Some Unique Questions on PGBP for IPCC Students

Q.1. X Co. Ltd. was amalgamated with Y Co. Ltd. with effect from 29th August 2009. The written down
value of its block of assets as on 1st April, 2009, the rate of depreciation on each block and the values at
which the block of assets were transferred by X Co. Ltd to Y Co. Ltd. are given below :
Block of Asset Rate of Depredation WD V in hands of X Co. Ltd. Transfer value of Y Co.
as on 1-4-09 Ltd.
Buildings 10% 1,000,000 900,000
Plant & Machinery 15% 2,500,000 2,400,000
Furniture 10% 500,000 450,000
You are required to work out the deductions admissible u/s 32 by way of depreciation to X Co. Ltd. and Y
Co. Ltd. in respect of these assets for the financial year 2009-10 relevant to the assessment year 2010-11. It
may be noted that the amalgamation is in terms of section 2(1B) of the Income Tax Act, 1961. For
computational purposes, assume 365 days in a year.
Ans. According to section 43(6), WDV of block of assets acquired in amalgamation by an amalgamated
Indian company shall be WDV of the block in hands of amalgamating company as on 1st day of the previous
year. As per Section 32, deduction on account of depreciation shall be apportioned between amalgamating
and amalgamated company in the ratio of the number of days for which the assets were used by them.
Therefore, as the amalgamation was effective from 29th August, X Co. Ltd. can claim depreciation for 150
days and for the balance 215 days, the depreciation is allowable to Y Co. Ltd.
The admissible depreciation is as follows - (Ratio 150:215)
Assets Rate WDV Total Depreciation X Co. Ltd Y Co. Ltd.
Building 10% 1000000 100000 41,096 58,904
Plant and Machinery 15% 2500000 375000 154,110 220,890
Furniture 10% 500000 50000 20,548 29,452

Q.2. The Written Down Value of Plant and Machinery on 1-04-2009 of X Ltd. engaged in manufacturing of
PVC granules is Rs. 1,000 lakhs. Company purchased additional plant and machinery for Rs. 800 lakhs on
18/04/2009 inclusive of second hand machine imported from China of Rs. 200 lakhs to increase its installed
capacity of production from 1000 TPA to 1500 TPA. The production from new machine was taken w.e.f.
1/12/09. Workout by giving reasons the amount of allowable depreciation.
Ans. Computation of depreciation allowable for assessment year 2010-11 (Rs. in lakhs)
WDV as on 1/04/2009 1,000
Add : Cost of Additions made during the year 800
WDV as on 31/03/2010 1,800
Less : Normal Depreciation (1000 x 15% + 800 x 15% x ½ as used for less than 210
180 days)
Less : Additional depreciation on new machine [(800 - 200, being old) x 20% x ½] 60 270
WDV as on 1-4-2010 1,530

Q.3. A copany engaged in the manufacturing of pharmaceutical products commenced its business on 1-4-
2009. During the financial years 2006-07 to 2008-2009 it had incurred Rs.2.00 lacs annually as expenditure
on salaries and purchase of raw materials for the purpose of research connected with its business. During the
previous year 2009-10 it incurred on scientific research revenue expenditure of Rs.2.00 lacs and a capital
expenditure of Rs.3.5 lacs on purchase of plant and machinery. Since the result of the research was
unsuccessful, the company sold its plant and machinery on 31.03.2010 for Rs. 8 lacs and closed its research
activity. Compute the admissible deduction u/s 35 for the Assessment Year 2010-11.
Ans. The deduction admissible under section 35 is as follows -
Particulars Section Rs.
Expenditure on salaries and purchase of raw materials incurred for 35(1)(i)
scientific research during the period of three years before the
commencement of business i.e. during the financial years 2006-07 to
2008-09 [Rs. 2 lakhs x 3 years] 600,000
Revenue expenditure incurred for previous year 2009-10 Rs. 2,00,000
Capital expenditure on purchase of plant and machinery Rs. 3,50,000 550,000 35(2AB)
Weighted deduction at 150% o/Rs. 5,50,000 825,000
Total deduction under Section 35 1,425,000
Note:
(1) According to Section 35(2AB), any expenditure incurred on in-house research and development is
entitled to weighted deduction of 150%. Pharmaceutical products are not covered in Eleventh
Schedule to the Act. Hence, the company in this case is eligible for deduction u/s 35(2AB)
(2) Taxability of deemed profits u/s 41(3) arises only when scientific research asset for which deduction
u/s 35(2) had been allowed, is subsequently sold. However, in this case the deduction in respect of
asset sold was allowed u/s 35(2AB), therefore, section 41(3) cannot be invoked in respect thereof.
the excess of sale proceeds received on sale of asset over cost thereof i.e. Rs. 4.5 lacs (Rs. 8 lacs- Rs.
3.5 lacs) shall be chargeable to tax under the head 'Capital Gains'.

Q.4. Tea Development Account, Sale of asset acquired under Deposit scheme: X Ltd. is a company
engaged in the business of growing, manufacturing and selling of Tea. For the accounting year ended 31st
March 2010, its composite business profits, before an adjustment under Section 33AB of the Income-tax
Act, were Rs. 60 lakhs. In the year, it deposited Rs. 25 lakhs with NABARD. The company has a business
loss of Rs. 10 lakhs brought forward from the previous year. The company withdrew in February, 2010 Rs.
20 lakhs from the deposit account to buy a non depreciable asset for Rs.18 lakhs and could not use the
balance before the end of the accounting year. The withdrawal and the purchase were under a scheme
approved by the Tea Board. The non-depreciable asset was sold in November 2010 for Rs. 29 lakhs. Indicate
clearly the tax of the above transactions and the total income for the relevant previous years.
Ans. For the purposes of allowing deduction under section 33AB, the profits and gains of business of
growing and manufacturing of tea in India must be considered and not just 40% thereof as per Rule 8. The
disintegration of 40% business income as per Rule 8 shall be done after allowing deduction u/s 33AB.

Tax consequences of the aforesaid transactions for the relevant years (amounts in Rs. lakhs)
Composite business profits before deduction under section 33AB 60.0
Less: Deduction under section 33AB, to the extent of lower of the following -
(I)40% of such profits before adjustment of b/f losses i.e. 40% of 60 lakhs 24.0
(II)Amount deposited 25.0 24.0
Profits and gains of business 36.0
Business Income as per Rule 8 (40% of 36 lakhs) 14.4
Less: Brought forward business loss 10.0
4.4
Add: 40% of amount withdrawn but not utilised during the year i.e. 40% of [20 - 18] lakhs 0.8
Net Income of the assessment year 2010-2011 5.2
Tax consequences for assessment year 2011-12 (Sale of asset on Nov 2010):
Business Income (40% of 18 lakhs being cost of the asset sold) 7.2
Short -Term Capital Gains (29 - 18) lakhs 11.0
Income chargeable to tax for assessment year 2011-12 18.2

Q.5. Deduction under section 35ABB : XYZ Ltd incurs an expenditure of Rs. 100 crore for acquiring the
right to operate telecommunication services for Haryana and Punjab circles. The payment of Rs. 100 crore
was made in September 2008 and the licence to operate the services was valid for 10 years. In December
2009, the company transfers part of the licence in respect of Haryana, to ABC Ltd. for a sum of Rs. 27 crore
and continues to operate the licence in respect of Punjab. What is the amount allowable as deduction u/s
35ABB to XYZ Ltd. in respect of the licence fee for assessment year 2010-11?
Ans. The amount deductible u/s 35ABB in hands of XYZ Ltd. for assessment year 2010-11 will be, -
(Rs .in crore)
Cost of licence acquired by XYZ Ltd. 100
Less: Amount written off during assessment year 2009-10 (I/ 10th of 100 crores) 10

Expenditure remaining unallowed 90

Less: Sale proceeds of part of the license 27
Remaining balance 63
Amount deductible for 9 years starting with assessment year 2010-11 is (63 ÷9) 7

Q.6. "Easy Call Ltd." to provide telecom services in Mumbai obtained a license on 11.4.2007 for a period of
10 years ending on 31.3.2017 against a fee of Rs. 27 lacs to be paid in 3 installments of Rs. 10 lacs, 9 lacs
and 8 lacs by April, 2007, April, 2008 and April, 2009 respectively. Explain how the payment made for
licence fee shall be dealt with under the I. Tax Act, 1961 and work out the amount, if any, deductible in this
respect out of income chargeable to tax for A.Y. 2010-11 and in subsequent years.
Ans. Since the amount has been paid in installments, the deduction will be allowed in respect of each part
payment for the remaining tenure of the license. Therefore, amount deductible in assessment year 2008-09
l/10th of 10,00,000 = Rs. 1,00,000; Amount deductible in assessment year 2009-10 = l/10th of 10,00,000 +
l/9th of 9,00,000 = Rs. 2,00,000; Amount deductible for eight assessment years starting from assessment
year 2010-11= l/10th of 10,00,000 + l/9th of 9,00,000 + l/8th of 8,00,000 = Rs. 3,00,000.

Q.7. Explain the meaning of "eligible expense" for the purpose of claiming benefit of Section 35D.
Ans. DEDUCTION IN RELATION TO PRELIMINARY EXPENSES [Section 35D]:
(1) Eligible assessee: Indian Company, or a non-corporate assessee resident in India
(2) Eligible Expenditure: Expenditure eligible for deduction should be incurred in connection with
commencement of business or extension of the undertaking of the assessee or setting up a new unit.
The following expenses are eligible for deduction: -
(a) Expenditure on preparation of feasibility/project report, conducting market or any other survey
necessary for business, or engineering services carried out by assessee or an approved concern.
(b) Legal charges for drafting any agreement at the time of setting up or conduct of business.
(c) In case of company assessee –
Legal charges for drafting and printing its Memorandum and Articles of Association; or
Registration fees for its registration under the Companies Act, 1956; or
Underwriting commission, brokerage/charges for preparation/advertisement of prospectus etc.
incurred in connection with issue of shares or debentures for public subscription.
(d) Any other prescribed expenditure if not allowable under any other provisions of the Act.
(3) Qualifying Expenditure: Lower of the following qualifies for deduction: -
(a) Aggregate amount of eligible expenditure; or
(b) 5% of Cost of the project.**
**In case of Indian company, 5% of cost of project or 5% of capital employed, whichever is higher, will
be taken.
'Cost of project' means actual cost of fixed assets acquired or developed in relation to such
commencement, extension or set up, and which are shown as on 31s' March of relevant previous
year.
'Capital employed in the business of company' = [Issued share capital + Debentures + Long-Term
borrowings] in relation to such commencement, extension or set up and which are shown as on 31st
March of the relevant previous year.
Premium collected on subscribed share capital (i.e. share premium) shall not form part of the 'capital
employed in business' - Berger Paints India Ltd. v. CIT [2006] 154 Taxman 293 (Del.)
Relevant previous year means the year in which the business is commenced; or the extension of such
undertaking is completed; or the new unit commences production or operation.
(4) Deduction and Period: 1/5* of 'qualifying expenditure' is allowed as deduction for each of the five
successive previous years starting with the relevant previous year.
(5) If, in case of amalgamation or demerger, the amalgamated/resulting company is an Indian company,
no deduction shall be allowed to amalgamating or demerged company in the year of transfer; and the
provisions of this section shall, as far as may be, apply to the amalgamated or resulting company.
(6) Audit: In case of an assessee other than company/co-operative society, the accounts for year(s) in which
expenditure is incurred must be audited by a Chartered Accountant and a report thereof in prescribed form
must be furnished along with return of income for the first year in which deduction is claimed.
(7) If a deduction is allowed under this section for any assessment year, no deduction shall be allowed in
respect of such expenditure under any other provision for the same or any other assessment year. ,
(8) Deduction available to service sector units also : Deduction under this section was, hitherto, available
only to industrial undertaking/unit. Word 'industrial' has been omitted with the result that the deduction is
now available to service sector units as well.

Q.8. G Ltd. a manufacturing company, was marketing its products through another company M Ltd., which
enjoyed the sole distribution rights. It was decided to amalgamate M Ltd., G Ltd., and to take over its
establishment so that the distribution, marketing and selling could be carried on by G Ltd., itself. A sum of
Rs. 50,000 was incurred by way of legal expenses in connection with the amalgamation which was claimed
by G Ltd,/ a§ revenue expenditure. Is the claim justified?
Ans. Expenditure incurred in relation to amalgamation shall be allowed in 5 equal annual installments
beginning with the previous year in which amalgamation takes place.
DEDUCTION FOR EXPENDITURE INCURRED ON AMALGAMATION/DEMERGER [SECTION
35DD] & DEDUCTION FOR EXPENDITURE ON VOLUNTARY RETIREMENT [SECTION 35DDA]:
Expenditure on amalgamation/demerger Expenditure on voluntary retirement

Assessee Indian Company Any person

Eligible 100% of expenditure incurred wholly & 100% of payment of any sum to an
expenditure exclusively for amalgamation or demerger of employee in connection with his
an undertaking. voluntary retirement in any year in
accordance with relevant scheme(s).

Deduction and l/5th of eligible expenditure is deductible in l/5th of eligible expenditure is

Period each of the 5 successive previous years deductible in each of the 5 successive
starting with the previous year in which previous years starting with the
amalgamation or demerger takes place. previous year in which such
expenditure is incurred.

Additional provisions of section 35DDA : If, in case of amalgamation or demerger of an Indian company
or succession of business of a firm or a proprietary concern by a company fulfilling conditions laid down in
47(xiii)/(xiv), the resultant company is an Indian company, then, no deduction shall be allowed to such
amalgamating or demerged company, or such firm or proprietary concern in the year of transfer; and the
provisions of this section shall apply to the amalgamated/resulting/successor company.

Q.9. X Ltd., during the financial year ending 31-3-2010, paid production bonus of an amount of Rs.3 lakhs
pursuant to a settlement arrived with the workers in addition to the statutory payment of Rs.1 lakhs as per
the Bonus Act. On these facts, your advice is sought:
(a) Whether the sum of Rs.3 lakhs is deductible s per the provisions of section 36(1)(ii)?
(b) If the claim is not so deductible, can it be claimed under any other provision?
Ans. The aforesaid issues are discussed below:
(a) As per Section 36(1)(ii), any sum paid to an employee as bouns or commission for services rendered
is allowable as deduction if the same is paid during the previous year or on or before the due date for
furnishing the return of income u/s 139(1). Therefore, the production bonus is allowable in this case.
(b) This question doesn’t survive in view of answer to preceding question.

Q.10. Atul Housing Finance Co. Ltd. provides you the following particulars from its accounts for the year
ended on 31-3-2010 and seeks your opinion as to availability of deduction under Section 36(1)(viii) and the
amount thereof
 -Profits from the business computed as per part D of Chapter IV of the Act but before claiming
deduction u/s 36(l)(viii): Rs. 560 lacs
-Paid-up share Capital Rs. 500 lacs
-General Reserve Rs. 100 lacs
-Balance in reserve created u/s 36(l)(viii) on 31.3.2009 Rs. 1,100 lacs
Ans. Atul Housing Finance Co. Ltd. is engaged in carrying on the eligible business as specified in section
36(1) (viii) of the Act and hence is entitled to claim the deduction.
Computation of deduction u/s 36(1)(viii) (amounts in Rs. lakhs)
Income from business computed under 'Profits and gains of business or
profession' before claiming deduction u/s 36(l)(viii) 560
Less: Deduction u/s 36(l)(viii) to the extent of lower of the following -
a. 20% of profits and gains of business or profession before this deduction i.e.
20% of 560 lakhs 112
b. 2 x (Paid-up share capital + general reserves on last day of previous year) –
Balance of Special Reserve A/c on 1st day of previous year i.e. 2 x (500 +
100) - 1100 100 100

Income under the head 'Profits and gains of business or profession' 460