CA Final – Group II : Direct Tax Laws – November 2009
This Paper has 23 answerable questions with 0 answered.
Total No. of Questions — 7] [Total No. of Printed Pages — 3
Time Allowed : 3 Hours Maximum Marks : 100
Answer all questions
1. (a) The net profit of ABC Ltd. for the year ending 31.03.2009 amounted to Rs.7,22,000 after debiting/crediting following items:
(i) Payment of interest on money borrowed from bank for purchase of land and building Rs.2,22,000.
(ii) Commission Rs.1,00,000 paid in the month of February, 2009 and Rs.1,25,000 paid in March, 2009. Tax deducted at source from the payments was deposited to the Government on 20.09.2009.
(iii) Travelling expenses of Rs.90,000 on a foreign tour of a director for negotiating collaboration with a foreign manufacturer for initiation of new line of business.
(iv) Securities transaction tax paid Rs.10,000. Income from trading in shares already credited to profit and loss account Rs.3,82,000.
(v) As part of the restructuring of its debt, the company has converted arrears of interest of Rs.3,00,000 on term loan into a new term loan with a revised repayment schedule.
The company has paid Rs.50,000 towards such funded interest during the year. Entire Rs.3,00,000 has been debited to profit and loss account. However, out of this, a further sum of Rs.50,000 was paid before the due date of filing of return.
(vi) Rs.5,00,000, being contribution to S Ltd. (wholly owned subsidiary company) for construction of a school for the benefit of its employees.
(vii) Provision for gratuity based on actuarial valuation Rs.6,00,000. Actual gratuity paid Rs.1,50,000 was debited to provision for gratuity account.
(1) Provision for bonus for the year 2007–08 paid on 15.11.2008 Rs.98,000. It is inclusive of payment by bearer cheque of Rs.34,000.
(2) The company has purchased a commercial vehicle of Rs.8,00,000 for the purpose of business on 21.03.2009 and calculated depreciation@15% for the full year. Depreciation debited to the profit and loss account is calculated on all other assets as per the rates prescribed in the Income–tax Act.
(3) The company collected Rs.3,00,000 from its customers towards sales tax in the year 1996–97 and remitted it to the State Government in due time. On the levy being challenged in the High Court, the Court held the levy as illegal and the State Government refunded the amount to the company in February, 2009. The company refunded Rs.2,00,000 to the customers and the remaining amount of Rs.1,00,000 was shown under the head “current liabilities”.
Compute the income chargeable to tax in assessment year 2009–10 and work out the amount of tax payable on such income, ignoring the provisions of section 115JB.
(b) Kalpesh Kumar is a musician deriving income of Rs.75,000 from concerts performed outside India. Tax of Rs.10,000 was deducted at source in the country where the concerts were performed. India does not have any double tax avoidance agreement with that country. His income in India amounted to Rs.2,25,000. Compute tax liability of Kalpesh Kumar for the assessment year 2009–10 assuming he has deposited Rs.10,000 in Public Provident Fund and paid medical insurance premium in respect of his father Rs.20,000. 5 (0)
2. (a) Yaman Limited is a company in which 60% shares are held by Piloo Limited. Yaman Limited declared a dividend amounting to Rs.35 lacs to its shareholders for the financial year 2007–08 in its Annual General Meeting held on 10th May, 2008. Dividend distribution tax was paid by Yaman Limited on 15th May, 2008. Piloo Limited declared an interim dividend amounting to Rs.50 lacs on 15th October, 2008 for the year ended 31st March, 2009.
Compute the amount of tax on dividend payable by Piloo Limited.
What would be your answer, if 58% shares of Piloo Limited are held by Kafi Limited, an Indian company?
Does the position change further, if Kafi Limited is a foreign company?
(b) Does the Assessing Officer have power to make any adjustment to income disclosed by the assessee in the return of income in course of processing the return under section 143(1)? 5 (0)
(c) Mahanadi Limited has taken a 3,000 sq. ft. flat on rent from Yamuna Limited to set up its Branch Office. The rent payable to Yamuna Limited for the flat is Rs.60,000 per month plus applicable service tax. Mahanadi Limited wishes to know whether tax is required to be deducted at source under section 194–I from gross amount of rent including service tax. Give your advice. 3 (0)
3. (a) Ishwar is a commission agent receiving commission from his principal. He collected certain amount as deposit towards sales tax and showed the amount so received under the head “Contingency deposit” in the Balance Sheet. He did not deposit the amount to the Government. The Assessing Officer invoked section 43B and added back the said amount to the business income of Ishwar. Examine the correctness of the action of the Assessing Officer. 4 (0)
(b) 3 Star & Company, a partnership firm, entered into a contract to purchase an immovable property. The agreement was not honoured by the seller. Therefore, the firm filed a suit for specific performance of contract against the owner of the property. Ultimately, a compromise was arrived at. In terms of the compromise, the owner agreed to pay 3–Star & Company Rs.15 lacs as consideration. State with reasons whether the receipt should be treated to be in the nature of capital gain in the hands of the firm. 4 (0)
(c) (i) Can a rectification order under section 254 of the Income–tax Act be passed by the Income–tax Appellate Tribunal beyond four years from the date of the order sought to be revised? 3 (0)
(ii) Sumit voluntarily filed a revised return of income within the prescribed time limit after discovering that interest received from bank was not disclosed in the original return. Can he be absolved of penalty under section 271(1)(c)? 3 (0)
4. (a) The business profit of T Ltd., a tea growing and manufacturing company, is Rs.120 lakh (before deduction under section 33AB) for the assessment year 2009–10. It deposits Rs.50 lakh with NABARD for claiming deduction under section 33AB. It wants to claim set–off of brought forward business loss of Rs.40 lakh. Find out the taxable income of T Ltd. for the assessment year 2009–10. 5 (0)
(b) What do you mean by substantial question of law? 5 (0)
(c) Mr. X filed the return of A.Y.2005–06 declaring an income of Rs.3,25,000. He had been assessed under section 143(3) and the Assessing Officer made the following additions:
(i) Unexplained cash credit for want of confirmation from creditors Rs.2,00,000.
(ii) Disallowance in respect of travelling expenditure of Rs.46,000 for tour to Chennai for effecting sales there, as Mr. X failed to establish that the expenditure had been incurred for the purpose of business.
At a later stage, he has been served with a notice under section 148 for income escaping assessment in respect of A.Y. 2005–06. During the course of reassessment proceeding, the Assessing Officer sought to add unaccounted sales of Rs.4,00,000 made at Chennai.
During the course of hearing, the assessee produced confirmation from creditors and requested to delete the addition for unexplained cash credit of Rs.2,00,000 and to allow deduction of travelling expenditure of Rs.46,000. Discuss the validity of the contention raised by the assessee.
5. (a) JK Associates is an Association of Persons (AOP) consisting of two members, J and K. Shares of the members are: 60% (J) and 40%(K). Income of the AOP for the previous year 2008–09 is Rs.6 lakh.
Compute tax liability of the AOP and the members in the following situations:
(i) J and K have their income, other than income from AOP, amounting to Rs.1 lakh and Rs.1.70 lakh, respectively.
(ii) J and K’s income, other than income from AOP, amount to Rs.1 lakh and Rs.1.20 lakh, respectively.
(b) During the financial year 2008–09, Mr. A received a sum of Rs.1,80,000 (Rs.60,000 p.a.) by way of enhancement for the last three years as the Government department (tenant) enhanced the rate of rent with retrospective effect. Will the sum of Rs.1,80,000 be taxable in the assessment year 2009–10 ? Can it be spread over the last three years? 3 (0)
(c) A charitable trust derives its income from the business of providing mineral water to various companies situated in software technology park in Hyderabad. A sum of Rs.10 lakh has been derived as net income from such business activity, which has been applied for the object of general public utility. Examine the taxability of application of the income, if the income so derived relates to the previous year 2008–09. Would your answer be different, if the trust runs a school in a backward district and applies the profits from the business for such school’s activity? 5 (0)
6. (a) Specify with reason whether the following acts can be considered as (i) tax management; or (ii) tax planning; or (iii) tax evasion: 4
(i) P deposits Rs.50,000 in PPF account so as to reduce his total income from Rs.3,40,000 to Rs.2,90,000. (0)
(ii) PQR Industries Ltd. 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. (0)
(iii) SQL Ltd. maintains register of tax deduction at source effected by it to enable timely compliance. (0)
(iv) R. Ltd. issues a credit note for Rs.40,000 for brokerage payable to Suresh, who is son of R, managing director of the company. The purpose is to increase his income from Rs.1,40,000 to Rs.1,80,000 and reduce its income correspondingly. (0)
(b) Mr. Kadam is entitled to a salary of Rs.25,000 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.5,000 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”. 6 (0)
(c) I Limited, an Indian Company supplied billets to its holding company, U. Limited, UK during the previous year 2008-09. I. Limited also supplied the same product to another UK based company, V. Limited, an unrelated entity. The transactions with U. Limited are priced at Euro 500 per MT (FOB), whereas the transactions with V. Limited are priced at Euro 700 per MT (CIF). Insurance and Freight amounts to Euro 200 per MT. Compute the arm’s length price for the transaction with U. Limited. 4 (0)
7. (a) Mrs. A furnishes the following particulars for the computation of her wealth tax liability for the assessment year 2009–10:
(1) Gifts of jewellery and gold ornaments received from her mother on the occasion of her marriage aggregating Rs.5,00,000. However, the said jewellery were forcibly taken away from her by her mother-in-law after marriage.
(2) She owns two residential house properties each valuing Rs.10,00,000.
(3) She is one of the partners in the business with her husband. The value of her interest in assets of the firm as at 31st March, 2009 is Rs.12,75,500. The said business is conducted in one of the house properties owned by Mrs. A.
(4) She has two motor cars of Rs.12,50,000, one of which is imported by her for Rs.7,50,000.
(5) She has invested Rs.10,00,000 in a bank deposit for five years to meet the future expense of children on their education.
(6) Mrs. A has signed “agreement to sell” for purchase of new residential house property of Rs.20,00,000 and has made advance payment of Rs.5,00,000 on 1st March, 2009 and has taken possession. However, the sale deed has not been executed till 31st March, 2009. She has taken loan of Rs.15,00,000 from bank for purchase of said property.
(7) She has cash balance of Rs.75,000.
Compute the wealth tax payable by Mrs. A for assessment year 2009–10.
(b) Under what circumstances can the Assessing Officer make a reference to the Valuation Officer for the purpose of making an assessment under the Wealth Tax Act? 3 (