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Direct tax planning
2008 question paper answers
Section-A
1.a.Give the meaning of company in which the public are substantially interested.
Ans:- A company is an association or collection of individual's people or "worm- bodies" or

else contrived " legal persons"( a mix of both). Company members share a common
purpose and unit it orders to focus their various talents and organize their collectively
available skills or resources to achieve specific declared goals. It is not affected by the
death , instantly or insolvency of an individual member.
b)When is a company treated as resident for tax purpose?
Ans:-A company is said to be resident in India in any previous year if
*It is an Indian company.
*During the year the control and management of it's affairs is aituated wholly in India.
c)State the Tax treatment for long term capital gain.
Ans:-Any profit or gain a raised from sale or transfer of any long term asset is treated as
long term capital gain.
It can be treated under the head Income from Capital gain. This can be eligible for tax at
20%. If it is liable for security transaction tax it will be treated as exempt under section
10(38).
d) When belated return is filed?
Ans:-If the tax payer fails to submit his income tax return
*on or before the due date mentioned u/s139(1).
*If the income tax is not filed before the due date and the income tax office has issued a
notice u/s142(1) directing the tax payers to file his/her income within the time specified is
the notice and he/she has not even filed return as required in the notice he / she can still
file his income tax return even after the due date.
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e) What do you mean by colourable devises ?
Ans:-Justice Ranganath mishra of SC speaking in McDowell & company Ltd u/s CTO
(1985)154/TR148 observed "tax planning may be legitimate provided it is within the
framework of law. Colour able devises cannot be part of tax planning and it is wrong to
encourage or entertain the belief that it is honorable to avoid payment of tax by resorting
to dubious methods.
f) State the circumstances where TDS can be made.
Ans:-* Deductions of tax from salaries (192).
* deductions of tax @source from interest on securities (section 192).
* deduction of TDS from dividends (194).
*deductions of TDS from interest on securities 194A.
*TDS from winning from lotteries or Cross word puzzle 194B.
* TDS from winning from horse race 194BB.
*TDS from payments to contractors 194C.
*TDS from insurance commission 194D.
* TDS from payments in respect of national savings scheme 194EE.
* TDS from payment on account of units by mutual funds or UTI194F.
g) Defferenciate advance tax from TDS.
TDS Advance Tax
TDS,the full firm tax deducted at source means Advance tax attract usually before the
against rendering a service it attracts such as closing of a financial year,i.e, before
contractor, professional , agent etc, whenever 31st March. Company usually pay tax
companies make payment to this vendors and (direct/indirect) on monthly or
deposited with income tax from these parties/ quaterally basis after ending of month
vendors and deposited with income tax Authority or quarter . but before closing of
and issue a certificate to the concerned dedicates financial year. Govt needs revenue in
as a proof paying income tax. the way of tax well in advance.
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h) State the reason to introduce MAT.
Ans:- The concept of MAT was introduced under IT Act to tax companies making high
profits and declare dividends to their shareholders but have no significant tax able income
because of exemptions , deductions and incentives.
I)State the different methods of tax collection.
Ans:-Different methods of tax collection is as follows
a. Taxes paid by the individual.
b. Taxes paid by business.
c. Property tax.
d. Corporate tax.
e. Capital gain taxes.
k) How do you treat the expenditure of amalgamation/ demerger?
l) What is Tax base?
Ans:- The assessed value of a set of assets investments or income stream that is subject to
taxation or the assessed value of single asset that is subject to taxation of anything that
can be taxed has a tax base.
Section- B
3. Discuss the deductions in respect of certain undertakings in north eastern states

U/S80IE.
Ans:- conditions- the following conditions should be satisfied
a. The tax payer begins manufacture or production of goods or undertakes substantial

expansion during April 1 2007 and march 31- 2017.
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b. Alternatively, the tax payer has begin to provide eligible to services during 1-4-2007 and
31-03-2017.
c. However deduction under this section ID not available in respect of manufacture or

production of tobacco , pan masala , plastic Carry bags or less than 20 microns or goods
produced by petroleum oil and gas refineries .
d. Eligible services for this pose are hotel ( 3star or above), nursing home (25 beds or
more), old age homes , vocational training institutes ( such as hotel management ,
cattering, entrepreneurship development, nursing and paramedical ,civil aviation related
training, fashion design and industrial training), IT related training centers, IT hardware
units and biotechnology.
e. The aforesaid activity takes place in any North eastern states (that is arunachal Pradesh,
Assam, Manipur, meghalaya, Mizoram, Nagaland, Sikkim and Tripura).
f. The aforesaid business is not formed by the splitting up. Or the reconstruction, of a
business already in existence [ subject to the few exceptions].
h. The aforesaid business is not formed by the transfer to a new business of machinery or
plant previously used for purpose (subject to a few exceptions).
i. Audit report should be submitted along with the return of income.
j. Return of income is submitted on or before the due date of submission of return of

income given under section 139(1).
Amount of deduction- If the aforesaid conditions are satisfied 100% Of profit from the
aforesaid business Or services shall be deductible for 10 years beginning with the
assessment year relevant to the previous year in which the undertaking begins to
manufacture or produce article or things or complete substantial expansion.
Substantial expansion for this purpose means increase in the investment in the plant and
machinery by atleast 25%of book value of plant and machinery (before taking depreciation
in any year), as on the first day of the previous year in the substantial expansion is
undertaking.
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Section C
7. Discuss the tax holiday and tax incentives available for companies engaged in
infrastructure development.
Ans:- Section 80IA: Deduction in respect of profits and gains from industrial undertaking or
enterprise engaged in infrastructure development
This section is available to the following business carried by an undertaking:
Case 1: Provision of infrastructure facility.
Case 2: Telecommunication services.
Case 3: Industrial parks.
Case 4: Power generation, transmission & distribution or substantial renovation and

Modernization of existing distance lines.
Case 5: Undertaking setup for reconstruction of power unit.
Case 6: A cross country natural gas distribution network.
Case 1: Infrastructure facility:-
The following conditions needs to be satisfied,
a. The undertaking should be engaged in providing infrastructure facility.
b. The undertaking should be owned by Indian company.
c. There should be agreement with central government.
If the above conditions are satisfied then
Deduction=100%of the profits for 10years commencing from the initial Assessment year.
Infrastructure facility means:-
* A road including a bridge or a rail system.
*A highway project including housing or other activities being an integral part of the
highway project.
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*A water supply project, water treatment system, irrigation project, sanitation, and
sewerage system or solid waste management system.
*A port, airport, inland waterway or inland port.
*Initial assessment year means, the Assessment year specified by the assessment at his
option to be the initial year not following beyond the 15th Assessment year starting from
the previous year in which the enterprise beings operating and maintaining the
infrastructure facility. However the benefit of Deduction is available only for 10
consecutive A.Y. following within a period of 15th A.Y. starting from the P.Y.in which the
assessee begins operating & maintaining such infrastructure facility. (10/15)
In case of the assessee is involved in providing infrastructure facilities such as a road

including a bridge or a rail system.
a. A highway project including housing or other activities being an integral part of the
highway project.
b. A water supply project, water treatment system, irrigation project, sanitation, and
sewerage system or solid waste management system. The deduction will be allowed in 10
years out of 20 consecutive assessment years (10/20)
Power of Assessing officer to re- compute profit:-
The assessing officer has power to re-compute profit in the following two situations:-
(i) Transfer between two units owned by the taxpayers:-
√ The taxpayer carries on two or more businesses.
√ The business which is eligible for deduction under section 80IA, transfer goods to such
business which is not eligible for deduction U/S80IA.
√ The consideration for such transfer which is recorded in the books of accounts is not
equal to market value of such goods.
(ii)Transfer by Assessee to any other person:-
a. The taxpayer has some business transaction with any other person.
b. The business transaction is such that it produces more than the ordinary profits.
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c. This is due to close connection between the taxpayer and the other person.
If the above conditions are satisfied in the two cases mentioned above, the Assessing
officer (AO) will re- compute the profits as if the transfer has been made at the normal
market price.
Consequences of merger/Amalgamation:-
Where any undertaking of an Indian company eligible for section 80IA deduction is
transferred before the expiry of 10 years of tax holiday to any other Indian company in a
scheme of amalgamation or demerger , then the deduction will be available as follows:-
Before the P.Y. in which the amalgamation/ demerger takes place, deduction is available
to amalgamation/ demerged company.
From the year in which the amalgamation/demerger takes place (including that year) the
amalgamated company or the resulting company will be entitled to claim deduction
u/s80IA for the unexpired period of tax holiday.
Case 2 :- Telecommunication services:-
The following conditions should be satisfied
1. It should be a new undertaking.
2. It should not be form by transfer of old plants & machinery.
3. The undertaking should be engaged in provided telecommunication services.
If the above conditions are satisfied, then
Deduction=100% of the profit such business for first five years starting from the initial AY
and 30%of the profits of such business for the next five years.
Case 3:- Industrial park or special economic zone:-
The following conditions should be satisfied.
The industrial undertaking should develop, develop and operate or maintain & operate an
industrial park and special economic zone notified for this purpose in a scheme formed by
central government.
Deduction=100% of profits for first 10years staring from initial AY.
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The assesse has the option to claim deduction for 10 consecutive assessment years out of
15years beginning from the year in which the undertaking develops an industrial park or
develops a special economic zone.
Audit report, re- computation of profit by assessing officer consequence of merger/

amalgamation (same as case1)
Case 4:- Power distribution or generation:-
The following condition should be satisfied:
a. It should be a new undertaking or an existing undertaking having substantial expansion.
b. It should not be formed by splitting up of an existing undertaking.
c. It should not be formed by transfer of old plant &machinery (20% old is allowed).
Second hand machinery imported from abroad which has not been used in India in any
time at past would be considered as new machinery.
d. It should be engaged in generation or generation and distribution of power.
If the above condition are satisfied
Deduction=100% of the profits of such business for 10years starting from initial AY.
The assessee has the option to claim deduction for 10 consecutive assessment years out of
15 years beginning from the year in which the undertaking generates power, commences
transmission or distribution lines.
Case 5:- Reconstruction of power unit:-
The following condition should be satisfied
a. It should be owned by an Indian company.
b. It should be set up for reconstruction or revival of power generating unit before

30thNov, 2005.
c. Such undertaking begins to generate or transmit or distribution power before 31-04-

2007.
If the above condition are satisfied, then
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Deduction=100% of profit of such business for first 10 years starting from initial AY.
The assessee has the option to claim deduction for 10 consecutive assessment years out of
15 years beginning from the year in which the undertaking generates power, commences
Audit report , re- computation of profits by Assessing Officer consequences of merger or

amalgamation ( same for all cases as case 1).
8. Enumerate the provisions for 'carry farward' and ' set off' of accumulated losses and
unabsorbed depreciation.
Ans:-Set off of losses
a. Income tax is only tax even there may be different heads of income.
b. Hence loss from one head of income may be set off against the income from another
head of income in the same previous year so that true income of current year may be
computed for paying tax.
There are three types of settings off of losses or modes of set off.
1. Intra head Adjustment or Intra head setoff.
2. Inter head Adjustment or inter head setoff.
3. Carry forward of losses.
1. Intra head adjustment u/s70:-
Any loss from one head of income can be set off under the same head of income u/s
70( within the same head). Loss from one business can be set off against the income from
another business under the same head of income.
Ex. Loss from cloth business to profit from sugar business etc.
Exceptions:-
1. Loss from speculation business u/s 73(1).
2. Loss from the activity of owning and maintaining of race horses.
3. Loss from winning from lotteries or card games etc.
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4. Long term capital loss from the assessment year 2003-2004.
5. Loss from exempted source of income not set off against taxable income.
Bearing the above :-
1) Loss from one house property can be setoff against any other income within house
property income.
2) Non - speculation business loss can be set off against speculation business and non -
speculation business .
3)Short term capital loss can be set off against both LTCG&STCG.
4)Other sources:- loss from one activity (except the above) may be set off against other
income within the head.
5) Loss from an exempted source cannot be setoff against taxable source.
2.Inter head Adjustment u/s71:-
If net results after intra head adjustments is still a loss the same current year loss can be
set off against the income from other heads of income.
In other words , loss from one head can be adjusted against another income head except
salaries only for the current year. Brought forward losses or carry forward losses cannot be
allowed under this adjustment.
Ex. Business loss can be setoff against income from house property, of the current year.
Exceptions :-
1) Speculation loss only against speculation income .
2)Loss from capital loss cannot be set off against other heads of income both STCL and
LTCL.
3)Loss from activities of owning and maintaining of race horses - not adjusted against any
heads of income.
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4)Loss from winnings from lotteries against such income.(lottery, cross word puzzle,
betting, races, card games and other gambling)
3. Carry forward of losses:-
If a loss cannot be set off either under the intra head adjustment and inter head
adjustment because of shortage of income of the same year, it may be carry forward u/s
71B.
1. Income from house property
From assessment year 1999-2000, loss from house property if it is not adjusted in the intra
head adjustment it can be Carry forward for next 8 assessment years.
2. Business loss:-
Once the loss is Carry forward, the Carry forward losses can be set off against business
income only. It can be carry forward and set off for next 8 assessment years.
3. Capital gain head loss
STCL-Against LTCG or STCG carry forward for next 8 assessment years.
LTCG- Against LTCG only c/f for next 8 assessment years.
4. Other sources:-u/s74A(3)
Loss from owning and maintaining of race horses can be set off only against such income
and C/f up to 4 assessment years.
5. Speculation losses -u/s73
Speculation loss can be set off against speculation income only. It can be carry forward for
next 4 assessment years.
Order of set off
1. Current year capital expenditure in scientific research including current year loss.
2. Current year depreciation.
3. Carry forward business losses.
4. Unabsorbed expenses on family planning.
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5. Unabsorbed depreciation.
6.Unabsorbed capital expenditure on scientific research.
Unabsorbed depreciation:-
Unabsorbed depreciation refers to the amount of depreciation, which is still not absorbed
from the profit of business or from other heads of income except salary head in a
particular financial year.
1. Depreciation allowance should first be deducted from the income chargeable to profit
and gains if business.
2. If profit and gains of business is not sufficient then the same should be adjusted with
other heads of income except salary head of income.
3. Any amount which is still unabsorbed should be carried forward to next assessment
years for set off.
4. There is no time limit regarding the period for which unabsorbed depreciation should be
carried forward. It can be carried forward till it is fully written off.
5. The order of set off should be
a. current year depreciation.
b. Brought forward business loss.
c. Unabsorbed depreciation.
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9. ZX ltd.is engaged in the business of manufacturing of garments.
Sale proceeds of goods (domestic sale) 44,47,800
Sale proceeds of goods (export sale) 11,52,200
Amount withdraw from general reserve (reserve was created 4,00,000

in 96-97 by debiting to p/l account
Amount withdraw from revaluation reserve

3,00,000
Total
63,00,000
Less expenses
Depreciation (normal)
12,32,000
Depreciation(extra depreciation because of revaluation)
5,40,000
Salary and wages
4,20,000
Fringe benefit tax
20,000
Income tax
7,00,000
Outstanding custom duty (not paid as yet)
35,000
Proposed dividend
1,20,000
Consultation fee paid to a tax expert
42,000
Other expenses
2,78,000
Net profit
29,13,000
For tax purpose company wants to claim the following:
Deduction u/s 8-IB (30% of 29,13,000).
Depreciation u/s 32 ( ₹10,72,000)
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The company wants to set off the following losses or allowances.
For tax purposes(₹) For accounting purpose (₹)
Brought forwarded loss of 2008- 29,60,000 8,00,000

2009
1,40,000
Unabsorbed depreciation
Compute the net income and tax liability of ZX ltd for the AY 2016-17 assuming tax ZX Ltd
has a (deemed) long term capital gain if ₹ 1,20,000 under provision (i) to sec 54D(2) which
is not credited to profit and loss account.
And:-step1:- calculation of net income and tax liability as per normal provisions of income
tax act 1961.
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Income from house property - -
Income from business (working note1) 8,28,000
Income from capital gain(LTCG) 1,20,000
Income from other -
Gross total income 9,48,000
Less : deductions u/s80C to 80U
Deduction u/s 80IB[828000*30/100] 2,48,400
Total taxable income 6,99,600
Calculation of tax liability
Tax on LTCG[120000*20/100] 24,000
Tax on balance of income [5,79,600*30/100] 1,73,880
1,97,880
Add: surcharge -
1,97,880
Add: education cess @ 2%(2,06,880*2%) 3,958
Secondary higher education cess @1%(2,06,880*1%) 1,979
2,03,817
Rounded off u/s 288B 2,03,820
Working note1: calculation of taxable income from business
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particulars Amount (₹) Amount

(₹)
Net profit as per profit and loss a/c
29,13,000
Add:-
a.in admissible/ disallowed/not allowable expenses

and losses already debited to p& l a/c
Depreciation
12,32,000
Depreciation (extra depreciation because of
5,40,000
revaluation)
7,00,000
Income tax
35,000
Outstanding custom duty
1,20,000
Proposed dividend
20,000
Fringe benefit tax
b.business income not credited to profit and loss a/c
c.overvaluation of opening stock
d.undervaluation of closing stock

26,47,000
Sub total
55,60,000
Less: allowed/ admissible expenses and losses which
are not debited to p& l a/c 10,72,000
Depreciation 4,00,000
Amount withdraw from general reserve 3,00,000
Amount withdraw from revaluation reserve

17,72,000
37,88,000
Business income
29,60,000
Less brought forward business loss
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Taxable income from business 8,28,000
Book profit as per 115JB
Net profit as per profit and loss a/c
Add: depreciation
Depreciation (extra depreciation)
Income tax
12,32,000 29,13,000
Proposed dividend
5,40,000
7,00,000
Subtotal
1,20,000
Less: depreciation
Amount withdraws from general reserve

25,92,000
Depreciation on revaluation or
12,32,000 55,05,000
5,40,000
Amount withdraw from revaluation reserve 4,00,000

3,00,000
Whichever is lesser
Brought forward business loss or 3,00,000

8,00,000
Unabsorbed depreciation
1,40,000
Whichever is lesser. 1,40,000
20,72,000
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Calculation of tax liability as per 115JB 34,33,000
18.5% of book profit 6,35,105
Add : surcharge -
6,35,105
Add education cess @2%(635105*2%) 12,702
Secondary higher education cess @1%(635105*1%) 6,351
Total tax liability 6,54,158
Step3 :- compare step 1 liability with step2 liability
Tax liability as per income tax act 1961. 2,03,820
Tax liability as per 115JB(book profit). 6,54,160
Whichever is higher is tax liability of ZX Ltd 6,54,160
Step4:- If step 2 tax liability is greater than step1
Tax credit= 6,54,160-2,03,820=4,50,340.
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III Semester M.com. Examination, Dec 2009/Jan 2010
COMMERCE
Paper A – 3: Direct Taxes
SECTION – A
Answer any 10 of the following in about 3-4 lines each. Each sub question carries 2
marks:-
a) Give the meaning of company in which the public are not substantially
interested.
Ans: A Company in which public are not substantially interested are known as
closely held company.
b) Define Assessee.
Ans: Assessee u/s 2(7) of Income Tax Act 1961 can be defined as a person from
whom any tax or any other sum is payable under the IT act 1961, and it includes:
 Every person in respect of whom any proceedings of loss is carried on.
 A person who is entitled for refund of taxes.
 Deemed assessee.
 Assessee in default.
c) When is a company treated as a resident for tax purpose?

Ans:
d) State the tax treatment for short term capital gain.

Ans: For both domestic and foreign company:
 STCG liable for Securities Transaction Tax (STT) u/s 111A will be taxable at flat
rate of 15%.
 Short term capital gain other than STCG liable for STT will be taxable at the
flat rate of 30%.
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e) Define Assessment Year.

Ans: Assessment year u/s 2(9) of Income Tax Act 1961 can be defined as a period
of 12 months commencing from 1st April of every year and ending on 31st March
of subsequent year. It is the year in which the income earned in the previous
year will be put into tax.
For instance current assessment year is 2016-17.
f) Write a note on voluntary return of Income.

Ans: An individual is under a statutory obligation to file a return of income, if the
total income without giving effect to the provisions of sec. 10A, 10AA, 10B or
10BA exceeds the minimum limit. After the end of financial year i.e., the previous
year (the year in which an assessee earns income), an assessee is required to
compute his exact amount of income and tax thereon. The income so computed
and tax on it has to be filled in a form(form no.2D “SARAL” ITR 1,2,3,4,5,6), and
tax is deposited in bank, a copy of income tax form and the proof of the income
tax deposited in the bank is prepared in duplicate. A copy is submitted with
income tax office and the assessee himself retains the other copy.
g) What do you understand by payment of advance tax?

Ans: In advance payment of tax, the assesse has to pay tax in a financial year on
estimated income which is to be assessed in the subsequent assessment year.
h) When does the claim for refund arise?

Ans: The case of refund arises on account of following:
 The total TDS is higher than the amount of tax liability as determined on
regular assessment.
 The amount of advance tax paid or the tax paid the basis of self-
assessment exceeds the tax liability as determined on regular assessment.
 By the rectification of a mistake.
 By the order of judgment in an appeal.
 Where relief for double taxation is granted.
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i) What is minimum alternative tax?

Ans: Minimum alternative tax (MAT) is the tax paid by the company on their
book profits. The Minimum alternative tax rate is 18.5% on their book profits.
Book profits are the profits calculated as per companies act.
j) State the circumstances under which T.D.S can be made.
Ans: The specified cases where tax deducted at source are:
Salaries, interest on securities, and interest other than interest on securities,
dividends, winning from lotteries and crossword puzzles, payment to contractors,
insurance commission, and winning from horse races and also on other sums
chargeable under the Act, which are paid to non-resident.
k) Define ‘Amalgamation’ as per Income Tax Act, 1961.

Ans: According to sec 2(IB) of Income tax act 1961 amalgamation of companies
either of one or more companies with another company or the merger of two
companies to form one company.
Conditions:
 All the properties of amalgamating companies should become the
amalgamated company.
 All liabilities of the amalgamating company should become the
 Shareholders holding not less than 3/4th of the shares should become the
shareholders of amalgamated company.
SECTION – B
Answer any three of the following in about one page. Each question carries 5 marks:-
2. Enumerate the factors that affect the decision to make or buy. Explain the
consideration also in this regard?
Ans: Factors that affect the decision in make or buy in tax consideration are as
follows:
 Present utilization capacity
 Availability of raw materials
 Availability of the product in market
 Latest technology
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 Variable cost of manufacturing

 Dependence on suppliers.
3. ABC Ltd is a domestic manufacturing company. The company expects total

Rs.10 crore for the previous year 2008-09. Compute the advance payment of tax to
be paid by the company from time to time in previous year 2008-09.
4. What are the tax advantages of amalgamation?

Ans: Tax reliefs and benefits in case of Amalgamation:
If an amalgamation take place within the mean of section 2(1B) of the
Income tax act 1961, the following tax reliefs and benefits shall available:-
1. Tax relief to the amalgamating company:
 Exemption from capital gains tax (sec 47(vi)):under section 47 (vi) of the income tax
act capital gain raising from the transfer of assets by the amalgamating companies
to the Indian amalgamated company is exempt from tax as such transfer will not be
regarded as the transfer for the purpose of capital gain
 Exemptions from capital gains tax in case of international restructuring (sec47 (via)):
under sec 47(via), in case of amalgamation of foreign companies, transfer of shares
held in Indian company by amalgamating foreign company to amalgamated foreign
company is exempt from tax.
2. Tax relief to the shareholders of an Amalgamating company:
 Exemption from capital gains tax (sec 47 (vii)): under section 47(vii) of the income-
tax act, capital gains arising from the transfer of shares by a shareholder of the
amalgamating companies are exempt from tax as such transactions will not be
regarded as a transfer for capital gain purpose.
 The transfer is made in consideration of the allotment to him of shares in the
amalgamated company
 Amalgamated company is an Indian company
3. Tax relief to the Amalgamated company:-
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 Carry forward and set off Accumulated loss and unabsorbed depreciation of the
amalgamating company (sec 72A): Section72A of the Income tax Act, 1961 deals
with the mergers of the sick companies and to take advantage of the carry forward
of accumulated of the carry forward of accumulated losses and unabsorbed
depreciation of the amalgamating company.
 Expenditure on scientific research (Sec 35(5)): When an amalgamating company
transfers any asset represented by capital expenditure on the scientific research to
the amalgamated Indian company in a scheme of amalgamation provisions of
section 35.
 Amortization of expenditure in case of Amalgamation (sec 35DD): Under Sec 35DD
for expenditure incurred in connection with the amalgamation the assessee shall
be allowed a deduction of an amount equal to one-fifth
of such expenditure for each of the five successive previous years beginning with
the previous year in which the amalgamation takes place.
 Treatment of preliminary expenses (Sec 35D(5)): When and amalgamating company
mergers with an amalgamated company under a scheme of amalgamation, the
amount of preliminary expenses of the amalgamating company to the extend not
yet written off shall be allowed as deduction to the amalgamated company in the
same manner as would have been allowed to the amalgamating company.
 Expenditure for obtaining a licence to operate telecommunication services (sec
35ABB(6)): Where in a scheme of amalgamation, the amalgamating company sells or
otherwise transfer its licence to the amalgamated company, the provisions of
Section 35ABB which were applicable to the amalgamating company shall become
applicable in the same manner to the amalgamated company.
 Treatment of capital expenditure on family planning (U/S 36(1)(iX) ): If asset
representing capital expenditure family planning is transferred by the amalgamating
company under a scheme of amalgamation, such expenditure shall be allowed as
deduction to the amalgamated company in the same manner as would have been
allowed to the amalgamating company.
 Treatment of bad debts (Sec 36(1)(vii)): When due to amalgamation debts of the
amalgamating company has been taken over by amalgamated company, and
subsequently, such debts turn out to bad, it shall be allowed as deduction to the
- 23 -
SECTION - C
Answer any 3 question. Each question carries 15 marks
1. Discuss the provision regarding set-off and carry forward of losses under
the Income Tax Act, 1961.
ans:- SET OFF OF LOSSES:-
 Income Tax is only tax; even there may be different heads of income.
 Hence loss from one head of income may be set off against the income from
another head of income in the same previous year so that true income of
current year may be computed for paying tax.
Provision regarding set-off and carry forward of losses under the

Income Tax Act, 1961 are in three types, they are:-
1. Intra head Adjustment or Intra head Setoff
2. Inter head Adjustment or Inter head Setoff
1. Intra head adjustment u/s 70:-

Any loss from one head of income can be set off under the same head
of income u/s 70 (within the same head). Loss from one business can be set off
against the income from another business under the same head of income.
eg:- Loss from cloth business to profit from sugar business etc.
Exception:-
1. Loss from speculation business u/s 73(1)
2. Loss from the activity of owning and maintaining of race horses.
3. Loss from winnings from lotteries/card games etc.
4. Long term capital loss from the assessment year 2003-04.
5. Loss from exempted source of income not set off against taxable income.
- 24 -
Bearing the above:-

1. Loss from one House-property can be set off against any other income
within House property income.
2. Non-speculation business loss can be set off against speculation business
and non-speculation business.
3. Short term capital loss can be against both LTCG & STCG.
4. Other source:- loss from one activity (except the above) may be set off
against other income within the head.
5. Loss from an exempted source cannot be set off against taxable source.
2. Inter head Adjustments u/s 71:-

If net results after intra adjustments is still a loss the same current year
loss can be set off against the income from other heads of income.
In other words, loss from one head can be adjusted against another
income head except salaries only for the current year. Brought forward losses or
Carry forward losses cannot be allowed under this adjustment.
eg:- Business loss can be set off against income from house property, of the
current year.
Exceptions:-;-
1. Speculation loss-only against speculation income.
2. Loss from capital loss-cannot be set off against other head of income
(both LTCG & STCG).
3. Loss from the activities of owning & maintaining of race horses - not
adjusted against any head of income.
4. Loss from winnings from lotteries - against such income.(Lotteru,
crossword puzzle, betting, races, card games and other gambling)

If a loss cannot be set off either under the intra head adjustment and
inter head adjustment because of shortage of income of the same year, it may be
carry forward u/s 71B.
- 25 -
1. Income from house property:-

From the assessment year 1999-2000, loss from house property if it is
not adjusted in the intra head adjustments it can be carry forward for next
8 assessment years.
2. Business loss:-
Once the loss is carry forward, the carry forward loss can be set off
against business income only. It can be carry forward and set off for next 8
assessment years.
3. Capital gain head loss:-

 STC Loss - Against Long term capital gain/ Short term capital gain -
Carried forward for next 8 assessment years
 LTC loss - Against Long term capital gain only - C/F for next 8
assessment years.
4. Other Sources:- U/S 74A(3):-

Loss from owning and maintaining of race horses can be set off
only against such income and Carried forward up to 4 assessment years.
5. Speculation loss:- U/S 73 :-

Speculation loss can be set off against speculation income only. It
can be carry forward for next 4 assessment years.
 Speculation Business :- It refers to speculative transactions. Speculative transaction

means a transaction which is settled in all respect other than the actual delivery or
transfer of commodity.
2. c ltd a company which public are substantially interested , it showed a net profit of
335000 during 2008-09. Scrutiny of the accounts revealed the following
Debits to p/l account
A) Donation paid to approved public charitable trust rs 20000

B) Provision for income tax 100000
C) Family planning expenses 25000
- 26 -
D) Capital expenditure on family planning 100000

Credits to p/l account
A) Bad debts allowed earlier recovered during the previous year 10000
B) Interest on bank deposits 30000
C) Long term capital gain 100000
D) Dividend from indian company 20000(gross)
There were (a) unabsorbed depreciation 35000 and (b)un absorbed capital loss
40000 brought forward from the earlier assessment year
Compute total income and tax liability of the company for the assessment year 2009-
10
Solu:
Name : C ltd Assessment year:2009-2010
Resident:resident Previous year:2008-09
PARTICULARS RS RS
A. Income from H.P -
B. Income from business 350000
c.income from capital gains
LTCG 100000
(-) UNABSORBED DEPN 40000 60000
C. Income from other sources
a. Int on deposits 30000
b. Dividend from indian company EXEMPTED 30000
GTI 440000
LESS Deductions u/s 80g to 80u 10000
- 27 -
Donation to public charitable trust
TOTAL TAXABLE INCOME 430000
TAX LIABILITY
TAX ON LTCG (60000*20%) 12000
TAX ON BALANCE OF INCOME (430000-60000)=470000*30%
111000
123000
(ADD) SURCHARGE -
EDUCATIONAL CESS 2% 2460
SECONDARY AND HIGHER EDUCATION CESS 1% 1230
TOTAL TAX LIABILITY 126690
WKN 1 :Calculation of income from business
Particulars RS RS
Net profit as per p/l a/c 335000
(ADD) Inadmissable expenses dr to p/l account
Donation paid to public charitable trust 20000
Provision for income tax 100000
Capital expenditure on family planning (100000*4/5) 80000
Undervaluation of closing stock -
- 28 -
200000
535000
(LESS)Admissable expenses
Int on bank deposits 30000
LTCG 100000
Divident from indian co 20000 150000
BUSINESS INCOME 385000
(-) UNABSORBED DEPN 35000
Income from business 350000
- 29 -
Direct tax planning
January -2011
Section-A
1)
a)
b) Factors to be considered in make or buy decision are:
Quantitative and qualitative
c) All methods by which tax liability is illegally avoided are termed as tax evasion. Tax evasion is an attempt to
evade tax liability with the help of unfair means.
d)
Due date for payment of Applicable for corporate Applicable for non-corporate
advance tax assessee assessee
On or before 15th June of the 15% of the advance tax payable Nil
previous year
On or before 15th September of 45% of the advance tax payable 30% of the advance tax payable
the previous year
On or before 15th December of 75% of the advance tax payable 60% of the advance tax payable
the previous year
On or before 15th march of the 100% of the advance tax payable 100% of the advance tax payable
previous year
e) When a company is formed and registered under the company’s act of 1956/2013. And a company which in
respect of its liable to tax under the act, has made prescribed arrangements for the declaration and payment of
dividends within India.
 Resident, ordinary resident (ROR) – income from India & outside is chargeable to tax.
 Resident, not ordinary resident (NOR) – income earned only in India are taxable.
 Nonresident (NR) – income earned only in India.
f) Belated return u/s 139(4) is the return filed after the due date, thus if an assessee submits his return after the
due date of filing return of income.
g) Losses of company which can be carried forward are:
- 30 -
Only inter head adjustments are allowable: loss from house property, business losses, capital gain loss and other
sources.
h)
I) cannon of equality, cannon of diversity, cannon of productivity, cannon of flexibility, cannon of simplicity.
j) Condition for claiming additional deprecation:
 Asset must be engaged in manufacturing / production of any article.

 New plant and machinery should be acquired and installed after March 31, 2005.
 It should be an eligible plant and machinery.
k)
l) Expenditure on scientific research whether it is carried on my assessee or given as a contribution to others is

eligible for weighted deductions under sec 35
SECTION – B
2) STEP 1: COMPUTATION OF TOTAL INCOME AND TAX LIABILITY OF BHANDARKAR CO. LTD
STEP 2: COMPUTATION OF TAX LIABLITY AS PER BOOK PROFITS U/S 115JB
STEP 3: COMPUTATION OF TAX LAIBILITY OF ASSESSEE
TAX LAIBILTY AS OER NORMAL PROVISIONS OF IT ACT OF 1961 (OR) TAX LAIBILITY UNDER SEC 115JB
WHICHEVER IS HIGHER - TAX LAIBILITY
STEP 4: IF STEP2 IS GREATER THAN STEP1 TACX CREDIT ARISES
Tax credit refers to excess of book profits over tax computed as per normal provision of income tax act of 1961. It
can be carried forward for subsequent 10 assessment years and can be utilized to pay the tax when the tax liability
exceeds the tax on book profits.
TAX CREDIT = TAX COMPUTED AS PER BOOK PROFITS LESS TAX COMPUTED AS PER NORMAL PROVISONS OF
INCOME TAX.
3)
4) TAX INCENTIVE AVALIBEL UNDER SECTION 80-IC:
Deduction is available in respect of profits and gains of certain undertakings in certain special category of states.
Conditions:
 The undertaking should be a new undertaking that is it should not be formed by splitting up or re-
construction of business.
 It should not be formed by transfer of old plant and machinery
- 31 -
 The industrial undertaking should manufacture or produce specified goods i.e. any article given in any
schedule other than 13th schedule
 The production or manufacturing must start within the time specified
 If there is substantial expansion, the expenses should take place within the specified period.
 The undertaking must be setup in Sikkim, himachal pradesh or Uttaranchal or north eastern state.
Deduction in case of:
Himachal Pradesh & Uttaranchal: 100% of profits for first 5 years & 30% for next 5 years (25% in case of other
persons)
In case of Sikkim & north eastern states 100% of profits for first 10 years.
5) COMPUTATION OF LOSS TO BE CARRIED FORWARD FOR THE ASSESSEMENT YEAR 2010-11
PARTICULARS AMOUNT(RS) AMOUNT(RS)
INCOME FROM HOUSE PROPERTY NIL
INCOME FROM BUSINESS (340000)
INCOME FROM CAPITAL GAIN
LTCG 20000
STCL (20000) NIL
INCOME FROM OTHER SOURCES 46000
LESS: SETOFF OF BUSINESS LOSS (46000) NIL
STATEMENTS SHOWING CARRY FORWARD OF LOSSES:
LOSSES CARRY FORWARD AMOUNT NO OF YEARS
BUSINESS LOSS(340000- CANT BE AS FILED 294000 NIL

46000) RETURN AFTER DUE
DATE
STCL(90000-20000) CANT BE AS FILED 70000 NIL

RETURN AFTER DUE
DATE
CAPITAL EXP ON CARRIED FORWARD 40000 UNLIMITED YEARS

SCIENTIFIC RESEARCH
DEPRECTION CARRIED FORWARD 60000 UNLIMITED YEARS
PY UNABSORBED CARRIED FORWARD 114000 UNLIMITED YEARS
- 32 -
DEPRECIATION
PY BUSINESS LOSS CARRIED FORWARD 36000 UPTO PY 2015-16
PY CAPITAL LOSS CARRIED FORWARD 70000 UPTO PY 2016-17
6)
SECTION-C
7) DEDUCTION OF TAX AT SOURCE (TDS):
In certain specified cases of income, tax at sources should be deducted by the person responsible for making
payment of such income. Income tax act provides that such tax must be deducted from the amounts of both
resident and nonresident according to the rates prescribed in the finance act of the year. Section 192 to 206 deals
with deduction of tax at source.
The specified cases where tax is deducted at source are: salaries, interest on securities, and interest other than
interest on securities, dividends, winning from lotteries and crossword puzzles, payment to contractors, insurance
commission, and winning from horse races and also on other sums chargeable under the act, which are paid to non
residents.
8) DEDUCTION U/S 80-IA
DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM INDUSTRIAL UNDERTAKING OR ENTERPRISE ENGAGED IN
INFRASTRUCTURE DEVELOPMENT
CASE CONDITION DEDUCTION NO OF YEARS Consequence of

amalgamation
Infrastructure 100% of profits 10 Entitled till the

facility consecutive expiry of tax holiday
years (10/15)
Telecommunication 100% of profit for Entitled till the

service 1st five years, expiry of tax holiday
30% for next five

years
Industrial parks 100% of profit 10 Entitled till the

consecutive expiry of tax holiday
years (10/15)
Power generation, 100% of profit 10 Entitled till the

transmission & consecutive expiry of tax holiday
distribution or years (10/15)
substantial
- 33 -
renovation &
modernization of
existing distance
lines
Undertaking setup 100% of profit 10 Entitled till the

for reconstruction consecutive expiry of tax holiday
of power unit years (10/15)
A cross country 100% of profit 10 Entitled till the

natural gas consecutive expiry of tax holiday
distribution years (10/15)
network
9) STEP 1: COMPUTATION OF TOTAL INCOME AND TAX LIABILITY OF BHANDARKAR CO. LTD
ASSESSE: BHANDARKAR CO. LTD ASSESSMENT YEAR: 2016-17
RESIDENTIAL STATUS: RESIDENT PREVIOUS YEAR: 2015-16
INCOME FROM HOUSE PROPERTY -
INCOME FROM BUSINESS(WN1) 2382000
INCOME FROM CAPITAL GAIN 290000
INCOME FROM OTHER SOURCES 40000
GROSS TOTAL INCOME 2712000
Less: DEDUCTION UNDER SEC 80G TO 80U
TOTAL INCOME 2712000
TAX LIABILITY
TAX ON LTCG @ 20%(240000*20/100) 48000
TAX ON BALANCE AMOUNT @ 30%(2672000-240000 ) 741600
- 34 -
( 2432000*30/100) 789600
Add: SURCHARGE -
789600
Add: EDUCATION CESS @ 2%
SECONDARY AND HIGHER EDUCATION CESS @1% 23688
TAX LIABILTY 813290
WN1: COMPUTATION OF INCOME FROM BUSINESS
NET PROFIT AS PER P&L A/C 4092000
Add: 1:INADMISSABLE EXPENCES DEBITED TO P& L A/C
SUNDRY EXPENSES 80000
SALES TAX 10000
DEPRECTAION 1100000
INCOME TAX 760000
WEALTH TAX 30000
PROVISON OF UNASCRTAINED LAIBILTY 120000
PROPOSED DIVIDEND 360000
PROVISON OF LOSS OF SUBSIDARY CO 90000 2550000
2:BUSINESS INCOME NOT CREDITED TO P&L A/C
3:OVERVALUATION OF OPENING STOCK
4:UNDERVALUATION OF CLOSING STOCK
Less:1:ADMISSABLE EXPENCES NOT DEBITED TO P&L A/C
- 35 -
EXCISE DUTY PAID 130000
DEPRECATION(NOTE) 2000000
AMPUNT WITHDRAWN FROM GENERAL RESERVE 600000
2:INCOME CREDITED TO P&L A/C CHARGEABLE UNDER

DIFFERENT HEADS OF INCOME
LTCG
240000
PROFIT ON SALE OF MOTOR CAR
50000
3:EXCEMPTED INCOM ECREDITED TO P&L A/C
TAX FREE GOVERNMENT SECURITIES

40000
4:UNDERVALUATION OF OPENING STOCK
5:OVERVALUATION OF CLOSING STOCK
3060000
Less: BROUGHT FORWARD BUSINESS LOSSES
1200000
BROUGHT FORWARD DEPRECIATION
1200000
INCOME FROM BUSINESS 2382000
CALCULATION OF DEPRECATION:
PARTICULARS AMOUNT(RS)
PLANT & MACINARY (12000000 * 15/100) 1800000
BUILDING (2000000 * 10/100) 200000
TOTAL 2000000
STEP 2: COMPUTATION OF TAX LIABLITY AS PER BOOK PROFITS U/S 115JB
NET PROFIT AS PER P&L A/C 4092000
Add:
INCOME TAX 760000
- 36 -
PROVISON OF UNASCRTAINED LAIBILTY 120000
PROPOSED DIVIDEND 360000
PROVISON OF LOSS OF SUBSIDARY CO 90000
DEPRECTAION 1100000 2430000
Less:
AMOUNT WITHDRAWN FROM GENERAL RESERVE 600000
DEPREATION 1100000
UNABSORED DEP (OR) UNABSORED LOSS
WHICHEVER IS LESS 600000
2300000
BOOK PROFITS
4222000
TAX LIABILITY
18.5% OF BOOK PROFITS(4182000 *18.5/100)
781070
Add: SURCHARGE
Add: EDUCATION CESS @ 2%
SECONDARY AND HIGHER EDUCATION CESS @ 1%
23432
TAX LAIBILTY
804502
- 37 -
STEP 3: COMPUTATION OF TAX LAIBILITY OF ASSESSEE
PARTICULARS AMOUNT(RS)
TAX LAIBILTY AS OER NORMAL PROVISIONS OF IT ACT OF 1961 813290
OR
TAX LAIBILITY UNDER SEC 115JB 804502
WHICHEVER IS HIGHER - TAX LAIBILITY 800930
STEP 4: IF STEP2 IS GREATER THAN STEP1 TACX CREDIT ARISES
- 38 -
III SEM M.Com Jan-2013
DIRECT TAXES
Sec A
1)
a) Differentiate between Indian Company u/s 2(26) and Domestic Company u/s 2(22A)
<Ans.>
Indian Company Domestic Company
Company formed & registered under Indian company or any other

the co’s act of 1956/2013 company which is in respect of its
liable to tax under the act
A company formed & registered Made the prescribed arrangements

under any law for the declaration & payments of
dividends within India.
b) Differentiate between first category of assesse & second category of assesses
<Ans.>
c) What do you mean by tax management?
<Ans.> Tax Management refers to the compliance with the statutory provisions of law.
While tax planning is optional, tax management is mandatory. It includes maintenance of
accounts, filing of return, payment of taxes, deduction of TDS, timely payment of advance
tax, etc. Poor tax management may lead to financial losses.
- 39 -
d) Define belated return.
<Ans.> Any person who has not furnished a return within the time allowed to him under
section 139(1) or
within the time allowed under a notice issued under section 142(1) may furnish the return
for any
Previous Year at any time -
(i) before the expiry of one year from the end of the relevant Assessment Year; or
(ii) before the completion of the assessment, whichever is earlier.
e) What are the cannons of taxation ?
<Ans.> i) Cannon of equity
ii) Cannon of certainty
iii) Cannon of convenience
iv) Cannon of economy etc.
f) State the criteria to claim additional depreciation
<Ans.> i) The assesse must be engaged in manufacturing/production of any article or thing
ii) New plant & machinery should be acquired & installed after March 31, 2005
iii) It should be an eligible plant & machinery.
g) Name the expenditures which are eligible for weighted deduction u/s 35
<Ans.> i) expenditure for agricultural extension project
ii) expenditure skill development project notified by the CBDT
iii) Contribution to National Labs etc.
h) Give the meaning of tax credit and its provisions
<Ans.> Tax Credit u/s 115JAA is the excess of book profit tax over computed as per normal
provisions of income tax is called Tax Credit. It can be carried forward for subsequent 10
AYs & can be utilised to pay the tax when the tax liability exceeds the tax on book profits.
- 40 -
i) What is tax base?

<Ans.> A tax base is the assessed amount of an entity’s assets or income that are
subject to taxation. The concept is used to derive the tax income of the government
entity.
k)What do you understand by ‘prior tax ruling’?
<Ans.>
Sec B
6) WDV of 4 machines at the beginning of the PY 2011-12, forming part of block of assets
carrying 15% rate of depreciation was Rs.500000. the following 4 machines of the same
block were bought:
Sl.No. Machines Date of Date when Cost(Rs.)

Purchase put to use
1 P 5.1.2011 14.1.2012 50000
2 Q 5.4.2011 15.5.2011 100000
3 R 15.5.2011 31.1.2012 200000
4 S 15.11.2011 27.3.2012 150000
Four Machines of this block (other than those which are were acquired and put to use for
less than 180days) were sold for Rs.400000
a) Calculate the depreciation for the AY 2012-13

b) What will be the answer if four machines were sold for Rs.700000 instead of
Rs.400000 ?
<Soln.> a)
- 41 -
Particulars Rs. Rs.
WDV 500000
(+) Purchases
P 50000
Q 100000
R 200000
S 150000 500000
1000000
(-) Sales Q (400000)
600000
(-)Depreciation
P+R+S b)
(50000+200000+150000)*15%*50% (30000)
(-)Bal (6L-4L)*15% (30000)
WDV 5,40,000
- 42 -
Particulars Rs. Rs.
WDV 500000
(+) Purchases
P 50000
Q 100000
R 200000
S 150000 500000
1000000
(-) Sales (PQRS) (700000)
300000
(-)Depreciation (300000*15%) (45000)
WDV 255000
3. Discuss the tax incentives available u/s 80I.D.
<Ans.>Section 80 –ID: Deduction in case of hotels and convention centre in NCR
(National Capital Territory)
Condition- Section 80-ID is applicable if the following conditions are satisfied,
1. The taxpayer is engaged in the business of hotel located in the specified area.
2. Alternatively, the taxpayer is engaged in the business of building, owing and

operating a convention centre, located in the specified area.
3. The specified area for this purpose means the National Capital Territory of Delhi and
the districts of Faridabad, Gurgaon,’Gautam Budh Nagar and Ghaziabad.
4. Hotels for this purpose means a hotel of two-star, three-star or four star category as
classified by the central government.
- 43 -
5. Convention centre means a building of a prescribes area comprising of convention

halls to be used for the purpose of holding conferences and seminars, being of such
size and number and having such other facilities and amentias, as may be prescribed.
6. The hotel is constructed and has started or starts functioning at any time during.
April; 1, 2007 and March 31, 2010. Likewise, the convention centre is constructed at
any time during April 1, 2007, and March 31, 2010.
7. The aforesaid business is not formed by the splitting up, or the reconstruction, of a
business already in existence [subject to a few exceptions].
8. The aforesaid business is not formed by the transfer to a new business of machinery
or plant previously used for any purpose[subject to a few exceptions.]
9. Audit report should be submitted along with return of income.6. Return of income is
submitted on or before the due date of submission of return of income given under
section 139(1).
10. Amount of deduction: If the above conditions are satisfied, 100 per cent of the
profit and gains derived from the aforesaid business is deductible for five
consecutive assessment years beginning from the initial assessment year.
11. Initial assessment year for this purpose means. The assessment year relevant to the
previous year in which the business of the hotel starts functioning or the previous
year in which the convention centre starts operating on a commercial basis.
4. Discuss the income tax provisions for the following:
a) Expenditure in connection with family planning by the company assessee.
b) Donations to political parties u/s 80 GGB.
<Ans.>a) Section 80 GGB:
1. Deduction in respect of contribution given by companies to political parties or

electoral trust.
2. Any sum contributed by the assessee during the previous year to any political party
or an electoral trust shall qualify for deduction under this section.
- 44 -
3. The contribution may be in the form of advertisement expenditure in the

souvenir/brochure owned by a political party.
4. From the Assessment year 2014-15, no deduction shall be allowed in respect of any
sum contributed by way of cash.
b) If any expenses incurred by an company assessee in respect of family planning eligible

for deduction
If the expenses incurred is revenue in nature, 100% expenses allowed as expenses.
If the expenses incurred is capital in nature, the expenses will be allowed as deduction in
a 5 assessment years in a 5 equal installments.
i.e.1/5th will be allowed in the current assessment year and remaining4/5th will be allowed
in the subsequent assessment years.
Sec C
7) Is Tax planning a legitimate Exercise and also discuss the scope of Tax Planning......
<Ans.>Tax Planning can be defined as an arrangement of one’s financial and economic

affairs by taking complete legitimate benefit of all deductions, exemptions, allowances and
rebates so that tax liability reduces to minimum.
Thus, all such arrangements by which the tax laws are fully complied and which meet all
legal obligations and transactions, representing tax planning not taking form of
“colourable devices” ( avoiding payment of tax) and having no intention to deceit the legal
spirit behind the tax law, would naturally fall within the ambit of tax planning.
We can distinguish Tax Planning with Tax Avoidance and Tax Evasion.
Tax avoidance is reducing Tax liability in legally permissible ways and has legal sanction.
Tax Evasion is all methods used by which tax liability is illegally avoided.
Hence, Tax planning is a Legitimate Exercise and should not be confused with Tax
avoidance and Tax evasion.
- 45 -
Scope of Tax Planning...
 It is the art of learning how to manage your affairs in ways that postpone or avoid
taxes.
 It saves more money and there can be a tax season as a financial boost instead of
financial burden
 It is the skill used to take full advantage of the beneficial tax law provisions,
increasing tax deductions and tax credits.
 Lower your amount of taxable income
 Ensuring to get all credits available to you.
 Strategies under the realm of tax planning are undertaken to achieve business goals.
 Maximising the business deductions.
 Tax planning ensures plan for potential tax liabilities.
 Helps in reviewing the financial structuring.
Following important things involved...

- Utilising carry forward tax losses
- Reviewing the structuring
- Utilising small business concessions
- Maximising superannuation contributions and deductions
- Writing off bad debts that are no longer available.
8) Discuss in detail the provisions of Set off and Carry forward of Losses under Income
Tax act.
<Ans.>Set off of losses.
* Income Tax is only tax, even there may be different heads of income.
Hence loss from one head of income may be set off against the income from another head
of income income in the same previous year so that true income of current year may be
computed for paying tax.
There are three types of setting off of losses or Modes of set off...
1. Intra head Adjustment or intra head set-off
2. Inter head Adjustment of inter head set-off.
- 46 -
1. Intra head Adjustment u/s 70 :-
Any loss from one head of income can be set off under the same head of income u/s
70. Loss from one business can be set off against the income from another business under
the same head of income.
Exceptions -
A. Loss from speculation business u/s 73(1)

B. Loss from the activity of owing and maintaining of race horses.
C. Loss from winning from lotteries/ card games etc.
D. Long term capital loss from the assessment year 2003-04
E. Loss from exempted source of income not set off against taxable income.
2. Inter head Adjustment u/s 71:
If net results after intra adjustments is still a loss the same current year loss can be
set off against the income from other heads of income.
In other words, loss from one head can be adjusted against another income head
except salaries only for the current year. Brought forward losses or carry forward losses
cannot be allowed under this adjustment.
Exceptions:-
A. Speculation loss - only against speculation income.

B. Loss from Capitol loss can be set off against other heads of income( both LTCG & STCG)
C. Loss from the activities of owning and maintaining of race horses- not adjusted against
any head of income
D. Loss from winnings from lotteries- against such incomes.( Lottery, crossword puzzle,
betting, races, card games and other gambling)
If a loss cannot be set off either under the intra head Adjustment and inter head
Adjustment because of shortage of income of same year, it may be carry forward u/s 71B.
A. Income from house property:

From the assessment year 1999-2000, loss from house property if it is not adjusted in
the intra head adjustments it can be carry forward for next 8 assessment years.
- 47 -
B. Business loss:
Once the loss is carry forward, the carry forward loss can be set off against business
income only. It can be carry forward and set off for next 8 assessment years.
C. Capital gain head loss:

> STC LOSS - Against long term capital gain/ short term capital gain- carried forward for
next 8 Assessment years.
> LTC LOSS - Against long term capital gain only- c/f for next 8 assessment years.
D. Other sources u/s 74A(3) :

Loss from owning and maintaining of race horses can be set off only against such
income and c/f upto 4 assessment years.
E. Speculation loss u/s 73 :

Speculation loss can be set off against speculation income only. It can be carry
forward for next 4 assessment years.
Important note :- To claim the carry forward of loss, the assessee must have to file the
return of loss before the due date in the relevant assessment year. If the loss of return
filed after the due date, such losses cannot be set off against any head of income or within
the same head of income.
9) X. ltd engaged in diversified activities, earned a net profit of Rs.14,25,000 after

debit/credit of the following items to its profit & loss a/c for the year ending on March 31,
2012
Items debited to profit and loss a/c:
Expenses on industrial unit exempt u/s 10A – 2,10,000
Provision for loss of subsidiary – 70,000
Provision for sales tax demand (paid before due date) – 75,000
Provision for wealth tax demand – 90,000
Provision for income tax demand – 1,05,000
Expenses on purchase/sale of equity shares – 15,000
Depreciation – 3,60,000
- 48 -
Interest on deposit credited to buyers on March 31, 2012 for advance received from them,
on which TDS was deposited on July 31, 2012 – 90,000
Item credited to Profit and Loss a/c:
Income on industrial unit exempt u/s 10A – 2,70,000
Profit from 100% EOU u/s 10B – 60,000
Long–term capital gain on sale of equity shares on which security transaction tax was paid
– 3,60,000
Income from unit of UTI – 75,000
i) Depreciation includes Rs.1,50,000 on a/c of revaluation of fixed assets

ii) Depreciation allowable as per income tax rules – 2,80,000
iii) Brought forward business loss/adsorbed depreciation:
Financial Year Amt as per Books Amt as per Income tax
Loss Depn. Loss Depn.
2003-04 2,50,000 3,00,000 2,00,000 2,50,000
2008-09 - 2,70,000 1,00,000 1,80,000
2009-10 3,50,000 3,15,000 1,20,000 2,10,000
You are required to :

1) Compute the total income of the company for the assessment year 2012-13
giving the reasons for treatment of items and
2) Examine the applicability of section 115IB and compute book profit and the tax
credit to be carried forward
<Soln.> CALCULATION OF TOTAL INCOME & TAX LIABILITY
Particulars Rs. Rs.
Income from House property nil Nil
- 49 -
Income from Business (WN) 3,70,000
Income from LTCG liable for STT exempt exempt
Other Sources nil nil
3,70,000
Less: Deductions nil nil
TOTAL INCOME 3,70,000
TAX LIABILITY
Particulars Rs.
Tax on total income 1,11,000
(3,70,000*30%)
Add: surcharge Nil
1,11,000
Add: E cess @ 2% 2220
Add: H&SE cess @ 1% 1110
Tax Liability 1,43,310
Working Note:
CALCULATION OF INCOME FROM BUSINESS:
Particulars Rs. Rs.
N.P as perP&L A/c 14,25,000
Add: Disallowed expenses
*expenses on industrial unit 2,10,000
- 50 -
exempt u/s 10A
*provision for loss of 70,000

subsidiary
*provision for wealth tax 90,000

demand
*provision for income tax 1,05,000

demand
*expenses on purchase & sale 15,000

of equity shares
*depreciation 3,60,000 8,50,000
SUB TOTAL 22,75,000
Less: disallowed incomes
*income on industrial unit 2,70,000

exempt u/s 10A
*profits from 100% EOU u/s 60,000

10B
*LTCG(STT paid) 3,60,000
*income from units of UTI 75,000
*Depn as per IT Act 2,80,000 (10,45,000)
12,30,000
Less: b/f business loss(1L+1.2L) (2,20,000)
10,10,000
Less: unabsorbed (6,40,000)

depn(2.5L+1.8L+2.1L)
INCOME FROM BUSINESS 3,70,000
- 51 -
CALCULATION OF BOOK PROFITS U/S 115JB
Particulars Rs. Rs.
N.P as perP&L A/c 14,25,000
Add:
*provision on loss of subsidiary 70,000
*provision for IT 1,05,000
*expenses on industrial unit exempt u/s 10A 2,10,000
*depreciation 3,60,000 7,45,000
SUB TOTAL 21,70,000
Less:
*income on industrial unit exempt u/s 10A 2,70,000
*profits from 100% EOU u/s 10B 60,000
*income from units of UTI 75,000
*b/f business / depn WIL 3,15,000
2008-09 nil
2009-10 (3.5L /3.15L)
(7,20,000)
14,50,000
Less: Depn(3.6L-1.5L) (2,10,000)
BOOK PROFIT 12,40,000
- 52 -
TAX ON BOOK PROFITS

Particulars Rs.
Tax (12,40,000*18.5%) 2,29,400
Add:surcharge Nil
2,29,400
Add: E cess @ 2% 4588
Add: H&SE cess @ 1% 2294
TAX LIABILITY 2,36,282
TAX CREDIT:
Tax as per IT provisions – 1,43,310
Tax as per Book Profits – 2,36,280
Tax as per Book Profits is greater therefore,

Tax Credit = 2,36,280 – 1,43,310
Tax Credit = 92,970
- 53 -
3rd Semester M.com. Degree Examination, December 2014
(2007-08 Scheme) (NS)
COMMERCE
Paper-A.3: Direct Taxes
SECTION – A
1. Answer any 10 of the following in about 3-4 lines each. Each sub-question carries 2
marks.
a) What are the principles of direct taxation?
Ans: Cannon of equity
Cannon of certainty
Cannon of convenience
Cannon of economy
b) State the tax provision of section 80GGB of the income tax act, 1961.
Ans: section 80GGB – deduction in respect of contribution given by
companies to political parties or electoral trust.
 Any sum contribution by the assesee during the previous year to any
political party or electoral trust shall qualify for deduction under this
section.
 The contribution may be in the form of advertisement expenditure in
souvenir/ brochure owned by political party.
c) Distinguish between ‘Tax Avoidance’ and ‘Tax Evasion’.

Ans:
Tax Avoidance Tax Evasion
1) Tax avoidance means planning for Tax evasion means

minimization of tax according to avoiding of tax liability
legal requirement but it defeats the illegally.
basic intention of the legislature.
- 54 -
2) Tax avoidance takes into account Tax evasion involves use

various lacunas of law. of unfair means
3) Tax avoidance is lawful but involves Tax evasion is unlawful.

the element of mala fide intention.
4) Tax avoidance is planning before Tax evasion involves

the actual liability for tax comes to avoidance of payment of tax
existence. after the liability of tax has
arisen.
d) What is prior tax ruling?

Ans: prior tax ruling refer to “A sound system of prior tax ruling or advance
ruling contributes to the success of tax planning in a big way.
But it is not in practice in general in our country.
e) What is Tax Credit? State its tax provisions.
Ans: tax credit refers to the excess of book profit tax liability over tax liability
as per normal provision of income tax act.
It can be carry forward to 10 subsequent assessment years and it can
be utilize for the payment of income tax .
f) What is reassessment?
Ans :- reassessment is assessing the income of the assesse that is already
already being assessed once and also any other income which comes to the
notice of the AO subsequently during the re assessment proceedings.
g) State the tax treatment for Long term and short term capital gain arising out
of sale of securities by paying Securities Transaction Tax (STT) U/S 111A?
Ans: long term capital gain (LTCG) liable for STT u/s 111A is exempted u/s
10(38).
- 55 -
h) What is PAN? What are its uses?

ANS :- PAN is 10 digit alphanumeric code the first 5 digit are the alphabets
,next 4 digits are the numbers and last digit is also an alphabet ,it is
mandatory to mention the pan on income tax return.
The uses of pan are-
A. it helps income tax department in storing the details relating to the
persons income.
B . it helps IT department in keeping the track of incomes of a person.
i) Give the meaning of company in which the public are substantially interested.
Ans : owned by govt. or RBI or in which not less than 40% of shares are held
by govt. or RBI or a corporation owned by that bank (in case of an indian CO
.who is in the business of :(1)construction of ships or(2)manufacture or
processing of goods or(3)in mining or(4)in the generation or distribution of
electricity or (5)any other form of power, item –it will be 50%) or registered
under section 25 0f the co. act, 1956.
j) Define Person U/S 2(31).
Ans: person u/s 2(31) includes
 An individual
 A Hindu undivided family
 A company
 A firm
 An association of person or body of individual, weather
incorporated or not
 A local authority
 Every artificial juridical person not falling within in any of the
above category.
- 56 -
SECTION-B
Answer any 3 of the following in about one page. Each question carries 5 marks.
2. Explain the tax treatment of expenditure on scientific research U/S 35 of Income Tax
Act, 1961.
Ans: expenditure on scientific research [sec 35]
Section Particulars Deduction
35(1) Revenue or capital Current year prior 100%(during the

expenditure (expect on period (3 years year in which
land) on scientific research preceding to the business is
related to the business commencement of commenced)
incurred for own business. business).
35(1)(2) Any sum paid to approved For undertaking 175% of amount

scientific research scientific research paid.
association for university or (related or
colleges or institution. unrelated to the
business of the
assesee).
35(1)(2a) Any sum paid for scientific For under taking 125% of amount
research to a company scientific research paid.
registered in India, having
an object to a carry out
scientific research and
development activity.
35(1)(3) Any sum paid to approved For research in 125% of amount

university, college or other social science or paid.
institution. statistical research
(related or
unrelated to
business of the
assesee)
- 57 -
35(1)(4) Capital expenditure Related to business 100% up to 3

incurred for own business current year prior years prior to
(excluding cost of land) period. commencement.
35(2AA) Any sum paid to national For undertaking a 200% of amount

laboratory or university or scientific research paid
IIT or a specified person program approved
by a prescribe
authority.
35(2AB) Expenditure (capital or Bio-technology or in 200% of

revenue on in house house research expenses
research and development incurred allowed
facility (expect on land and up to 3-3-07
building )by a company
engaged in manufacturing
or production of drugs,
chemical , fertilizers,
pharmaceuticals,
telecommunication
equipment, helicopter,
aircraft
3. Discuss the tax provision under section 80IC.

Ans: section -80IC:- deduction in respect of profit and gain of certain
undertaking in certain special category of states.
Condition:-
 The undertaking should be a new undertaking that is should not be
formed by splitting up or re-construction of business.
 It should not be formed by transfer of old plant and machinery.
 The industrial undertaking should be manufacture or produce specified
goods i.e any article given 4th schedule and any article but other than
those given in the 13th schedule.
 The industrial undertaking must begin the production or manufacture
within the time limit prescribed.
- 58 -
 If there is substantial expansion (i.e. more than 50%) then the

substantial expansion should take place within the specified period.
 The industrial undertaking should be set up in Sikkim, himachal
Pradesh, Uttaranchal or north
Eastern state.
4. From the following information of Zeal Limited, compute the gross total income for
the assessment year 2014-15. Show the carry forward of losses clearly along with
reasons.
Sl. no. Particulars Amount in Rs
1. Income from house property 3,00,000

2. Current year Business loss 1,20,000
3. Current year’s depreciation 20,000
4. Business loss of preceding years 1,00,000
5. Unabsorbed depreciation of preceding year 60,000
6. Short-term Capital loss 80,000
7. Long-term Capital gains 1,00,000
8. Dividend received from Foreign company 65,000
9. Dividend received on shares in Indian Company 79,00
Ans : Computation of Gross Total Income of zeal ltd for the A.Y 2014-15.
Particulars Amount Amount
INCOME FROM HOUSE PROPERTY
Income from house property 3,00,000
(-)current year business loss 1,20,000
(-)current year depreciation 20,000
(-)unabsorbed depreciation of P.Y 60,000
- 59 -
1,00,000
INCOME FROM CAPITAL GAIN
Long term capital gain 1,00,000
(-) short term capital loss 80,000
20,000
INCOME FROM OTHER SOURCES
Dividend from foreign company
Dividend from Indian company 65,000
Exempted
GROSS TOTAL INCOME 1,85,000
5. An industrial undertaking which commences the manufacturing activity w.e.f. 01-09-

2013 has acquired the following assets during the previous year 2013-14.
Assets Date of Date when Cost of
acquisition put into use acquisition
(in Rs.)
Factory building 4-4-2013 1-9-2013 25,00,000
Plant and Machinery
I. Air pollution control 4-5-2013 1-9-2013 2,00,000

equipment
II. Machinery P 5-5-5013 1-9-2013 8,50,000
III. Machinery Q 1-9-2013 31-10-2013 3,50,000
IV. Machinery R (second 1-1-2014 13-1-2014 1,00,000

hand)
V. Motor car 1-2-2014 1-2-2014 2,50,000
- 60 -
VI. Air conditioner 1-2-2014 2-2-2014 50,000

(installed in office)
Compute the allowable depreciation U/S 32 for the A.Y.2014-15 and WDV as on 01-
04-2014.
Ans : Computation of depreciation of WDV for the A.Y 2014-15.
Working note;-
Calculation of additional depreciation
Machine P : more than 180 days 8,50,000
(8, 50,000*20%) 1,70,000
Machine Q : less than 180 days - 3,50,000
(3, 50,000*10%) 35,000
2,05,000
TOTAL
Computation of Normal depreciation.

Particulars Amount
Machinery P
more than 180 days; 8,50,000*15% 1,27,500
less than 180 days ;
machinery Q 3,50,000
machinery R 1,00,000
motor car 2,50,000
air conditioner 50,000
7,50,000*7.5% 56,250
Total 1,83,750
- 61 -
Computation of depreciation
Particulars Block 1 Block 2 Block 3 air
machinery @ pollution control
Factory
15% equipment @
building @
100%
10%
WDV as an 1-4- Nil Nil Nil

2013
(+) additions 25,00,000 16,00,000 2,00,000
25,00,000 16,00,000 2,00,000
(-) depreciation
Additional Nil 2,05,000 Nil

depreciation
Normal
2,50,000 1,83,000 2,00,000
depreciation
WDV as on 1-4- 22,50,000 12,11,250 Nil

2014
SECTION-C
Answer any 3 questions. Each question carries 15 marks.
1. Discuss the tax holidays and tax incentives available for company assessee U/S 80-
IA.
Ans: this section is available to the following business carried by an undertakings:
Case 1: provision of infrastructure facility
Case 2: telecommunication
Case 3: industrial parks
- 62 -
Case 4: power generation, transmission & distribution or substantial renovation and

modernization of existing distance lines.
Case 5: undertaking setup for reconstruction of power unit
Case 6: a cross country natural gas distribution network.
Case 1: infrastructure facility:-
The following conditions needs to be satisified,
A) The undertaking should be engaged in providing infrastructure facility.
B) The undertaking should be owned by indian company.
C) There should be agreement with central government.
If the above condition satisfiesd then
Deduction=100%of the profit for 10 years commencing from the initial
assessment year.
Infrastructure facility means:-
 A road including a bridge or a rail system
 A highway project including housing or other activities being an
integral part of the highway projects.
 A water supply project ,water treatment system, irrigation projects
,sanitation and sewerage system or solid waste management system.
 A port ,airport ,inland water way or inland port.
Case 2:telecommunication service:-
The following condition should be satisfied:-
i. It should be a new undertaking.

ii. It should not be form by transfer of old plant and machinery
iii. The undertaking should be engaged in providing telecommunication services.
If the above conditions are satisfied ,then
Deduction=100% of the profit of such business for 1st five years starting from the
initial a.y and 30% of the profits of such business for the next five years.
Case 3:industrial park or special economic zone:-
The following conditions should be satisfied:-
- 63 -
The industrial undertaking should develop and operate or maintain and operate an
industrial park and special economic zone notified for this purpose in a scheme formed by
central government.
If the above conditions is satisfied .
Deduction =100%of profit for first 10 years starting from initial A.Y
The assessee has the option to claim deduction for 10 consecutive years out of 15 years
beginning from the yearin which the undertaking develops an industrial park or develops a
special economic zone.
Case 4:power distribution or generation
The following conditions should be satisfied:-
 It should be a new undertaking or an existing undertaking having substantial

expansion.
 It should not be formed by splitting up of an existing undertaking.
 It should not be formedby transfer of old plant and machinery (20% old is
allowed).second hand machinery which is imported from abroad which has not
been used in india in any time at past would be considered as new machinery.
 It should be engaged in generation and distributionof power.
If the above conditions are satisfied ,
Deduction=100%of the profits of such business for 10 years starting from initial A.Y.
The assesse has the option to claim deduction for 10 consecutive A.Y out of 15
years beginning from the year in which the undertaking generates power,
commences transmission or distribution lines.
Case 5:reconstruction of power unit:-

The following conditions are to be satisfied:-
 It should be owned by an Indian company.
 It should be set-up for reconstruction or rival of power-generating unit before 30th
nov 2005.
 Such undertaking begins to generate or transmit or distributing power before 31st
march 2007.
If the above conditions are satisfied , then
Deduction=100%of the profit of such business for 10 years starting from initial A.Y.
- 64 -
The assesse has option to claim deduction for 10 consecutive A.Y out of 15 years
beginning from the year in which the undertaking generates power ,commences
2. Enumerate the tax provisions regarding set-off and carry forward of losses under
the Income Tax Act, 1961.
Ans: the tax provision of set of carry forward of loss.
Set of loss
 Income tax is only tax even there may be different heads of income.
 Hence loss from one head of income may be set off against the income from
another head of income in the same previous year so that true income of
current year may be computed for paying loss.
There are three types of setting of losses or modes of set off.
1. Intra head adjustment or intra head setoff
2. Inter head adjustment or inter head setoff
1)Intra head adjustment u/s
Any loss from one head of income can be set off under the same head of income u/s 70
(within the same head) loss from one business can be set off against the income from
another business under the same head of income.
Example: loss from cloth business to profit from sugar business etc.
Exemptions:
 Loss from speculation business u/s 73(1)
 Loss from the activity of owing and maintaining of race horses.
 Loss from winning from lotteries / car games
 Long term capital loss from the assessment year 2003-04
 Loss from exempted source of income not set off against taxable
income.
- 65 -
Bearing the above;
 loss from one house property can be set off against any other income within house
property income
 non-speculation business loss can be set off against speculation business and non-
speculation business
 Short term capital loss can be against both long term and short term capital gains.
 Other source: - loss from one activity (expect the above) may be set off against
other income within the head.
 Loss from an exempted source cannot be set off against taxable sources.
2)Inter head adjustment u/s 71
If a net result after intra adjustment is still a loss the current year loss can be set off
against the income from other heads of income.
In other words, loss from one head can be adjusted against another income head
except salaries only for the current year. Brought forward losses or carry forward losses
cannot be allowed under this adjustment.
Example; business loss can be set off against income from house property of the current
year.
Exceptions;
 Speculation loss – only against speculation income.

 Loss from capital loss- cannot be set off against other heads of income (both LTCG
and STCG)
 Loss from the activities of owing and maintain of race horse – not adjusted against
any head of income.
 Loss from winnings from lotteries – against such income (lottery, crossword, puzzles,
betting, races, card games)
If a loss cannot be set off either under the intra head adjustment and inter head
adjustment because of shortage of income of the same year. It may be carry forward u/s
718.
- 66 -
 Income from house property :- from the assessment year 1999-2000 loss from
house property if it is not adjusted in the intra head adjustment it can be carry
forward for next 8 assessment years.
 Business loss: - once the loss is carry forward. The carry forward loss can be set off
against business income only. It can be carry forward and set off for next 8
assessment years.
 Capital gain head loss :-
Short term capital loss – against long term capital gain / short term capital gain –
carried forward for next 8 assessment year.
Long term capital loss – against long term capital gain only – carry forward for next 8
assessment years.
 Other sources :- u/s 74A (3)
Loss from owning and maintaining of race horse can be set of only against such
income and carry forward up to 4 assessment years.
 Speculation loss ;-u/s 73
Speculation loss can be set off against speculation income only it can be carry
forward 4 assessment year.
3. Satyam limited. Is a public company engaged in the business of printing and

publication of books. Its profit and loss account for the year ended March 31, 2014
disclosed a net profit of Rs. 16, 00,000. Particulars noted from the company’s
account and on inquiry from the company are given below.
a) The head office of the company is situated in a building taken on lease. During
the year, the company incurred an expenditure of Rs. 2, 00,000 on extension
and improvement to this building. The sum of Rs.2, 00,000 was debited by the
company to its profit and loss account.
b) In the past, the company used to value its closing stock at cost. This year the
closing stock was valued at 10 percent below cost of Rs. 1, 80, 00. The
company has resolved that it will hence forth adopt this method of valuation.
c) A motor car purchased by the company in the past or Rs.25, 000 it’s written
down value Rs. 16,000 was sold in the previous year of Rs.14, 000.
d) Rs.30, 000 income from business activities was not included in the above net
profits.
e) Income tax refund of Rs.12,500 received during the year was credited to the
profit and loss account.
- 67 -
f) A manager of the company paid salary of Rs.60,000 , dearness allowances Rs.

12,000, commission Rs. 10,000, bonus Rs.7,500 and leave salary Rs. 2,500.
The company also paid of Rs. 6,000 to the watchman and sweeper provided
free of charge to the manager.
g) Debits to the profits and loss account include the followings :
I. Rs. 10,000 regarding expenditures incurred for inaugurated of a new
branch opened for expanding the business.
II. Rs. 25,000 regarding expenditure incurred on printing additional articles of
association of the company.
III. Rs. 2,000 regarding legal expenses in connection with the alteration of the
company articles of association.
IV. Rs. 25,000 paid as advertisement expenses paid in cash to an
advertisement agency.
V. Rs. 24,000 regarding payment by way of contribution towards approved
gratuity fund.
VI. Rs. 8,000 regarding deposit made under the own telephone (OYT) scheme.
VII. Rs. 7,500 regarding penalty imposed by the assessing officer for
concealment of income made by the company for an earlier assessment
year for which assessment was completed during this year.
VIII. Rs. 5,000 regarding interest paid to bank for money borrowed to pay
advance tax (Rs. 4,000) and wealth tax (Rs. 1,000).
IX. Rs. 6,000 paid as electricity expenses.
X. Rs. 5,000 regarding loss of cash in robbery in the company’s business
premises.
XI. Rs. 12,000 regarding payment of interest to a Non-resident (Tax Deducted
at Sources (TDS) is not made le by the company).
XII. Rs. 1, 00,000 paid by the company to an approved scientific research
association which undertakes scientific research not related to the
business of the company.
XIII. Rs. 10,000 paid as interest on borrowings made for purchase of shares of
the company which has still not paid any dividend.
Compute:
i. Total income of the company and
ii. Tax liability of the A.Y 2014-15.
- 68 -
Computation of taxable income of the company for the assessment

year 2014-15.
Particulars amount Amount

Net profit as per profit and loss a/c 16,00,000
(+) disallowed or inadmissible expenses
which are already debited to profit and
loss a/c.
Capital expenditure on building 2,00,000
Advertisement expenses 25,000
Contribution towards approved gratuity
fund. 24,000
Penalty 7,500
Interest 5,000
Payment of interest to non-resident 12,000
Interest on borrowings 10,000
Depreciation (2, 00,000*10%) 20,000
Business income not credited to profit
and loss a/c.
Income from business activity 30,000
Under valuation of closing stock
(180000*10/90) 20,000 3,53,500
19,53,500
(-) allowable expenses or admissible

expenses or loss which are not debited to
profit and loss a/c.
Income tax refund 12,500 12,500
Income from business 19,41,000
- 69 -
Tax liability
Tax on business income (19, 41,000*3%) 5,82,300
(+) education cess (5,82,300*2%) 11,646
(+)secondary and higher education cess
(5, 82,300*1%) 5,823
Tax liability 5,99,769
4)‘LMN’ Ltd, manufacturing electric pumping sets. The

company has the option to either make or buy from the
market. Compute ‘X’ used in manufacture of pumping sets. The
following details are available.
The component will be manufactured on new machinery
costing Rs. 2,00,000 with a life of 10 years. Materials required
cost Rs. 4 per Kg and wages Rs.0.60 per hour. The salary of the
foreman employed is Rs. 3,000 per month and other variable
overhead include Rs.40,000 for manufacturing 50,000
components per year. Materials required is 50,000 Kg’s and
requires 1,00,000 labour hours.
The component is available in the market at Rs.8.6 per piece.
Will it be profitable to make or buy the component ’M’?
Does it make any differences if the component can be
manufactured on an existing machine?
- 70 -

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Direct tax planning

2008 question paper answers

Ans:- A company is an association or collection of individual's people or "worm- bodies" or

b)When is a company treated as resident for tax purpose?

Ans:-A company is said to be resident in India in any previous year if

*It is an Indian company.

c)State the Tax treatment for long term capital gain.

d) When belated return is filed?

*on or before the due date mentioned u/s139(1).

e) What do you mean by colourable devises ?

f) State the circumstances where TDS can be made.

Ans:-* Deductions of tax from salaries (192).

* deductions of tax @source from interest on securities (section 192).

* deduction of TDS from dividends (194).

*deductions of TDS from interest on securities 194A.

*TDS from winning from lotteries or Cross word puzzle 194B.

* TDS from winning from horse race 194BB.

*TDS from payments to contractors 194C.

*TDS from insurance commission 194D.

* TDS from payments in respect of national savings scheme 194EE.

* TDS from payment on account of units by mutual funds or UTI194F.

g) Defferenciate advance tax from TDS.

TDS Advance Tax

h) State the reason to introduce MAT.

I)State the different methods of tax collection.

Ans:-Different methods of tax collection is as follows

a. Taxes paid by the individual.

b. Taxes paid by business.

e. Capital gain taxes.

k) How do you treat the expenditure of amalgamation/ demerger?

l) What is Tax base?

3. Discuss the deductions in respect of certain undertakings in north eastern states

Ans:- conditions- the following conditions should be satisfied

a. The tax payer begins manufacture or production of goods or undertakes substantial

c. However deduction under this section ID not available in respect of manufacture or

i. Audit report should be submitted along with the return of income.

j. Return of income is submitted on or before the due date of submission of return of

This section is available to the following business carried by an undertaking:

Case 1: Provision of infrastructure facility.

Case 2: Telecommunication services.

Case 3: Industrial parks.

Case 4: Power generation, transmission & distribution or substantial renovation and

Case 5: Undertaking setup for reconstruction of power unit.

Case 6: A cross country natural gas distribution network.

Case 1: Infrastructure facility:-

The following conditions needs to be satisfied,

a. The undertaking should be engaged in providing infrastructure facility.

b. The undertaking should be owned by Indian company.

c. There should be agreement with central government.

If the above conditions are satisfied then

Infrastructure facility means:-

* A road including a bridge or a rail system.

*A port, airport, inland waterway or inland port.

In case of the assessee is involved in providing infrastructure facilities such as a road

Power of Assessing officer to re- compute profit:-

(i) Transfer between two units owned by the taxpayers:-

√ The taxpayer carries on two or more businesses.

(ii)Transfer by Assessee to any other person:-

Case 2 :- Telecommunication services:-

The following conditions should be satisfied

1. It should be a new undertaking.

2. It should not be form by transfer of old plants & machinery.

3. The undertaking should be engaged in provided telecommunication services.