Taxation Management (Planning):

I:Some model questions

(1) The period of 12 months commencing from 1st of April, every year is called
---------(financial year/assessment year)
(2) Under the IT Act, exemptions are allowed, only in respect of Sec80C and 80D
----(true/false) (3) A bank is started by a partnership firm, the
maximum partners allowed are: (a) 2(b)7(c)10(d)20
(4) an assessee’s residential status is determined based on (a) calendar year (b)
previous year (c) assessment year (d) any one of the above
(5) Rajendran wins a lottery, this income should not be charged to tax under
--------------(capital gains/income from other sources)
(6) 80 C deduction is applicable to (i) individuals (ii) HUF (iii) Companies (iv)
Societies (a) i (b) i,iii(c) ii( d) i,ii
(7)Copy rights is an intangible asset. It is also known as ----------------------capital
assets (corporeal/non corporeal)
(8) Jayesh is an investor in stock market. He is holding 20 shares of State Bank of
India for the past 18 months. This will be treated as ------------ capital asset (short-
term/long-term) (9) Altaf Ahmed is owning
a car for personal use . This can be classified as capital asset (correct/incorrect)
(10)Service tax is a tax on -----------(Service/Service provider)
(11) Service tax is governed by-------------- (a) The Excise Act(b) The Finance
Act,1994 (c) The CENVAT Credit Rules,2004 (d) The Income Tax Act,1961
(12) As per IT Act,Manipal Univesity is ---------------(a) an undertaking (b) a local
authority (c) an educational institution (d) an artificial judicial person
(13) Which is not taxable -----------------(black money/pin money)
(14) Foreign income is taxable in case of a non resident ----------(true/false)
(15) The maximum period of tax holiday which can be enjoyed by a computer
software company of a Free Trade Zone -------------- (a) 3 years (b) 5 years (c) 10
years (d) no limit

Solution:

(1) assessment year(2)false(3)10(4)b previous year(5)capital gains(6)d(7) non

corporeal(8) long-term
(9) incorrect(10) Service(11) (b)The Finance Act,1994 (12) (d) an artificial judicial
person (13) pin money (14) false(15) (c) 10 years
II:Political Parties: A political party to get exemption (Sec 13A) should be a
political party registered under the Representation of the People Act,1951. Every
political party is obliged to file every year a return of their total income voluntarily .

Some of the exemptions allowed to these political parties are :

 Income chargeable under “Income from house property”

 Income chargeable under “Income from other sources”

 Any income by way of voluntary contribution form any person

 Any income by way of capital gains

These exemptions mentioned above are allowed, only when the political parties
comply with the following conditions:

 Maintains all the relevant books and records, to enable the Assessing Officer
to decide about the income

 If the amount of voluntary contribution from a person exceeds Rs.20,000, the

party keeps and maintains a record of such contribution with full details such
as the name, address of the donor.

 The accounts of the political party are audited by a Chartered Accountant

 The treasurer or an authorized person should comply with proper reporting to

the concerned authorities for the relevant financial year (under sec 29C(3) of
the Representation of People Act,1951)

 In case, the report mentioned above is not submitted, the political party is
not entitled for the exemption for such financial year

III: Free Trade Zones: (Sec 10A) Subject to provisions of this section, certain
deduction is allowed to all categories of assesses (i) individuals (ii) firms (iii)
companies and others who derive any profit or gain from an undertaking
engaged in the export of goods or articles or computer software

Other conditions:
(a) It has started production or begins production of goods or articles or
computer software in any Free Trade Zone, Electronic Hardware Technology
Park or Software Technology Park (b) It should not be
formed by splitting up or reconstruction of an existing business (however
exemptions is provided for certain categories)
(c)It should not be formed by the transfer of machinery or plant, previously used
for any purpose, to a new business, with some exceptions.
(d) The Indian assessee, should ensure that the export proceeds of goods or
articles or computer exports out of India: (i) is received (ii) in convertible foreign
currency (iii) with in a period six months from the end of the previous year or
within any further period which RBI may allow in this behalf. (e) The
assessee should also furnish a Chartered Accountant’s certificate in Form No
56F. with the income tax return. The certificate should indicate that the
deduction has been correctly accounted as per the provisions of this section.

How a Period of tax holiday is computed?

The profits and gain from the exports by such undertaking (operating in Free
Trade Zones, as mentioned above) shall not be included in the total income of
the assessee for

 any ten consecutive assessment years beginning with the assessment year,
relevant to the previous year ,in which the undertaking begins to
manufacture or produce goods or articles or computer software.

 The deduction shall be allowed maximum upto assessment year 2011-12.

 No deductions, under this section shall be allowed to any undertaking for the
assessment for the assessment year 2012-13 and thereafter.

 For ease of reference, let us understand that, if an undertaking has set up (in
a Free Trade Zone) on or before 31st March,2002 shall be entitled to a
deduction of a period of 10 years.

 In case of an undertaking ,which was set up (in a Free Trade Zone) during the
period for 2004-05 shall get a deduction for a period of only 7 years

What is an “Export turnover”?

The consideration, in respect of export by the undertaking of goods or articles or
computer software received in India, within the prescribed time frame, in foreign
exchange as per sub section (3), but does not include expenses (logistic charges
)– freight, telecommunication charges or insurance attributable to the export of
such goods or articles or computer software outside India or expenses if any,
incurred in foreign exchange in providing technical services

Calculate the deductable amount for “Silver Laser Note” a computer

software company in SEEPZ, as per Sec 10A(4):
Profits of Silver Laser Note for the year 2009-10 (previous year)
x ET of the firm Silver Laser Note of computer software exports/ Total turnover
of business of Silver Laser Note
(All figures are indicated in Indian Rupees)
Total sales of Silver Laser Note
60,00,000 Export sales
50.00,000 Sales in India
10,00,000 Export proceeds brought to India in convertible forex upto 30th
September,2009 46,00,000 Profits from the above undertakings
6,00,000 Computation of deduction available u/s 10A
Profit from business of the undertaking x Export Turnover/Total turnover of the
undertaking 6,00,000x46,00,000/60,00,000 = 4,60,000 Deduction available
u/s 10A shall be Rs. 4,60,000

IV:Write Short notes on Public Provident Fund (PPF):

This scheme is covered under the Public Provident Fund Act,1968. Features of
PPF are: (i) Any member of the public can contribute to this scheme (ii) whether
the person is employed or self employed can contribute to this scheme (iii) The
employee can contribute over and above his contribution to other provident fund
schemes.(iv) The minimum contribution is Rs.500 and maximum Rs.70,000 per
year (v) Unless otherwise extended, the scheme is a 15 year scheme.(vi) The
contribution under PPF is exempted under Sec 80C (maximum deduction allowed
is Rs 100,000 out of which maximum Rs 70,000 can be covered by PPF
investment)

V: Mergers & Amalgamations :As regards , amalgamation and

demerger{ (Sec 10AA (5)} deduction is allowable, if an undertaking, being the
unit of an Indian company which is entitled to the deduction under this section is
transferred to another Indian company under a scheme of amalgamation or
demerger, the deduction shall be allowable in the hands of the amalgamated or
the resulting company. However no deduction, is allowed under this section to
the amalgamating company or the demerged company for the previous year in
which the amalgamation or demerger takes place.

By a scheme of an amalgamation ANS &Co amalgamated with BNM & Co in April

2010. Which company gets deduction and in which assessment year? (a) BNM &
Co (b) 2011-2012

Amortization of expenses: In case of amalgamation or demerger, how to

treat the amortization of expenditure (Sec 35DD)
(i) The company should be an Indian company (ii) Expenses incurred wholly and
exclusively (iii) The purpose is amalgamation or demerger of an undertaking (iv)
the Indian assessee would be eligible for deduction of an amount equal to 1/5th
of such expenditure for each of five successive previous years, in which
amalgamation or demerger takes place.(v) No other deduction shall be allowed
in respect of the expenditure mentioned above under any other provision of the
Act

What should be the Tax Planning? In respect of Amortization of

expenses in Amalgamation or Demerger?
The concerned persons of both the companies (amalgamation or demerger)
should plan their tax carefully.
  In case, the expenses on amalgamation are incurred by the amalgamating
company, it can claim 1/5th of such expenses in the year of amalgamation.

 The balance 4/5th of expenditure cannot be claimed as deduction for the

reason, as the company ceased to exist.

 On the other hand, if the expense are incurred by the amalgamated

company, it will be eligible for deduction over period of five years, as it
continues to exist

 In the case, of demerger both the companies (demerged and resulting) can
claim deductions as both would continue to exist.

Cost of shares allotted in a demerger:{Sec 492©}

“Demerger’ means transfer of a part (unit, division or undertaking). In the given
example, AMN company (known as demerged company) and ABY company
(called as resulting company) are involved. The cost of acquisition of the shares
in resulting company (ABY) shall be, by the assessee of the demerged company
would be :
Cost of acquisition of share in AMN x Net book value of assets of AMN
transferred in demerger/Net worth of AMN before demerger

Please note that (a) The period of holding of the shares in the resulting
company, shall be counted from the date of acquit ion of shares in the demerged
company, in order to find out whether or not they are long term capital asset (b)
The indexing will start from the date of allotment in the resulting company

VI: Capital Gains: As per Sec 45(1):

+ arises out of a capital asset

+ the capital asset must have been transferred

+ there should be profits or gains on such transfer, called as capital gains

+ such capital gain should not be exempt u/d different relevant section of the
IT Act

Capital gains, arises only out of transfer of a capital asset, in the previous year

Capital asset, is a property of any kind held by the assessee (business or

personal), but the following are not included:
(a) any stock- in-trade, consumable stores or raw materials, would be taxed under
the head “profits and gains of business or profession”
(b) personal effects ,ie., moveable property (including wearing apparel and
furniture) held for personal use by assessee of any member of his family depends
on him.
(Exceptions: The following assets (though movable) may be held for personal use,
shall not be treated as personal effects: (i) jewellery (ii) archaeological
collection (iii) drawings (iv) paintings (v) sculptures or (vi) any work of art)

(c) rural agricultural land in India

Salient features: Any kind of property, barring the exceptions, include both
tangible as well as intangible rights. Also it may be either corporeal or incorporeal in
nature.

Distinguish between corporeal assets and incorporeal assets. These are

things in physical state, like land, building, machinery, jewellery, shares, cars. etc.,
Examples of incorporeal assets are : tenancy rights, lease hold rights, copy rights,
route permits for buses ,etc., and covered under the definition of capital assets.
However, the assets which are purely for personal use and movable are not treated
as capital assets, but personal effects

Capital assets

Short-term capital Long-term capital

asset asset
(a) Short-term capital asset {Sec 2(42A)}: A capital asset held by an assessee,
for not more than 36 months, immediately preceding the date of its transfer, is
known as a short term capital asset. Exceptions: In certain cases,
the assets are treated as short-term capital assets, if they are held for not more
than 12 months, instead of 36 months, immediately preceding the date of its
transfer .Some examples are: (i) Equity or preference shares held in a company (ii)
certain specified investments in Mutual funds qualified u/s 10(223D) (iii) zero
coupon bonds (iv) any other security listed in a recognized stock exchange in India

(b) Long-term capital asset{Sec 2(29A}: If an asset, is held by an assessee, for

more than 36 months or 12 months, as the case may be, such an asset will be
treated as a long-term capital asset

Like short-term capital asset and long-term capital asset, the gains arising out these
types of asset/s are classified as short-term capital gain {Sec 2(42B)} and long-
term capital gain {Sec 2(29B)}
While the important requirement, for the applicability of the capital gain, the capital
asset must have been transferred. One exception is in respect of profits or gains
from insurance claim due to damage or destruction of an asset (property), there will
be capital gain although no asset has been transferred in such case/s.

Identify some of the items, which are included under the term ‘transfer’ in relation
to capital asset: (a) the sale, exchange or relinquishment of the
asset; (b) the extinguishment of any rights thereon; (c) the compulsory
acquisition thereof under any law;(d) maturity or redemption of a Zero Coupon
Bonds/s(e) any transaction involving the allowing of the possession any immovable
property (as per the provisions of Transfer of Property Act,1882)

VII:Computation of total income for the assessment year 2011-12

You are a tax consultant and your client Mr.Sanjay Gupta, wants you to compute the
total income and income tax payable by him for the assessment year 2011-12.

The details furnished by your client Sanjay Gupta, working in a KPO, are as under:

Gross income from salary Rs. 6,00,000

Income from other sources Rs 17,500

Other details furnishes by Sanjay Gupta for the previous year are: (a) Contribution
to PPF Rs 20,000 (b) Payment of insurance premium (self) Rs 22,500 (c) PF
and VPF contribution Rs 66,000 (d) Professional tax
Rs 2,500 (e) Mediclaim policy Rs 18,600 (family floater policy) (f) TDS Rs 28,300

The tax rate for the assessment year 2011-12 are: Tax Rate (%)
Upto Rs 1,60,000 Nil
Above Rs.1,60,000 – Rs.5,00,000 10%
Above Rs.5,00,000 - Rs. 8,00,000 20%
Above Rs.8,00,000 30%

Education Cess 2% SHEC 1%

Compute the total income for the assessment year 2011-12 and tax payable by
Sanjay Gupta

Solution:
Computation of the total income for the assessment year 2011-12 ( Rs )

Income from salary 6,00,000

Income from other sources 17,500
Gross Total Income 6,17,500
Less deduction u/s 80C 1,00,000
{(a) Contribution to PPF Rs 20,000
(b) Payment of insurance premium Rs 22,500
(c) PF and VPR contribution Rs 66,000
Total Rs 1,08,500
Maximum deduction allowed ( Rs. 1,00,000}

Gross Salary 6,00,000

Income from other sources 17,500
Total Income 6,17,500

Deductions:
Tax on employment (professional tax) (2,500)
Income chargeable under Head Salaries 6,15,000
Add Other income 17,500
Gross Total Income
6,23,500

Deductions u/s Chapter VI-A

U/S 80C

(a) Contribution to PPF Rs 20,000

(b) Payment of insurance premium Rs 22,500
(c) PF and VPR contribution Rs 66,000
Total Rs 1,08,500
Maximum deduction allowed Rs. 1,00,000 1,00,000
U/S 80D
Medi claim policy Rs 18,600
Eligible 15,000
Total
(1,15,000) Total taxable income
5,08,000 Tax on Total Income*

Working: Tax on Total Income*

Upto Rs 1,60,000 Nil
Above Rs.1,60,000 – Rs.5,00,000 10%
Above Rs.5,00,000 - Rs. 8,00,000 20%

Upto 1,60,000 - 0
Above 1,60,000 – 5,00,000 34,000 ( 10% on 3,40,000)
Above Rs.5,00,000 - Rs. 8,00,000 1,600 (20% on 8,000)
Tax on total income 35,600
Education Cess and SHE Cess (3%) 1,068
 Tax payable 36,668
Less TDS (28,300)
Tax payable 8,368

Since TDS has already been deducted, the tax payable for AY 2011-12 by Sanjay
Gupta would be Rs. 8,368