BBA509 - TAXATION MANAGEMENT

Q.1. Write notes on:

a) Tax Treatment of Income.

b) Capital Expenses vs. Revenue Expenses.

c) Fringe Benefit Tax.

Answer:-

a) Tax Treatment of Income:-

Tax treatment of income Treatment of income for tax purposes can be divided into three
categories. They are:

(i) Taxable income: These incomes form a part of the total income and are fully taxable.
These are treated u/s 14 to 69 of the Act. These are salaries, rent, business profits,
professional gain, capital gain, interest, dividend, winning from lotteries, races, etc.

(ii) Exempted incomes: These incomes do not form a part of the total income either fully or
partially. Hence, no tax is payable on such incomes. These incomes are given u/s 10(1) to
10(32) of the Act.

(iii) Rebateable (tax free) incomes: These incomes form a part of the total income and are
fully taxable. Tax is calculated on the total income out of which a rebate of tax at an average
rate is allowed.

b) Capital Expenses vs. Revenue Expenses:-

(i) Nature of the assets: The amount incurred to purchase or gain fixed assets or due to the
installation of fixed assets is called capital expenditure.

while When a person incurs expenses due to purchasing of goods for resale as well as other
costs in connection with the purchase, it is termed as revenue expense.

(ii) Nature of liability: A payment made by an individual to clear a capital liability is capital
expenditure.

While any expense incurred to clear revenue liability is revenue expenditure.

(iii) Nature of transaction: If an expense is incurred to obtain a source of income it is capital

expenditure, e.g., purchase of patents to produce picture tubes of TV sets. While any expense
incurred to earn an income is revenue expenditure, e.g., salary to staff, advertisement
expenses etc.

(iv) Nature of payment in the hands of payer: If any expenditure is incurred by an assessee
as a capital expenditure, it will remain a capital expenditure even if the amount may be
revenue receipt in the hands of receiver, e.g., purchase of motor car by a businessman is
capital expenditure in his hands although it is revenue receipt in the hands of the car dealer.

c) Fringe Benefit Tax:-

Fringe Benefit Tax (FBT) was introduced in the Finance Act, 2005, as an additional income-
tax and came into force on 1st April 2005. The term ‘fringe benefits’ means ‘any
consideration for employment provided by way of any privilege, service, facility or amenity
provided by the employer to the employees’. Fringe Benefit Tax is to be levied on the
employer in respect of fringe benefits provided/deemed to be provided by the employer to his
employees during any financial year commencing on or after 1st April 2005. Fringe Benefit
Tax is payable at the rate of 30 per cent of the value of fringe benefits computed in the
manner prescribed under Sec. 115WC.

Q.2. A) Raj was born in Karachi on January 2,1947. He has been staying in USA since
1986.He comes to India on a visit of 200 days on October 10, 2014. Determine the
residential status of Mr Raj for the assessment year 2015-16.

B) Discuss the advantages of VAT over Sales tax.

Answer:-

a) To decide residential status of raj we must know the following factors regarding
residential status

Rules for determining residential status of individuals

There are two conditions to determine the residential status of an individual viz.

(i) Basic conditions and

(ii) Additional conditions

(i) Basic conditions

There are two basic conditions. They are:

(a) An individual has been in India for 182 days or more during the previous year (P.Y) or (b)
An individual has been in India for 60 days or more during the previous year and 365 days or
more during four years proceeding the relevant previous year. Exceptions to the above basic
conditions

(b): o In case of an Indian citizen who leaves India during the previous year for the purpose
of employment or as a member of crew of Indian ship or, o In case of an Indian citizen or a
person of Indian origin who comes on a visit to India during the previous year. The presence
of 60 days required, is extended to 182 days or more in India during the previous year. In
other words basic conditions (b) referred above is not applicable for such individuals
mentioned above.

(ii) Additional conditions

There are two additional conditions which are as follows:

(a) He has been resident in India for at least two out of ten years immediately preceding the
relevant previous year and,

(b) He has been in India for at least 730 days or more, during seven years immediately
preceding the relevant previous year.

Important points to be considered while calculating number of days for the residential status
of an individual are as follows: 1. The day of leaving and arriving to India – both days are
inclusive. 2. Day starts from midnight 12.01 hour, i.e. at zero hours. 3. Any fraction of a
minute is also treated as one day i.e. 0.0001 hour is also taken as one day. 4. Sundays and
holidays are inclusive. 5. The stay may be at any place or places in India. 6. The stay need not
be continuous during the previous year.

B) Advantages of VAT over sales tax:-

i. As VAT is a multi-point tax with set-off for tax paid on purchases, it prevents repeated
taxation of the same product.
 ii. Simple and transparent: In the sales tax system, the amount of tax levied on the goods at
all stages is not known. However, in VAT, the amount of tax would be known at each
and every stage of goods sale or purchase.

iii. VAT has the flexibility to generate large and buoyant revenues, as it levies tax on value
additions.

iv. Zero rating of tax on exports is possible in case of VAT.

v. Fair and equitable: VAT introduces uniform tax rates across the state so that unfair
advantage cannot be taken while levying the tax.

vi. Procedure of simplification: Procedures related to filing of returns, payment of tax,

furnishing declaration and assessment are simplified under the VAT system so as to
minimize any interface between the tax payer and the tax collector.

vii. Ability to provide same revenue to the government with lower rates of tax.

viii. Tax does not become a cost of doing business.

Q.3. “Section 48 of the Income-tax Act, 1961 discusses the methods of computation of
short term and long term capital gains”. Enumerate with examples.

Answer:-

Computation of short-term Capital Gain Computation of long-term capital asset

1.Calculate full value of consideration 1. Calculate full value of consideration
2.Deduct the following: 2. Deduct the following:
a. expenditure incurred wholly and a. Expenditure incurred wholly and
exclusively in connection with such transfer exclusively in connection with such transfer
b. cost of acquisition b. indexed cost of acquisition
c. cost of improvement c. indexed cost of improvement
3. From the resulting sum deduct the 3.From the resulting sum deduct the
exemption provided under sections 54.54B, exemption provided under
54D,54EC,54G,and 54 GA sections54,54B,54D, 54EC,54gG,and 54GA
 4.The balanced amount is short-term capital 4. The balance e amount is long-term capital
gain gain

Note: No deduction will be allowed in respect of payments of Securities Transaction Tax

(STT) in computing income under the head ‘Capital Gain’

Example of short term capital gain:-

1)Mr. Kaushal is a salaried employee. In the month of December, 2015 he purchased gold
worth Rs. 8,40,000 and sold the same in August, 2016 for Rs. 9,00,000. At the time of sale of
gold, he paid brokerage of Rs. 10,000. What is the amount of taxable capital gain? ** Gold
was purchased in December, 2015 and sold in August, 2016, i.e., sold after holding it for a
period of less than 36 months and, hence, the gain will be short-term capital gain. The gain
will be computed as follows :

Solution:-

Example of long term capital gain:-

2) Mr.Abrar purchased a flat measuring 1,000 square feet in Mumbai in April 1991 at the rate
of 2,500 per square feet and sold the same in December 2012 at the rate of 48,000 per square
feet. Abrar spent 80,000 on brokerage and 20,000 on legal consultation in connection with
the sale of the flat. Compute the capital gain from this transaction.

Solution:-

Particular ₹
Sale consideration (1000x48000) — 4,80,00,000
Less- Borkerage and legal charges (1,00,000)
Net sale consideration 4,79,00,000
Less ICOA =`25,00,000 x 785/199 98,61,809
Long term capital gain 3,80,38,191