Q 1 What are the factors that are helpful for effective tax planning

Ans Factors Affecting the Tax Planning

The following factors are essential for effective tax planning: 1. Residential status and citizenship of the assessee: We know that a non-resident in India is not liable to pay income-tax on incomes which accrue or arise and are also received outside India, whereas a resident in India is liable to pay income-tax on such incomes. Therefore, every assessee would like to be a non-resident in India, if he has any income which accrues or arises outside India. 2. Heads of income/assets to be included in computing net wealth: Before the Tax-planner goes in for his task; he has to have a full picture of the sources of income of the tax payer and the members of his family. Though total income includes all income from whatever source derived, the scope of tax planning is not similar in respect of all sources of income. The assessee can avail the benefits of exemption and deductions under each head of income. Further he can avail the benefit of rebate and relief under the Act. 3. Latest legal position: It is the foremost duty of a tax-planner to keep him fully conversant with the latest position of the taxation laws along with the allied laws and also the judicial pronouncements in respect thereof. For this purpose he must have a thorough and up-to-date understanding of the annual Finance Acts, the Taxation Laws Amendments, the amendments, if any, of the allied laws, the latest judicial pronouncements of the High Courts and the Supreme Court, various Circulars of the Central Board of Direct Taxes which seek to clarify the legal position in so far as the Revenue is concerned. 4. Form vs Substance: A tax planner has to bear in mind the following principles enunciated by the courts on the question whether form or substance of a transaction should prevail in Income-tax matters. (a) Form of transaction: When a transaction is arranged in one form known to law, it will attract tax liability while, if it is entered into another form which is equally lawful, it may not. (b) Genuineness of transaction: It is important to observe whether the transaction is a genuine or not. If in case it is not then in such a situation depiction of truth is needed and it is not the question of form and substance. It will be open to the authorities to pierce the corporate veil and look behind the legal faade, at the reality of the transaction. (c) Expenditure: In the case of expenditure, the mere fact that the payment is made under an agreement does not preclude the department from enquiring into the actual nature of the payment.

Q 2 Define the term tax holidays. What are the different tax incentives for new units established in Special Economic Zone (SEZ)?

Ans Income Tax Holidays

A tax holiday is a temporary reduction or elimination of a tax. Governments usually create tax holidays as incentives for business investment. The taxes that are most commonly reduced by national and local governments are sales taxes. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting Foreign Direct Investment or stimulating growth in selected industries. Tax holiday is given in respect of particular activities, and sometimes also only in particular areas with a view to develop that area of business. You can see box 2.1 for the tax incentives offered to the investors by the Government of India to accelerate the economic growth. Box 2.1: Tax holidays Available in India

Tax holiday A tax holiday is available in respect of profits derived from exports by a 100% export oriented undertaking, or an undertaking located in a free trade zone, export processing zone, special economic zone, software technology park, etc. The tax holiday is available in respect of profits derived by non-SEZ units up to years ending 31st March 2009. In the case of an undertaking located in a special economic zone commencing activities on or after 1st April 2003, the tax incentives are available as follows: First five years 100% Next two years 50% Last three years 50% (to the extent amount credited to specified reserve) In the case of new units located in a Special Economic Zone commencing activities on or after 1st April 2006, the tax incentives available are as follows: First five years 100% Next two years 50% Last three years 50% (to the extent amount credited to specified reserve) Profits of Industrial Undertakings A tax holiday for a specified number of years is available in respect of either the entire or part of the profits derived by an industrial undertaking located in a backward state or district or an industrial undertaking engaged, inter alia, in any of the following activities: Infrastructure facility Industrial parks Generation or distribution of powers Power transmission Renovation of existing network of power transmission Gas distribution network Hospitals in rural area Hotels and conventions centers in specified area Undertaking establishment in the north eastern state carrying on specified business Undertakings deriving profits from operating and maintaining hospitals in places other than urban agglomerations

Q 3 What are the key steps to calculate the tax liability of an individual?

Ans Computation of Total Income and Tax Liability

An individual not only has to pay income tax on his total income at a graded scale of tax rates ruling during the concerned assessment year. In addition to his own income under different heads , an individual may also get share of income from his membership in different institutions and some income of others are also clubbed in his total income. Finding out your tax liability is a fairly simple process, once you have understood the different incomes to be included in income of assessee. Its relatively simple to compute his total income and tax liability .Steps given below will help you for the same. Step 1: Compute the income of an individual under 5 heads of income on the basis of his residential status. Step 2: Income of any other person, if includible under Sections 60 to 64, will be included under respective heads. Step 3: Set off of the losses if permissible, while aggregating the income under 5 heads of income. Step 4: Carry forward and set off the losses of past years, if permissible, from such income. Step 5: The income computed under Steps 1 to 4 is known as Gross Total Income from which deductions under Sections 80C to 80U (Chapter VIA) will be allowed. However, no deduction under these sections will be allowed from long-term capital gain/winning of lotteries, etc., though these incomes are part of gross total income. Step 6: The balance income after allowing the deductions is known as Total Income which will be rounded off to the nearest Rs. 10. Step 7: Compute tax on such total income at the prescribed rates of tax. Step 8: Allow rebate of income tax under section from the tax computed in step 7. Step 9: The balance tax shall be increased by a surcharge if applicable. Step 10: Allow relief under Section 89(1), if any, and the balance tax shall be rounded off to nearest Re. 1. Step 11: Deduct the TDS and advance tax paid for the relevant assessment year. The balance is the net tax payable, which must be paid as self-assessment tax before submitting the return of income. Special provisions for persons covered under Portuguese civil law The persons who are governed by the Portuguese Civil Code of 1860 and are residing in the state of Goa, Union Territories of Dadra & Nagar Haveli and Daman & Diu, are governed by the system of community of property. But the total income will not be assessed as that of such community of property. Income of husband and wife under each head of income other than salary shall be apportioned equally between the husband and wife and the income so apportioned shall be included separately in the Total Income of the husband or wife respectively. Income from salary will, however, continue to be assessed in the hands of the husband or wife who actually earned the salary.

Q 4 What are the tax provisions for assessment of firms?

Ans Position of Firm under the Income Tax Act

Legally, a partnership firm does not have a separate entity from that of the partners constituting the firm as the partners are the owners of the firm. However, a firm is treated as a separate tax entity under the Income Tax Act. Salient features of the assessment of a firm are as under: 1. A firm is treated as a separate tax entity. 2. While computing the income of the firm under the head Profits and gains of business or profession, besides the deductions which are allowed u/ss 30 to 37, special deduction is allowed to the firm on account of remuneration to working partners and interest paid to the partners. However, it is subject to certain limits laid down u/s 40 (b). 3. Share of profit which a partner receives from the firm (after deduction of remuneration and interest allowable) shall be fully exempt in the hands of the partner. However, only that part of the interest and remuneration which was allowed as a deduction to the firm shall be taxable in the hands of the partners in their individual assessment under the head profits and gains of business or profession. 4. The firm will be taxed at a flat rate of 30% plus education cess @ 3% plus for the financial year 2010-11. 5. The firm will be assessed as a firm provided conditions mentioned under Section 184 are satisfied. In case these conditions are not satisfied in a particular assessment year, the firm will be assessed as affirm, but no deduction by way of payment of interest, salary, bonus, commission or remuneration, by whatever name called, made to the partner, shall be allowed in computing the income chargeable under the head profits and gains of business or profession and such interest, salary, bonus, commission or remuneration shall not be chargeable to income tax in the hands of the partner. Assessment of firm From point (5) stated above, it can be concluded that for taxation purposes, a firm can be of two types: 1. Firm assessed as firm (provided conditions mentioned u/s 184 are satisfied).and the firm shall be eligible for deduction on account of interest, salary etc while computing its income under the head business and profession). However, it will be subject to the maximum of the limit specified under Section 40(b) 2. If the prescribed conditions are not satisfied, no deduction shall be allowed to the firm on account of such interest, salary, bonus etc. 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 4.1 for some important points to be considered in this regard. Box 4.1

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 5 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 Ans Different Forms of salaries =>Advance Salary Advance salary is taxable on receipt basis, in the year, which it is drawn. =>Arrear Salary It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis. =>Fees and Commission This is paid by an employer to his employee for doing any extra work (not over time) other than the job assigned to him as an employee. It will be included under the head salaries in computation income of the employee. =>Bonus: It is taxable as salary in the year of receipt, if it has not been taxed earlier on due basis. =>Death cum Retirement Gratuity Death cum Retirement Gratuity [Sec.17 (1) iii]

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 (un-commuted) received by all employees (govt. and non govt.) during their life time is included in the salary income and chargeable to tax. =>Leave Salary or Encashment of earned leave Cash equivalent of leave salary payable to an employee of the central and the sate government in respect of the earned leave at his credit at the time of his retirement whether on superannuation or otherwise (e.g. by resigning), is exempt from tax.

The least of the following is exempt from tax: Particulars Amount xxx 1. Maximum of 10 months salary on the basis of the average salary drawn by the employee during 10 months preceding his retirement on superannuation or otherwise 2. Average salary x Approved Period Maximum or Statutory limit 3. Amount actually received Approved period: Earned leave entitlement cannot exceed xxx Rs. 3,00,000 xxx 30 days for every year of actual service

Salary: Basic pay + Dearness Allowance (given in terms of employment) + Commission achieved on fixed percentage of turnover Tax Planning

If a Govt. employee is due for retirement shortly, it is better for him not to encash his salary while he is in service. This is because he can avoid paying tax on leave encashment which he receives at the time of retirement. Even an employee in private service gets exemption for a major part of the amount received as leave encashment. In this connection employee should also consider the loss of interest on the amount which is not taking to save tax. =>Compensation for Retrenchment [Sec10 (10B)] Any compensation received by a workman under Industrial Disputes Act, 1947; at the time retrenchment is exempt from the tax to the extent of the least of the following: Particulars Amount

1. An amount calculated in accordance XXX with Sec 25F(b) of the industrial dispute act 1947; or 5,00,000 2. Statutory Limit (as the central government notified in this behalf) XXX 3. Actual amount of compensation received by the employee Receipts of employees on voluntary retirement [Sec10 (10C)] The least of the following is exempt from tax: Particulars Amount XXX 1. Three months salary X Each completed year of XXX service 2. Salary at the time of retirement X the balance of XXX months of service left before the date of his retirement 5,00,000 3. Actual Amount received 4. Max Statutory limit Note: Salary means Basic pay + DA in terms of employment + Commission achieved fixed percentage of turnover achieved by the employee Note: It applies to an employee who has completed ten years of service or completed 40 years of age (not applicable to P. S. U employees) Tax planning The voluntary retirement can be postponed to the beginning of the next year, to see that taxable income from salary (actual salary is less or nil) is restricted to the compensation. =>Tax paid by the employer on the value of perquisites [Sec 10(10CC)] The amount of tax actually paid by an employer, at his option, on non-monitory perquisites on behalf of an employee, is not taxable in the hands of the employee and it shall not be treated as an allowable expenditure in the hands of the employee. => Salary and pension from U N O It is totally exempt in India. Even pension received by widows/ children of former U N O employees is exempt from tax

Set 2

Q 1 Describe, in brief, the provisions for set off and carry forward of losses. Ans Provisions regarding Set off and Carry Forward of Losses of Firms

There are no special provisions for set off and carry forward of losses of firms. However, there is a special provision as regards carry forward and set off of losses in case of change in the constitution of the firm which is discussed below. Carry forward and set off of losses in case of change in constitution of firm [Section 78] 1. Where a change has occurred in the constitution of a firm, due to retirement of a partner or death of a partner, the firm shall not be entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year. [Section 78(1)]. 2. Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, no person other than the person incurring the loss shall be entitled to have it carried forward and set off against his income. [Section 78(2)] In other words, treatment will be as follows: Step 1: Calculate the share of profit of the retiring/deceased partner in the year in which there is a change in the constitution due to such retirement/death. Step 2: Compute the share of loss of the retiring/deceased partner in the brought forward loss of the firm. Step 3: Set off the share in the brought forward losses of the retiring/deceased partner from his share of the profit of the current year. This set off of share in the brought forward loss will be allowed to the extent of share of profit of such partner. The balance loss, if any, will not be allowed to be carried forward either to such partner or to the firm. On the other hand, if in the current year also the share of the partner is a loss, then share of the brought forward loss along with the share of loss of current year will not be allowed to be set off and carried forward. Unabsorbed depreciation of the firm is not covered u/s 78 and therefore, the entire unabsorbed depreciation will be allowed to be carried forward in the hands of the firm, even if there is a change in the constitution of the firm.

Q 2 . Compute the net wealth and wealth tax liability of R Ltd. as on 31-3-2011. The company is engaged in jewellery business-exports and domestic sales:

The company has taken a loan of Rs. 6,00,000 by mortgaging guest house and built the factory premises. Ans Valuation of Assets [Section 7 and Schedule III] 1) Subject to the provisions of sub-Section (2), the value of any asset, other than cash, for the purposes of this Act shall be its value as on the valuation date determined in the manner laid down in Schedule III. 2) The value of a house belonging to the assessee and exclusively used by him for residential purposes throughout the period of twelve months immediately preceding the valuation date, may, at the option of the assessee, be taken to be the value determined in the manner laid down in Schedule III as on the valuation date next following the date on which he became the owner of the house or the valuation date relevant to the assessment year commencing on the 1st day of April, 1971, whichever valuation date is later: Explanation: For the purposes of this sub-section: i) Where the house has been constructed by the assessee, he shall be deemed to have become the owner thereof on the date on which the construction of such house was completed; ii) "House" includes a part of a house being an independent residential unit.

Net Wealth taxable Rs. 14,50,000; Wealth tax 14,500

Q 3 State the provisions relating to the computation of capital gains in the hands of shareholders of a company on a distribution of assets upon liquidation. Ans Provisions for Computation of Capital Gain Provisions under Section 48 The income under the head Capital Gains shall be computed by deducting the following from the full value of the consideration received or accrued as a result of the transfer of the capital asset: 1) Expenditure incurred wholly and exclusively in connection with such transfer. 2) The cost of acquisition of the asset and the cost of any improvement thereto. Computation of capital gains

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 moneys 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. Cost of acquisition The cost of acquisition of an asset would normally be taken to be the price at which the asset was acquired by the assessee. Such price may litigation expenses incurred for having the shares registered in his name (as company refused to register the same) is part of the cost of acquisition and that incurred for gaining better voting rights is cost of improvement. [Bengal Assam Investors Ltd. vs. CIT] Cost inflation index Means the index as the Central Government may notify in this behalf. The government has notified the following cost of inflation index vide notification dated 5th August 1992 as amended till 2004:

Indexed cost of acquisition = Indexed cost of improvement

Section 50: Computation of capital gains in case of depreciable assets Where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed, the provisions of Sections 48 and 49 shall be subject to the following modification:

Where the full value of consideration received or accruing for the transfer of the asset plus the full value of such consideration for the transfer of any other capital asset falling with the block of assets during the previous year exceeds the aggregate of the following amounts namely: 1. Expenditure incurred wholly and exclusively in connection with such transfer; 2. WDV of the block of assets at the beginning of the previous year; 3. The actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets. Where all assts in a block are transferred during the previous year, the block itself will cease to exist. In such situation, if the aggregate of above three items exceeds the full value of consideration received/accruing for the transfer of asset(s), the loss shall be deemed to be short-term capital loss. Section 51: adjustment of advance money received against cost of acquisition It is possible for an assessee to receive some advance in regard to the transfer of capital asset. Due to the breakdown of the negotiation, the assessee may have retained the advance. Section 51 provides that while calculating capital gains, the above advance retained by the assessee must be used to reduce the cost of acquisition. Self Assessment Questions 7. Full value means the whole price without any deduction whatsoever and it cannot refer to adequacy or inadequacy of price. (True/False) 8. The cost of acquisition of an asset would normally be taken to be the price at which the asset was transferred by the assessee. (True/False) 7.6 Capital Gains Exempt from Tax Capital Gains exempt from tax are defined in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54H and 54GA. Section 54: Capital gains arising from the transfer of residential House Property: is exempt from tax provided the following conditions are satisfied: 1. The house property is a residential house whose income is taxable under the head Income from House Property. 2. The house property is owned by an individual or HUF. 3. The house property is a long term capital asset. 4. The assessee has purchased residential house within a period of one year before the transfer or within two years after the date of transfer. OR He has constructed a residential house property within a period of three years after the date of transfer. Notes: 1. Construction of the house should be completed within 3 years from the date of transfer. Date of commencement of construction is irrelevant. 2. Case of allotment of flat under the self financing scheme of DDA is treated as construction of house for this purpose. Amount of exemption: If the amount of the capital gains is less than the cost of new house property, entire amount of capital gains is exempt from tax. On the other hand, if the amount of capital gains is greater than cost of new house property, the difference between of new house is chargeable to tax as capital gains.

Section 54B: Capital gains on transfer of agricultural land: Any capital gains arising on the transfer of agricultural land situated in an urban is exempt subject to the following conditions: 1. The agricultural land is owned by an individual. If agricultural land is transferred by a HUF, the family is not entitled to exemption u/s 54B [CIT vs. G.K. Devrajulu] 2. The agricultural land must have been used by the assessee or his parents for agricultural purpose during the two years immediately preceding the date of its transfer. 3. The assessee has purchased within a period of two years from the date of transfer (and not before sale) any other land for being used for agricultural purposes. Amount of exemption: The capital gains arising from the transfer of such agricultural land is exempt to the extent of the cost of the new agricultural land purchased within the period mentioned above. It means, if the whole capital gain is reinvested it is fully exempt from tax. Section 54D: Capital gains on compulsory acquisition of lands and buildings: Any capital gain arising on the transfer of land or building or any right in land or building is exempt subject to the following conditions: 1. The assessee is engaged in an industrial undertaking. 2. The land or building or any right there in should form part of the industrial undertaking. 3. Such asset should have been compulsorily acquired under any law. 4. The assessee has used the land or building or any right there in for the purposes of the business of industrial undertaking in the two years immediately preceding the date on which the transfer took place. 5. The assessee has within a period of three years after such transfer purchased any other land or building or any right in any other land or building or constructed any other building for the purposes of shifting or reestablishing the industrial undertaking or setting up another industrial undertaking. 6. The capital gain arising from the transfer of such land or building is exempt to the extent of the cost of the new land or building purchased or constructed within the period mentioned in (5). Where the amount of the capital gain exceeds the cost of acquisition or construction, only excess shall be chargeable to tax. Section 54EC: Exemption of long-term capital gain in case of investment of capital gains in certain bonds: w.e.f. 1.4.2001 (assessment year 2001-02 and onwards), where the capital gain arises from the transfer of a long-term capital asset, it will be exempt if the assessee has invested the capital gain in the long-term specified asset subject to the fulfillment of all the conditions given hereunder: 1. The capital gain arises on or after 1.4.2000 (and not up to 31.3.2000) from the transfer of a long-term capital asset (hereafter referred to as the original asset); 2. The assessee has, within a period of 6 months after the date of transfer or sale of the original asset, invested whole or any part of capital gains, in the long-term specified asset; Long-term specified asset is defined to mean any bond redeemable after three years and issued, on or after 1.4.2000, by the National Bank for Agricultural and Rural Development or by the National Highways Authority of India. 3. The cost of the long-term specified asset is not less than the capital gain in respect of the original asset. If the cost of the long-term specified asset is less than the capital gain, then, the capital gain, proportionate to part of capital gain invested will be exempt. After availing the exemption, the assessee has to retain the long-term specified asset for a minimum period of three years from the date of its acquisition. If the long-term specified asset is transferred or converted (otherwise than by transfer) into money or the assessee takes loan or advance on the security of such long-term specified asset, at any time within a period

of three years from the date of its acquisition, the amount of exempted capital gain on transfer of original asset will be deemed to be long-term capital gain a) of the previous year in which long-term specified asset is transferred or converted into money, or b) of the previous year in which loan or advance is taken against security of such long-term specified asset. It may be noted that irrespective of the quantum of loan or advance taken, the entire exempted amount of capital gain will be brought to tax. Where the cost of long-term specified asset is also eligible for rebate u/s 88, the said rebate will not be allowed for any AY before 1.4.2006 and u/s 80(C) for any AY after 1.4.2006 if the exemption is availed under Section 54EC. Section 54ED: The feature of this Section is as follows: 1. A long term capital asset is transferred by an assessee during the P.Y. 2. The long-term capital asset is transferred to (a) a security listed in any recognized stock exchange in India (b) a unit of UTI or a mutual fund (whether listed or not). Securities mean (i) shares, scripts, stocks, bonds, debenture, debenture stocks or other marketable securities of a like nature in or of any incorporated company or other corporate. (ii) Government securities, (iii) such other instruments as may be declared by the central government, (iv) Rights of interest in securities. 3. Within 6 months from the date of transfer of the asset, the assessee should invest the whole or part of the capital gains in Specified Equity Shares. 4. If the cost of the specified equity shares is not less then the whole capital gains will be exempt from tax. If however, the amount invested in the specified equity shares in less then the capital gains, then the amount of exemption is equal to the amount in specified equity shares. 5. If the specified equity shares are sold or otherwise transferred within one year from the date of acquisition. The amount of capital gains arising from transfer of original assets which was not charged to tax will be deemed to be income by way of long term capital gain of previous year in which specified equity shares transferred. 6. The cost of specified equity shares which is considered for the purpose of Section 54ED shall not be eligible for tax rebate u/s 88 for any A.Y. before 1.4.2006 and u/s 80C for A.Y. starting after 1.4.2006. Section 54F: Capital gain on transfer of long-term capital asset: [Exempted if net consideration is invested in residential house]: Exemption is granted if following conditions are fulfilled: 1. The assessee is either an individual or a HUF. 2. Assessee has transferred a long-term capital asset other than residential house. 3. The assessee purchases within a year before or within a period of 3 years after the date of transfer, a residential house. 4. Assessee does not own more than one residential house except as mentioned in 3 above. Amount of exemption 1. If the cost of the new house is more than the net consideration in respect of the capital asset transferred, the entire capital gain arising from the transfer will be exempt from tax. 2. If the cost of the new house is less than the net consideration in respect of the asset transferred, the exemption from long-term capital gains will be granted proportionately on the basis of investment of net consideration either for purchase or construction of the residential house (cost of new house X capital gains/net consideration). Net consideration in respect of the transfer of capital asset as the full value of the

consideration received or accruing as a result of the transfer of a capital asset after deduction of any expenditure incurred wholly and exclusively, in connection with the transfer. Section 54G: Capital gains on shifting of industrial undertakings from urban area: Capital gains on shifting of industrial undertaking from urban area to non-urban area are exempt if the following conditions are satisfied: 1. The assessee transfers a long-term or short-term capital asset in the nature of plant, machinery, building or land or any right in building or land. It means exemption is not available on capital gains on transfer of other assets e.g. furniture. 2. Such asset should have been used for the purpose of the business of industrial undertaking situated in urban area. 3. The asset should have been transferred in connection with the shifting of the undertaking to a non-urban area. 4. The amount of capital gains should be utilized within a period of one year before or three years after the date of transfer for the following purposes: a) Purchases new machinery or plant, acquire land or building or construction of building for the purposes of his business in the area to which the undertaking is shifted, or b) Incurs expenses on shifting the original asset and transferring the establishment of the undertaking to such area. c) Incurs expenses on such other purposes as may be specified in a scheme framed by the Central Govt. The capital gain shall be exempted to the extent such gain has been utilized for the aforesaid purposes. Section 54H: Extension of time limit for acquiring new asset: Where the transfer of the original asset is by way of compulsory acquisition under any law and the amount of compensation awarded for such acquisition is not received by the assessee on the date of such transfer, the period of acquiring the new asset under Sections 54, 54B, 54D, 54BC and 54F by the assessee or the period for depositing or investing the amount of capital gain shall be extended in relation to such amount of compensation as is not received on the date of transfer. The extended period shall be reckoned from the date of transfer. The extended period shall be reckoned from the date of receipt of the amount of compensation. Section 54GA: Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area to any Special Economic Zone: The benefits under this Section are similar to Sec. 54G of exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban area. This has been inserted by the Special Economic Zones Act, 2005 applicable with effect from a date yet to be notified.

Q 4 Explain the different schemes of service tax planning. Ans Different Schemes of Service Tax Planning

Given below are the key schemes under which an assessee can reduce their tax liability: i) Regular Scheme under which, the works Contractor would have to pay service tax at the applicable rate of 12.36% and would be entitled to cenvat credit in respect of inputs, capital goods and input services. ii) The works Contractor can opt for the benefit of Notification No. 12/2003 dated June 20, 2003, as amended from time to time read with Rule 2A of the Service Tax (Determination of Value) Rules, 2006 which has come into effect from June 1, 2007, whereby, he would be entitled for an exclusion of the extent of the value of goods and materials used while computing the value of taxable services and would still be entitled for cenvat credit in respect of service tax paid on input services, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials. This exemption will apply only in such cases where (i) no Cenvat Credit on such goods and materials had been taken by the service provider, or (ii) if such Cenvat Credit had been taken by the service provider on such goods and materials, such service provider had paid the amount equal to such credit availed before the sale of such goods and materials. In other words, either the service provider should not have taken Cenvat Credit on such goods and materials, or, if he had taken such credit, he must reverse the credit before the sale of such goods and materials. iii) Abatement Scheme: Under Notification No 1/2006 dated March 1, 2006, as amended from time to time, whereby, the works Contractor is entitled to claim abatement to the extent of 67% of the value of services rendered by him. In effect, the works Contractor would have to pay service tax @ 4.08% and would not be entitled for any cenvat credit on inputs, capital goods and input services. iv) Composition Scheme: The newly introduced Composition Scheme, effective June 1, 2007, under which the works Contractor would be required to collect service tax @ 2.06% on the value of services rendered and would be entitled for cenvat credit in respect of input services and input capital goods.

Q 5 During the P.Y. 2010-11, the gross total income of Mr. X is Rs. 4, 00,000. During the P.Y. he pays the
following premiums on Medi-claim insurance policy by cheque. Calculate the amount of tax benefit under Section 80 D. (a) Mr. X 6,000 (b) Mrs. X 4,000 (c) Son (not dependent) 3,000 (d) Daughter (dependent) 2,000 e) Father (not dependent) 1,500 (f) Mother (dependent) (age 68 years & resident in India) 2,000 Hint: Total deduction is Rs. 12,000

Ans 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. Total deduction is Rs. 12,000 Q 6 What is slump sale? Explain provisions relating to slump sale. Ans Cost of acquisition in the case of slump sale [Sec. 50 B]: Provisions of Section 50 B, applicable for computation of capital gains in the case of slump sale are given below: i) Any profits or gains arising from the slump sale affected in the previous year shall be chargeable as long term capital gains and shall be deemed to be income of the previous year in which the transfer took place. However, any capital asset being one or more undertakings owned and held by the assessee for not more than 36 months is transferred under the slump sale, then capital gain shall be deemed to be short term capital gain. ii) In the case of slump sale of the capital asset being one or more undertaking, the net worth of the undertaking shall be taken as cost of acquisition and cost of improvement. Net worth for this purpose is the aggregate value of total asset of the undertaking of division as reduced by the value of liabilities of such undertaking of division as reduced by the value of liabilities of such undertaking or division as appearing in the books of accounts. Any change in the value of assets on account of revaluation of asset of such undertaking or division shall be the written down value of block of asset determined in accordance with the provisions contained in sub-item (C) of Section 43(6)(c)(i) in the case of depreciable assets and the book value for all other assets. iii) The benefit of indexation will not be available. iv) Every assessee, in the case of slump sale, shall furnish along with the return of income, a report of a chartered accountant in form No. 3 CEA indicating the computation of the net worth of the undertaking or division as the case may be has been correctly arrived at.