Income From Other Sources – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Income From Other Sources – CA Final DT Question Bank
Question 1.
Land owned by Ganesh was acquired by NHAI in 2017 and since then litigation was going on for enhancement of compensation. The issue was resolved on 11.09.2020 and the court ordered finally to make payment to Ganesh of the enhanced compensation and following interest on such enhanced compensation was received:
Financial Year : ₹
2017- 2018 : 1,15,000
2018- 2019 : 2,25,000
2019- 2020 : 3,75,000
2020- 2021 : 2,14,000
Explain the provisions of the Act and also work out the amount of interest and the assessment year in which the same shall be taxed. [CA Final May 2010] [4 Marks]
Answer:
As per section 56(2)(vii) the income by way of interest received on compensation or on enhanced compensation shall be assessed as “Income from other sources” in the year in which it is received.
Further, Sec. 145B( 1) provides that the interest received by an assessee on compensation or on enhanced compensation shall be deemed to be the income for the year in which it is received, irrespective of the method of accounting followed by the assessee.
Section 57 allows a deduction of 50% of such interest income. It is further clarified that no other deduction would be allowable under any other clause of section 57 in respect of such income.
Therefore, the entire interest income of ₹ 9,30,000, subject to deduction of 50% of the interest received by Ganesh for the different years would be taxable under the head “Income from other sources” in the year of receipt i.e., in the previous year 2020-21 as under:
| ₹ | |
| Interest on enhanced compensation taxable u/s 56(2)(viii) Less: Deduction u/s 57(iv) @ 50% Interest chargeable under the head “Income from other sources” |
9,30,000
4,65,000 |
| 4,65,000 |
Question 2.
Dhaval is in business of manufacturing customized kitchen equipments. He is also the Managing Director and held nearly 65% of the paid-up share capital of Aarav Ltd. A substantial part of the business of Dhaval is obtained through Aarav Ltd. For this purpose, Aarav Ltd. passed on the advance received from its customers to Dhaval to execute the job work j entrusted to him.
The Assessing Officer held that the advance money received by Dhaval is in the nature of loan given by Aarav Ltd. to him and accordingly is deemed dividend within the meaning of provisions of section 2(22)(e) of j the Income-tax Act, 1961. Examine whether the action of the Assessing Officer is tenable in law. [CA Final May 2012] [4 Marks]
Answer:
As per section 2(22)(e), payment of any sum by way of advance or loan by a company, in which public are not substantially interested, to its share-holder holding not less than 10% of voting power of the company, shall be deemed as dividend to the extent of accumulated profits ol the company.
In the given case, Dhaval is holding 65% of the paid-up capital of Aarav Ltd. Aarav Lid. has passed on advance received from its customers to Dhaval for execution of job work entrusted to Dhaval.
Assuming that Aarav Ltd. is not a company in which public are substantially interested, the applicability of the provisions of section 2(22)(e) in respect of such transaction has to be examined.
In CIT v. Rajkumar (2011) (Del.), it was field that trade advance given to the shareholder which is in the nature of money transacted to give effect to a commercial transaction, would not be deemed to be dividend u/ s 2(22) (e). The Delhi High Court ruling in CIT v. Ambassador Travels (P) Ltd, (2009) also supports the above view.
In the present case, the payment is made to Dhaval by Aarav Ltd. for execution of work is in the course of commercial business transaction and therelore, it shall not be deemed as dividend u/s 2(22)(e). Hence, the action ; of the Assessing Officer is not tenable in law.
Note: If it is assumed that Aarav Ltd., being a public limited company, is a company in which the public are substantially interested, then, the provisions of section 2(22)(e) shall not be applicable and the said amount paid to Dhaval shall not be treated as dividend u/s 2(22)(e).
Question 3.
Mr. Manas is a distributor of lottery tickets. He won ₹ 6,00,000 as prize money on unsold lottery tickets. It was offered as business income, The Assessing Officer wants to tax the same as lottery winning at the rate prescribed under section 115BB. Is he justified? [CA Final May 2015] [4 Marks]
Answer:
The issue under consideration is whether winnings of prize money on unsold lottery tickets held by the distributor of lottery tickets can be subject to tax at the rate of 30% prescribed u/s II5BB.
In CIT v. Manjoo and Co. (201 1), the Kerala High Court observed that the receipt of winnings from lottery by the distributor was not on account of any physical or intellectual effort made by him and therefore cannot be said to be “income earned” by him in business.
The unsold lottery tickets cease to be stock-in-trade of the distributor i because it will have no value after the draw and the distributor will get nothing on sale of the same except any prize winning ticket held by him which will entitle him for the prize money. Hence, the receipt of the prize money is not in his capacity as a lottery distributor but as a holder of the lottery ticket which won the prize.
Further, winnings Irom lotteries are taxable under the special provisions of section 115BB, irrespective of the head under which such income falls.
Therefore, the Kerala High Court held that the rale of 30% prescribed u/s @ 115BB would be applicable on prize money winnings received by a distributor on unsold lottery tickets held by him.
Applying the rationale of the Kerala High Court ruling to the case on hand, the Assessing Officer’s intention to tax the prize money received by the distributor on unsold lottery tickets held by him at the rate prescribed u/s 115BB is justified.
Question 4.
Mr. Santhanam holding 25% voting power in VKS Private Limited permitted his own land to be mortgaged to a bank for enabling the company to obtain a loan. Mr. Santhanam requested the company to release the property from the mortgage. The company failed to do so, but for retaining the benefit of bank loan it gave an advance of ₹ 10 lakhs to Mr. Santhanam, which was authorized by a resolution, passed by the Board of Directors. The company’s accumulated profit on the date of payment of advance was ₹ 50 lakhs. The A.O. proposes to tax the amount of ₹ 10 lakhs by invoking the provision of Sec. 2(22)(e). Is the proposition of the Assessing Officer correct in law? [CA Final Nov. 2015] [4 Marks]
Answer:
The issue under consideration is whether loan or advance given to a j shareholder by the company, in return of an advantage or benefit conferred on the company by the shareholder, can be deemed as dividend u/s 2(22)(e).
The facts of the case are similar to the facts in Pradip Kumar Malhotra v. CIT (2011) where the Calcutta High Court observed that the phrase “by way of advance or loan” appearing in section 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys being a person who is the beneficial owner of shares holding not less than 10% of the voting power.
But, in case such, loan or advance is given to such shareholder for a further consideration which is beneficial to the company and therefore, such advance or loan cannot be said to be deemed dividend u/s 2(22)(e). Hence, as the advance given by the company was not in the nature of a gratuitous advance but instead it was given to protect the interest of the company, it was held that such advance cannot be treated as deemed dividend u/s 2(22)(e).
In this case, advance of ₹ 10 lakhs was given by VKS Manufacturing (P.) Ltd. to Mr. Santhanam holding 25% of voting power in lieu of non-release of his personal property from mortgage thereby enabling the company to i§ retain the benefit of loan obtained from bank.
Applying the above rationale of the Calcutta High Court ruling in this gi case, such advance cannot be brought within the purview of section 2(22) (e), since it was not in the nature of gratuitous advance but was given to protect the interest of the company. The proposition of.the A.O. to tax the amount of ₹ 10 lakhs by invoking the provisions of section 2(22)(e) in this case is, therefore, not correct.
Question 5.
Mr. Vivek, a resident assessee holds 80% of equity shares in a company and is the executive director of the company. In his personal capacity, he is the owner of certain premises (building) in which he was carrying on a proprietary business. Subsequently, the assessee ceased to carry on the business of proprietary firm and leased the building to the company for its business. The company incurred ₹ 3.2 crores towards construction and improvement of this premises, which it continued to use otherwise than as the owner of the premises. The Assessing Officer held that the amounts spent by the company towards repairs and renovation of the building is taxable as deemed dividend in the hands of the assessee. Is the action taken by the Assessing officer valid? [CA Final Nov 2017] [4 Marks]
Answer:
Issue involved: The issue under consideration is whether repair and renovation expenses incurred by a company in respect of premise leased out by a shareholder having substantial interest in the company, be treated as deemed dividend.
Provisions applicable: As per section 2(22)(e), in case a company, not being a company in which the public are substantially interested, makes payment of any sum by way of advance or loan to a shareholder holding not less than 10% of voting power/share capital of the company, then, the payment so made shall be deemed to be dividend in the hands of such shareholder to the extent to which the company possesses accumulated profits.
Analysis: The facts of the case are similar to the facts in CIT v. Vir Vikram Vaid (2014) (Bom.), wherein the above issue came up before the Bombay High Court. The High Court observed that no money had been paid by way of advance or loan to the shareholder who has substantial interest in the company. Further, the amount spent was towards repairs and renovation of the premises owned by the assessee but occupied by the company as lessee. There is no dispute that the company had taken on rent the aforesaid premises.
The High Court observed that the expenditure incurred by virtue of repairs and renovation on the premises cannot be brought within the definition of advance or loan given to the shareholder having substantial interest in the company, though he is the owner of the premises. It cannot be treated as payment by the company on behalf of the shareholder or for the individual benefit of such shareholder. If held in such manner, it is a mere assumption not tenable in law.
The High Court, accordingly, held that the repair and renovation expenses in respect of premises occupied by the company cannot be treated as deemed dividend in the hands of shareholder being the owner of the building.
Conclusion: Thus, applying the rationale of the Delhi High Court ruling to the present case, contention of the Assessing Officer that the amounts spent by the company towards repairs and renovation of the building is taxable as deemed dividend in the hands of the assessee is not tenable in law.
Question 6.
HLI Private Limited is a company with three shareholders H (40%), L (20%) and I on behalf his HUF (40%). I (HUF) is a Hindu Undivided Family whose members are Mr. I, Mrs. I and their two sons, G and J. The company gave a loan of ₹ 9 lakhs to I (HUF) on 30th April, 2020, on which date the accumulated profits of the company was ₹ 6 lakhs. What is the tax consequence of this transaction? [CA Final Nov. 2018 (Old Syllabus), Nov. 2012] [4 Marks]
Answer:
The issue under consideration in this case is whether, where the Karta is a shareholder (on behalf of his HUF) of a company in which public are not substantially interested, the loan advanced by the company to the HUF would constitute deemed dividend u/s 2(22)(e) to the extent to which the company possesses accumulated profits.
The facts of the case are similar to the facts in Gopal & Sons (HUF) v. CIT (2017), where the Supreme Court held that loans and advances given by the closely held company to the HUF holding more than 10% shares shall be treated as deemed dividend u/s 2(22)(e) in both the cases whether HUF is treated as a shareholder or HUF’s Karta is treated as a shareholder.
If the HUF was the shareholder, sec. 2(22)(e) would be attracted since the HUF holds more than 10% shares and if the Karta was the shareholder, sec. 2(22)(e) would be attracted since the HUF would be the concern in which the Karta has substantial interest. The Supreme Court, accordingly, held that the loan amount is to be assessed as deemed dividend u/s 2(22)(e).
By applying the above rationale in the present case, the loan advanced by HLI Pvt. Ltd. to I (HUF) upto the accumulated profits of the company i.e. ₹ 6 lakhs shall be treated as deemed dividend u/s 2(22)(e). As per the amendment made by the Finance Act, 2020, such deemed dividend shall be taxable in the hapds of HUF.
Question 7.
Luminous Pvt. Ltd., whose accumulated profits are ₹ 20 lakhs wants to disburse a loan of ₹ 25 lakhs to Mrs. Nisha, a resident shareholder holding 20% of the equity shareholding in the company. Can the entire amount of loan be disbursed to the shareholder keeping HI mind the provisions of the Income-tax Act, 1961? The Finance Manager feels that this being a pure loan transaction, there is no bar for disbursing the entire amount. Is his view correct? [CA Final Nov. 2018 (New Syllabus)] [4 Marks]
Answer:
As per Sec. 2(22)(e), if a company not being a company in which public are substantially interested makes any payment by way of loans or advances, to a shareholder, being the beneficial owner of shares, carrying not less than 10% of voting power, then such payment shall be as deemed dividend to the extent of accumulated profits.
In this case, Luminous Pvt. Ltd. has disbursed a loan of ₹ 25 lakhs to Mrs. Nisha, a resident shareholder holding 20% of the equity shareholding in the company and therefore such loan shall be treated as deemed dividend to the extent of ₹ 20 lakhs (accumulated profits). As per the amendment made by the Finance Act, 2020, the dividends including deemed dividends are taxable in the hands of shareholders w.e.f. A.Y. 2021-22 as per their regular slab rates.
Therefore, the view of the Finance Manager that this being a pure loan transaction, there is no bar for disbursing the entire amount, is correct but Mrs. Nisha shall be liable to pay tax on it.
Question 8.
SRM Tech Ltd. is engaged in the manufacture of multi-layer tubes and other specialty packaging and plastic products. It came out with an initial public issue of shares during the relevant assessment year and deposited the share application money received in banks. The share capital was received by the SRM Tech Ltd. to meet capital expenditure for setting up of its factory. As the funds were not immediately required, it made temporary deposits with bank which earned interest.
This interest income of ₹ 1.71 crores was treated as abatement of capital cost of the project factory by the company and set off such interest earned against public issue expenses, in the books of account. The AO is of the opinion that the same should be treated as revenue receipt and taxed the j same as income from ‘Other Sources’. Decide the correctness of action of the Assessing Officer. [CA Final May 2019 (Old Syllabus)] [4 Marks]
Answer:
The issue under consideration is whether the interest income from share application money is taxable under the head ‘Income from Other Sources’, or can the same be set-off against public issue expenses.
The facts of the case are similar to the facts in CIT v. Sree Rama Multi Tech Ltd. (2018), where the Supreme Court observed that the assessee-company was statutorily required to keep share application money in a separate account till the allotment of shares was completed. The interest earned was inextricably linked with the requirement of raising share capital. Only the surplus money deposited in the bank for earning interest is liable to be taxed as “Income from Other Sources”.
But, here, the share application money was deposited with the bank not to make additional income but to comply with the statute and the interest accrued on such deposit is merely incidental. Moreover, the issue of shares relates to capital structure of the company and hence, expenses incurred in connection with the issue of shares are to be capitalized. Accordingly, the accrued interest is not liable to be taxed as “Income from Other Sources” and the same is eligible to be set-off against public issue expenses.
Thus, the contention of the A.O. that the interest accrued by SRM Tech Ltd. of ₹ 1.71 crores on deposit of share application money with bank is taxable as income from other sources is not correct. Such interest is eligible for set off against the public issue expenses and hence, not taxable as ‘Income from Other Sources’.