Corporate & Fiscal Planning Prof.

Suresh
Dhoot
PROBLEMS ON CORPORATE TAX BY CA SURESH DHOOT- MIMR
P 1 General- XLtd. A closely held Indian company, is engaged in the business of manufacture
of chemicals goods(Value of plant and Macinery oned by the company is !s.""la#h$. %he
folloing information for the financial year &'('-(( are gi)en*
+!,-I% A./ L,00 A11,2.%
!s.
0ale proceeds of goods (domestic sale$ &&,&3,4''
0ale proceeds of goods (e5port sale$ ",67,(''
,ther receipts
(i.e, income from sale of shares(-$!s.8','''and interst*!s.&,8',''$ &,'','''
999999999
%otal 3','','''
Less* :5penses
/epreciation 8,(7,'''
0alary and ages &,(','''
:ntertainment e5penditure (",'''
%ra)elling e5penditure 37,'''
Income-%a5 3,&','''
;ealth-ta5 <,'''
-ringe benefit ta5 8,'''
=an#ing cash transaction ta5 7,'''
/i)idend ta5 (&,'''
0ecurities transaction ta5(proof of payment not submitted $ <,'''
,utstanding custom duty (6,"''
+ro)ision for unascertained liabilities 6','''
+roposed di)idend 7','''
Loss of subsidiary company 3','''
1onsultation fess paid to a ta5 e5pert &(,'''
0alary and per>uisites of managing director (,<,''''
999999999
.et profit (",<7,"''
999999999
-or ta5 purpose the company ants to claim the folloing*
- /eduction under section <'-I=(3' per cent of !s.(",<7,"''$
- :5cise duty pertaining to &''7-'6 paid during &'('-(((amount actually paid is !s.6","''$.
/epreciation under section 3&(!s. ",37,'''$
%he company ants to set off folloing losses?alloances*
-or ta5 -or accounting
purposes purposes
!s. !s.
=rought forard loss of &''"-'7 (3,<',''' &,8','''
2nabsorbed depreciation __ (,'''
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( | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
P 2: 0:1%I,.0 <'-IA A./ <'-I=, /:/21%I,. A %he proBected profit and loss accounts of X
Ltd. and C Ltd. (;hich are under the same management$ for the pre)ious year &'('-(( are gi)en
belo*
X Ltd.
1ost of goods sold
/epreciation D(".3E on
!s.(','','''
,ther e5penses
.et profit
!s
8",'','''
(,"3,'''
&,'',3''
(7,87.6''
0ale
!s
7",'','''
7",'',''' 7",'','''

%he company has set up an industrial underta#ing in notified industrial par# and >ualified
for ('' per cent deduction section <'- IA. ;ritten don )alue of plant and Machinery for
income-ta5 purpose is !s.6,"','''.
Y Ltd.
1ost of goods sold
/epreciation D(3.4(E
on !s.(8,3','''
.et profit
!s
7(,'','''
(,4<,4(3

&8,&(,.'<6
0ale
+rofit on sale of a plot of land
(long -term capital gain
determined under section 8<$
!s
<7,'','''
(,&','''
<6,&',''' <6,&','''

Y Ltd. is not entitled to any deduction under section <'-IA. ;ritten don )alue of assets for
income ta5 purpose is !0.((,&7,'''
0uggest ta5 planning for sa)ing ta5
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P 3* %he profit and loss account of XCF Ltd, Indian public company engaged in the Manufacture
of cement and refractories (not listed in :le)enth 0chedule$, for the year ending March 3(, &'('
shoed profit !s. <(,"','''. %he company has an authorised capital of !s. " crore, of hich
capital orth !s. & crore has been issued and subscribed for and paid up. In addition, the
company has borroed !s. ( crore from I-1I payable on the e5piry of 3 years after the company
goes into production. %he company as registered in April (44& and its factory is set up in the
/istrict of Gulbarga in the Garnata#a 0tate, hich is a Hbac#ard areaI. %he machinery as
nely ac>uired and installed beteen April (44& and January &''' and after some test runs the
company commenced regular commercial production on March 3', &'''
%he shares of the company are >uoted on the =ombay and Madras 0toc# :5changes.
& | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
A scrutiny of the profit and loss account and balance sheet and other statements elicited the
folloing further information*
(. %he normal depreciation (ithout considering multiple shift or#ing$ is !s. (3,6&,"''.
%his is made up as under*
1ost?
;/V
!s
!ate of
/eprecation
(E$
Amount of
/epreciation
!s
=uilding(ne constructed$
-actory- &
nd
class
,ffice- &
nd
class
0taff >uarters -&
nd
class
Machinery in factory
-urniture K e>uipment in office
Air- conditioners, typeriters,
accounting machines K other
office machines
Motor cars and Beeps
Motor truc#s
&",'','''
(','','''
8,"','''
"','','''
",'','''
",'','''
3,33,333
",'','''
('
('
"
("
('
("
("L
("
&,"','''
(,'','''
&&,"''
6,"','''
"','''
6",'''
"','''
6",'''
%otal (3,6&,"''
%he factory or#ed double shift on (<' days during the year.
&. :5penditure incurred prior to March 3',&''' amounting to !s. (',"',''', appears as an asset
in the balance sheet. %his amount is made up as under *
!s
+reparation of proBect report ",'','''
1onducting mar#et sur)ey &,"','''
Legal charges for drafting the memorandum and articles of association,
printing the same, fess for registering the company under the 1ompanies
Act and underriting commission and bro#erage for public issue of shares 3,'','''
999999999
%,%AL (',"','''
3. %he company ac>uired the patent rights o)er the process used by it for manufacture of
refractories from another company (hich had obtained the patent in March (447 and used it for
four years$ by paying !s. 3,"',''' in April &'''. %his amount is shon as an asset in the
balance sheet.
8. %he managing director of the company as paid a remuneration of !s. 47,'''. In addition, the
company had spent !s. (",''' in pro)iding rent- free residential accommodation (unfurnished$
to him and !s. 7,''' in pro)iding a motor car e5clusi)ely for his personal use.
".%he company had gi)en a donation of !s. &',''' to the Gulbarga Municipality to be used for
any charitable purpose and this amount is debited in the +KL account.
Cou are re>uired prepare to ad)ise the company as to its ta5 liability and prepare its return of
income for the assessment year &'((-(&, indicating briefly the reasons for additions, e5clusions
and deductions to be made in computation of the gross total income and total income. Cou are
also re>uired to indicate hether any amount ill be carried forard to future assessment year
for being alloed in computing the total income those years and specify the amount or amounts
and number of years for hich these ill be so carried forard.
3 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
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P 4 : XCF Ltd proposes to construct a hospital for its or#er. %he alternati)es open to it are *
(. %o purchase building orth !s. 8' la#h, the purchase price being payable in to annual
e>ual installments.
&. %o purchase the aforesaid building but instead of paying the price in installments, an
agreement ould be entered into ith the )endor of the building to pay him (' percent of
the net profits of the company for an indefinite period of time.
3. %o 1ontribute !s. 3' la#h to the 2+ Go)ernment, hich ill construct a building on land
oned by it and allo the company to use it as a hospital for its or#ers through the
onership of the building ill )est ith the go)ernment. 1onsider each proposal in detail
and ad)ise company to enable it to ma#e the right choice.
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P : ,n April (, &'(', X and Mrs. X purchased all the shares of a pri)ate limited company. %he
company had the unabsorbed alloances? losses*
Accumulated loss 3,'','''
2nabsorbed depreciation <,'','''
2nabsorbed in)estment alloances ",'','''
0tate the effect of change of shareholders on the right of the company to carry forard the
abo)e items.
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P ! : A public sector company is proposing to enter into an agreement for transfer of technology
ith a Japanese company. %he consideration is a lump sum royalty of !s. &",'','''(net of the
Indian ta5es$. %he company ill get the necessary Go)ernment appro)al. It ants to #no the
ta5 implications and in particular hether the Indian ta5 payable by it ould be grossed up.
Ad)ice company.
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P " * X Ltd. maintaining the financial year as its pre)ious year, ent into li>uidation in April
&'(( conse>uent upon the compulsory ac>uisition of its business by the Go)ernment on March
3(, &'((. ,n March 3(, &'((, its summariMed balance sheet as under*
C#$%t#& R' A''(t' R'
8 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
+aid-up share
1apital
!eser)es and
0urplus
0undry
creditors
(,'','','''
3,'','','''
"','','''
-i5ed assets
1urrent assets
3,'','','''
(,"','','''
4)*)**)*** 4)*)**)***
%he 0hare capital consisted of (','',''' e>uity shares of !s.(' each out of hich ",'','''
e>uity shares had been issued in (44" as fully paid-up bonus shares by capitalising an e>ual
amount of reser)es created out of profits. %he reser)es and surplus account includes a capital
reser)es of !s.4",'',''' created by re)aluation of the assets in the year &''(. the profit and loss
account shos a balance of !s.",'',''' and reser)es created out of profits for the last ten years
at !s.(','',''' e)ery year. %he li>uidator got a compensation of !s ",'','',''' hich as dealt
ith as follos*
!s
(. -irst distribution to shareholders on 0eptember 3',&'(( (4,"','''
&. :5penses in forming a ne company in .o)ember &'(( 8,"','''
3. Money ta#en o)er by the ne company hich issued four shares
(-ully paid up e>uity shares if face )alue of !s.(' each$ to the 8,'','','''
0hareholders of X ltd. for each share held by them in
the last named company
8.Li>uidatorNs e5penses "','''
1onsider the effect of the transactions in the assessments of the shareholders.
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P + * X(+ Ltd. is engaged in the manufacture of engineering goods. %he profit and loss account of
the company for the year ending March 3(, &'(( shos a net profit of !s.3' la#h (before ta5$.
%he company gi)es you the folloing information.
(.0urplus on sale of building !s. & la#h has been credited to profit and loss account. %his
building as purchased on July (,&''< for !s. 8 la#h and as sold on 0eptember 3', &'(' for
!s. 7 la#h. .o depreciation as pro)ided in the boo#s of company although the same as
claimed and alloed in earlier years in the income ta5 assessments of the company D " percent.
%he building as, let out to employees of the company for their residence.
&. %he managing director has spent !s. 37,''' during his )isit to 2G and 20A. %his )isit as for
studying the mar#et for engineering goods in foreign countries but no orders could be boo#ed
during his )isit.
3. %he company has gi)en donation of !s. & la#h to scientific research association appro)ed
under section 3"(($ (ii$ and !s. (,'',''' to an appro)ed charitable trust
8. %he company has a guest house at its factory at .asi#. :5penditure on maintenance of guest
house* !s ",''' and on messing of customers )isiting the factoryO !s. ",''' ha)e been included
in miscellaneous e5penses.
" | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
". Miscellaneous income includes di)idend if !s. &4,6"' from a foreign company. %he shares in
the foreign company ere allotted in consideration of supply of technical #no-ho under a
collaboration agreement appro)ed by the central Go)ernment. /i)idend distributed for the
financial year &'('-(( is !s. 8','''.
7. %he profit and loss account has been debited ith !s. &,'',''' for depreciation hich has
been or#ed out on straight line basis. %he figures of ritten don )alue of assets as per income-
ta5 records and rates of depreciation are gi)en belo
%he factory or#ed for 3'' days in first shift and for &'' days in second shift.
6. %he company has set up a ne industrial underta#ing at .asi# for production of engineering
goods. %his unit started production on July(, &''6 and or#ed on single shift basis. -or this
purpose, fresh capital of !s.(' la#h as called from members and their relati)es. %he company
has spent !s. (',''' for the purpose of setting up this ne unit (the e5penditure as incurred
before April (, &''8$. %his e5penditure has not been debited to profit and loss account but
appears in the balance sheet under the head H+reliminary e5pensesI. ,ther particulars about this
unit are as underO
1ost of ne building constructed during &''8* !s. & la#h.
1ost of ne machinery installed during &''8* !s. (' la#h
1apital employed in the unit after adBustment liabilitiesO !s.(& la#h.
+rofit of the unit during &'('-((* !s. &,'',''' %his is included in the figure of net profit as per
profit and loss account.
.o separate boo#s are maintained for this unit*
<. %he company earns a short-term capital gain of !s. 8,8','''.
4. %he company has suffered losses in earlier years. %he figures of losses and unabsorbed
depreciation of earlier years as per income-ta5 assessment areas under*
7 | + a g e
ASSETS ,D-
A$.%& 1)2*1*
/R'. I0 &#123
R#t( 45
D($.(6%#t%40
/%0 $(.6(0t#7(3
=uilding(e5cluding the building let out to
employees and sold during the year$
Machinery
Motor cars
-urniture
<
('
(
(
"
&"
&"
('
2**"-*+
R'. L#12
2**+-*8
R'. L#12
2**8-1*
R'. L#12
2*1*-11
R'. L#12
Long-term capital loss on sale of
land
0hort-term capital loss
=usiness loss
2nabsorbed depreciation(for ta5
purposes$
2nabsorbed depreciation(for
accounting purposes$
'.<(
----
&.''
3."'
'.6'
-----
3.''
(.''
6."'
'.3'
(.77"
----
3.''
----
'.'"
----
----
8.''
----
'.('
Corporate & Fiscal Planning Prof. Suresh
Dhoot
Cou are re>uired toO
a. compute the total income 'f the company,
b. state hether any part of the abo)e di)idend ill be e5empt in the hands of the
shareholders and if so , ho part,
c. gi)e your reasons, in brief, for any adBustments that you may ma#e in your
computations.
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P 8: +rofit and loss account of X ltd. a public limited company, discloses a net profit of !s.7 la#h
for the year ending March 3(, &'((.from scrutiny of records the folloing position emerged*
(. ;or#men and staff elfare e5penditure debited in profit and loss account includes of sum of
!s. "',''' being the cost of construction of a primary school e5clusi)ely for the benefit of
children of employees.
&. A sum of !s. &',''' as debited in profit and loss account, being penalty by ay of ( percent
reduction in selling price imposed by the purchaser for non-fulfilment of deli)ery conditions of
contract of sale due to factors beyond the control of the company.
3. General manager as paid a monthly salary of !s. <,"'' and as pro)ided ith per>uisite of
the total )alue of !s. &',''' during the pre)ious year.
8. -oreign technician (appointment appro)ed by the central Go)ernment$ co)ered under section
('(7$()iia$ ho has come for the first time for production of sophisticated products of the
company, as paid salary of !s.(."' la#h and per>uisites !s.&7''' per annum.
". Guest house e5penses of !s. 8',''' as debited to profit and loss account.
7. Interest account includes payment of !s. &"''' in respect of funds borroed separately for
ac>uisition of machinery
6.1ompany recei)ed remuneration of !s.( la#h for supply of #no-ho in the installation of
machinery in pursuance of an agreement appro)ed by the board from a foreign enterprise.
<.Managing director incurred e5penses on his foreign tour for promotion of sales outside India
!s. 7',''' debited to profit and loss account.
4./uring the year one machinery(rate of depreciation * (" percent$ as sold for !s. &&,'''. its
original cost and ritten don )alue of income ta5 basis as on April (, &'(' ere !s. 3',''' and
!s. &,''' respecti)ely and the surplus as credited to capital reser)e account.
1ompute the ta5able income of the company for the assessment year &'((-(& after ta#ing the
folloing into account*
(. /epreciation in all assets including all additions made during the year on straight line
basis charged to profit and loss account amounted to !s. &la#h.
&. /eprecated )alue of assets on April (,&'(' is as follos * +lant and Machinery * !s.
&','',''' (rate of depreciation * (" percent$, building * Is.7,'",''' (rate of depreciation*
(' percent$.
3. +lant and Machinery additions during the year amounted to !s. <','''(assume normal
depreciation at (" percent on 3 shifts or#ing, date of installation* April (',&'('$
8. +lant and Machinery (solar poer generating system$ additions during the year amounted
to !s.(.&'la#h (assume normal depreciation at ('' per cent and 3 shifts or#ing, date of
installation* April (', &'('$
Indicate the reasons for the particular treatment gi)en by you to the different times.
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P 1* : XCF Ltd. furnishes the folloing particulars. 1ompute the total ta5able income of the
company for the Assessment year &'((-(& (Accounting year ended on 3( March, &'(($
6 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
!s (in la#h$
(. .et income hich includes penal interest of !s. 3(,''' paid for
delayed payment of sales ta5 and interest of !s.& la#h paid on fi5ed deposits
from public subBect to the folloing adBustments
/epreciation hich includes !s '."' La#h for guest house building 3(.38
2nabsorbed depreciation of the assessment year &''7-'6 (.7"
2nabsorbed business loss brought forard 6.3"
&. 0hort-term capital gain on sale of shares (trade in)estment$ &8.8<
3. Long-term capital gain on sale of e>uity shares on May (', &'(' '.44
(1omputed under section 8<$
8. =rought forard short-term capital loss &."&
". =rought forard long-term capital loss of the assessment year '.8"
&''6-'< on sale of shares
7.Gross interest from Go)ernment securities (.&6
6. =an# commission, etc, for realising interest '.'6
P 11 : :ngineering 0er)ices Ltd., an Indian company, ha)ing acted as the agents of a corporation
established in 20A earned commission of !s.<,"',''' for effecting sales in India, of the goods
manufactured by the American concern. %he amount as credited to the Indian companyNs
account in America ith the permission of the !eser)e =an# of India. %he pre)ailing rate if
e5change being P ( @ !s. 8(."' the sum credited in dollars amounted to P (,'','''. %he Indian
company retained the money in America for the time being as it as planning to ac>uire certain
ne plant and machinery from another American 1ompany for use in its on manufacturing
acti)ities. %he total cost as estimated to be P ",'',''' and ith the permission of the !eser)e
=an# ,f India a further sum of !s. (,76,&',''' e>ui)alent to P 8,'',''' at the then pre)ailing
e5change rate of P ( @ !s. 8(.<' as remitted by :ngineering 0er)ices Ltd. to America. %he
deal, hoe)er, did not ultimately materialise and the entire sum as brought bac# to India by the
company. At the time of remittance the pre)ailing rate of e5change as P (@ !s. 83.'' and thus,
as much as !s. &,(",'',''' as recei)ed in remittance. %he company ants to #no ho the
surplus realised by it should be treated for purposes of the income-ta5 Act /iscuss fully all the
aspects as to hether there can be a charge as a re)enue profit and? or capital gains.
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P 12 : An Indian company proposes to supply to a foreign concern to #no-ho for construction
of spans of bridges. %he foreign concern situated in the Middle :ast is to construct the spans of
bridges by utilising such #no-ho, but thereafter the tas# of actual building of the bridges in the
Middle :ast country is to be underta#en by the Indian company. -or the supply of #no-ho the
Indian company is to recei)e !s."' la#h in foreign e5change and for the construction of the
bridges another sum of !s.& crore in foreign e5change. %he company ants to #no the benefits
in Indian income-ta5 if any, it may be entitled to in its assessments and also hat formalities it
must obser)e in order to obtain those /iscuss
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P 13: ,n receipt of assessment order for the assessment year &'('-(( of X ltd, the chief
accountant of that company finds that the folloing deductions claimed by it in the return of total
income ha)e not been alloed*
< | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
(. :5penditure of !s.(",''' incurred on accommodation maintained, at the place here the
factory is located, for the directors and other employees of the company, ho )isit the factory for
the purposes of the companyNs business.
&. A sum of !s.(6,"'' incurred for lunch at a fi)e-star hotel here se)en representati)es of a
prominent ra material supplier ere ta#en for lunch and the purchase manager of the assessee
had accompanied them.
3. :5port mar#ets de)elopment alloance on a sum of !s.(<,''' spent by it in connection ith a
party gi)en to the o)erseas buyers of its products.
8. 1laimed for deduction of a sum of rs.8,"',''' being the amount of liability for gratuity fir the
calendar year (44" calculated on actuarial basis for hich no pro)ision as made in the boo#s of
account. %he company does not maintain any gratuity fund. It maintain its account in mercantile
basis. 0o far as gratuity liability is concerned, it has made pro)ision for the same in the boo#s of
account for the pre)ious year ended March 3(, &''7. %hereafter it stopped ma#ing pro)ision for
gratuity liability in the boo#s of account. Qoe)er, actual payments are debited to the profit and
loss account.
". :5penditure of !s.(',''' incurred for drilling a tube-ell in the factory. %he drilling
operations ere gi)en up as the ater as hard and not suitable for use. %he e5penditure thus
became infructuous.
7. Annual preference di)idend liability of !s.(,'',''' on the companyNs (' percent cumulati)e
redeemable preference shares hich are not entitled to any further rights to participate in profits
or surplus assets. %hese shares are redeemable on /ecember (,&''4 according to the terms of
issue.
%he assessing officer has also added a sum of !s.<,''' pertaining to unclaimed ages for the
year &''( hich as transferred to the profit and loss account of the year &''4-(' since the
claim has become timed bares. %he assessee had claimed that the same as not liable to be
included in the total income. %he company see#s your ad)ice on the correctness or otherise of
the disalloances.
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P 14 : 1onsider the admissibility or otherise of the folloing payments in the income-ta5
assessment of X Ltd99
(. Interest of !s.(,&',''' paid on money borroed from A, one of its maBor shareholders,
for the purchase of plant for the ne tea garden at Assam. X Ltd as already engaged in
the business of culti)ation, manufacture and sale of tea in its tea garden at /arBeeling.
/uring the rele)ant pre)ious year, the ne plant so purchased as under installation. %he
1ompany claims normal depreciation as also the said interest of !s.(,&',''' as deduction
in computing the business income.
&. Loss of !s.8",''' arising from non-reco)ery of the amount lost in the theft that too#
place in its /arBeeling garden cash office. An aggregate cash of !s.(,'',''' as initially
lost, =ut, subse>uently, the police ere able to reco)er !s."",'''. %he balance 0um of
!s.8",''' has been claimed by the company as a bad debt.
3. Legal charges of !s.4<,''' hich include, inter alia, (i$ !s.37,''' retainerNs fee paid to
an ad)ocate for ad)ising on matters relating to company la, foreign e5change and
e5ercise at the rate of !s.3,''' per monthO (ii$!s.(<,''' fee paid to a firm of cost
accountants during the rele)ant pre)ious year for appearing before the ta5 authorities
including the income-ta5 Appellate %ribunal in connection ith their assessment
proceedings for the assessment year &''<-'4O and (iii$ !s.&',''' toards cost of
e5ecution of mortgage in respect of the companyNs tea garden at /arBeeling as a security
4 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
against a long-term loan of !s.&','',''' ta#en from the Assam 0tate -inancial
1orporation. %he loan as utilised in purchasing the ne tea garden at Assam
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P 1: XCF(+$ Ltd, carrying on business in manufacture and sale of sale of sugar, had its factory
in 2+. /uring the accounting period March 3(, &'(' the company paid to amounts, namely, (i$
a contribution of !s.&&,33& at the re>uest of the collector toards the construction of the /eon
/am and road hich has been completed se)eral years beforeO and (ii$ a contribution of
!sd."',''' to the 0tate Go)ernment toards meeting the cost of construction of roads in the area
around itNs factory under a sugarcane de)elopment scheme under hich one-third of the cost of
construction of roads as to be met by the 1entral Go)ernment, one third by the 0tate
Go)ernment and one-third by sugar factories and sugarcane groers. Are these to amounts
deductible in computing the assesseeNs profit under section 36(($ of the income-ta5 ActR
P 1!: A foreign technician is sent by a foreign company to India in terms of a collaboration
agreement dated January (, &''" ith an Indian company to assist the Indian company in setting
up a plant. %he fees charged by the foreign company are !s. ",''' per day for e)ery of stay in
India of the technician for such or#. %he technician dras total emoluments of !s. &,''' per
day, out of hich a sum of !s. (&'' per day is paid by the Indian company. %he technician stays
in India for 6" days. ;hat are the ta5 effects in India of the transactions mentioned in the
preceding paragraph.
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P 1": %he shareholding of XCF Ltd, a public limited company is as follos* (i$ Go)ernment of
India * (7 per cent O (ii$ !eser)e =an# of India * (" per centO
(iii$ A corporation holly oned by the !eser)e =an# of India * " per centO
(i)$ +ublic* 78 per cent (none holds more than half per cent$. Ad)ise hether the company is one
in hich the public are substantially interested ithin the meaning of the
Income-ta5 Act for the pre)ious year ending March 3(, &'(' if (a$ its shares are listed on
recognised stoc# e5change throughout the pre)ious year, or (b$ its shares are listed on the /elhi
0toc# :5change ith effect from /ecember &3, &''4, or (c$ its shares are not listed on any
recognised stoc# e5change in India throughout the pre)ious year &''4-('.
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P 1+: A (+.$ Ltd. rendered the folloing ser)ices as promoters prior to the incorporation of X
Ltd, a public limited company O
It applied to the Go)ernment for selling up a ne industrial underta#ing and pursued the matter
until it obtained a letter of intent. It negotiated ith the proposed foreign collaborators and
finaliMed agreement ith it. It made efforts to obtain license for import of capital goods and
appro)al of foreign collaboration agreement and as a result the Go)ernment sanctioned the
necessary appro)als. After completion of )arious formalities, it made an applications for issue of
industrial license in the name of X ltd. hich as e)entually sanctioned. It complied ith )arious
formalities ith regard to the registration of X Ltd. and public company as e)entually
registered in -ebruary &'''. these ser)ices ere rendered o)er a period of almost se)en years.
(' | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
X Ltd. intends to pay A(+$ Ltd. a sum of !s.& la#h by che>ue or by allotment of shares of
e>ui)alent amount. Cou are re>uested to e5amine the position regarding the payment of !s.&
la#h both in the hands of A(+.$Ltd. and X Ltd, ith respect to income-ta5 e5emption benefits
a)ailable in their respecti)e hands.
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P 18: 1ompute the business income as ell as the total income of X Ltd. -or the assessment year
&'('-((( pre)ious year ended March 3(, &'('$ on the basis of the folloing particulars*
(. %he company is a Hclosely-heldI public limited company incorporated in India in a
notified bac#ard area to carry on the business of manufacture and sale of typeriters.
%he company commenced commercial production on ,ctober (, (44'.
&. %he company e5ported goods orth !s.(' la#h to Malaysia during the pre)ious year
&''4-('(the entire turno)er is recei)ed in con)ertible foreign e5change$ and incurred
e5penses as under*
1ost of ad)ertisement outside India , !s.& la#h in respect of goods e5ported but
payment as made to an ad)ertising agency in India.
1ost of free samples incurred in India , !s."',''' and incurred outside India
!s.8','''.
:5penditure on branch office outside India !s.(." la#h.
1ost of tenders incurred outside India !s.(','''
1ost of tenders incurred outside India !s.(','''
Insurance of !s.(la#h paid to the foreign insurer on goods e5ported.
3. %he company contributed a sum of !s."',''' to !ural /e)elopment -und, notified by
1entral Go)ernment(amounted debited to +KL Account$
8. %he company incurred bro#erage and legal charges(debited to +KL Account$ as under*
!s."',''' on Machineries purchased and installed before ,ctober (,&''4 on
installment payment system.
!s.",''' on money borroed for ma#ing in)estment in Go)ernment =onds as
security for electricity deposit.
". 1apital e5penditure as incurred during the year on plant and machinery of the )alue of
!s." la#h in the research de)elopment nely set up.
7. 0alary to managing director as paid at !s.<,''' per month plus per>uisites )alued at
!s.(,&'' per month.
6. !s.&,'',''' as incurred in ad)ertisement and publicity e5cluding ad)ertisement referred
to in item &.(this sum of !s.&,'',''' includes !s."<,''' on guest house e5penditure and
!s.(',''' on ad)ertisement n sou)enir published by a political party$. %he turno)er of the
company is !s.(.7' la#h
<. /onation to an institution recognised under section <'G og the income-ta5 Act as
!s.6",'''(debited +KL Account $
4. %he net profit of the company as per +KL Account is !s.&"la#h
('. Gross di)idend of !s.&",''' as recei)ed from a foreign company on April (',&''4 and
credited to profit and loss account. Amount of di)idend distributed by the assessee-
company to its shareholders for &''4-(' is !s.(',''' (date of distribution is April(,
&'('$.
((. /epreciation is to be charged at (' per cent on buildings (;/V * !s.8','','''$ and at ("
per cent on plant and Machinery(;/V * !s.8',"',''', e5clusi)e of bro#erage?legal
charges$. /epreciation debited in the accounts is !s.7la#h.
(( | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
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P 2*: X Ltd transferred shares held by it in )arious companies, as stoc#-in-trade, to its
subsidiary 1 Ltd. at the boo# )alue of !s.7,'','''. %he mar#et )alue if the shares at the rele)ant
time as !s.(<,'','''. %he Assessing ,fficer, hile ma#ing the assessment of X Ltd. assessed it
on the surplus of !s.(&,'',''' hich in his opinion the assessee must be deemed to ha)e made
on the transfer of such shares to its subsidiary. X Ltd. holds 7' per cent of the share capital of 1
Ltd. X Ltd. see#s your ad)ice as to the correctness of the assessment. In case you feel that the
said assessment cannot be Bustify in la, suggest to alternati)e proposals for appropriate action
in the matter.
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P 21: X Ltd. (a company incorporated in the 2.G$ and A Ltd.(an Indian company$ ha)e entered
into an agreement on June 3', &''3 under hich the :nglish company agreed to gi)e to the
Indian company the #no-ho for the manufacture in India of cameras, proBectors and allied
e>uipments, on the folloing terms*
(. %he :nglish company ill hand o)er to the Indian company in London, the detailed data,
documentation, draings and specifications relating to the manufacture for hich it ill
be paid S "',''' in London in foreign e5change.
&. %he :nglish company ill depute to technicians to India to assist the Indian company in
setting up of plant and also in the operation of the plant for a period of (& months, during
hich time they ill train an ade>uate number of Indians in the manufacturing
operations. In return for these ser)ices, the Indian company ill pay to the :nglish
company S (',''' in four e>ual >uarterly installments, hich ill be o)er and abo)e the
salary and alloances of the to technicians hich ill be paid to them in India by the
Indian company.
3. %he Indian company ill pay to the :nglish company a royalty at the rate of S & per
camera and S " per proBector manufactured by it, for a period of ("years from the
commencement of production.
%he agreement has been appro)ed by the 1entral Go)ernment. /iscuss the folloing*
(. ;hat is the scope of ta5 liability in India of the :nglish company in respect of the
amounts payable to it under the agreementR
&. ;hat deductions, if any, are a)ailable to it in the computation f its income for ta5
purposesR
3. At hat rate is ta5 chargeable on the )arious itemsR Also indicate the time at hich the
ta5 is to be paid or reco)ered.
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P 22: X (+.$ Ltd. carrying on business in manufacture of machinery, spare parts, has submitted
the folloing details in respect of its income. ,n the basis of further particulars obtained
(& | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
compute, gi)ing reasons, its income for the assessment year &'('-((. %he company follos
mercantile system of accounting and its pre)ious year is financial year ending March 3(,&'('*
(. +rofit as per + K L Account * !s.(8 la#h
&. ,n August (, &''4, G (+.$ Ltd. hich folloed financial year &''4-(' as its pre)ious
year for assessment year &'('-((, amalgamated ith the assessee-company. =efore
amalgamation (+.$ Ltd. had placed orders for purchase of certain machineries abroad.
%he machinery )alued at !s." la#h as recei)ed by G (+.$ Ltd. before /ecember 3(,
&''4 and it has claimed in)estment alloance thereon. %he balance machinery )alued at
!s.(' la#h as recei)ed in /ecember &''4 but as installed in -ebruary &'('. %he
assessee-company claims in)estment alloance in its return after ma#ing necessary
reser)e in its boo#s. %he claim for in)estment alloance is !s.&."' la#h.
3. %he auditors of the assessee-company, hile e5amining the accounts found that the
cashier of the company had embeMMled !s.&la#h during &''"-'7. %he embeMMlement
as noticed during the pre)ious year ending March 3(, &'('. %he cashier is unable to
pay the amount. .o other action is possible for reco)ering the amount. %he company has
debited the amount to H=ad debt accountI in the boo#s. %he bad debt account is not
transferred to the profit and loss account.
8. %he company had paid technical fess to certain non-residents ithout deduction of ta5 at
source. %he income-ta5 authorities ha)e reco)ered !s."',''' from company. %he said
amount is debited to H!ates and ta5es accountI
". Interest account includes a sum of !s.(,"',''', being interest on o)erdraft. It is
ascertained that the company had obtained an o)erdraft of !s.(' la#h from a local ban#.
%he said amount as utiliMed as follosO (a$!s.",'',''' donation to a pri)ate trust for
construction of a school in the name of founder director of the company, (b$ !s.&,"','''
for the payment of ad)ance ta5 for assessment year &''4-(', (c$ !s.&,"',''' for payment
of penalty le)ied under section &68(($(c$ for assessment year &''(-'&.
7. 1ommission account includes payment of commission of !s.(,'',''' to managing
directorNs son C. %he commission as paid at 3 per cent on sales made through C, under
an agreement made ith the company. %he in>uiries sho that, in the earlier year,
commission paid to C in e5cess of !s.6&,''' as disalloed under section 8'(c$. %he
matter is pending in appeal.
6. %ra)elling e5penses include a sum of !s.(,&',''' incurred by the directors of the
company in connection ith their tour to Germany and Japan for purchase of ne
machinery for setting up a ne company for manufacture of chemicals.
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P 23: X Ltd. carrying on business in manufacture of colour, dyes and chemicals, has submitted
the folloing particulars of its income. ,n the basis of the further particulars obtained on in>uiry,
compute, gi)en reasons, its total income for the assessment year &'('-((. %he company follos
mercantile system of accounting and the pre)ious year is financial year ending March 3(, &'('.
(. +rofit as per profit K loss account * !s.(3,"','''
&. %he company has claimed the folloing deductions in its return of income*
In respect of e5penditure on purchase of laboratory e>uipments and machinery
incurred during the pre)ious year for the purpose of setting up a scientific research
unit for conducting research in dyes and chemicals O !s.&,'','''. %he research
unit is not, hoe)er, appro)ed by the prescribed authority.
(3 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
In respect of furniture, fi5tures and intercom e>uipment purchased in financial
year (44'-4( for !s.3',''' transferred to nely set up scientific research unit at
ritten don )alue of !s.&','''. It is ascertained that both these amounts appear
on the asset side of the balance sheet.
/epreciation debited to profit K loss account in respect of assets used for
scientific research ac>uired in the pre)ious year rele)ant to the assessment year
&'('-((. In respect of such assets full deduction as alloed for the said
assessment year O !s.(','''.
3. 1ompensation account debited to profit and loss account * !s.",'','''. It is ascertained
that "' percent of shares of these assessee-company ere held by ! group. 2nder an
agreement reached ith ! group the company decided to purchase the shares of the said
group. It as also decided to terminate ser)ices of the managing director and other
employees belonging to ! group. As a result the company as re>uired to pay
retrenchment compensation as also compensation for termination of employment to the
abo)e persons. %he company claims that there as substantial reduction in the age bill
and it has been able to conduct its business more efficiently.
8. A sum of !s.3la#h as ritten off as bad debt. It is ascertained that + one of the directors
of the company had obtained a loan of !s.3la#h. for the purpose of constructing his on
residential house, from a local ban# on the strength of a guarantee furnished by the
assesee-company. %he director as unable to pay the loan. As a result the company as
re>uired to pay to the ban# a sum of !s.3,"','''. being the amount of loan along ith
interest. %he interest of !s."',''' paid as debited to interest account.
". Legal charges debited to + K L account include remuneration to auditors for conducting
proceeding before income-ta5 authorities O !s.6,"''.
P 24: XCF Ltd . is a public company engaged in the business of printing and publication of
boo#s. Its profit and loss account for the year ended March3(, &'(' disclosed a net profit of
!s.<,'','''. +articulars noted from the companyNs accounts and on in>uiry from the company
are gi)en belo*
(. %he head office of the company is situated in a building ta#en on lease. /uring the year, the
company incurred an e5penditure of !s.(,'',''' on e5tension of and impro)ements to this
building. %he sum of !s.(,'',''' as debited by the company to its +rofit and Loss account
&. In the past, the company used to )alue its closing stoc# at cost. %his year, the closing stoc#
as )alued at (' percent belo cost at !s.4','''. %he company has resol)ed that it ill hence
forth adopt this method of )aluation
3.A motorcar purchased by the company in the past for !s.&",''' as sold to an employee of the
company for !s.(7,''' hich as also the ritten don )alue of the car at the beginning of the
year. %he mar#et )alue of the car on the date of sale as !s.&8,'''.
8. Income-ta5 refund of !s.(&,"'' recei)ed during the year as credited to the +rofit K Loss
account.
".A refund of !s.3',''' obtained from customs authorities in partial reduction of penalty of
!s.(,'',''' le)ied and paid in the past for infringing customs regulations (and alloed by the
Assessing ,fficer as deduction in the computation of total income$ as credited to general
reser)e.
(8 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
7.A manger of the company as paid salary !s.7',''', dearness alloance !s.(&,''',
commission !s.(',''', bonus !s.6",''' and lea)e salary !s.&,"''.Qe as also alloed rent-free
furnished house for hich the company also paid of rent of !s.(&,''' besides rent of furniture
and air-conditioner !s.3,'''. %he company also paid salary of !s.7,''' to the atchman and
seeper pro)ided free of charge to the manager.
6. 1redits to +rofit and Loss account include the folloing*
a. !s.(',''' regarding e5penditure incurred for painting in)itation cards and hiring and transport
charges of furniture and shamiana in connection ith the inauguration of a ne branch opened
for e5panding the business.
b.!s.&,"'' regarding e5penditure incurred on printing additional articles of association of the
company.
c. !s.&,''' regarding legal e5penses in connection ith the alteration of the company Ts articles
of association
d. !s.&',''' paid as penalty to Go)ernment for the companyNs failure to perform the Bob of
printing and supply of the te5t boo#s to the :ducation department ithin the stipulated time.
%here as delay of 8 months and according to the agreement entered ith the Go)ernment, the
company had to pay a penalty of !s.",''' per month.
e. !s.&8,''' regarding payment by ay of contribution toards appro)ed gratuity fund.
f. !s.<,''' regarding deposit made under the on your telephone scheme.
g. !s.6,"'' regarding penalty imposed by the Assessing ,fficer for concealment of income made
by the company for an earlier assessment year for hich assessment as completed during this
year.
h. !s.",''' regarding interest paid to ban# for money borroed to pay ad)ance ta5(!s.8,'''$
and ealth-ta5(!s.(,'''$
i. !s.7,''' paid as pension D !s."'' per month to the ido of founder director.
B. !s.",''' regarding loss of cash in burglary committed at night in the companyNs business
premises
#. !s.(&,''' regarding e5penses of shifting business premises from the original site to the
present site hich is more ad)antageously situated
l. !s.(,'',''' paid by the company to an appro)ed scientific research association hich
underta#es scientific research not related to the business of the company.
m. !s.(',''' paid as interest on borroings made for purchase of shares of the company hich
has still not paid any di)idend.
1ompute the total income of the company for the assessment year &'('-((. Gi)e reasons for
additions made or deductions alloed in respect of the )arious items. Assume that the company
has not distributed any di)idend for the financial year &''4-('.
(" | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
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P 2: XCF Ltd. is ha)ing business in manufacture, sale and e5port of goods. Its +rofit and Loss
Account for the year ending March3(,&'(' disclosed a net profit of !s.6." la#h. 1ompute the
assessable income for the assessment year &'('-(( from the folloing data*
(. %a5 paid on behalf of foreign collaborator, the company ha)ing failed to deduct ta5 on the
remittances, such ta5 paid being !s.3',''' debited to the profit and loss account.
&. 1ommission paid to foreign buyer in )iolation of -oreign :5change !egulation Act in the
course of in)oicing e5ports, debited to profit and loss account O !s.8','''
3. 1ommission paid to local agents f foreign principals for securing e5port orders, debited to
profit and loss account * !s.&','''. !elief claimed under section 3"=.
8. !emuneration to managing director comprised of salary at !s.6,"'' per month, bonus for the
year !s.(',''' and commission !s.&',''' all debited to profit and loss Account. %he entire
remuneration has been appro)ed by the 1ompany La =oard.
". Interest paid on borroings made in e5cess of the limits laid don under section "<A of the
1ompanies Act read ith rule 3 of the 1ompanies(Acceptance of +ublic /eposits$ !ules *
!s."',''' debited to profit and loss account.
7. 1ontribution to a political party for securing help in getting loan from a Go)ernment financial
institution, charged to profit and loss account * !s(la#h
6. 0urta5 +aid O !s.&",'''
<. Interest paid for belated payment of income-ta5O !s.<,''' debited to profit and loss Account.
4.Insurance compensation recei)ed !s.&la#h for damage to a machinery, the e5penditure incurred
for repairing the same being !s.(,"',''', the balance !s."',''' credited to !eplacement !eser)e
Account in the balance sheet.
('. Amount realised in sale of import entitlements !s.<',''' ta#en to !eser)e Account in the
balance sheet. Gi)e reasons for the additions or deletions suggested.
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P 2!: %he folloing information is a)ailable in respect of X Ltd. for the year ending March
3(,&'('*
/uring the year the company has99
(. +urchased heat for its canteen from an agriculturist for !s."',''' in cash.
&. +urchased a ne plant costing !s.3,'',''' on deferred payment interest payable for the period
subse>uent to the installation amounting to !s.(,'',''' has been capitaliMed.
3. +urchased certain e>uipments to be used in its laboratory for research at a total cost of
!s.(,"','''
8. Incurred !s.&',''' for digging a bore ell hich, hoe)er did not yield any ater.
". 0upplied spare parts to its customers(free of charge$ under the arranty clauseUthe selling
price of spare parts so supplied is !s.(,<',''' and the cost is !s.(,&',''' no accounting entries
in the financial boo#s ha)e been passedVO
(7 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
7. 0pent !s.6',''' toards training an employee in ;est Germany, the details are* air fareO
!s.(',''' and daily alloance (D P<' per day for 7' days$* !s.7','''Uin earlier years such
e5penditure has been disalloed on the ground that it is capital e5penditure as ell as in e5cess
of the limitsVO
6. +urchased a building to be e5clusi)ely used as a family planning centre for its employees at a
cost of !s."','''.
<. /onated !s.(','',''' to +rime MinsterNs .ational !elief -und O and
4. +aid !s.3',''' as interest on loans borroed for the purpose of paying installments of ad)ance
ta5. Cou are re>uired to state ho the abo)e facts ill be dealt ith hile computing the total
income of the company.
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P 2": %he profit and loss account of X Ltd., a manufacturer of electronic goods, disclosed a profit
of !s.<','',''' for the year ending March3(,&'(' before ma#ing any appropriations for ta5es,
reser)es or di)idends. Cou are re>uired to state, ith reasons, ho you ill treat the folloing
hile computing its total income (computation of total income is not re>uired$*
(. Interest debited to profit and loss account includes*
!s.&,'',''' on loan borroed for redeeming preference shares.
!s.<,'',''' on deposits accepted from the public.
&. %he company ac>uired a sic# business on January (,&''6 in respect of the said business*
A trade debtor ent ban#rupt. %he company recei)ed !s.&,'',''' as against the boo#
balance of !s.",'','''.
A trade creditor to hom a sum of !s.(,8',''' is payable as on January (,&''& is not
traceable.
A de)elopment loan of !s.(','',''' granted by the 0tate Go)ernment has been
ai)ed to the e5tent of &' per cent.
%he company has considered the abo)e as re)enue and accordingly adBusted its accounts by
debiting or crediting the profit and loss account as the case may be.
3. %he company has paid a lump sum amount of !s.3','',''' to ac>uire technical #no-
ho from a laboratory oned by the go)ernment in 0eptember &''4, %his being treated
as a deferred re)enue e5penditure and sum of !s.",'',''' has been charged off to profit
and loss account.
8. /etails of sales*
/omestic sales O !s.<,'','''
:5port to 2.0.A * !s.&,'','''
". %he company has paid an annual remuneration of !s.3,'',''' to its production manager
ho retired in &''6-'< for super)ising the erection of a ne plant. %his amount has been
debited to capital or#-in-progress.
7. %he company has collected charity at '.( per cent of its domestic sales its has spent
!s.3',''' on charity during the year and the balance is being shon as a liability
6. %he audit fess debited to profit and loss account include !s.(',''' for appearing before
the Assessing ,fficer, and !s.&',''' for conducting the ta5 audit.
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P 2+ : X Ltd, a manufacturing company, retains you to assist in preparing the ta5 return for
assessment year &'('-((. %he company earns a net profit of !s.7,'',''', in the financial year
&''4-('. Cou are re>uired to compute its total income after ta#ing note of the folloing *
(6 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
(. &''4-(' sales of !s."crore include e5ports of !s."'la#h (goods imported !s.""la#h$.
&. ,ther income credited to profit and loss account, inter alia, include*
!s.3",''' recei)ed on termination of contracted entered into in the ordinary course of
business.
!s.&",''' realised as penalty from a supplier of ra material hose supply fell short of
the agreed >uantity contracted to be supplied by him.
!s."',''' being di)idends recei)ed from a foreign company on shares allotted in
pursuance of a collaboration agreement.
3. Interest debited to profit and loss account is inclusi)e of *
+ayment of interest for late filing of return of income for the assessment year &''"-'7 O
!s.",'''
+ayment of interest on money borroed from ban# for purchase of land for constructing
a building for on administrati)e office O !s."",'''
+ayment of interest on o)erdraft ith ban# utilised for payment of di)idends O !s.8','''
8. !epairs and maintenance include *
.:5penditure incurred on replacement of orn out asbestos sheets of the factory shed ith
ne sheets *
!epairs to compound all collapsed due to hea)y rains * !s.&",'''
". 0alaries and staff elfare include*
:5penditure of capital nature incurred for the purpose of promoting family planning
amongst its employees * !s.6",'''
1ontribution to Go)ernment for construction of health centre adBacent to the companyNs
factory here its employees are alloed to ha)e treatment along ith the members of
public O !s.3",'''.
0alary of foreign technicians retained on contract basis to study and suggest impro)ed
method of application O
7. Legal e5penses debited include*
%he managing director, the manger and the company ere Bointly and se)erally
prosecuted by the Go)ernment for breach of regulations and for lac# of conformity to
manufacturing regulations laid don by the Go)ernment. %he company defended itself
and its employees. %he prosecution resulted in the company being found guilty hile the
others ere ac>uitted. Legal e5penses incurred in this regard O !s.6,'''
:5penses incurred in defending a suit filed by some shareholders against change in the
Articles of Association O rs.<,'''
6. %rade e5penses include *
:5penditure incurred on payment of secret commission to persons hose names and
addresses are not a)ailable on records O !s.<','''
/emurrage to the Indian railays for not clearing the goods in time * !s.<,'''.
<. General e5penses includeO
:ntertainment e5penses O !s.(','''
1ost of a statue of the founder-chairman erected ithin the factory premises *
!s.(",'''
4. %he company decided to close one of its di)isions and accordingly retrenched employees
or#ing in that di)ision by paying the retrenchment compensation and notice pay of !s.4','''
(0eparately debited to profit and loss account$
(< | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
%he anser should clearly indicate the reasons for the treatment accorded by you to the )arious
items gi)en abo)e.
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P 28 : A=1 Ltd. is an Indian company engaged in the business of manufacture and sale of
engineering goods. Its net profit for &''4-(' is !s.&','''. %he folloing are the other
particulars*
(. /ebits to profit and loss account include *
a. penalty paid for default in payment of sales ta5 * !s.(','''
b. cost of machinery purchased and installed during the year * !s.",'''
c* 1ost of imported motor car * !s.&,8',''' and depreciation thereon * !s8<,'''
d. rent for premises hired at /elhi for the stay of the companyNs employees hen on tour for
purposes of business* !s.(','''
e. foreign tour e5penses of e5ecuti)e director and his ife O !s."','''(the e5penses of the ife
are estimated at !s"','''(the e5penses of the ife are estimated at !s.&8,''', the tour as
underta#en for promotion of e5ports and the director being a diabetic patient, it became
necessary, under medical ad)ise, for his ife to accompany him for the purpose of attending on
him$O
f. annual premium paid for personal accident insurance policy accident insurance policy ta#en by
the company for its staff O !s.(','''O
g. interest on deposits recei)ed by the company from public* !s.3','''
h. 0ecurity deposits paid for tele5 connection * !s.(','''
i. interest paid on money borroed from ban# for purchase of shares in +. Inc., a company
incorporated in .e Cor# * !s.(','''
B. salary, etc., paid to =, the e5ecuti)e directorO
i. salary O !s.6&,'''.
ii. commission on sales O !s.3','''
iii. house rent alloance O !s.&",'''
i). tra)el concession for self and ife in connection ith his proceeding on lea)e to his home
district*
). rent for office premises of the company oned by the director * !s.(&,'''
# salary, etc, paid to C, an accounts officer* salary* !s.6",''', bonus* !s.(<''', house rent
alloance O !s.&,8'', special alloance O !s.",'''
l. depreciation of plant purchased during &''4-(' * !s.8,'','''(i.e., normal depreciation D33.33
per cent cost of !s.(&,'','''$
&. 1redits to profit and loss account includes di)idend recei)ed from +. Inc, a foreign company *
!s."','''
(4 | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
3. -olloing items ere credited to Hcapital reser)e accountI during the year*
%he assessee- company has purchased a plant on June3,(44" for !s.&,"',''' for its
research laboratory and claimed a deduction of !s.&,"',''' under section 3"(&$(ia$. %he
research acti)ity for hich the machine is purchased ceases in &''8-'" and the machine
is brought into business proper on .o)ember (,&''< (mar#et )alue O !s(,3','''$ the
machine sold for !s.(,"',''' is credited to capital reser)e account during the year &''4-
('.
%he assessee-company has purchased a machine on /ecember (,(44" for !s.3,'','''
and claimed a deduction of !s.3,6",'''(being (.&" of !s.3,'','''$ under section 3"(&=$,
as the machine as meant for on appro)ed in-house research acti)ity. %he particular
research acti)ity for hich the machine as purchased ceases on .o)ember (,&''4 and
the machine is sold, ithout being used for any other purpose on /ecember (4,&''4 for
!s.&,'','''. %his amount is credited to capital reser)e account on the same day.
%he +rofit of !s.&',''' is calculated before deducting income-ta5 liability
Cou are re>uired to compute the total income of the company for the assessment year&'('-((.
Gi)e reasons for the adBustments that you ma#e in the net profits.
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P 3* : X Ltd, an Indian company, discloses a profit of !s.8','',''' for the year &''4-(' and the
folloing further particulars are also made a)ailable*
(. %he closing stoc# of the finished goods has uniformly been )alued at (' per cent under
cost e)ery year. %he opening and closing stoc#s for the year ere shon in the boo#s at
!s."7,'',''' and !s.<3,'',''' respecti)ely.
&. %he boo# depreciation amounts to !s.(",'','''. -or ta5 purposes depreciated )alue of
bloc# of assets on April (, &''4 is !s.6",'','''(rate of depreciation * &" per cent$.
3. %he under noted debits appear in the profit and loss account*
Loss on sale of fi5ed assets * !s.(,&",'''.
%ransfer to in)estment alloance reser)e account* !s.3,'',''', ne machine as
ac>uired during the year at a cost of !s.(7,'',''' and brought into use during the
year(rate of depreciation * &" per cent$.
8. %he salaries include gratuity of !s.<',''' paid to a retired employee in accordance ith
the rules and payment of !s.(,3",''' to the managing director by ay of salary and
commission as permitted by the 1ompany La =oard. %he managing director as
pro)ided ith a house oned by the company for hich depreciation of !s.&",''' and
repairs e5penses of !s.&',''' ere claimed. %he repairs e5penses are included in the
profit and loss account under the head H !epairs to buildingsI. %he managing director as
also reimbursed the salary of !s.&,8'' paid for a gardener and of !s.3,7'' paid for a
domestic ser)ant. %he e5penses are charged to H Miscellaneous e5pensesI.
". /uring the year plant and Machinery of boo# ritten don )alue of !s.&,'',''' as sold
for !s.6",'''. %he ritten don )alue for income-ta5 as !s.(,&','''
7. %here is a credit of !s.",'',''' to the +rofit and Loss Account as being sale proceeds of
import entitlements hich the company claims as a capital receipt not chargeable to
income-ta5.
6. HInterest accountI includes a sum of !s.3",''' charged by the +ro)ident -und
1ommissioner for delay in depositing the members as ell as the companyNs
contribution.
&' | + a g e
Corporate & Fiscal Planning Prof. Suresh
Dhoot
1ompute the total income of the company on the basis of the abo)e noted information gi)ing
your reasons here)er necessary.
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P 31: A 0tate Industrial /e)elopment 1orporation recommends proBect in a bac#ard 0tate to
your client. %he estimated outlay is about !s.('la#h of hich your client ill ha)e to borro
!s."la#h hich ill be lent by 0tate financial institutions at (8 per cent interest. 0ales ta5 and
energy concessions are a)ailable. %he proBect ill >ualify for relief under section <'- I=. If the
annual income e5pected to be generated is !s.(."la#h per annum prior to deduction of interest on
borroed capital and alloances under section <'-I=, ad)ise your client as to the ad)isability of
accepting the proBect ith reasons. Ma#e suitable assumptions.
&( | + a g e