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) Assignment Set- 1 (60 Marks)
Q.1 Tax evasion is a menace to the people, economy and the country. In the wake of recent Swiss bank account scandal give your views on the following: a. How does it affect the Indian economy and the growth prospects? b. Does black money cause Inflation? Answer: Tax evasion is sheer non-payment of tax even when it is due to be paid in the circumstances of the case. It should be remembered that while tax planning is perfectly legal, Tax Evasion is illegal and can result into penalties and prosecution for the perpetrator. When financial transactions are arranged in a way that it becomes obvious that they were entered with a malafide intention of either not paying taxes or with a view to defeat the genuine spirit of law, they cannot be accepted as legitimate Tax Planning. Twisting of facts or taking a very strict and literal interpretation of law without understanding the basic purpose of the law can only lead to punishable offence. a. Swiss bank account scandal affects the Indian economy and the growth as follows: 1. Substantial loss of much needed public revenue, particularly a welfare state like ours. 2. Serious disturbance caused to the economy of the country by piling up of black money directly causing inflation. 3. Large hidden loss to the community by some of the best brains in the country being involved in the perpetual war waged between tax avoider and his expert team of advisers, lawyers, and accountants on one side, and the Tax adviser and his perhaps not so skilful advisers on the other side. 4. Sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it. 5. Ethics (or lack of it) of transferring the burden of tax liability to the shoulders of guideless, good citizens from those of artful dodgers. As to the ethics of Taxation, the learned judge observed: We now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognize that there is behind taxation laws as much moral sanction as behind any
other welfare legislation and it is pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. b. Yes, Serious disturbance caused to the economy of the country by piling up of black money directly causing inflation. Q.2 Detail death cum retirement gratuity under Sec 17(1)iii of IT Act. Is commutation of pension a viable option in terms of tax planning? Answer:
Tax planning: If an employee is due for retirement shortly, it is better to go for commutation of pension as per the above stated rules. Because pension (uncommuted) received by all employees (govt. and non govt.) during their life time is included in the salary income and chargeable to tax. Q.3 Explain the essential conditions to be satisfied by a firm to be assessed as firm under Section 184. Answer: Essential conditions to be satisfied by a firm to be assessed as firm (Section 184) 1. In the first assessment year: The firm will be assessed as a firm, also known as „Firm Assessed as Such‟ (FAAS) if the following conditions are satisfied: (a) Partnership is evidenced by an instrument i.e. there is a written document giving the terms of partnership. (b) The individual share of the partners is specified in that instrument. (c) Certified copy of partnership deed must be filed: A certified copy of the said instrument of partnership shall accompany the return of income in respect of the assessment year for which the assessment as a firm is first sought. Where certified copy is not filed with the return there is no provision for condonation of delay. However where the return itself is filed late then there is no problem if the certified copy is filed along with such return as the condition that it shall accompany the return of income is satisfied. Further Delhi ITAT in the case of Ishar Dass Sahini & Sons v CIT held that where uncertified Photostat copy of the instrument of partnership is submitted along with the return of income and the certified copy is produced at the time of assessment, it will satisfy this condition. 2. In the subsequent assessment years: If the above three conditions are satisfied the firm will be assessed as such (FAAS) in the first assessment year. Once the firm is assessed as firm for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the share of the partners.
Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year. Read box below for some important points to be considered in this regard. Box 1. The copy of the instrument of partnership should be certified by all partners, not being minors. 2. Where a firm had been assessed as a firm and in a later year, the salary and interest to be paid to partners has been changed in the partnership deed but the changed partnership deed is not attached along with the return of income of such assessment year, the firm will be still assessed as a firm but in such a situation, the interest and salary shall be allowed as deduction as per the earlier deed which was attached along with the return of income. Circumstance where the firm will be assessed as a firm but shall not be eligible for deduction on account of interest, salary, bonus, etc.[Section 184(5)] The firm will be assessed as a firm but shall not be eligible for any deduction on account of interest, salary and bonus etc if there is failure on the part of the firm as is mentioned in Section 144 (relating to Best Judgment Assessment) and where the firm does not comply with the three conditions mentioned under Section 184. Q.4 List out the steps to compute total income Answer: Steps to compute total income The steps in which the total income for any assessment year is determined as follows: 1. Determine the residential status of the assessee to find out which income is to be included in the computation of his total income 2. Classify the income under each of the following five heads. Compute the income under each head after allowing deductions prescribed for each head of income: a) Income from salaries Salary/Bonus/Commission, etc. _______ Taxable Allowance _______ Value of Taxable perquisites _______ Gross salary _______ Less: Deductions u/s 16 _______ Net taxable income from salary _______ b) Income from House Property Net annual value of house property _______ Less: Deduction under Section 24 _______ Income from house property _______ c) Profits & gains of business & profession Net profit as per P&L A/c _______
Less/Add: Adjustments required to be made to the profit as per provisions of Income tax Act _______ Net profit and gains of business & Profession _______ d) Capital gains Capital gains as computed Less: exemptions u/s 54/54B/54D etc. Income from capital gain e) Income from other sources: Gross income _______ Less: Deductions _______ Net income from other sources _______ Gross Total Income [(a)+(b)+(c)+(d)+(e)] Less: Deductions available under chapter VI A Sections 80 C to 80 U _______ Total Income _______ Income computed under four heads (salary head is not applicable), is aggregated. While aggregating the income, Sections 60 and 61 shall be applicable. Further, effect to set off of losses and adjustment for brought forward losses will also be done. From the gross total income so computed, the following deductions of Chapter VIA should be allowed: 80 G Donations to certain funds / charitable institutions, etc. 80GGA Certain donations for scientific research or rural development 80GGB Contribution to political parties 80 IA Profits and gains of new industrial undertakings or enterprises engaged in infrastructural development, etc. 80 IB Profits gains from certain industrial undertakings other than infrastructure development undertakings 80 IC Profits and gains of certain undertakings in certain states 80 ID Deduction in respect of profits and gains from business of hotels and convention centres in specified area. 80 IE Deduction in respect of certain undertakings in North Eastern States 80JJA Deduction in respect of profits and gains from business of collecting and processing of bio-degradable waste 80JJAA Deduction in respect of employment of new workmen 80LA Income of Offshore Banking Limit and international Financial Services Centre Q.5 Detail the important provisions under Wealth tax Act. Answer: Important Provisions under Wealth Tax Act: You should try to understand the following provisions related to wealth tax act without which would not be able to get exact implications of wealth tax act.
Asset must belong to the Assessee The above six assets will be included in the net wealth of the assessee only when they belong to him. Mere possession or joint possession unaccompanied by the right to, or ownership of, property would therefore, not bring the property within the definition of net wealth for it would not be an asset belonging to the assessee. Assets must be held by the Assessee on the Valuation Date If the asset has been spent, lost, destroyed or transferred by the assessee before the valuation date, it is not held by the assessee on the valuation date. Hence the value of such asset shall not be included in the net wealth of the assessee. Assets required being included, though these may belong to others[Section 4] Individual In computing the net wealth of an individual, there shall be included, as belonging to that individual, the value of assets which on the valuation date are held: i) by the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or ii) by a minor child, not being a minor child suffering from any disability of the nature specified in Section 80U of the Income-tax Act, or a married daughter, of such individual, or iii) by a person or association of persons to whom such assets have been transferred by the individual directly or indirectly, otherwise than for adequate consideration for the immediate or deferred benefit of the individual, his or her spouse, or iv) by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer, or v) by the son's wife, of such individual, to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration, or vi) by a person or association of persons to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration for the immediate or deferred benefit of the son's wife, of such individual or both, whether the assets referred to in any of the sub-clauses aforesaid are held in the form in which they were transferred or otherwise: Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958) or is not chargeable under Section 5 of that Act, for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972 the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual. A partner in a firm or a member of an association of persons In the case of an assessee who is a partner in a firm or a member of an association of persons (not being a co-operative housing society), there shall be included, as belonging to that assessee, the value of his interest in the assets of the firm or association determined in the manner laid down in Schedule III :
Provided that where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor in the firm, determined in the manner specified above, shall be included in the net wealth of the parent of the minor, so far as may be, in accordance with the provisions of the third proviso to clause (a). An Individual being a Member of a Hindu undivided family Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration (the property so converted or transferred being hereinafter referred to as the converted property), then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computing the net wealth of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1972: a) the individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly; b) the converted property or any part thereof shall be deemed to be assets belonging to the individual and not to the family; c) where the converted property has been the subject-matter of a partition (whether partial or total) amongst the members of the family, the converted property or any part thereof which is received by the spouse of the individual on such partition shall be deemed to be assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly: Provided that the property referred to in clause (b) or clause (c) shall, on being included in the net wealth of the individual, be excluded from the net wealth of the family or, as the case may be the spouse of the individual. Membership under a house building scheme [Section 4(7)] Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be, the assessee shall, notwithstanding anything contained in this Act or any other law for the time being in force, be deemed to be the owner of such building or part and the value of such building or part, shall be included in computing the net wealth of the assessee; and, in determining the value of such building or part, the value of any outstanding installments of the amount payable under such scheme by the assessee to the society, company or association towards the cost of such building or part and the land appurtenant thereto shall, whether the amount so payable is described as such or in any other manner in such scheme, be deducted as a debt owed by him in relation to such building or part.
Building/Right in building acquired in special cases [Section 4(8)] A person: a) who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, 1882 (4 of 1882); b) who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of Section 269UA of the Income-tax Act (43 of 1961), shall be deemed to be the owner of that building or part thereof and the value of such building or part shall be included in computing the net wealth of such person. Assets held by a minor child [Provisos 2 and 3 to Section 4(1)(a)] Provided further that nothing contained in sub-clause (ii) shall apply in respect of such assets as have been acquired by the minor child out of his income referred to in the proviso to sub-section (1A) of Section 64 of the Income-tax Act and which are held by him on the valuation date: Provided also that where the assets held by a minor child are to be included in computing the net wealth of an individual, such assets shall be included, (a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth (excluding the assets of the minor child so includible under this sub-section) is greater; or (b) where the marriage of his parents does not subsist, in the net wealth of that parent who maintains the minor child in the previous year as defined in Section 3 of the Income-tax Act, and where any such assets are once included in the net wealth of either parent, any such assets shall not be included in the net wealth of the other parent in any succeeding year unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do. Q.6 What is meant by Full value of consideration? How short term capital gains and long term capital gains are computed using full value of consideration? Answer: Full value of consideration: The expression “full value” means the whole price without any deduction whatsoever and it cannot refer to adequacy or inadequacy of price. The consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely money or money‟s worth is m. It is not necessarily always the market value of the asset on the date of transfer. However, at many places, reference is made to Free Market Value (FMV). Expenses incurred wholly and exclusively in connection with such transfer It refer to expenses necessary for effecting transfer, e.g. brokerage, commission paid for securing a purchaser, cost of stamp, traveling expenses, incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation, etc. Short-term capital gain The profits and gains arising from the transfer of a short-term capital asset are treated as short-term capital gains and included in the total income of the taxpayer for taxation
at the rates applicable to him. Where a taxpayer incurs a loss from the transfer of a short-term capital asset (such loss is termed as short-term capital loss.) the same is allowed to be set off only against gain from the transfer of another short-term or longterm capital asset. In a case where the short-term capital loss remains unabsorbed, the same is allowed to be carried forward for set off only against gain from the transfer of another short-term and long-term capital asset in the subsequent year. However, such carry forward is restricted for a period of eight years. In other words, a short-term capital loss cannot be set off against income from salaries, house property, business or profession or income under the head other sources. Long-term capital gain Similarly, the profits and gains arising from the transfer of a long-term capital asset are treated as long-term capital gains. Since long-term capital gains represent accumulation of income over a period of time, these could turn out to be illusory in real terms. Accordingly, the cost of the asset is adjusted for inflation during the period of holding. The increased cost is set-off against the sale consideration of the long-term capital asset to determine the long term capital gain. Such long-term capital gain is subjected to a concessional rate of tax to eliminate the bunching effect. Computation of capital gains Computation of Short-term Capital Gains From full value of consideration, deduct 1) Expenditure incurred wholly & in exclusively 2) Cost of acquisition 3) Cost of any improvement of asset Computation of Long-term Capital Gains From full value of consideration, deduct 1) Expenditure incurred wholly & exclusively connection with the transfer 2) Indexed cost of acquisition of asset 3) Indexed cost of any improvement of asset
Q.1 Prepare a ready reckoner of various tax savings investment options covering Section C to U. According you what are the 5 best investment options under these sections. Answer: 1. Deductions in respect of life insurance premium, deferred annuity, contributions to provident fund, subscription to certain equity shares or debentures, etc. [Section 80c] :-In computing the total income of an assessee, being an individual or a Hindu Undivided Family, there shall be deducted in accordance with and subject to the provisions of this Section, the whole of the amount paid or deposited for the current year as does not exceed Rs. 1 lacs. 2. Deduction in respect of contribution to certain pension funds [Section 80ccc] • Deduction is permissible, under this Section, only to an individual assessee. • It is allowed in respect of nay amount paid or deposited in the previous year by such individual to effect or keep in force a contract for any annuity plan of life Insurance Corporation of India or any other insurer for receiving pension fund from the fund set up by LIC/or any other insurer referred to in Section 10(23AAB) • The amount is paid out of his income chargeable to tax.Quantum of deduction: The whole of the amount paid or deposited (excluding interest or bonus accrued or credited to the assessee‟s account, (if any) or Rs. 1,00,000 whichever is less. 3. Deduction in respect of contribution to pension scheme of central government or any other employer [Section 80CCD] :-The deduction under this Section is allowed to an assessee who is an individual and who is employed by the Central Government or any other employer. The deduction is allowed on account of: • any amount not exceeding 10% of salary of the previous year paid or deposited by the employee in his account under the notified pension scheme • any amount contributed by the employer (i.e. central Government or any other employer) to such pension scheme not exceeding 10% of the salary of the employee. 4. Section 80D: Deduction in respect of medical insurance premium Conditions • Payment shall be on account of insurance premium in respect of Medical Insurance (Not Life Insurance). • Payment shall be made by cheque. • Payment shall be out of income chargeable to tax. • Insurance scheme shall be framed by GIC and approved by the Central Government from A.Y. 2002-03 the amount deposited in any scheme of any other insurer who is approved by the Insurance Regulatory & Development Authority shall also be eligible for deduction. • Deduction can be claimed only by individual (in respect of policy taken on his Health of his/her spouse, dependent parents, dependent children) and by the HUF (on the health of any member of such family).
Quantum of deduction: The actual premium/premia paid during the tear, or Rs. 15,000 whichever is less. 5. Section 80DD: Deduction in respect of maintenance including medical treatment of handicapped dependents Quantum of deduction: Rs. 50,000 irrespective of the amount deposited and Rs. 75,000 where such dependant is a person with severe disability. Conditions 1. The assessee is either an individual who is resident in India or a Hindu Undivided Family who is resident in India. 2. i) The assessee has during the previous year incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a handicapped dependant. OR ii) He has paid or deposited any amount under a scheme framed in this behalf by the Life Insurance Corporation or Unit Trust of India, which is approved by the Board. 3. The scheme mentioned under (2)(ii) above fulfills two additional conditions: i) The scheme provides for payment of annuity or lump sum amount for the benefit of a handicapped dependent in the event of the death of the individual or the member of the Hindu Undivided Family in whose name subscription to the scheme has been made. ii) The assessee nominates either the handicapped dependent or any other person or a trust to receive the payment on his behalf for the benefit of the handicapped dependent. Q.2 Write short notes on (a) Profit in lieu of salary (b) Sec 80D Answer: (a) Profit in lieu of salary [Section 17(3)]: Section 17(3) defines „profit in lieu of salary‟ to include: 1. The amount of compensation due to or received by an assessee from his employer or former employer at or in connection with • Termination of employment; or • Modification of the terms and conditions of employment. 2. Any payment due to or received by the assessee from his employer or former employer or from provident or any other fund or any sum received under a key man insurance policy including the sum allocated by way of bonus on such policy (It does not include exempt payments from superannuation fund, gratuity, commuted pension, retrenchment compensation, house rent allowance, employee‟s contribution to PF and interest thereon). 3. Any amount due to or received whether in lumpsum or otherwise, by any assessee from any person before his joining any employment with that person or after cessation of his employment with that person. (b) Sec 80D: Deduction in respect of medical insurance premium Conditions 1. Payment shall be on account of insurance premium in respect of Medical Insurance (Not Life Insurance). 2. Payment shall be made by cheque.
3. Payment shall be out of income chargeable to tax. 4. Insurance scheme shall be framed by GIC and approved by the Central Government from A.Y. 2002-03 the amount deposited in any scheme of any other insurer who is approved by the Insurance Regulatory & Development Authority shall also be eligible for deduction. 5. Deduction can be claimed only by individual (in respect of policy taken on his Health of his/her spouse, dependent parents, dependent children) and by the HUF (on the health of any member of such family). Quantum of deduction: The actual premium/premia paid during the tear, or Rs. 15,000 whichever is less. Q.3 Explain the tax provisions for new business in free trade zones Answer: Tax Provisions for New Business:- Many incentives are available under the Income Tax Act which is directly co-related to the nature of business. Some of these incentives are given as follows: Newly established undertakings in free trade zones [Section10A] A deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. Essential conditions to claim deduction: The deduction shall apply to an undertaking which fulfills the following condition: i. It has begun or begins to manufacture or produce articles during the previous year, relevant to the assessment year a) 1981-82 or thereafter, in any free trade zone b) 1994-95 or thereafter, in nay electronic hardware technology park, or as the case may be, software technology park; or c) 2001-02 or there after in any special economic zone ii. It should not be formed by the splitting op or reconstruction of a business already in existence. iii. It should not be formed by the transfer of machinery or plant, previously used for nay purpose, to a new business. iv. The sale proceeds of articles or things or computer software exported out of India should be received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months or, within such extended period as the competent authority may allow. v. The exemption shall not be admissible for any A.Y 2001-02 or thereafter, unless the assessee furnishes in the prescribed form [Form No.65F] along with the return of income, the report of the chartered accountant certifying that the deduction has been correctly claimed as per provisions of this Section. The expression Free Trade Zone means such areas as Kandla Free Trade Zone, Santa Cruz Electronics Export Processing Zone, Falta Export Processing Zone, Madras Export Processing Zone, Cochin Export Processing zone, Noida Export Processing Zone, or situated in an Electronic Hardware Technology Park or in a Software Technology Park.
Period of tax holiday: The profits and gain from the exports of such undertaking shall not be included in the total income in respect of any ten consecutive assessment years beginning from the year in which the unit begins to manufacture or produce such article or things or computer software. No deduction under this Section shall be allowed for the Assessment Year 2010-2011 and thereafter. Therefore, any unit set up after financial year 2000-2001 is be eligible to claim exemption for less number of years i.e. units set up in 2001-2002 can claim this deduction for 9 years, units set up in 2002-2003 can claim this deduction for 8 years and so on. In case of existing units which are already claiming this exemption, deduction is being allowed only for the unexpired period of the aforesaid 10 years. Newly established 100 percent export oriented units [Section10B]: Profits of 100 percent Export Oriented Units are exempt provided it is a new unit. This exemption is available for a period of 10 consecutive years beginning from the year in which the unit commenced production. No deduction under this Section is being allowed after financial year 2010-2011 i.e. from the A.Y.2011-2012. Therefore, any unit set up after financial year 2000-2001 is be eligible to claim exemption for less number of years i.e. units set up in 2001-2002 can claim deduction for 9 years, units set up in 2002-2003 can claim this deduction for 8 years and so on. In case of existing units which are already claiming this exemption, deduction is to be allowed only for the unexpired period of the aforesaid 10 years. The following are the main conditions for claiming this deduction: i. The unit manufactures or produces any articles or things or computer software. ii. It is not formed by splitting or re-construction of an existing unit. iii. It is not formed by transfer of used plant and machinery. iv. The Assesssee will have to bring the sale proceeds into India in convertible foreign exchange within 6 months from the end of the financial year in order to avail of the exemption. This period of 6 months may be extended by the RBI on application made in this behalf. The deduction will be proportionately reduced in case the entire sale proceeds are not brought into India as mentioned above. v. Audit report should be submitted in Form No. 56G. vi. Amount of deduction: The deduction will be computed as follows: Profits of the business of the undertaking × Export turnoverTotal turnover of the business carried on by the unit vii. Period of deduction: 10 consecutive AYs beginning with the AY relevant to previous year in which the undertaking begins manufacture or produce such articles or things or computer software. Venture capital companies [Section 10(23 FB)]: Any income of a VCF or a VCC set up to raise funds for investment in a VCU is exempt subject to certain conditions. • VCC means a company which has been granted a certificate of registration by SEBI and which fulfils the conditions laid down by SEBI with the approval of the Central Government. • VCF means a fund operating under a trust deed registered under the Registration Act, 1988, which has been granted a certificate of registration by SEBI and which fulfils the conditions laid down by SEBI with the approval of the Central Government.
VCU means a domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the business for providing services, production or manufacture of an article or thing but does not include activities or sectors which are specified by SEBI with approval of the Central Government.
Tea development account, coffee development account and rubber development account [Section 33 AB]: An assessee carrying on business of growing and manufacturing tea or coffee in India is entitled for deduction to the extent of least of the following: • amount deposited in special A/c with NABARD within a period of 6 months from the end of the previous year or before due date of furnishing return of income, whichever is earlier. • 40% of profits of such business as computed before making deduction u/s 33 AB and before a adjusting brought forward business loss u/s 72. Key points to remember: 1) For claiming deduction u/s 33 AB, assessee must get accounts audited by a Chartered Accountant and furnish the report of such audit in prescribed form along with his return of income. 2) The amount standing to the credit of special account with NABARD is to be utilized as per the specified scheme of Tea Board. In no case, it shall be utilized for the purpose of the following: a) Any machinery/Plant installed in any office premises/residential accommodation including guest house. b) Any office appliances (Other than Computer) c) Any machinery or plant entitled for 100% write off by way of depreciation or otherwise d) Any new machinery or plant installed for production of any low priority item specified in the Eleventh Schedule. 3) Deduction allowed under this provision will be withdrawn if the asset acquired in accordance with the scheme, is sold or otherwise transferred within 8 years from the end of the previous year in which it was acquired. However, it shall not be withdrawn in the following cases: a) Transfer to Government, Local Authority or Statutory Corporation or Government Co. b) In case of Sale of business by partnership firm to a company, if Company has taken over all assets and liabilities of the firm and all the shareholders of the company were partners of the firm before such sale. 4) Assessee is however, allowed to withdraw any amount standing to his credit in special account with NABARD in the following circumstances: a) Closure of business b) Dissolution of firm c) Death of an assessee d) Partition of a HUF e) Dissolution of a Company
Where the withdrawal is made in the circumstances stated above in (a) and (b), the amount withdrawn such business shall be taxable as business profit of that previous year, as if the business had not been closed or the firm had not been dissolved. Q.4 Distinguish between amalgamation, merger and demerger. What type of transactions is not treated as ‘amalgamation’? Answer: Amalgamation: Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings. Merger or amalgamation under the Income Tax Act is said to occur when two or more companies combine into one company. In legal terms, the term amalgamation is used to denote merger. Sec.2 (1B) of the Income Tax Act 1961 defines amalgamation as the merger of one or more companies with another company or the merger of two or more companies (called amalgamating companies) to form a new company (called amalgamated company) in such a way that all assets and liabilities of the amalgamating company or companies become assets and liabilities of the amalgamated company and shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company. The following cases subject to fulfilling the above conditions fall within the definition of Section 2(1B): • Merger of A Ltd. with X Ltd. (A Ltd. goes out of existence) • Merger of A Ltd. and B Ltd. with X Ltd. (A Ltd. and B Ltd. go out of existence) • Merger of A Ltd. and B Ltd. into a newly incorporated X Ltd. (A Ltd. and B Ltd. Go out of existence) • Merger of A Ltd., B Ltd. and C Ltd. into a newly incorporated X Ltd. (A Ltd., B Ltd. and C Ltd. go out of existence) In the aforesaid cases, A Ltd., B Ltd. and C Ltd. are amalgamating companies while X Ltd. is the amalgamated company. Transactions not treated as ‘amalgamation’ Section 2(1B) Section 2(IB) specifically provides that in the following two cases there is no amalgamation, for the purpose of income tax though, the element of merger exists: a) Where the property of the company which merges is sold to the other company and the merger is the result of a transaction of sale. b) Where the company which merges is wound up in liquidation and the liquidator distributes its property to another company. Demerger – [Section 2 (19AA)]: Demerger in relation to companies, means the transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the companies Act, 1956 by a demerged company of its one or more undertakings to any resulting company in such a manner that:
i) All the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of demerger. ii) All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of demerger. iii) The property and liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in the books of accounts immediately before the demerger. iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis. v) The shareholders holding not less than three-fourths in value of shares in the demerged company other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company. vi) The transfer of the undertaking is on a going concern basis vii) The demerger is in accordance with the conditions, if any, notified under Subsection(5) of Section 72A by the Central Government in this behalf. Explanation 1: For the purpose of this clause „undertaking” shall include any part of the undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any key combination thereof not constituting a business activity. Explanation 2: Liabilities include (i) the liabilities which arise out of the activities or operations of the undertaking (ii) the specific loans or borrowings including debentures raised, incurred or utilized solely for the activities or operations of the undertaking and (iii) in other cases so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a demerger bears to the total value of the assets of such demerged company immediately before the demerger. Transactions not treated as ‘amalgamation’ Section 2(1B) Section 2(IB) specifically provides that in the following two cases there is no amalgamation, for the purpose of income tax though, the element of merger exists: a) Where the property of the company which merges is sold to the other company and the merger is the result of a transaction of sale. b) Where the company which merges is wound up in liquidation and the liquidator distributes its property to another company. Q.5 What are the key factors of dividend policy? How do dividend policy affect financial decisions? Answer: Key factors of dividend policy: The following Tax considerations one need keep in mind: a) Meaning of dividend under Section 2(22)
b) Tax treatment in the hands of shareholders c) Tax deduction at source under Section 194 d) Tax on dividend Dividends can be of three types: a) Dividends declared by a domestic company b) Dividends declared by a foreign company c) Dividends or any other income distributed by Unit Trust of India. Any amount declared, distributed or paid by a domestic company by way of dividends (whether interim or otherwise), on or after 1.6.1997 but up to 31.3.2002, whether out of current or accumulated profits, shall be exempt in the hands of shareholders under Section 10(33). Dividend includes deemed dividend but shall not include deemed dividend mentioned in Section 2(22) (e), i.e. loan/advance given by a closely held company to a specified shareholder/concern. Therefore w.e.f. assessment year 20032004, any dividend received either by a domestic company is taxable. Deemed dividend: Dividend includes deemed dividend. Section 2(22) defines the term “dividend” which includes the following: a) Any distribution of accumulated profits entailing the release of assets of the company. b) Any distribution by a company of debentures, debenture – stock, etc. to its shareholders and distribution of bonus shares to preference shareholders to the extent of accumulated profits; c) Any distribution made to the shareholders on a company’s liquidation, to the extent of accumulated profit. d) Any distribution to its shareholders on the reduction of capital to the extent of accumulated profits that arose after 31.3.1933; and e) Any payment by a closely held company made after 31.5.1987 by way of advance or loan to a shareholder with substantial interest provided lending of money is not a substantial part of the business of the company. Types of dividend policies: The firm’s dividend policy is formulated with two basic objectives in mind – providing for sufficient financing and maximising the wealth of the firm’s shareholders. Three of the more commonly used dividend policies are: 1. Constant Payout Ratio Dividend Policy 2. Regular Dividend Policy 3. Low Regular and Extra-dividend Policy Constant Payout Ratio Dividend Policy: The term payout refers to the ratio of dividend to earnings or the percentage of share of earnings used to pay dividend. With constant target payout ratio, a firm pays a constant percentage of net earnings as dividend to the shareholders. In other words, a stable dividend payout ratio implies that the percentage of earnings paid out each year is fixed. Accordingly, dividends would fluctuate proportionately with earnings and are likely to be highly volatile in the wake of wide fluctuations in the earnings of the company. As a result, when earnings of the firm decline substantially or there are losses in a given period, the dividends according to the target payout ratio would be low or nil.
Regular Dividend Policy: The regular dividend policy is based on the concept of a fixed rupee dividend in each period. This policy provides the owners with positive information, thereby minimising the uncertainty. Another variant of this policy is to increase the regular dividend once a proven increase in earnings has occurred. Often, a regular dividend policy is built around a target dividend payout ratio but without letting the dividends fluctuate, it pays a stated rupee dividend and adjusts that dividend towards the target payout as proven earnings happen. Low Regular and Extra Dividend Policy: Some firms have the policy of low regular and extra dividend meaning that the firms keep the regular earnings as low which is supplemented by additional dividend when earnings are higher than normal in a given period. By terming the additional dividend as extra dividend, firms avoid giving shareholders false hopes. This policy is especially common among companies that experience cyclical shifts in earnings Q.6 Explain the tax considerations of bonus shares to Equity shares on: Situation 1: At the time of issue of bonus shares Situation 2: At the time of sale of bonus shares by shareholders Situation 3: At the time of redemption of bonus shares Answer: Tax considerations are given below: Bonus Shares to Equity Shareholders
Capital gains on bonus shares: Section 55 provides that cost of acquisition of any additional financial asset as bonus shares or security or otherwise which is received without any payment by the assessee on the basis of his holding any financial asset shall be taken to be nil. Moreover, in the case of a capital asset being a share, security or unit which is allotted without any payment on the basis of holding of any other financial asset, the period for treating such share, security or unit as a short-term capital asset shall be calculated from the date of allotment of such share, security or unit, as the case may be. Illustration 1: X purchases 1,000 equity shares in A Ltd. @ Rs.16 per share (brokerage 1 per cent) on December 10, 1979. He gets 500 bonus shares (by virtue of his holding of 1000 shares) on January 10, 1984 Fair market value of shares of A Ltd. on April 1, 1981 is Rs. 24. On March 13, 2005 he transfers 1000 original shares @ Rs.81 per share (brokerage 1.5 per cent) On March 15, 2011, he transfers 500 bonus shares @ Rs. 87 per share (brokerage 1.5 per cent) shares.
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