company, is carrying on the business of manufacture and sale of teakwood furniture under the brand name “PUREWOOD”. In order to expand its overseas sales/exports, it launched a massive advertisement campaign of its products. For the purpose of online advertisement, it utilized the services of PQR Inc., a London based company.

During the previous year 2021-22, ABC Ltd. paid Rs. 5 lakhs to PQR Inc. for such services. Discuss the tax implications/TDS implications of such payment and receipt in the hands of ABC Ltd. and PQR Inc., respectively, if –

(i) PQR Inc. has no permanent establishment in India

(ii) PQR Inc. has a permanent establishment in India

Ans:- Chapter VIII of the Finance Act, 2016, "Equalisation Levy", provides for an equalisation levy of 6% of the amount of consideration for specified services received or receivable by a nonresident not having permanent establishment in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.

“Specified Service” means

  1. online advertisement;
  2. any provision for digital advertising space or any other facility or service for the purpose of online advertisement and
  3. any other service as may be notified by the Central Government.

However, equalisation levy shall not be levied-

  • where the non-resident providing the specified services has a permanent establishment in India
  • the aggregate amount of consideration for specified service received or receivable during the previous year does not exceed Rs. 1 lakh.
  • where the payment for specified service is not for the purposes of carrying out business or profession

(i)Where PQR Inc. has no permanent establishment in India

In the present case, ABC Ltd. is required to deduct equalisation levy of Rs. 30,000 i.e., @6% of Rs. 5 lakhs, being the amount paid towards online advertisement services provided by PQR Inc., a non-resident having no permanent establishment in India. Non-deduction of equalisation levy would attract disallowance under section 40(a)(ib) of 100% of the amount paid while computing business income.

(ii)Where PQR Inc. has permanent establishment in India and the service is effectively connected to the permanent establishment in India

Equalisation levy would not be attracted where the non-resident service provider (PQR Inc., in this case) has a permanent establishment in India. Therefore, the ABC Ltd. is not required to deduct equalisation levy on Rs. 5 lakhs, being the amount paid towards online advertisement services to PQR Inc, in this case.

However, tax has to be deducted by ABC Ltd. at the rates in force under section 195 in respect of such payment to PQR Inc. Non-deduction of tax at source under section 195 would attract disallowance under section 40(a)(i) of 100% of the amount paid while computing business income.

 

Q-86: Tanzon Web is owned by Tanzon Inc., USA. It provides online marketplace for goods/services and mainly targets customers in India and other Asian and African countries. Inventory of individuals/companies / firms of goods/supply are sold through Tanzon Web. Generally, sale proceeds are collected by Tanzon which are later on remitted to suppliers after deducting agreed commission. Besides, advertisement facility is provided by Tanzon against fixed charges. The following information is noted from the records of Tanzon Inc. for the financial year 2021-22 –

                                                                                                                                      (Rs. in crore)

 

 

Case 1

Case 2

Case 3

Case 4

 1. 

Goods sold [or service provided (other than advertisement service)] to persons

  resident in India  (or to persons using IP address in India)

0.6

0.6

19

12

2.

Service provided to persons resident in India

by way of sale of online advertisement -

 

 

 

 

 

2.1 When amount of bill (or aggregate amount of bills) to a recipient of service

during the financial year does not exceed Rs. 1 lakh per recipient of service

(amount of all bills issued to such recipients is given →

0.3

0.1

2

3

 

2.2 When amount of bill (or aggregate amount of bills) to a recipient of service

during the financial year exceeds Rs. 1 lakh per recipient of service (amount of

all bills issued to such recipients is given →

Nil

0.4

Nil

10

3.

Service provided to non-residents by way of

sale of online advertisements which target Indian customers

0.8

0.8

9

18

 

Total of (1) + (2.1) + (2.2) + (3)

1.7

1.9

30

43

4.

Goods sold/ service provided to non- residents (not covered by above data and

not covered by section 165/165A of the Finance Act, 2016)

100

150

96

10

 

 Total of (1) + (2.1) + (2.2) + (3) + (4)

 101.7  151.9  126  53

Tanzon Inc. wants to know tax consequences in India pertaining to above information in the following situations –

SITUATION 1 – Tanzon Inc. has PE in India and the above activities are effectively connected with such Indian PE.

SITUATION 2 – Tanzon Inc. does not have any PE in India.

Ans:- SITUATION 1 – If Tanzon Inc. has PE in India and e-commerce supply or services is effectively connected with such PE, then the provisions of equalisation levy (as given by section 165/165A of the Finance Act, 2016) are not applicable. Consequently, in Situation 1, equalisation levy is not applicable and income of India PE of Tanzon Inc. from the above activities shall be calculated under normal provisions of the Income-tax Act. However, tax is deductible by Tanzon Inc. within the parameters of section 194-O in respect of consideration paid or payable (pertaining to the above activities) to a person resident in India.

SITUATION 2- In Situation 2, equalisation levy is applicable as follows –

Equalisation levy at the rate of 6% under section 165 of the Finance Act, 2016 –

Every resident person shall deduct equalisation levy at the rate of 6% (with effect from June 1, 2016) from amount paid / payable to e-commerce operator pertaining to activities given under section 165 of the Finance Act, 2016 [i.e.,activities given in point 2.2 in the above case study]. However, equalisation levy at the rate of 6% is deductible only if aggregate consideration (of one or more bills during the financial year) exceeds Rs. 1 lakh. In such a case, income from this activity is exempt from income-tax in the hands of e-commerce operator under section 10(50) with effect from June 1, 2016.

Equalisation levy at the rate of 2% under section 165A of the Finance Act, 2016 –

Equalisation levy shall be charged at the rate of 2% (with effect from the assessment year 2021- 22) of the amount of consideration received/receivable by an e-commerce operator from e- commerce supply or services made by it to persons given under section 165A of the Finance Act, 2016 [i.e., activities given in Points 1, 2.1 and 3 in the above case study].

However, the equalisation levy at the rate of 2% is chargeable only if the aggregate turnover /gross receipts of the e-commerce operator [from transactions given in Points 1, 2.1, 2.2 and 3] is Rs. 2 crore or more during the financial year. In such a case, income of the e-commerce operator is exempt from income-tax under section 10(50) with effect from the assessment year 2021-22 (in respect of e-commerce supply or service made or provided on or after April 1, 2020).

Double equalisation levy, not possible –

Equalisation of levy at the rate of 2% under section 165A of the Finance Act, 2016 is not chargeable if the person making payment to e-commerce operator, is liable to deduct 6% equalisation levy under section 165 of the Finance Act, 2016 [i.e., activities given in Point 2.2].

Tax deduction under section 194-O –

Tax is deductible by Tanzon Inc. within the parameters of section 194-O in respect of consideration paid or payable (pertaining to the above activities) to a person resident in India. Keeping in view the above legal provisions, tax consequences in Situation 2 are as follows –

(Rs. in crore)

 

Case 1

Case 2

Case 3

Case 4 

Equalisation levy @ 6% - It is deductible under section 165 of the Finance Act, 2016 by a resident

person out of consideration paid or payable by him / it to e-commerce operator (i.e., Point 2.2) –

 

 

 

 

– Is it applicable

No

Yes

No

Yes

– Amount deductible as equalization levy (6% of Point 2.2)

 NA      

 0.024 

NA       

 0.60     

– Whether income-tax exemption is available to ecommerce operator pertaining to income from

 activities given under Point 2.2

NA

Yes

NA

Yes

Equalisation levy @ 2% - It is chargeable under section 165A of the Finance Act, 2016 and

 payable by e-commerce operator if its turnover from activities given under Points 1 to 3 is

Rs. 2 crore or more in a financial year -

 

 

 

 

– Is it applicable

No

No

Yes

Yes

– Amount chargeable as equalization levy in the hands of e-commerce operator

[2% of (Points 1 + 2.1 + 3)]

NA

NA

0.6

0.66

– Whether  income-tax  exemption  is  available  to ecommerce operator pertaining to income from 

 activities given under Points 1, 2.1 and 3

No

No

Yes

Yes

Notes –

  1. When equalization levy is not applicable under section 165/165A of the Finance Act, 2016, income of e-commerce operator shall be calculated under normal provisions of the Income-tax Act.
  2. Apart from equalization levy at the rate of 2% under section 165A of the Finance Act, 2016, Tanzon Inc. is required to deduct tax at source from the gross amount of consideration paid or payable to resident e-commerce participants. Tax is deductible by Tanzon Inc. even if it has a PE in India and the above activities are effectively connected with such PE.

 

Q-87: Explain the core reasons for difference between the e-commerce transactions and the traditional business transactions causing difficulty to tax the income of e-commerce transactions.

Ans:- The core reasons for difference between e-commerce transactions and traditional business transactions causing difficulty to tax the income from e-commerce transactions under the Income- tax Act, 1961 are absence of national boundaries, no requirement of physical presence of goods and no requirement of physical delivery (in certain cases). Since ecommerce transactions are completed in cyberspace, it is often not clear as to the place where the transaction is effected, thereby causing difficulty in implementing source rule taxation.

 

Q-88: “In addition to allocating the taxing rights and elimination of double taxation, there are various other important considerations while entering into tax treaty”. Elucidate.

Ans:- In addition to allocating the taxing rights and elimination of double taxation, there are various other important considerations while entering into a tax treaty, as mentioned below:

  • Ensuring non-discrimination between residents and non-residents
  • Resolution of disputes arising on account of different interpretation of tax treaty by the treaty partner.
  • Providing assistance in the collection of the fair and legitimate share of tax.

Further, in addition to above, there are some other principles which must be considered by countries in their tax system –

(i) Equity and fairness: Same income earned by different taxpayers must be taxed at the same rate regard less of the source of income.

(ii) Neutrality and efficiency: Neutrality factor provides that economic processes should not be affected by external factors such as taxation. Neutrality is two-fold.

(a) Capital export neutrality and

(b) Capital import neutrality (CIN).

Capital export neutrality (CEN) provides that business decision must not be affected by tax factors between the country of residence and the target country; whereas CIN provides that the level of tax imposed on non-residents as well as the residents must be similar.

(iii) Promotion of mutual economic relation, trade and investment: In some cases, it is observed that avoidance of double taxation is not the only objective. The other objective may be to give impetus to a country’s overall economic growth and development.

 

Q-89: What do you mean by double taxation? Discuss the connecting factors which lead to Double taxation.

Ans:- The taxability of a foreign entity in any country depends upon two distinct factors, namely, whether it is doing business with that country or in that country. Internationally, the term used to determine the jurisdiction for taxation is “connecting factors”. There are two types of connecting factors, namely, “Residence” and “Source”. It means a company can be subject to tax either on its residence link or its source link with a country. Broadly, if a company is doing business with another country (i.e. host/source country), then it would be subject to tax in its home country alone, based on its residence link. However, if a company is doing business in a host/source country, then, besides being taxed in the home country on the basis of its residence link, it will also be taxed in the host country on the basis of its source link.

  • Jurisdictional double taxation: Accordingly, when source rules overlap, double taxation may arise i.e. tax is imposed by two or more countries as per their domestic laws in respect of the same transaction, income arises or is deemed to arise. in their respective jurisdictions. This is known as “jurisdictional double taxation”.

In order to avoid such double taxation, a company can invoke provisions of Double Taxation Avoidance Agreements (DTAAs) (also known as Tax Treaty or Double Taxation Convention– DTC) with the host/source country, or in the absence of such an agreement, an Indian company can invoke provisions of section 91 of the Income-tax Act, 1961, providing unilateral relief in the event of double taxation.

  • Economic double taxation: ‘Economic double taxation’ happens when the same transaction, item of income or capital is taxed in two or more states but in hands of different person (because of lack of subject identity)

 

Q-90: What are the Extrinsic Aids to interpretation of a tax treaty?

Ans:- A wide range of extrinsic material is permitted to be used in interpretation of tax treaties. According to Article 32 of the Vienna Convention the supplementary means of interpretation include the preparatory work of the treaty and the circumstances of its conclusion.

According to Prof. Starke one may resort to following extrinsic aids to interpret a tax treaty provided that clear words are not thereby contradicted:

  1. Interpretative Protocols, Resolutions and Committee Reports, setting out agreed interpretations;
  2. A subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions [Art. 31(3) of the VCLT];
  3. Subsequent conduct of the state parties, as evidence of the intention of the par ties and their conception of the treaty;
  4. Other treaties, in pari materia (i.e., relating to the same subject matter), in case of doubt.

Provisions in Parallel Tax Treaties:

If the language used in two tax treaties (say treaties: X and Y) are same and one treaty is more elaborative or clear in its meaning (say treaty X) can one rely on the interpretation/explanations provided in a treaty X while applying provisions of a treaty Y?

However, the views of the Indian Judiciary are not consistent in this respect. There are contradictory judgments by Indian courts/tribunal in this regard.

 

International Articles/Essays/Reports:

International Article/Essays/Reports are referred as extrinsic aid for interpretation of tax treaties. Like, in case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), the High Court obtained “useful material” through international articles.

 

Cahiers published by International Fiscal Association (IFA), Netherlands:

“Cahiers de Droit Fiscal International” is the main publication of the IFA, which is published annually and deals with two major topics each year. Cahiers were relied upon in case of Azadi Bachao Andolan’s (supra) case by the SC.

 

Protocol:

Protocol is like a supplement to the treaty. In many treaties, in order to put certain matters beyond doubt, there is a protocol annexed at the end of the treaty, which clarifies borderline issues.

A protocol is an integral part of a tax treaty and has the same binding force as the main clauses therein.

Protocol to the India-US tax treaty provides many examples to elucidate the meaning of the term “make available”. Protocol to India France treaty contains the Most Favoured Nation Clause. Thus, one must refer to protocol before arriving at any final conclusion in respect of any tax treaty provision.

Preamble:

Preamble to a tax treaty could guide in interpretation of a tax treaty. In case of Azadi Bachao Andolan, the Apex Court observed that ‘the preamble to the Indo-Mauritius Double Tax Avoidance Convention (DTAC) recites that it is for the ‘encouragement of mutual trade and investment’ and this aspect of the matter cannot be lost sight of while interpreting the treaty’.

These observations are very significant whereby the Apex Court has upheld ‘economic considerations’ as one of the objectives of a Tax Treaty.

Mutual Agreement Procedure [MAP]:

MAP helps to interpret any ambiguous term/provision through bilateral negotiations. MAP is more authentic than other aids as officials of both countries are in possession of materials/documents exchanged at the time of signing the tax treaty which would clearly indicate the object or purpose of a particular provision. Successful MAPs also serve as precedence in case of subsequent applications.

 

Q-91: What are the ways in which hybrid mismatch arrangements are used to achieve unintended double non-taxation or long-term tax deferral?

Ans:- Hybrid mismatch arrangements are sometimes used to achieve unintended double non- taxation or long-term tax deferral in one or more of the following ways -

  1. Creation of two deductions for a single borrowal;
  2. Generation of deductions without corresponding income inclusions;
  3. Misuse of foreign tax credit; and
  4. Participation exemption regimes.

 

Q-92: Discuss the provision incorporated in the Income-tax Act, 1961 in line with the OECD recommendations under Action Plan 4 of BEPS.

Ans:- In line with the recommendations of OECD BEPS Action Plan 4, new section 94B has been inserted in the Income-tax Act, 1961, to provide a cap on the interest expense that can be claimed by an entity to its associated enterprise. The total interest paid in excess of 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise for that previous year, whichever is less, shall not be deductible.

The provision is applicable to an Indian company, or a permanent establishment of a foreign company, being the borrower, who pays interest in respect of any form of debt issued by a non- resident who is an 'associated enterprise' of the borrower. Further, the debt is deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender, being a non-associated enterprise, or deposits a corresponding and matching amount of funds with such lender.

Nothing contained in sub-section (1) shall apply to interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident, being a person engaged in the business of banking.

The provision allows for carry forward of disallowed interest expense for 8 assessment years immediately succeeding the assessment year for which the disallowance is first made and deduction against the income computed under the head "Profits and gains of business or profession” to the extent of maximum allowable interest expenditure.

In order to target only large interest payments, it provides for a threshold of interest expenditure of Rs. 1 crore in respect of any debt issued by a non-resident, being an associated enterprise, exceeding which the provision would be applicable. Banks and Insurance business are excluded from the ambit of the said provisions keeping in view of special nature of these businesses.

 

Q-93: What are the significant OECD Recommendations under Action Plan 1 of BEPS? Which recommendation has been adopted in Indian tax laws?

Ans:- The OECD has recommended several options to tackle the direct tax challenges which include :

  1. Modifying the existing Permanent Establishment (PE) rule to provide that whether an enterprise engaged in fully de-materialized digital activities would constitute a PE, if it maintained a significant digital presence in another country's economy.
  2. A virtual fixed place of business PE in the concept of PE i.e., creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website.
  3. Imposition of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.

Taking into consideration the potential of new digital economy and the rapidly evolving nature of business operations, it becomes necessary to address the challenges in terms of taxation of such digital transactions.

In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled "Equalisation Levy", provides for an equalisation levy of 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.

Meaning of “Specified Service”:

  1. Online advertisement;
  2. Any provision for digital advertising space or any other facility or service for the purpose of online advertisement;

Specified Service also includes any other service as may be notified by the Central Government.

Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy shall be made if the aggregate amount of consideration for specified services received or receivable by a non-resident from a person resident in India or from a non-resident having a permanent establishment in India does not exceed Rs. 1 lakh in any previous year.

Note: The Finance Act, 2018 has amended section 9(1)(i) to provide that significant economic presence would also constitute business connection from A.Y.2019-20.

However, this provision is extended t o AY 2022 - 23 and hence applicable in PY 2021-22 .

 

Q-94: Explain the nexus approach recommended by OECD in BEPS Action Plan 5 which has been adopted in the Income-tax Act, 1961.

Ans:- In India, the Finance Act, 2016 has introduced a concessional taxation regime for royalty income from patents for the purpose of promoting indigenous research and development and making India a global hub for research and development. The purpose of the concessional taxation regime is to encourage entities to retain and commercialise existing patents and for developing new innovative patented products. Further, this beneficial taxation regime will incentivise entities to locate the high-value jobs associated with the development, manufacture and exploitation of patents in India.

The nexus approach has been recommended by the OECD under BEPS Action Plan 5. This approach requires attribution and taxation of income arising from exploitation of Intellectual property (IP) in the jurisdiction where substantial research and development (R & D) activities are undertaken instead of the jurisdiction of legal ownership. Accordingly, new section 115BBF has been inserted in the Income-tax Act, 1961 to provide that where the total income of the eligible assessee (being a person resident in India who is the true and first inventor of the invention and whose name is entered in the patent register as the patentee in accordance with the Patents Act, 1970 and includes every such person, being the true and the first inventor of the invention, where more than one person is registered as patentee under Patents Act, 1970 in respect of that patent.) includes any income by way of royalty in respect of a patent developed and registered in India, then such royalty shall be taxable at the rate of 10% (plus applicable surcharge and cess). For this purpose, developed means atleast 75% of the expenditure should be incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970.

 

Q-95: Explain briefly the significant differences between the UN and OECD Model Tax Convention.

Ans:- OECD Model is essentially a model treaty between two developed nations whereas UN Model is a model convention between a developed country and a developing country.

Further, OECD Model advocates the residence principle, i.e., it lays emphasis on the right of state of residence to tax the income, whereas the UN Model is a compromise between the source principle and residence principle, giving more weight to the source principle as against the residence principle.

 

Q-96: When does it become necessary to apply the tie-breaker rule? Discuss the manner of application of the tie-breaker rule.

Ans:- Every jurisdiction, in its domestic tax law, prescribes the mechanism to determine residential status of a person. If a person is considered to be resident of both the Contracting States, relief should be sought from Article 4 of the Tax Treaty. A series of tie -breaker rules are provided in Paragraph 2 Article 4 of Model Convention to determine single state of residence for an individual.

The tie-breaker rule would be applied in the following manner:

(i) The first test is based on where the individual has a permanent home. Permanent home would mean a dwelling place available to him at all times continuously and not occasionally and includes place taken on rent for a prolonged period of time. Any place taken for a short duration of stay or for temporary purpose, may be for reasons such as short business travel, or a short holiday etc. is not regarded as a permanent home.

(ii) If that test is inconclusive for the reason that the individual has permanent home available to him in both Contracting States, he will be considered a resident of the Contracting State where his personal and economic relations are closer, in other words, the place where lies his centre of vital interests. Thus, preference is given to family and social relations, occupation, place of business, place of administration of his properties, political, cultural and other activities of the individual.

(iii) Paragraph (ii) establishes a secondary criterion for two quite distinct and different situations:

  • The case where the individual has a permanent home available to him in both Contracting States and it is not possible to determine in which one he has his centre of vital interests;
  • The case where the individual has a permanent home available to him in neither Contracting State.

In the aforesaid scenarios, preference is given to the Contracting State where the individual has an habitual abode.

(iv) If the individual has habitual abode in both Contracting States or in neither of them, he shall be treated as a resident of the Contracting State of which he is a national.

(v) If the individual is a national of both or neither of the Contracting States, the matter is left to be considered by the competent authorities of the respective Contracting States.

 

Q-97: Explain the meaning of “interest” and “fees for technical services” under the UN Model Convention.
Ans:- As per Article 11 of the UN Model Convention, “Interest” essentially means income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment are not regarded as interest for the purpose of this Article.

As per Article 12A of the UN Model Convention, “Fees for technical services” is defined as payments for managerial, technical or consultancy services but excludes payment to an employee, payment for teaching in an educational institution or for teaching by an educational institution, payments by an individual for services for personal use.

 

Q-98: State the conditions, if any, to be satisfied by an assessee in order to get relief under section 273A(4) regarding the waiver of penalty. Can the Commissioner refuse to grant relief, when the conditions laid down in the section was complied with, by the ass essee?

Ans:- There are two conditions to be satisfied by an assessee in order to get relief in the form of a waiver or reduction of penalty by the Commissioner of Income-tax under section 273A(4) of the Act. These conditions are:

(i) The payment of penalty would cause "genuine hardship" to the assessee and the Commissioner is satisfied about the existence of genuine hardship having regard to the circumstances of the case. The existence of genuine hardship would entitle the assessee to relief. The CBDT in its Circular No 784 dated 22-11-1999 has clarified that “genuine hardship” referred to in the provisions of section 273A(4) should exist both at the time at which the application under section 273A(4) is made by the assessee before the Commissioner and at the time of passing of order under section 273A(4) by the Commissioner.

(ii) The assessee has co-operated in any enquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

As per the decision of Andhra Pradesh High Court in K.S.N. Murthy v. Chairman, CBDT (2001), if the above conditions laid down for exercise of the discretion are satisfied, the Principal Commissioner or Commissioner cannot refuse to exercise the discretion. Though the power given to the Commissioner under section 273A is discretionary, the exercise of discretion cannot be either arbitrary or capricious and has to be judicious and objective, once the conditions required for exercise of discretion in any judicial or quasi-judicial proceedings are satisfied. Such discretion must be exercised taking into consideration all relevant facts. The satisfaction for exercise of discretionary power under the section must be based on objective consideration and not on subjective satisfaction.

Also, as per the proviso to section 273A(4), in case the quantum of penalty exceeds Rs. 1 lakh, the Principal Commissioner or Commissioner can grant relief only with the previous approval of the Principal Chief Commissioner or Chief Commissioner or the Principal Director General or Director General, as the case may be.

Note - The Principal Commissioner or Commissioner has to pass an order under section 273A(4), either accepting or rejecting the application in full or in part, within a period of 12 months from the end of the month in which the application is received. Further, no order rejecting the application, either in full or in part, shall be passed unless the assessee has been given an opportunity of being heard.

 

Q-99: GVB Charitable Trust engaged in the activities of running a charitable hospital and medical college since 8 years, has been merged with a Corporate hospital on 31st March, 2022. The said Corporate Hospital is not eligible for registration under section 12AB of the Act. The position of assets and liabilities of the Charitable trust as on the date of merger are furnished as under:

Properties and Assets:

Rs.

(a) Shares and securities held by Trust acquired out of agricultural income

exempt u/s 10(1) of the Act:

25 lakhs

(b) Book value of Quoted shares and securities:

35 lakhs 

Market value (Average of lowest and highest price of such shares as on date of

merger quoted on recognized stock exchange)

40 lakhs

(c) Book value of Land and Building held by Trust:

60 lakhs

Value of Immovable Properties (Land & Buildings) as per valuation report from  

Registered Valuer:

40 lakhs

Stamp Duty value

38 lakhs 

The Trust was created on 1st January, 2013 and obtained registration under

section 12AA on 31st March, 2013.

 

(d) The Trust holds 40% of  equity shares in an unlisted company and the

financial position of said unlisted company as on date of merger is as under:

Rs.

Book value of assets (other than immovable property)

25 lakhs

Fair Market value of Immovable Property

45 lakhs

Reserves and Surplus

15 lakhs

Provision for taxation

5 lakhs

Total amount of Paid-up Equity Share Capital

25 lakhs

B: Liabilities:

(a) Liability in respect of shares and securities (unlisted)

8 lakhs

(b) Bank Liability in respect of quoted shares and securities

 15 lakhs 

(c) Advance Tax paid

12 lakhs

Compute the tax liability, if any, of Charitable Trust, arising out of above merger, giving explanation for treatment of each item in the context of relevant provisions contained in the Act. Assume that the trust has no tax liability in respect of other activities undertaken during previous year 2021-22.

Ans:- Computation of exit tax payable by GVB Charitable Trust

As per section 115TD, the accreted income of “GVB Charitable Trust”, registered u/s 12AB, would be chargeable to tax at maximum marginal rate @ 34.944% [30% plus surcharge@ 12% plus cess@4%] on its merger with another entity not registered u/s 12AB.

     Particulars

 Amount (Rs.) 

Aggregate FMV of total assets as on 31.3.2022, being the specified date

(date of merger) [See Working Note 1]

1,08,00,000

Less: Total liability computed in accordance with the prescribed method of

valuation [See Working Note 2]

23,00,000

Accreted Income

85,00,000

Tax Liability@34.944% of Rs. 85,00,000

29,70,240

Working Note 1

 

Aggregate fair market value of total assets on the specified date

 

Share and securities held by the trust, which are acquired out of agricultural

income exempt u/s 10(1) shall be ignored by virtue of proviso to section 115TD(2).

Nil

Quoted shares and securities

40,00,000

[The fair market value of quoted shares would be average of the lowest and highest price of

such shares quoted on the recognized stock exchange on the specified date i.e.,31.3.2022]

 

Land and building, being immovable property

40,00,000

The fair market value of land and building would be higher of Rs. 40,00,000 i.e., price that

it would ordinarily fetch if sold in the open market as per registered valuer’s certificate and

Rs. 38,00,000, being stamp duty value as on the specified date i.e., 31.3.2022]

 

Equity shares in an unlisted company:

 

Book value of assets (other than immovable property)

25,00,000

 

Fair market value of immovable property

45,00,000

 

 

70,00,000

 

Less: Book value of liabilities in the balance sheet:

 

 

[Provision for taxation not to be included in the liabilities; total amount of paid up share

 capital and reserves and surplus would also not be included in liabilities]

Nil

 

 

70,00,000

 

 Value of unlisted shares held by GVB Charitable trust 

 [70,00,000 × 40%]

     28,00,000
   

 1,08,00,000

 

Working Note 2

Particulars

Amount (in Rs.)

Total liability

 

Liability in respect of unlisted shares and securities

8,00,000

Bank liability in respect of quoted shares and securities

15,00,000

Total liability of Charitable Trust

23,00,000

 

Q-100: Following are the details of income provided by Mr. Singh, the assessee for the financial year ended 31st March, 2022:

  1. Rental income from property at Bangalore - Rs. 3 lakhs, Standard Rent - Rs. 2,50,000, Fair Rent - Rs. 2,80,000.
  2. Municipal and water tax paid during 2021-22: Current year Rs. 35,000, Arrears - Rs. 1,50,000.
  3. Interest on loan borrowed towards major repairs to the property: Rs. 1,50,000.
  4. Arrears of rent of Rs. 30,000 received during the year, which was not charged to tax in earlier years.

Further, the assessee furnished following additional information regarding sale of property at Chennai:

  1. Mr. Singh's father acquired a residential house in April 2006 for Rs. 1,25,000 and thereafter gifted this property to the assessee, Mr. Singh on 1st March, 2007.
  2. The property, so gifted, was sold by Mr. Singh on 10th June 2021. The consideration received was Rs. 25,00,000.
  3. Stamp duty charges paid by the purchaser at the time of registration @ 13% (as per statutory guidelines) was Rs. 3,90,000.
  4. Out of the sale consideration received:

a) On 02/01/2022, the assessee had purchased two adjacent flats, in the same building, and made suitable modification to make it as one unit. The investment was made by separate sale deeds, amount being Rs. 8,00,000 and Rs. 7,00,000, respectively.

b) On 10/l0/2021, Rs. 10 lakhs was invested in bonds issued by National Highways Authority of India, but the allotment of the bonds was made on 1.2.2022.

Compute Mr. Singh's taxable income for assessment year 2022-23. Cost inflation index: F.Y. 2006-07: 122; F.Y. 2021-22: 317

Ans:- Computation of taxable income of Mr. Singh for A.Y.2022-23

Particulars

Rs.

Rs.

Income from house property

 

 

Gross Annual Value [Higher of Expected

Rent & Actual Rent]

 

 3,00,000

Expected Rent (lower of Fair Rent and Standard Rent)

 2,50,000  

 

Actual Rent

3,00,000

 

Less: Municipal  taxes  paid  by     Mr. Singh during the year

(including arrears) [Rs. 35,000 + Rs.1,50,000]

 

 1,85,000   

Net Annual Value (NAV)

 

 1,15,000

Less: Deductions under section 24

 

 

(a) 30% of NAV

34,500

 

(b) Interest on loan borrowed for major repairs

1,50,000

1,84,500

 

 

(69,500)

Arrears of rent taxable under section 25A

30,000

 

Less: Deduction@30%

9,000

21,000

 

 

(48,500)

Capital Gains

 

 

Full value of consideration

 

 30,00,000 

As per section 50C, the full value of consideration would be

the higher of -

 

 

Actual Consideration

25,00,000

 

Stamp Duty Value [Rs. 3,90,000/13%]

30,00,000

 

Since stamp duty value > 110% of actual consideration

 

 

Less: Indexed cost of acquisition [Rs. 1,25,000 × 317/122]

 

 

As per section 49(1), cost of acquisition of the

residential house gifted by Mr. Singh’s father to

Mr. Singh would be the cost for which Mr. Singh’s

father acquired the asset

 

3,24,795

 

 

26,75,205

Less:  Exemption  under  section  54  (Rs.  8,00,000  +  Rs. 

7,00,000)

 

 

Purchase of residential house within the stipulated time

(within one year before or two years after the date of sale)

[Where the flats are situated side by side and the builder

had effected the necessary modification

to make it as one house, the assessee would be entitled

to exemption under section 54 in respect

of investment in both the flats, despite the fact that they 

were purchased by separate sale deeds] [CIT v.

Ananda Basappa (2009) (Kar.)]

15,00,000 

 

 Note: Since two adjacent flats are treated as one residential

house, Mr. Singh can defer availing exemption under section

54 in respect of two residential houses (where capital gains

does not exceed Rs. 2 crores) to a later assessment year.

 

 

Exemption under section 54EC

 

 

Investment in bonds of NHAI within six months from the

date of transfer. Where the payment for bonds has been

made within the six month period, exemption under section

54EC would be available even if the allotment of bonds was

made after the expiry of the six months

[Hindustan Unilever Ltd. v.

DCIT (2010) (Bom.)]

10,00,000 

 25,00,000

Long-term capital gains

 

1,75,205

Total Income

 

1,26,705