Taxation of Companies, LLP and Non-resident – CS Professional Study Material

Chapter 18 Taxation of Companies, LLP and Non-resident – CS Professional Advance Tax Law Notes is designed strictly as per the latest syllabus and exam pattern.

Taxation of Companies, LLP and Non-resident – CS Professional Advance Tax Law Study Material

Question 1.
Discuss briefly the treatment of un-availed tax credit of minimum alternate tax (MAT) in case of conversion of a private company or unlisted public company into a limited liability partnership (LLP). (Dec 2012, 3 marks)
Answer:
Section 115JAA(7) w.e.f. 1.04.2011, Assessment Year 2011-12 and onwards, provides that in case of conversion of a private company or unlisted public company into a Limited Liability Partnership Act, 2008, the provisions of Section 115JAA shall not apply to the successor LLP, that is to say tax credit will not be allowed to such LLP.

Question 2.
What are the provisions of section 54F in relation to capital gains on transfer of asset other than a residential house? (Dec 2012, 5 marks)
Answer:
Any long term capital gain, arising to an individual or HUF from the transfer of any long term capital asset, not being residential house property shall be exempt in full, if the entire net sales consideration is invested in purchase of one residential house within one year before or 2 years after the date of transfer of such an asset or in the construction of one residential house within 3 years after the date of such transfer. Where part of the net sales consideration is invested, then Long term capital gain shall be exempted proportionately.

The proportionate exemption shall be that amount of capital gains which bears the same proportion which the amount invested in the new house bears to the net consideration price of the asset transferred i.e.
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 1
The above exemption shall be available only when the assessee does not own more than one residential house property on the date of transfer of such asset exclusive of the one which he has bought for claiming exemption u/s 54F.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 3.
Discuss with the help of an example, the cascading effect of dividend distribution tax and the remedial action taken by the government. (Dec 2012, 7 marks)
Answer:
Tax on distributed profits of domestic companies [Section 115-O (1)]: The Domestic Company shall, in addition to the income tax chargeable in respect of its total income, be liable to pay additional income-tax on any amount declared, distributed or paid by such company by way of dividend (whether interim or otherwise), whether out of current or accumulated profits. Such additional income-tax shall be payable @15% plus surcharge @12% plus Health and Education cess 4% of the amount so declared, distributed or paid.

Tax Rates:
Tax on distributed profit shall be computed after grossing up the tax by using following formula:
Rate of Dividend Distribution Tax before surcharge and cess =
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 2

Dividend received from subsidiary company to be reduced from the above dividend to be distributed [Section 115-O(1A)]:
For the purpose of computation of tax on distributed profits, the amount of dividend distributed by the domestic company during the financial year shall be reduced by the following:

(i) The amount of dividend, if any, received by the domestic company during the financial year, if such dividend is received from its subsidiary and,-
(a) where such subsidiary is a domestic company, the subsidiary has paid the tax which is payable under this section on such dividend; or
(b) where such subsidiary is a foreign company, the tax is payable by the domestic company under section 115BBD on such dividend;
However, the same amount of dividend shall not be taken into account for reduction more than once;

(ii) The amount of dividend, if any, paid to any person for, or on behalf of, the New Pension System Trust referred to in Section 10(44).

For the purpose of Section 115-O(1A), a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company.

NOTE 1:

  • The above additional tax shall be payable even if no income-tax is payable by such company on its total income. [Section 115-O(2)]
  • For the purposes of Section 115-O(1A), a company shall be a subsidiary of another company, if such other company holds more than half in nominal value of the equity share capital of the company.

Section 11 SBBD is applicable when an Indian company holds 26% or more in nominal value of equity shares in the foreign company. But for taking the benefit under section 115-O (1A) the Indian company should hold more than half (instead of 26%) in the nominal value of the equity share capital of the company.

Note 2: Abolition of Section 115-O-Deals with the tax on the distribution of dividend, commonly known as “DDT’, which was to be paid by the company distributing its income by way of dividend to its shareholders. Earlier the DDT was taxed @20.56%, which has now been abolished and all the dividend income shall be taxed in the hands of the shareholders. (Finance Act, 2020)
Below table summarize amendment under the Act with respect to DDT abolishment and taxing in the hands of recipient:

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
DDT by domestic company 115-O(1)
Amended
Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 but on or before 31 -Mar-2020

Note 3: The provisions of Section 11 5BBD shall not be applicable to any A.Y. starting from or after 1.4.2023.
Example:
Where the amount of dividend paid or distributed by a company is ₹ 85, then
DOT under the amended provision would be calculated as follows:
Dividend amount distributed = ₹ 85
Increase by ₹ 15 [i.e.(85*0.1 5)/(1-0.15)]
Increased amount = ₹ 100
DDT@15% of ₹ 100 = ₹ 15
Tax payable u/s 115-O is = ₹ 15
Dividend distributed to shareholders = ₹ 85
Effective rate of dividend distribution tax
The effective rate of dividend distribution tax payable shall be as under:
Tax payable u/s 115-O on ₹ 85 distributed = ₹ 15
Therefore DOT rate on ₹ 100 distributed shall be 15/85 × 100 = 17.64706%
Add: Surcharge @12% of 17.647 = 2.11764%
Total 19.7647%
Add: Health and Education cess@ 4% = 0.79058%
Total effective DOT rate applicable = 20.56%
Hence, the effective rate of DOT has been increased to 20.56% approximately.
Alternatively the net amount of dividend paid on distributed should first be grossed up and DOT should be paid @17.472% (15%+12%SC+4% H&EC).

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 4.
What is the time-limit in the following different cases:
(i) To file return of income under section 139(1) by an assessee who is required to furnish audit report under section 92E.
(ii) To file a revised return, if the assessee discovers any omission or wrong statement in the originally filed return. (Dec 2013, 2 marks each)
Answer:
(i) 30th November of the assessment year.
(ii) Revised return can be filed at any time before the end of the relevant assessment year, or before the completion of the assessment, whichever is earlier.

Question 5.
A CEO of an unlisted public company approached you with a proposal to convert the company into a Limited Liability Partnership (LLP) without attracting any liability towards capital gain tax. Draft a suitable reply. (June 2014, 5 marks)
Answer:
To,
CEO
XYZ LTD.
Sir,
As per Section 45 of the Income Tax Act, 1961, Income will be chargeable as Capital gains if there is a capital asset and there is transfer of the capital asset during relevant previous year.
But as per Section 47 (xiiib) Nothing contained in Section 45 shall apply to any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of Section 56 or Section 57 of the Limited Liability Partnership Act.

Provided that:
(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than 50%, at any time during the period of 5 years from the date of conversion;
(e) the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed ₹ 60,00,000; and
(f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of 3 years from the date of conversion.

Thanking You
Company Secretary
XYZ LTD.

Question 6.
Question Under LLP
(i) Who shall verify the return of income of a limited liability partnership?
(ii) ABC LLP is liquidated. What is the liability of partners of ABC LLP in respect of its tax dues?
(iii) DCB LLP has a profit of ₹ 500 lacs after charging interest on capital for B amounting to ₹ 10 lacs calculated at 15% p.a. as per the agreement, but before considering remuneration to partners. What is the maximum admissible amount of remuneration to partners who are working partners and remuneration is authorized by the LLP instrument?
Answer:
(i) Under section 140, in the case of a limited liability partnership (LLP), the return of income shall be verified by the designated partner.
Where for any unavoidable reason, such designated partner is not able to verify the return, or where there is no designated partner as such, the return of LLP can be verified by any partner.

(ii) Section 167C provides for the liability of partners of LLP in liquidation. In the case of liquidation of an LLP and where tax due from the LLP cannot be recovered, every person who was a partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP.

(iii) Computation of maximum admissible remuneration to working partners:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 57

Question 7.
A corporate assessee, who inadvertently failed to claim deduction under section 80IB during the initial years, cannot claim deduction under the said section for the remaining years during the period of eligibility, in spite of fulfillment of stipulated conditions. Examine the assertion contained in the above para in the background of judicial decision. (June 2014, 5 marks)

(ii) Whether MAT credit admissible under section 115JAA has to be set off against the assessed tax payable before calculating interest under sections 234A, 234B and 234C. (June 2014, 5 marks)
(iii) Discuss the provisions regulating determination of fair market value of ESOPs. (June 2014, 5 marks)
Answer:
(i) Where assessee is a company entitled to deduction under section 80 IB which it did not claim in the initial years, it can claim the said deduction for the remaining years during the period of eligibility, if the conditions are satisfied. [Praveen Soni vs. CIT(2011) (Del)]
(ii) No, MAT credit admissible in terms of Section 115JAA has to be set off against the tax payable before calculating interest only under sections 234B and 234C. [CIT vs. Deccan Creations Pvt. Ltd. (2011) (Kar)]

(iii) Determination of Fair Market Value (FMV) of ESOPs on the date of exercise of option:
(a) Where shares in the company are listed on a single stock exchange: FMV will be average of opening and closing prices of shares on the date of exercise of option. If on the date of exercise of option there is no trading in shares, the FMV shall be the closing price of the share on any recognised stock exchange on a date closest to the date of exercise of option and immediately preceding such date of exercise of option.

(b) Where shares in the company are listed on more than one recognised stock exchange: FMV will be average of opening and closing price of shares on the date of exercise of option on a recognised stock exchange which records the highest volume of trading in the shares.

If on the date of exercise of option there is no trading in shares, the FMV shall be the closing price of the share on a recognised stock exchange which records the highest volume of trading on a date closest to the date of exercise of option and immediately preceding such date of exercise of option.

(c) Where shares in the company are not listed on a recognised stock exchange: FMV will be value on a “specified date” as determined by a Category I merchant banker registered with SEBI.

Specified date means the date of exercise of option or any date earlier than the date of exercise of option, not being a date which is more than 180 days earlier than the date of exercise of option.

Question 8.
Explain whether the benefit of exemption under section 54EC would be available in the case of ‘capital gains arising on transfer of depreciable asset’. (June 2015, 5 marks)
Answer:
Benefit under section 54EC, etc. available even on transfer of depreciable assets:
Although as per Section 50 the profit arising from the transfer of depreciable asset shall be a gain arising from the transfer of short term capital asset, hence short term capital gain but Section 50 nowhere says that depreciable asset shall be treated as short term capital asset. Section 54EC [or say 54EC or 54F, etc.] is in independent provision which is not controlled by Section 50. If the conditions necessary under Section 54E are complied with by the assessee, he will be entitled to the benefit envisaged in Section 54E even on transfer of depreciable assets held for more than 36 months. [CIT V Assam Petroleum Industries (P.) Ltd. (2003)].

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 9.
Comment on the following in the context of provisions contained in the Income-tax Act, 1961:
(i) The provisions of section 115JB are applicable in case of foreign companies. (June 2015, 2 marks)
(ii) The provisions of dividend distribution tax are applicable to an undertaking or enterprise engaged in developing, operating and maintaining a special economic zone (SEZ). (June 2015, 3 marks)
Answer:
(i) Section 115JB of the Income Tax Act, 1961, states that all companies having book profits under the Companies Act shall have to pay MAT at the rate of 15%, there is no provision restricting its applicability to only domestic companies. Thus, MAT is applicable to all companies irrespective of it being a domestic company or a foreign company.

However, MAT is required to be computed with reference to book profits computed on the basis of profit and loss account prepared as per the Companies Act, and the Companies Act requires only foreign companies, having a place of business within India, to prepare and file its financial statements with the Registrar of Companies.
Hence, the MAT provisions shall not apply to foreign companies, which do not have any presence in India.

Alternative Answer:
The Authority for Advance Ruling has deforeign red the ruling in the case of the Timken Company holding that the provisions of Section 115JB of the Income-tax Act, 1961 levying MAT on the book profit of a company would not apply to a foreign company not having any physical presence in India. Hence, provisions of Section 115JB are applicable only to those foreign companies which have physical presence in India.

(ii) Applicability of DDT on SEZ
Finance Act, 2011 inserted a proviso to sub-section 6 of Section 115- O by which the provisions of Section 115-O shall also be applicable on an enterprise or undertaking engaged in developing, operating and maintaining a SEZ.

Note: Abolition of Section 115-O – Deals with the tax on the distribution of dividend, commonly known as “DDT’, which was to be paid by the company distributing its income by way of dividend to its shareholders. Earlier the DDT was taxed @20.56%, which has now been abolished and all the dividend income shall be taxed in the hands of the shareholders. (Finance Act, 2020)

Below table summarize amendment under the Act with respect to DDT abolishment and taxing in the hands of recipient:

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
DDT by domestic company 115-O(1) Amended Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 Payable @15% in respect of dividends declared, distributed or paid on or after 01 -Apr-2003 but on or before 31 -Mar-2020

Question 10.
Explain the meaning of ‘eligible expenses’ for the purposes of claiming benefit under section 35D. Also enumerate these eligible expenses. (June 2015, 5 marks)
Answer:
Preliminary expenses are specified expenses incurred before setting up of the business or the expenses are incurred in connection with extension of an undertaking or in connection with setting up of a new unit.
Specified preliminary expenses are:
(a) Preparation of feasibility report;
(b) Conducting market survey or any other survey necessary for the business;
(c) Preparation of Project report;
(d) Engineering services relating to the business;
(e) Legal charges for drafting an agreement relating to the setting up or conduct of the business;
(f) Legal charges for drafting and printing of Memorandum of Association (MOA) and Articles of Association (AOA);
(g) Registration fees of a company paid to Registrar of Companies;
(h) Expenses and legal charges incurred in drafting, printing and advertising for prospectus;
(i) Expenditure incurred on issue of shares or debentures like underwriting commission, brokerage.

Question 11.
(b) Narrate the provisions of the Income-tax Act, 1961, with respect to surcharge on income-tax for various types of assessees for the assessment year 2023-24. (Dec 2015, 5 marks)
(c) State the rate of deduction allowable under the Income-tax Act, 1961 while assessing income from business or profession in the following cases:
(i) For acquisition and installation of new plant or machinery by a manufacturing company.
(ii) For expenditure (revenue or capital) on in-house scientific research by a company engaged in business or manufacture or production of any article other than those specified in the Eleventh Schedule of the Income-tax Act, 1961.
(iii) Contribution to approved scientific research association including social and statistical research.
(iv) Capital expenditure (other than on acquisition of land, goodwill or financial instrument) incurred for setting-up and operating cold chain facility.
(v) Expenditure incurred by companies on notified skill development projects. (Dec 2015, 5 marks)
Answer:
(b) Provisions of Income Tax Act, 1961 with respect to Rate of Surcharge are discussed below:
1. For resident individuals (including senior citizens and super senior citizens) whose total income exceeds ₹ 1 crore = 15% on income tax payable. Co-operative societies, firms and local authorities whose total income exceeds ₹ 1 crore -12% on income tax payable.
2. For domestic company having a total income of exceeding ₹ 1 crore but not exceeding ₹ 10 crore – 7% on income tax payable.
3. For domestic company having a total income of exceeding ₹ 10 crore -12% on income tax payable.
4. For company other than a domestic company having a total income exceeding ₹ 1 crore but not exceeding ₹ 10 crore – 2% bn income tax payable.
5. For company other than a domestic company having a total income exceeding ₹ 10 crore – 5% on income tax payable.
(c) (i) Section 32 AC(1)—@15%
(ii) Section 35 – An assessee can claim the following expenditure as a deduction:
(a) revenue expenses (Sec. 35)
(b) capital expenses
All revenue expenses laid out or expended on scientific research during the previous year are full allowed as a deduction. It has further been provided that following revenue expenses, expended or laid out during three years immediately preceding the commencement of the business shall be deemed to be the expenditure of the previous year in which the business commences and therefore, shall be allowable in that year to the extent these are certified by the prescribed authority.
(iii) Payment to outside agencies for:
(a) Scientific research 100%
(b) Research in Social Science or Statistical -100% [Sec. 35 (1)(iii)]
(iv) Sec. 35AD(1A) —100%
(v) Sec. 35CCD —100%

Question 12.
Give examples of five incomes in India which are exempt under section 10 in respect of non-residents. (June 2016, 5 marks)
Answer:
The following are the income exempt from tax under section 10 of the Income tax Act, 1961 in the hands of non-residents:

1. Interest on NRE A/c [Section 10(4) (ii)]: In the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India in accordance with the Foreign Exchange Management Act, 1999 (‘FEMA’) is exempt.
2. Tax payable on Royalty or FTS on behalf of foreign company: Tax payable, under the terms of the agreement, on Royalty or FTS on behalf of foreign company is exempt under section 10(6A).
3. Tax payable on certain incomes on behalf of foreign company or Non-Resident ‘NR’: Tax payable on certain incomes (not being salary, royalty or FTS) on behalf of foreign company or a NR is exempt u/s 10(6B).
4. Tax payable by Indian Company on behalf of foreign Government etc.: Tax payable, on behalf of foreign Govt, or foreign enterprises by, Indian company engaged in business of operation of aircraft, on income from leasing of aircraft etc. u/s 10(6BB).
5. Royalty or FTS received by a specified foreign company: Royalty or FTS received by specified foreign company is exempt u/s 10(6C).

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 13.
What is an LLP? How is it different from a partnership firm? (June 2016, 3 marks)
Answer:
Entrepreneurs now have an alternative and innovative form of business organization i.e. Limited Liability Partnership (LLP) which combines the benefits of company and general partnership form of business organizations. LLP has separate legal entity, perpetual succession and limited liability of partners.
From income-tax point of view, LLP is treated as general partnership firm and therefore, its profits will be taxed in the hands of the LLP and not in the hands of its partners.

Difference between Partnership Firm Vs. LLP

Traditional Partnership LLP
Not a Legal Entity Legal Entity
Minimum 2 Partners Minimum 2 Partners
Maximum 100 Partners No Limit
Partners are jointly liable To the extent of their contribution
Registration is not compulsory Compulsory
BS etc. need not be filled Filling is compulsory
Audit is not Compulsory Compulsory if Turnover is ₹ 40 Lakhs or contribution is ₹ 25 Lakhs
Name may be any Must be approved by Registrar and must have LLP as suffix
Minor can become Partner Minor can not become Partner

Question 14.
Explain the cases of exception under the Income Tax Act, 1961, if any from the general rule “Income earned by a person during a previous year is always taxable in the Assessment Year”. (June 2017, 5 marks)
Answer:
Income earned by a person during the previous year is always taxable in the Assessment Year as per Income tax Act, 1961. However, there is an exception to this general rule and the Income earned during a previous year is taxable in the previous year itself in the following cases:

  • Income of non-resident shipping companies [Section 172]
  • Income of persons leaving India with no intention of returning back to India [Section 174]
  • Association of Persons (AOP)/Body of Individuals (BOI)/Artificial Juridical Person (AJP) formed for a particular purpose likely to be dissolved in the same year of formation [Section 174A]
  • Cases of transfer of assets with a view to avoid tax [Section 175]
  • Income of a discontinued business [Section 176]

Question 15.
Explain the provisions contained under the Income Tax Act, 1961 relating to set-off and carry forward of:
(i) Speculative Business Losses
(ii) Short-term Capital Losses. (June 2017, 5 marks)
Answer:
The provisions related to set off and carry forward of losses under the Income tax Act, 1961 in the following cases are as follow:

(i) Speculative Business Losses: Loss from speculation business is set-off in the same year from available profits and gains of any other speculative business. However, where, for any assessment year, any loss computed in respect of a speculation business has not been wholly set-off against the profits of another speculation business, ii shall be carried forward to the following assessment year and shall be set-off against the profits of any speculation business carried on by him and assessable for the assessment year. This loss can be carried forward to a maximum of four consecutive assessment years immediately succeeding the assessment year for which the loss was first computed.

(ii) Short-term Capital Losses (Sec. 74): Where in respect of any assessment year, the net result of the computation under the head “Capital gains” is a loss to the assessee, whether short-term or long-term. Such short-term and long-term capital losses shall be separately carried forward. Further, such carried forward short-term capital loss can be set off in the subsequent assessment year from income under the head capital gains, whether short-term or long-term. But brought forward long-term capital loss shall be allowed to be set off only from the long-term capital gain.

Question 16.
State the period of holding for considering the shares in a private limited company to be treated as long-term capital asset. (June 2018, 1 mark)
Answer:
The period of holding of shares of a private limited company to be treated as Long Term Capital Assets is 24 Months.

Question 17.
Discuss provisions under Section 115BBD Vs. 115BBDA with reference to taxation of foreign dividends. (Dec 2018, 5 marks)
Answer:
Section 115BBD of Income Tax Act, 1961: Where the total income of an assessee, being an Indian company, includes any income by way of dividend declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of:

  • The amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen percent; and
  • The amount of income tax with which the assessee would have been chargeable had its total income reduced by the aforesaid income by way of dividends.

Notes:

  1. The aforesaid amount would be increased by the applicable surcharge and cess.
  2. Deduction in respect of any expenditure or allowance shall not be allowed to the assessee under any provision of this Act in computing its income by way of aforesaid dividends.
  3. Above provisions are not applicable to deemed dividend u/s 2(22)(e).
  4. Specified foreign company means a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital of the company.

Note: The provisions of Section 115BBD shall not apply to any A. Y. starting on or after 1.4.2023.

Section 115BBDA of income Tax Act, 1961: Notwithstanding anything contained in this Act, where the total income of a specified assessee, being a domestic company, or a fund/ institution/ trust/ university/ educational institution/ hospital/ other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of Section 10, or a trust/ institution registered u/s 12A/12AA), includes any income in aggregate exceeding 10 lakh rupees, by way of dividend declared, distributed or paid by a domestic company or companies on or before the 31st day of March, 2020, the income tax payable shall be the aggregate of:

  • The amount of income tax calculated on the income by way of such dividends in aggregate exceeding 10 lakhs rupees, at the rate of 10% and
  • The amount of income tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount by way of dividends.

Notes:

  1. No deduction in respect of any expenditure or allowance or set-off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-Section (1).
  2. The aforesaid amount would be increased by the applicable surcharge and cess.
  3. Above provisions are not applicable to deemed dividend u/s 2(22)(e).

Note: Abolition of Section 115BBDA- Deals with the taxation of dividend income which shall be taxable in the hands of the shareholders if the dividend received is in excess of ₹ 10,00,000/- in a FY, which shall be taxed @10%. This section has now been abolished w.e.f. 01.04.2021 and all the dividend income shall be taxed in the hands of the shareholders.

Below table summarize amendment under the Act with respect to DDT abolishment and taxing in the hands of recipient.

Amendment regard to Section (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
Tax on dividend in excess of ₹ 10 lakhs in the hands of shareholders 115BBDA (1) – Amended Dividend in excess of ₹10 lakhs taxable @ 10% in the hands of resident specified assessee on or after 01-Apr-2017 Dividend in excess of ₹10 lakhs taxable @ 10% in the hands of resident specified assessee on or after 01- Apr-2017 but on or before 31 -Mar-2020

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 18.
Briefly explain the provision of Section 115 BBG of The Income Tax Act, 1961, regarding taxability of income earned from transfer of “Carbon Credits” for assessment year 2021 -22. (June 2019, 3 marks)
Answer:
Tax on Income from transfer of Carbon Credits [Section 115BBG]:
Where the total income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of:

(a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of 10%; and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).

Not withstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in Clause (a) of sub-section (1).

Explanation: “carbon credit” in respect of one unit shall mean reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is validated by the United Nations Framework on Climate Change and which can be traded in market at its prevailing market price.

Question 19.
State the meaning assigned to “Speculative Transaction” under the Income Tax Act, 1961. Explain with brief reasons whether the following are in the nature of speculative transactions:
(i) Hedging contract in respect of raw materials
(ii) Forward contract. (Dec 2021, 3 marks)
Answer:
As per Section 43(5) of the Income tax Act, 1961, Speculative Transaction means a transaction in which a contract for the purchase or sales of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer/bf the commodity or scrips of the shares.

Proviso to section 43(5) lists down certain transactions which have been expressly excluded from the scope of speculative transaction. Let us understand the nature of following transactions in light of the said provisions.

(i) Hedging contract in respect of raw materials or merchandise:
In terms of Clause (a) of Proviso to Section 43(5), A contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising business to against loss through future price fluctuations in respect of his contracts for the actual delivery of goods manufactured by him or merchandise sold by him is not in the nature of a speculative transaction.

(ii) Forward contract:
In terms of Clause (c) of Proviso to Section 43(5), a contract entered into by a member of a forward market or stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against any loss which may arise in the ordinary course of the business as a member is not in the nature of a speculative transaction.

Question 20.
Enumerate any five of the cases where ‘income’ is deemed to accrue or arise in India u/s 9 of Income-tax Act, 1961 even though it may actually accrue or arise outside India. (Dec 2021, 5 marks)
Answer:
The cases enumerated u/s 9 of the Income tax Act, 1961 are as under:

  1. Income from Business Connection in India
  2. Income from any property, asset or source of income in India.
  3. Capital Gain on transfer of a capital asset situated in India
  4. Income from salary, if services are rendered in India
  5. Income from salary (not being perquisite/allowance), if service is rendered outside India (provided that the employer is Government of India and the employee is citizen of India).
  6. Dividend paid by the Indian Company.
  7. Interest, royalty or technical fees received from Government of India
  8. Interest, royalty or technical fees received from a resident (except when the payment pertains to business carried on by the payer outside India)
  9. Interest, royalty or technical fees received from Non-Resident if the payment pertains to business earned on by the payer in India.
  10. Gift of money [covered by sec 56(2)(x)] received from a resident person by a non-resident/ foreign company.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 21.
In respect of a non-resident, what are the key parameters for determining the existence of “Business Connection” in India? (June 2022, 5 marks)
Answer:
The term business connection has not been defined in the Income Tax Act, 1961. However, an inclusive definition is available in Explanation 2 of section 9(1)(i), with respect to business connection arising on account of an agent of a non-resident. However, based on various judicial pronouncements and practice and well established principles, the following are considered as the pre-requisites to conclude that a non-resident has a business connection in India.

  1. There must be a business activity outside India.
  2. There must be a business activity within India.
  3. The relation between the two should contribute to the earning of income by the non -resident
  4. There must be an element of continuity between the business of the non-resident, carried out outside India and inside India.
  5. A stray and isolated transaction cannot be regarded as business connection.

Question 22.
“Liaison office maintained in India to explore the opportunity of business in India does not constitute business connection”. In the context of provisions contained in the Income Tax Act, 1961, examine the correctness of the above statement if above activity is approved by the Reserve Bank of India. (Dec 2022, 3 marks)

Question 23.
Whether minimum alternate tax (MAT) under section 115JB is payable in advance and interest under sections 234B and 234C is payable on failure to pay such advance tax? Also explain whether MAT credit admissible under section 115JAA has to be set-off against the assessed tax payable before calculating the interest under sections 234A, 234B and 234C. You may take help of decided case law, if any. (Dec 2021, 6 marks)
Answer:
Companies liable to pay tax on the basis of MAT under section 115JB are required to pay advance tax and interest under sections 234B and 234C is payable on failure to pay such advance tax. [JCITvRolta India Ltd. (2011)]
For the purpose of computing interest chargeable under section 234A, 234B and 234C, credit of MAT under section 115JAA has to be set off against the assessed tax payable. [CIT v Tulsian NEC Ltd. (2011)]

Question 24.
Following is the trading and profit and loss account of Narendra for the year ended 31st March, 2023:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 3

Additional information:

(i) Opening stock has been undervalued by 10% of -cost while closing stock has been valued at its cost.
(ii) One-third of the building rent is related to self-residential house.
(iii) The car is used equally for business as well as for personal purposes.
(iv) Wages includes wages of household servant ₹ 250 per month.

From the above information, you are required to determine the taxable income of Narendra under the head income from business and profession. (Dec 2012, 10 marks) [CSEPM -1]
Answer:
Computation of taxable Income of Narendra under the head Income from business and profession
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 4

Question 25.
The net profit of Renuka Ltd., an Indian company, as per its profit and loss account prepared as per the Income-tax Act, 1961 is ₹ 90,00,000 after debiting and crediting following items:
Provision for income-tax : ₹ 5,00,000
Provisions for deferred tax : ₹ 3,00,000
Proposed dividend : ₹ 7,50,000
Depreciation Including depreciation on revaluation of assets ₹ 20,00,000 debited to profit and loss account : ₹ 60,00,000
Profit from industrial unit in SEZ area : ₹ 80,000
Provision for permanent diminution in the value of investments : ₹ 70,000
Compute tax liability under section 11 5JB for the assessment year 2023-24. (June 2013, 9 marks)
Answer:
Computation of Tax Liability of Renuka Limited for Assessment Year 2023-24.
(a) Computation of Book Profits:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 5
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 6

Question 26.
A limited liability partnership (LLP) has following income for the assessment year 2023-24:
Profit from business eligible for deduction @ 100% of profits under section 80-IA : ₹ 32,00,000
Profit from other business : ₹ 48,00,000
Compute the tax payable by the LLP, assuming that it has no other income during the assessment year 2023-24. (June 2013, 5 marks)
Answer:
(i) Computation of Total Income and Income Tax Payable For Assessment Year 2023-24
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 7
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 8
Here, as per Section 115JC, since the Income tax payable as per normal provisions of the Income Tax Act is less than the AMT, the LLP would be liable to pay ₹ 15,39,200 as tax.

Question 27.
X Ltd. charged depreciation on its fixed assets at the rate prescribed in the income tax rules. However, the Assessing Officer disallowed the same and allowed the rate as prescribed in the Companies Act, 2013 for the purpose of computation of book profit under section 115JB for the previous year 2021-22. Examine the legality of action taken by the Assessing Authority. (Dec 2013, 5 marks)
Answer:
The action of the Assessing Officer is not sustainable in law. He has limited power to look into that the books of account have been properly maintained as per Indian Companies Act, 2013. He does not have the power to question the profit shown in the profit and loss account. This issue was settled by the Supreme Court in Malayala Manorama Co. Ltd. v. CIT(2008)

300 ITR 251. The Apex Court observed that for the purpose of computation of book profit under section 115JB, the Assessing Officer’s power is restricted to examining whether the books of account are certified by the authorities under the Companies Act as having been property maintained in accordance with the Companies Act. Thereafter, he only has the limited power of making additions and deductions as provided for in Explanation 1 to Section 115JB. The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in Explanation 1 to Section 115JB.

Where an assessee is consistently charging depreciation in its books of account at the rates prescribed in Incometax Rules and the accounts of the assessee have been prepared and certified as per the provisions of the Companies Act, the Assessing Officer does not have any jurisdiction under section 115JB to rework the net profit of the assessee by substituting the rates of depreciation prescribed under the Companies Act.
Applying the ratio of the Supreme Court decision to this case, it may be concluded that the action of the Assessing Officer is not correct.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 28.
Comment in brief on allowability of following expenditure while computing the income under the head ‘profits and gains of business or profession’ for the assessment year 2023-24:
(i) Kanha commenced operations of the business of setting-up a warehousing facility for storage of sugar on 1st June, 2022. He incurred capital expenditure on purchase of building during the period from January, 2022 to March, 2022 exdusively for the above business and capitalised the same in its books of account on 1st June, 2022.
(ii) Ms. Radha incurred expenditure on purchase of computer software and capitalised such expenditure in her books of account.
(iii) Muni is operating a pharmaceutical factory. he incurred expenditure in providing freebies to medical pcactWoners. (Dec 2013, 3 marks each)
Answer:
(i) Deduction of 100% for AY. 2023-24 of the capital expenditure is available under section 35AD for Assessment year 2023-24 in respect of specified business of setting up and operating a warehousing facility for storage of sugar, if following conditions are fulfilled:
(a) Operations are commenced on or after Dl-04-2021.
(b) If expenditure is incurred prior to the commencement of its operations wholly and exclusively for the specified business, and the amount is capitalised in the books of accounts of the assessee on the date of commencement of its operations; and
(c) Expenditure should not be incurred on acquisition of any land, goodwill or financial instrument.
Hence, 100% deduction will be allowed for capital expenditure incurred and capitalised, excluding the expenditure incurred on acquisition of land,

(ii) The expenses incurred by assessee on purchase of computer softwares are revenue In nature in view of rapid advances and changes in technical know how.
Thus, such expenditure shall be allowable.

(iii) As per Circular No. 5/2012, Dated 1-8-2012, some pharmaceutical and allied health sector industries are providing freebies (freebies) to medical practitioners and their professional associations in violation of
the regulations issued by Medical Council of India (the ‘Council) which is a regulatory body constituted under the Medical Council Act, 1956.

The Claim of any expense incurred in providing above mentioned or similar freebies in violation of the provisions of Indian Medical Council (Professional Conduct. Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law.

This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebies and claimed it as a deductible expense in its accounts against income.

The sum equivalent to value of freebies enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. Thus, expenditure incurred by Murli in providing freebies to medical practitioners is disallowed.

Question 29.
(b) XYZ LLP has income of ₹ 72,00,000 under the head ‘profits and gains of business or profession’. One of its business is eligible for deduction @ 100% of profits under section 80-IB for the assessment year 2023-24. The profit from such business included in the business income is ₹ 58,00,000. Compute the tax payable by the LLP, assuming that it has no other income during the previous year 2022-23. (Dec 2014, 5 marks)

(c) The book profits of a company in the previous year 2022-23 computed in accordance with section 11 5JB are ₹ 60,00,000. It the total income for the same period computed as per the provisions of the Income-tax Act, 1961 is ₹ 12,00,000, calculate the tax payable by the company in the assessment year 2023-24 and also indicate whether the company is eligible for any tax credit. (Dec 2014, 5 marks)
Answer:
(b) (i) Computation of Total Income and Income Tax Payable for Assessment Year 2023-24.
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 9

(ii) Computation of Alternate Minimum Tax (Amount)
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 11
Here, as per Section 115JC, Since, the income tax payable as per normal provisions of the Income Tax Act is less than the AMT, the LLP would be liable to pay ₹ 13,85,280 as tax.

(iii)
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 11

(iv) Tax payable (higher of AMT or Normal Tax

(v) Tax Credit

Note:
Since the regular income tax payable is less than AMT, the adjusted total income would be deemed to be the income of LLP and it would be liable to tax @ 18.5% plus cess. Further the LLP would be eligible for credit in 10 subsequent years to the extent of difference between the AMT and Normal Tax, in the year in which the tax payable under regular provisions exceeds the AMT.

(c)
1. Calculation of tax liability u/s 115 JB:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 60

2. Calculation of tax liability as per Income Tax Act, 1961:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 59

3. Computation of final tax payable:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 58
The company is eligible for MAT tax credit of ₹ 5,61,600 (₹ 9,36,000 – ₹ 3,74,400) which can be carried forward for 10 years or is to be awaited within 10 years u/s 115 JAA.

Question 30.
You are the Financial Controller in a manufacturing company having turnover exceeding ₹ 800 crore. Write a report for your Managing Director highlighting the legal position pertaining to the following:

(i) Tax on distributed income by a company for buy-back of unlisted shares.
(ii) Time-limit for completion of assessment/ reassessment when a reference is made to the Transfer Pricing Officer (TPO).
(iii) Allowance for acquisition and installation of new plant and machinery under section 32AC.
(iv) Tax consequences of assignment of keyman insurance policy before maturity by employer-company to its employee. (Dec 2014, 15 marks)
Answer:
(i) A company, having distributable reserves, has two options to distribute the same to its shareholders either by declaration and payment of dividends to the shareholders or by way of purchase of its own shares (i.e. buy back of shares) at a consideration fixed by it. In the first case, the payment by company is subject to DDT and income in the hands of shareholders is exempt. In the second case the income is taxed in the hands of shareholder as capital gains.

Unlisted Companies, as part of tax avoidance scheme, are resorting to buy back of shares instead of payment of dividends in order to avoid payment of tax by way of DDT particularly where the capital gains arising to the shareholders are either not chargeable to tax or are taxable at a lower rate.
Note: DDT has been abolished through Finance Act, 2020.

In order to curb such practice the Act has amended the Act, by insertion of new Chapter XII-DA, to provide as under:

(1) Tax on distributed income to shareholders [Section 115QA]

(A) Additional income tax on buy back of shares [Section 115QA(1)]
(i) In addition to the income tax payable by the company on its total income as per the provisions of the Act, the domestic company shall be liable to pay additional income tax @ 20% on any amount of distributed income paid by the company on buy back of shares not being shares listed on a recognised stock exchange.
(ii) Rate of additional income tax is 20%+12%SC+4%Cess i.e. 23.296%

(B) Additional income tax payable even if the total income of domestic company is exempt [Section 115QA(2)] Notwithstanding that no income tax is payable by a domestic company on-its total income computed in accordance with the provisions of this Act, the tax on the distributed income under section 115QA(1) shall be payable by such company.

(C) Time limit for deposit of additional income tax [Section 115QA(3)]
The principal officer of the domestic company and the company shall be liable to pay the tax to the credit of the Central Government within 14 days from the date of payment of any consideration to the shareholders on buy back of shares referred to in Section 115QA(1).

(D) Additional income tax to be treated as final payment [Section 115QA(4)]
The tax on the distributed income by the company shall be treated as the final payment of tax in respect of the said income and no further credit therefore shall be claimed by the company or by any other person in respect of the amount of tax so paid.

(E) Income charged to tax not allowed as deduction [Section 115QA(5)]
No deduction under any other provision of this Act shall be allowed to:
(a) the company; or
(b) a shareholder
In respect of the income which has been charged to tax under section 115QA(1) or the tax thereon.

(2) Interest payable for delayed payment of tax [Section 115QB] Where the principal officer of the domestic company and the company fails to pay the whole or any part of the tax on the distributed income referred to in Section 115QA(1), within the time allowed under section 115QA(3) of that section, he or it shall be liable to pay simple interest @ 1% for every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

(3) When company is deemed to be assessee in default [Section 115QC]
If any principal officer of a domestic company and the company does not pay tax on distributed income in accordance with the provisions of Section 115QA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income tax shall apply.
Exemption to the shareholder on account of buy back of shares [Section 10(34A)] [W.e.f. A.Y. 2014-15]

Since, the company has to pay additional income tax on buy back of shares, any income arising to an assessee, being a shareholder, on account of buy back of shares (not being listed on recognised stock exchange), shall be exempt.

(ii) Where a reference under section 92CA(1) is made, an order under section 92CA(3) may be made at any time before 60 days prior to the date on which the period of limitation referred to in Section 153, or as the case may be, in Section 153B for making the order of assessment or re-assessment or re-computation or fresh assessment, as the case may be, expires.

(iii) The date of installation of machinery or plant costing more than ₹ 100 crores for investment allowance @ 15% u/s 32AC extended to 31.03.2018 and 15% shall also be allowed to any assessee who installed new asset of ₹ 100 crore or less but more than ₹ 25 crores in any previous year upto 31.03.2018.

(iv) Where maturity amount is received by the legal heir on the death of employee under keyman insurance policy, then such amount is taxable as Income from other sources in the hands of recipient.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 31.
Amar, an individual, resident of India, receives the following payments after TDS during the previous year 2022-23:

(i) Professional fees on 17.08.2022 : ₹ 2,40,000
(ii) Professional fees on 04.03.2023 : ₹ 1,60,000
Both the above services were rendered in Pakistan on which TDS of ₹ 50,000 and ₹ 30,000 respectively has been deducted. He had incurred an expenditure of ₹ 2,40,000 for earning both these receipts/income. His income from other sources in India is ₹ 3,00,000 and he has made payment of ₹ 70,000 towards LIC.
Compute the tax liability of Amar and also the relief under section 91, if any, for assessment year 2023-24. (June 2015, 5 marks)

(b) Apple Industries Ltd. provides the following information for the financial year 2022-23:
Net profit as per statement of profit and loss after debiting/crediting the following: ₹ 120 lakh
Proposed dividend : ₹ 30 lakh
Profit from unit established in SEZ : ₹ 20 lakh
Provision for income-tax : ₹ 18 lakh
Provision for deferred tax : ₹ 10 lakh
Provision for permanent diminution in value of investments : ₹ 3 lakh
Depreciation debited to statement of profit and loss ₹ 10 lakh includes depreciation on revaluation of assets to the tune of : ₹ 1 lakh

Previous Year Brought Forward Losses Unabsorbed Depreciation
2017-2018 1 4
2018-2019 1 1
2019-2020 10 5

Compute the book profit of the company as per Section 115JB for the assessment year 2023-24. (June 2015, 5 marks)
Answer:
(a) Computation of Tax Liability of Amar for Assessment Year 2023-24:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 15
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 16

Note:
1. Gross professional fee = Payment after TDS + TDS
Thus, professional fee on 17.08.2021 = ₹(2,40,000 + 50,000)
Professional fees on 04.03.2022 = ₹ (1,60,000 + 30,000)

2. Tax Relief u/s 91
Income for services rendered in Pakistan taxed in India
= (2,40,000 + 50,000 + 1,60,000 + 30,000) – 2,40,000)
= ₹ 2,40,000
Income assessed in Pakistan
= (2,40,000 + 50,000 + 1,60,000 + 30,000)
= ₹ 4,80,000

Tax paid in Pakistan = (50,000 + 30,000) = ₹ 80,000

(i) Tax on double taxed Income in India = (20,600 × 2,40,000/4,70,000)
= ₹ 10,519
(ii) Tax on double taxed Income in Pakistan = (80,000 × 2,40,000/4,80,000)
= ₹ 40,000
Tax relief u/s 91 will be lower of (i) or (ii)
Tax reliefs ₹ 10,519

(b) Computation of Books Profits of Apple Industries Ltd. for FY 2022-23:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 17

Note: Since, unabsorbed depreciation is less than brought forward losses, unabsorbed depreciation is taken.
Profit from unit established in SEZ is not deductible.

Question 32.
(a) Tinoo Ltd. is eligible to claim deduction of ₹ 2 crore under section 80-IA. It has filed its return of income after the due date as specified in Section 139(1). Discuss the allowability of deduction under section 80-IA. (June 2015, 2 marks)
(c) An HUF, resident in India, has a gross total income of ₹ 5,40,000 for the assessment year 2023-24. It made a payment of ₹ 50,000 for life insurance premium of one of its members. Whether the HUF is entitled
to claim the rebate as per Section 87A? (June 2015, 1 mark)
Answer:
(a) No deduction shall be allowed to the assessee unless he furnishes a return of his income of the relevant assessment year on or before the due date specified under section 139(1).
(c) No. Rebate under section 87A is available only in the case of a resident individual if his/her taxable income is ₹ 5,00,000 or less.

Question 33.
(a) Jatin submits the following information relevant for the assessment year 2023-24:

Short-term capital gains : ₹ 1,25,000
Income from owning and maintaining race horses : ₹ 20,000
Income from units of mutual fund : ₹ 17,000
Long-term capital gains In respect of buildings : ₹ 7,000
Business profits: ₹ 14,000
The following items have been brought forward:
Long-term capital loss in respect of assessment year 2019-20 : ₹ 30,000
Brought forward business loss from assessment year 2020-21 : ₹ 15,000
Brought forward loss from the activity of owning and maintaining race horses from the assessment year 2018-19 : ₹ 27,000
Speculation losses of the assessment year 2019-20 : ₹ 35,000
Calculate the gross total income of Jatin for assessment year 2023-24. (Dec 2015, 5 marks)

(c) Alfa Ltd., a domestic company purchased its own unlisted shares on 4th July, 2021. The consideration for buy-back amounting to ₹ 10.50 lakh was paid on the same day. The amount received by the company two years back for issue of such shares was ₹ 6.5 lakh. The Assessing Officer has issued a notice to tax the gains on shares to which company denies. State the correctness of the contention of Assessing Officer and
also compute the tax payable, if any. Also, compute the amount of interest, if any, payable by company assuming that the tax due is paid to the credit of the Central Government on 29th September, 2021. (Dec 2015, 5 marks)
Answer:
(a) Computation of Gross total Income of Mr. Jatin for the Assessment Year 2023-24:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 61

(c) As per Section 115QA of the Income Tax Act, 1991, any amount of distributed income by the company on buy-back of shares (not being shares listed on a recognised stock exchange) from a shareholder shall be charged to tax.

Further, such company shall be liable to pay additional income-tax at the rate of 20% on the distributed income.
Thus, the contention of the Assessing Officer relating to taxability of the resulting from the buy back of shares is correct.

Computation of Tax Payable by Alfa Ltd.

Particulars Amount (in ₹)
Consideration for Buy Back 10,50,000
Consideration received for issue of shares (6,50,000)
Distributed Income 4,00,000
Additional Tax @ 20% 80,000
Surcharge @ 12% 9,600
Health and Education @ 4% 384
Total Tax Payable 89,984

The above tax should be paid on or before 18th July, 2021.
However, it was paid on 29th September, 2021.
Thus, for this delay interest is payable @ 1% per month for each month in whole or part. Therefore, interest is payable for 3 months.
Interest = ₹ (89,984 × 1/100 × 3) = ₹ 2,699.52
= ₹ 2,795

Question 34.
A company wants to raise capital of ₹ 40,00,000 for a project wherefrom earnings before tax would be 30% of the capital employed. The company can raise debt finance @ 12% p.a.

The following three alternatives for raising capital are available for the company:
(i) ₹ 40,00,000 by equity capital
(ii) ₹ 20,00,000 by equity capital and ₹ 20,00,000 by loans
(iii) ₹ 8,00,000 by equity capital and ₹ 32,00,000 by loans.

Assume that the company would distribute the entire amount of profits as dividend. The tax rate is 31.2% and dividend distribution tax rate is 20.56%.
Work out which one of the above three alternatives should the company opt to minimise its tax liability? (June 2016, 5 marks)
(c) Comment with reasons on the taxability or otherwise of the following incomes for the year ended on 31” March, 2023 as per the Income-tax Act, 1961:

(i) Akhil, a not ordinarily resident, earned ₹ 65,000 from a business in Australia when he was in Australia. Later the profits were remitted to India,
(ii) Birender, an ordinarily resident and a financial consultant, received a fee of ₹ 50,000 from an Indian company carrying on business in Canada for the services rendered there. The fee was directly deposited in a bank In Canada.
(iii) Chandan, an ordinarily resident, earned agricultural income of ₹ 25,000 from land in England. He spent the entire income for his son’s education in India.
(iv) Dinesh, a citizen of India, got employment in Burma. He left India on 1st September, 2022 after earning ₹ 5,00,000 in India. He earned ₹ 7,00,000 in Burma during the previous year.
(v) Girish, a resident, brought to India, his income earned in 2021-22 in Sri Lanka which was not taxed in Sri Lanka. (June 2016, 5 marks)
Answer:
Analysis of total tax liability of the Company under various financing options.
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 18
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 19
As the tax liability is minimum in option 3, therefore company should go for option 3.

(c) (i) Akhil, a not ordinarily resident have to pay taxes in Australia, due to income earned in Australia.

(ii) Taxable In India: An individual, qualifying as resident and ordinarily resident in India would be liable to pay tax on his, her Gbbal Income. Therefore, the fee of ₹ 50,000 received by Mr. Birender from an Indian company carrying on business in Canada for the services rendered there would be chargeable to tax in India.

(iii) Taxable In India: An individual, qualifying as resident and ordinarily resident in India would be liable to pay tax on his / her Global Income. Therefore, the agriculture income of ₹ 25,000, from a land in England, would be taxable in India. Further Mr. Chandan may be eligible to claim deduction with respect to the expenditure incurred for his son’s education in India subject to the provisions of Section 80C of the Income tax Act, 1961.

(iv) As Dinesh, Citizen of India, has left India for the purpose of employment outside India, present in India for less than 182 days during the previous year and therefore qualifying as non-resident NR’ in India. Accordingly, he would be liable to pay tax on source based income in India.

Therefore, Income of ₹ 5,00,000 earned in India would only be taxable in India. Income of ₹ 7,00,000 earned outside India i.e. in Burma would not be taxable in India.

(v) Not Taxable In India: Since, the Income accrued and received during the year 2022-23 and not during the previous year ie. 2021-22 and therefore not taxable in India during the previous year ie. 2021-22. Further, the subsequent remittance of the fund to India would not deemed to be received in India,
Note: DOT has been abolished through Finance Act, 2020.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 35.
From the following information, determine the tax payable under section 115-O by a domestic company on the dividend distributed by it where the rate of dividend distribution tax is 20.56%:

  • It received dividend of ₹ 5,00,000 on 20th November, 2020 from its subsidiary company which paid dividend distribution tax under section 115-O.
  • It distributed dividend of ₹ 33,00,000 on 14th December, 2020 to its shareholders.
  • Out of ₹ 33,00,000. the company paid dividend of ₹ 3,00,000 to a person on behalf of the New Pension System Trust. (June 2016, 3 marks)

Answer:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 20
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 21

Note: There is a nominal difference between Alt I and Alt II, therefore, any can be paid.

Note: Abolition of Section 115-O – Deals with the tax on the distribution of dividend, commonly known as “DDT”, which was to be paid by the company distributing its income by way of dividend to Its shareholders. Earlier the DDT was taxed @20.56%, which has now been abolished and all the dividend income shall be taxed In the hands of the shareholders. (Finance Act, 2020) Below table summarize amendment under the Act with respect to DDT
abolishment and taxing in the hands of recipient:

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
DDT by domestic company 115-O(1) Amended Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 but on or before 31 -Mar-2020

Question 36.
Global Ltd. is a widely-held company engaged in power generation in Assarn. At present, the company is having a capital of ₹ 10 crore in fully paid equity shares. The company is considering a proposal to increase its power generation capacity which will require ₹ 5 crores. The additional capital required can be raised either by issue of fully paid equity shares or by issue of 10% debentures. Directors of the company want to raise the funds through equity shares as the company can have fully owned capital. Will you accept the proposal at 20% rate of return (pre-tax) and 30% rate of tax? Give reasons in support of your answer. (Dec 2016, 5 marks)

(c) Brisk Ltd. incurred ₹ 52.75 lakhs during the period April, 2020 to June, 2020 on advertisement, professional fees, administration cost, etc. for the purpose of public issue of ₹ 555 croes in July, 2020 and had, therefore, accounted all such expenses under the head ‘share issue expenses’. However, the clearance for the public issue was not given by SEBI. The company in its return of income filed for the year ended 31st March, 2021 had claimed such expenses as revenue expenses which were disallowed by the Assessing Officer.
The company seeks your opinion. Advise. (Dec 2016, 5 marks)
Answer:
(a) Computation of Expected Rate of Return on Capital Employed
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 22
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 23
Conclusion: The proposal of denying additional capital by issuing fully paid up equity shares is not acceptable as it will give lesser rate of return to share holders in future. Therefore, it is beneficial to raise the additional funds through the issue of 10% debentures as it will increase the rate of return to shareholders from 14% to 17.50%.

(c) MASCON TECHNICAL SERVICES LTD. V. CIT (Madras High Court): Share issue expenses cannot be allowed as revenue expenditure even when shares could not be issued due to non-approval by SEBI:

In the instant case the assessee incurred expenditure for issuing shares. However, on account of non-clearance from the SEBI, shares could not be issued. It claimed deduction for share issue expenses as revenue expenditure by contending that suice the expenditure did not yield any desired result, the character of the expenditure had to be decided on the basis of the result that would yield benefit in assessee’s business. The Assessing Officer and the CIT (A) disallowed such expenses. The Tribunal also affirmed the view of the Assessing Officer. Aggrieved assessee filed the instant appeal.

The High Court held in favour of revenue as under:

The impugned expenses were incurred by the assessee for the purpose of widening its capital base. The assessee, admittedly, took steps to go in for public issue and alter incurring expenditure, just before the public issue, by reason of the orders from the SEBI, the assessee could not go in for public issue. Thus, the efforts were
aborted.

There was no justifiable ground to accept the plea of the assessee that on account of the abortive efforts, the expenditure incurred would lose its character as capital expenditure for the purpose of allowing it as a revenue expenditure.

Question 37.
Explain in brief the treatment as to the taxability and/or allowability, in the context of provisions contained under the Income-tax Act, 1961 for the assessment year 2023-24, in the following cases:

(i) Aroma Ltd., an investment company, received dividend of ₹ 3,00,000 on equity shares from listed domestic companies. It paid interest of ₹ 2,00,000 on the borrowed funds utilised for making investment in such shares of these companies.
(ii) Chetan Ltd. did not have any active business carried on by it during the previous year ended on 31st March, 2023 and had incurred capital expenditure on scientific research amounting to ₹ 2,00,000 related to its subsidiary company. (Dec 2016, 5 marks)
Answer:
(i) The dividend income earned by Aroma Ltd. on the shares held as investment is exempt under the provisions of Section 10(34). As per Section 14A, no expenditure is allowable in respect of income which does not form part of total income. The interest paid on borrowed capital is an expenditure incurred in respect of shares purchased for investment. Since the dividend income received on shares is exempt and does not form part of total income of Aroma Ltd., the interest expenditure is not allowable as deduction in view of Section 14A. [The quantum of disallowance must be In accordance with Rule 8D of the Income-tax Rules, 1962.)

Note: Abolition of Section 10(34) — Dealt with the exemption of the dividend income in the hands of the shareholders, which has now been scrapped off vide Finance Act, 2020. Any dividend received on or after 01.04.2020 will be taxed in the hands of the shareholder.

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
Exemption in the hands of shareholder 10(34) Proviso Inserted Exempt from tax (However, dividend in excess of ₹10 lakhs taxable in the hands of resident specified assessee) No exemption for dividend received on or after 01 – Apr-2020 (However, exemption continues for dividend on which tax u/s 115-O and 115BBDA has been paid)

(ii) As per Section 35(1)(iv), deduction in respect of capital expenditure on scientific research would be admissible under the provisions Section 35(2) only it the scientific research relates the business carried on by the assessee.
However, in the given case, Chetan Ltd., did not have any active business carried on by it to which the said scientific research related to. The capital expenditure incurred by Chetan Ltd. related to its subsidiary company. Therefore, Chetan Ltd. is not eligible for deduction under the provisions of Section 35(1)(iv) read with Section
35(2).

Question 38.
Arvind, a textile merchant and resident Indian is doing business in India and abroad. During the previous year 2022-23, he disclosed the following information:
Income from business in India : ₹ 27,00,000
Income from business in Country-A with which India does not have agreement for avoidance of double taxation : ₹ 15,00,000
Income-tax levied by government in Country-A : ₹ 5,00,000
Loss from business is Country-B with which also India does not have agreement for avoidance of double taxation : ₹ (4,00,000)
Contribution to public provident fund : ₹ 1,50,000
Payment of life insurance premium on the life of his father and mother : ₹ 20,000
Compute the tax liability of Arvind for the assessment year 2023-24. (Dec 2016, 5 marks)

(iii) Nandita Traders, engaged in manufacturing activity, was in receipt of sales-tax subsidy of ₹ 5 lakh from State Government as its manufacturing unit was located in a backward area. The subsidy is related to the sales of its products and was payable only after the commencement of production. Nandita Traders claimed that the subsidy so received is in the nature of capital receipt and hence, cannot be taken as chargeable to tax for the assessment year 2021-22. How will you deal with the situation in the context of provisions of the income-tax Act, 1961? (Dec 2016, 5 marks)
Answer:
(ii) Computation of Taxable Income of Mr. Arvind for assessment year 2023-24:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 24
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 25

Note 1
Computation of Relief under section 91 of the Income Tax Act, 1961
Average rate of Tax in India ₹ (9,43,800/36,50,000 × 100) = 25.8575%
Average rate of tax in foreign country (5,00,000/15,00,000 × 100) = 33.33%
Doubly Taxed Income 15,00,000
Relief under section 91 (on ₹ 15,00,000 @ 25.61%) i.e. rate 25.8575% or 30% whichever is lower 3,84,150

(iii) Section 4 brings to charge tax on total income prima facie in order to come within the scope of the charging provisions. The receipt in question should normally be a revenue receipt. Capital receipt are normally exempt. However capital receipt has been specifically included in the definition of income as under:

Assistance in the form of subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assesee other than:

(a) The subsidy or grant or reimbursement which is taken into account for determination of the actual cost of the asset in accordance with the provision of explanation 10 to clause (1) of Section 43, or
(b) The subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or a State Government as the case may be.
Therefore, Nandita Traders, can’t be exempted and will be chargeable to tax for the assessment year 2023-24.

Question 39.
How will you decide the residential status of the following companies or firms for the Previous Year 2022-23 under the provisions of Income Tax Act, 1961? Give brief reasons for your answer:
(i) XYZ Pharma Ltd., a company registered in India under the Companies Act, 2013.
(ii) POR Ltd., a company incorporated in Germany. of which the control and management of the affairs of the business is situated wholly in India
(iii) SVR Ltd.. a French company of which the control and management of the affairs of the business is situated wholly outside India in Spain.
(iv) ABC Ltd., a company incorporated in Australia, of which the control and management of the affairs of the business is situated partly outside India and partly in India.
(v) PCA & Co., a partnership firm is doing its business activities in Chennai, India. All the meetings of the partners during the year for decision-making tool place in Singapore and Malaysia. (June 2017, 5 marks)
Answer:
As per the provision of Section 6(3) of the Income tax Act, 1961 for the Financial Year 2022-23. MI Indian companies within the meaning of Section 2(26) of the Act are always resident in India regardless of the place
of control and management of its affairs. Further, in the case of a foreign company, for the FY 2021-22, the place of control and management of its affairs is the basis on which the company’s residential status is determinable.

Accordingly a company shall be said to be resident in India in any previous year, if:

(i) it is an Indian company; or
(ii) the control and management of Its affairs is wholly situated in India.

(a) XYZ Pharma Ltd.. a company regïstered in India under the Companies Act, 2013 is an Indian company and therefore is always resident in India.

(b) PQR Ltd., a company incorporated in Germany, of which the control and management of the affairs of the business is situated wholly in India. As the control and management of the affairs of the business of PQR Ltd. is situated wholly In India and accordingly POR Ltd. shall be a resident in India.

(c) SVR Ltd., a French Company, of which the control and management of the affairs of the business is situated wholly in Spain. As the control and management of the affairs of the business of SVR Ltd. s situated wholly in Spain and accordingly SVR Ltd. shall be a non-resident company.

(d) ABC Ltd.. a company incorporated in Australia, of which the control and management of the affairs of the business is situated partly outside India and partly in India. As the control and management of the affairs of the business of ABC Ltd. is situated partly outside India and partly in India and accordingly ABC Ltd. shall be a non-resident company.

(e) The Partnership firm is non-resident in India, if control and management of its business affairs is wholly situated outside India as per Section 6(2) of the Income tax Act, 1961. Accordingly, PCR & Co. shall be non-resident in India.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 40.
The profit and loss account of XYZ Ltd. for the year ended 31.03.2023 showed a not profit of ₹ 80,00,000 after making of the following adjustments:
(a) Depreciation ₹ 24 lakh (including depreciation on revaluation of assets of ₹ 4 lakh).
(b) Provisions for unascertained liabilities ₹ 2 lakh.
(C) Transfer to General Reserve ₹ 9 lakh.
(d) Agricultural Income ₹ 15 lakh.
(e) Amount transferred to profit and loss account from general reserve ₹ 3 lakh. Brought forward business losses and unabsorbed depreciation as per books of accounts were ₹ 15 lakh and ₹ 11 lakh respectively.
Compute book profits and Minimum Alternate Tax (MAT) under section 115JB payable by XYZ Ltd. for A.Y. 2023-24. (June 2017, 5 marks)
Answer:
Computation of Book Profit of XYZ Ltd. under section 115JB
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 26

Question 41.
Discuss the taxability or otherwise of the following income in the context of provisions contained under the Income Tax Act, 1961:
(i) Agricultural Income of ₹ 2,50,000 earned by Ms. Divita, a non resident from land in Barmer in Rajasthan.

Question 42.
Discuss the deductibility or otherwise of the following expenditure incurred by Sumit Agro Industries, while computing its business income for the year ended 31.03.2022.

(i) Land & Building acquired for scientific research related to the business in September, 2021 for ₹ 22,50,000 consisting of cost of land ₹ 9,50,000 and balance for building. (Dec 2017, 2 marks)
(ii) Contribution to the account of employees as per pension scheme referred to in Section 8OCCD amounted to ₹ 35,00,000. Amount above 10% of the salary of employees in ₹ 5,80,000. (Dec 2017, 2 marks)
(iii) Tax on non-monetary perquisites provided to the employees and borne by the employers of ₹ 4,50,000. (Dec 2017, 1 mark)
Answer:
(i) As per section 35(1)(iv) read with section 35(2), if any capital expenditure (other than expenditure on acquisition of land) is incurred on scientific research related to the business carried on by the assessee, the whole of such capital expenditure is allowable as deduction in the previous year in which it is incurred. Therefore, ₹ 13,00,000 (i.e. ₹ 22,50,000 – ₹ 9,50,000 being the cost of land) is allowable as deduction for the AY 2021-22.

(ii) The employer’s contribution to the account of an employee under a pension scheme referred to in section 8OCCD, is allowable as deduction under Section 36(1)(iva) while computing business income only upto 10% of salary of the employee in the previous year. Accordingly, ₹ 29,20,000 would be allowed as deduction under section 36(1)(iva).

Disallowance under section 40A(9) would be attracted only in respect of the amount in excess of 10% of salary. Therefore, ₹ 5,80,000 would be disallowed as per section 40(A)(9).

(iii) The income chargeable under the head ‘Salaries’ of an employee below sixty years of age inclusive of all perquisites is ₹ 4,50,000 out of which, ₹ 50,000 is on account of non-monetary perquisites as per provision.

Question 43.
Mr. Bewaja, grows sugarcane and uses the same for the purpose of manufacturing sugar in his factory. 35% of the sugarcane produce is sold for ₹ 20 lacs and the cost of cultivation of such sugarcane is ₹ 7 lacs. The cost of cultivation of the balance sugarcane (65%) is ₹ 13 lacs and the market value of the same is ₹ 35 lacs. He after incurring ₹ 3.5 lacs in the manufacturing process on the balance sugarcane, sold the sugar for ₹ 45 lacs. Is he liable to tax on any income for A. Y. 2023-24 and if, yes, compute the taxable income and the agricultural income? (Dec 2017, 5 marks)
Answer:
Sugarcane is an agricultural produce and therefore income from the sale of sugarcane gives rise to pure agricultural income.

However, in case of cultivation of sugarcane and use of sugarcane to manufacture sugar, the income would be partly business and partly agricultural. As per Rule 7 of the Income-tax Rules, 1962. taxable business income would be computed after deducting market value of any agricultural produce utilised as a raw material in such business, and no further deduction shall be made in respect of any expenditure incurred by the assessee as a
cultivator or receiver of rent-in-kind.

The relevant workings as under:
Business Income: Sales — Market Value of 65% of sugarcane produce — manufacturing expenses.
45 lakhs – 35 lakhs – 3.5 lakhs = 6.5 lakhs
Agriculture Income: Market Value of sugarcane produce – Cost of cultivation of the sugarcane
= [20 lakhs + 35 Lakhs] – [7 lakhs + 13 lakhs]
= 55 lakhs – 20 lakhs
= 35 lakhs

Question 44.
Define the term ‘Mat Credit’ under section 115 JAA of the Income Tax Act. And also calculate the tax payable by the company in the assessment year 2023-24, if the book profits of a company in the previous year 2022-23 computed in accordance with Section 115 JB is ₹ 20 lakhs. The total income computed for the same period as per the provisions of the Income Tax Act, is 7.5 Lakhs. You are also required to indicate whether the company is eligible for any tax credit. (Dec 2017, 5 marks)
Answer:
Mat Credit:
Section 115JAA provides that where any amount of tax is paid under Sec. 115JB(1) by a company for any assessment year beginning on or alter 1.4.2009, credit in respect of the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under Section 115JB and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the act.
Mat Credit shall be computed as under:
Mat credit available = Tax paid under Section 11 5JB — Tax payable on the total income under normal provision of the act.
However, no interest shall be allowed on the amount of tax credit available under Section 115JAA.
Computation of tax payable in the A.Y. 2023-24
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 27

Question 45.
An assessee has purchased a car for business purposes on 10th June, 2021 for ₹ 10 lakhs. This is the only asset in the block of assets. In the previous years 2021-22 and 2022-23,25% of the usage of car was for personal purposes. What is the depreciation allowable for the assessment year 2023-24? You may take the rate of depreciation as 15%. (June 2018, 2 marks)
Answer:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 28

Note : The car after the purchase being used for business purpose 75% and personal purpose 25%. Therefore depreciation allowable as per Section 32 read with Section 37 (1) is 75% of the depreciation to be calculated @ 15% on the value of the car.

Question 46.
Shakshitha Pvt. Ltd., furnishes the following summarized position of its profit and loss account and pertinent additional information thereto, for the year ended 31.03.2023:
Paticulars : (All amounts are ₹ in lakhs)
(i) Net profit as per books : 26
(ii) Share income from an AOP : 6
Expenditure debited in books for earning such income : 0.8
(iii) Provision for income-tax : 2
(iv) CSR expenditure debited to P & L Account : 14
(v) Royalty received relating to business (Chargeable at 10%) : 6
(vi) The brought forward business loss and depreciation are as under:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 29
(vii) The members as well as their shares in the AOP in which Shakshitha Pvt. Ltd. is a member, are spectic and determinate.
(viii) In the current year, the depreciation charged as per books is the same as that of the one allowable as per Income-Tax Act, 1961, before considering the provisions of section 32(2).
Compute the book profits of the company and the tax on book profits under section 115JB for the AY 2023-24.
The company is not an ind-As compliant company (June 2018, 5 marks)
Answer:
Computation of Book Profits u/s 115JB of Shakshlta Pvt. Ltd. Assessment Year (2023 – 24):
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 30

Calculation of Tax payable
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 31

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 47.
From the following particulars relating to Mrs. Sridevi for the assessment year 2023-24, compute the deduction available under Chapter VI-A of the Income-Tax Act. 1961:

Gross total income : ₹ 11,90000
Above includes the following:
Short-term capital gains from sale of listed shares ₹ 50,000
Long-term capital gains from sale of vacant site ₹ 1,50,000
Winnings from crossword puzzles (gross) ₹ 90,000

Other Information:
Contribution to PPF
in the name of son, a software engineer ₹ 80,000
Stamp paper and registration expenses relating to residential house purchased during the year ₹ 85,000
Donation to National Defence Fund ₹ 40,000
Donation given to Bhhodhan Charitable Trust ₹ 80,000 recognised for section 80G purposes (June 2018, 5 marks)
Answer:
Computation of Deduction available under Chapter VI- A for AY 2023 -24 to Mrs. Sridevi
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 32
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 33

Question 48.
On 11.5.2021, Rama Ltd. purchased its own shares having face value of ₹ 10. Amount offered to shareholders was ₹ 80 per share. Total amount distributed by Rama Ltd. on buy back of 15,000 shares is ₹ 13,50000. These shares were issued in the year 2008-09 at a premium of ₹ 15. Kaka one of the shareholder holding 1,500 shares (cost of acquisition ₹ 25 per share, year of acquisition 2011-12) got ₹ 1,35,000. Determine tax consequences in the hands of Kaka (Shareholder) and Rama Ltd. under section 115QA for AY. 2023-24, assuming shares are unlisted. (June 2018, 5 marks)
Answer:
Tax Liability of Kaka (Shareholder):
As share of Rama Limited are unlisted, Kaka is not chargeable to tax for Capital Gains which is exempt under Section 10(34A) of the Income Tax Act, 1961.
Tax Liability of Rama Limited as per Section 115QA
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 34
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 35

Note : The offered price was ₹ 80/- per share but actual amount paid for 15,000 shares is ₹ 13,50,000 which gives the rate per share as paid by the company of ₹ 90/- per share.

Question 49.
From the following information provided for the previous year 2022-23, compute the total income and tax liability considering provisions of Alternate Minimum Tax assuming the assessee is an individual:

Particulars : Amount (₹)
Net Profit as per Profit & Loss A/c : 19,05,000
Depreciation as per Profit & Loss A/c : 3,50,000
Depreciation as per Income Tax Rules : 3,60,000
Inadmissible expenses : 1,40,000
Deduction u/s 10AA (computed) : 12,00 000
Deduction u/s 80-IA : 35,000 (Dec 2018, 5 marks)
Answer:
Computation of Total Income and Tax Liability for A.Y.2023-24:

Computation of Total Income and Tax Liability Amount (₹)
Net Profit as per Profit and Loss A/c 19,05,000
Add: Inadmissible Expenses 1,40,000
Add: Depreciation as per P and L A/c 3,50,000
Less: Depreciation as per Income Tax Rules (3,60,000)
Total 20,35,000
Less: Deduction u/s 10AA of Income Tax Act (12,00,000)
Business Income 8,35,000
Less: Deduction u/s 80IA of Income Tax Act (35,000)
Net Total Income 8,00,000
Tax Liability
(₹ 8,00,000 – ₹ 5,00,000) × 20% + ₹ 12,500
72,500
Add: H and EC @ 4% 2,900
Total Tax Liability 75,400

Computation of Adjusted Total Income for Calculation of AMT

Particulars Amount (₹)
Total Income 8,00,000
Add: Deduction u/s 10AA 12,00,000
Add: Deduction u/s 80IA 35,000
Total 20,35,000
Tax on adjusted income (including cess)
(18.50% + 4% on 18.50% = 19.24% of 20,35,000) 3,91,534
Tax Payable (Round off) 3,91,530
AMT Credit (3,91,530 – 75,400) 3,16,130

Question 50.
An individual has business income of ₹ 35,00,000 for previous year 2022-23. He for the previous year 2021-22 was subject to Alternate Minimum Tax (AMT) because of claiming deduction under Section 80-1E of Income Tax Act, 1961. He has an AMT credit of ₹ 5,00,000.
Calculate the tax to be paid by him for assessment year 2023-24. Also work out the amount of balance of available AMT credit. (June 2019, 3 marks)
Answer:
Computation of Tax Liability for A.Y. 2023-24 of an Individual

Particulars Amount (₹)
Normal Tax Liability on Income of ₹ 35,00,000
On ₹ 2,50,000 – Nil
Nil
On (₹ 5,00,000 — ₹ 2,50,000) @ 5% 12,500
On (₹ 10,00,000 — ₹ 5,00,000) @ 20% 1,00,000
Balance (₹ 35,00,000 — ₹ 10,00,000) @ 30% 7,50,000
Total Tax Liability (excluding cess) 8,62,500
Add: Health and Education Cess @ 4% 34,500
Total Tax Liability 8,97,000
Alternate Minimum Tax ‘AMT’ @ 19.24% (18.5% + 4% cess) on ₹ 35,00,000 6,73,400

The tax payable by the assessee shall be ₹ 6,73,400 out of total tax liability of ₹ 8,97,000 after taking credit of AMT of ₹ 2,23,600. The Assessee will carry forward the balance AMT of ₹ 2,76,400 (₹ 5,00,000 – ₹ 2,23,600).

Question 51.
The net profit as per Statement of Profil and Loss of PQR Ltd., a resident company for the year ended 31st March, 2023 is ₹ 280 lakhs arrived at after debiting/crediting following items:

(i) Depreciation on Assets ₹ 110 lakhs (includes ₹ 30 lakhs on revaluation)
(ii) Dividend received from Indian companies ₹ 8 lakhs
(iii) Transfer to general reserve ₹ 5 lakhs
(iv) Provision for tax ₹ 50 lakhs
(v) Proposed dividend ₹ 20 lakhs
(vi) Amount withdrawn from revaluation reserve ₹ 40 lakhs.

Following further information are also provided by the company:
(i) Provision for tax includes ₹ 15 lakhs of tax payable on distribution of profit and of ₹ 3 lacs of interest payable on income tax.
(ii) Brought forward loss and unabsorbed depreciation as per books are ₹ 13 lakhs and ₹ 9 lakh respectively.
Compute Minimum Alternate Tax (MAT) under Section 11 5JB of Income Tax Act. 1961 for the Assessment Year 2023-24. (June 2019, 5 marks)
Answer:
Computation of Book Profit of POR Limited under Section 115JB For A.Y. 2023-24:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 36
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 37

Note 1: Abolition of Section 115-O — Deals with the tax on the distribution of dividend, commonly known as DDT’, which was to be paid by the company distributing its income by way of dividend to its shareholders, Earlier the DDT was taxed @20.56%. which has now been abolished and all the dividend income shalt be taxed In the hands of the shareholders. (Finance Act, 2020)

Below table summarize amendment under the Act with respect to DDT abolishment and taxing in the hands of recipient:

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
DDT by domestic company 115-O(1) Amended Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 Payable @15% in respect of dividends declared, distributed or paid on or after 01 -Apr-2003 but on or before 31-Mar-2020

Note 2: Abolition of Section 10(34) — Dealt with the exemption of the dividend income in the hands of the shareholders, which haš now been scrapped off vide Finance Act, 2020. Any dividend received on or after 01.04.2020 will be taxed in the hands of the shareholder.

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
Exemption in the hands of shareholder 10(34) Proviso Inserted Exempt from tax (However, dividend in excess of ₹10 lakhs taxable in the hands of resident specified assessee) No exemption for dividend received on or after 01 – Apr-2020 (However, exemption continues for dividend on which tax u/s 115-O and 115BBDA has been paid)

Question 52.
Jyoti Limited of Kolkata is a company in which 70% of the shares are held by Sanjana Limited of Jaipur. Jyoti Limited declared a dividend amounting to ₹ 40 lakh to its shareholders for the financial year 2020-21 in its Annual General Meeting held on 12 August, 2021. Dividend distribution tax was paid by Jyoti Limited on 21 August. 2021. Sanjana Limited declared an interim dividend amounting to ₹ 60 lacs on 22nd October, 2021.
Compute the amount of tax on dividend payable by Sanjana Limited under Income Tax Act, 1961 and also briefly state the relevant statutory provisions. (June 2019, 5 marks)
Answer:
Tax on distributed profits of domestic companies [Section 115-O of Income Tax Act, 1961]: Not withstanding anything contained in any other provision of this Act and subject to the provisions of this section, in addition to the income-tax chargeable respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) but on or after the 1st day of March, 2021, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of 15%.

The amount referred to in sub-section (1) shall be reduced by the amount of dividend, if any, received by the domestic company during the financial “year, if such dividend is received from its domestic subsidiary company and the subsidiary has paid the tax which is payable under this section on such dividend [Section 115-O(1A)].

Grossing up of Distributed Profits: For the purposes of determining the tax on distributed profits payable in accordance with this Section, any amount by way of dividends referred to in sub-section (1) as reduced by the amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be increased to such amount as would, after reduction of the tax on such increased amount at the rate specified in sub-section (1). be equal to the net distributed profits.

Calculation of Dividend Distribution Tax payable by Sanjana Limited
(Grossing up excluding surcharge and cess)
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 38
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 39

Note: Abolition of Section 115-O — Deals with the tax on the distribution of dividend, commonly known as DDT, which was to be paid by the company distributing its income by way of dividend to its shareholders. Earlier the DDT was taxed @20.56%, which has now been abolished and all the dividend income shall be taxed in the hands of the shareholders. (Finance Act, 2020)
Below table summarize amendment under the Act with respect to DDT abolishment and taxing in the hands of recipient:

Amendment regard to Section Existing (Till 31-Mar-2020) Amended (W.e.f. 01-Apr-2020)
DDT by domestic company 115-O(1) Amended Payable @ 15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 Payable @ 15% in respect of dividends declared, distributed or paid on or after 01 -Apr-2003 but on or before 31-Mar-2020

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 53.
ABC & Co. Is a partnership firm consisting of four partners. The partnership deed provides for remuneration of ₹ 4,00,000 to partners and interest to partners at 12%. Profit for the year ended 31st March, 2023 is ₹ 1,00,000 after arriving the following adjustments:

Particulars : Amount ₹
Remuneration to partners : 4,00,000
Interest to partners on capital account @ 12% : 20,000
Municipal tax of house property : 5,000
Rent received on house property : 50,000

Compute the book profit and remuneration deductible under section 40(b) of the Income-tax Act, 1961. (Dec 2019, 5 marks)
Answer:
Computation of book profit for AY 2023-24 and remuneration allowed under section 40(b) of income -Tax Act, 1961
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 40
Remuneration allowed is lower of the amount as per partnership deed (₹ 4,00,000) or amount actually paid (₹ 4,00,000) or the amount computed as under:

Maximum amount deductible on account of payment of remuneration to partners
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 41
Lower of above le. ₹ 363000 is the maximum remuneration permissible u/s 40(b).

Question 54.
X Ltd. is a resident company engaged in garment manufacturing at Kolkata. The Profit & Loss Account has been prepared in accordance with Schedule III of the Companies Act, 2013.
Net profit for the year ended 31st March, 2022 is ₹ 99,000 arrived at after the following adjustments:

Particulars : Amount ₹
Depreciation (includes Revaluation of assets ₹ 1,000) : 4,000
Provision for Income Tax : 3,000
Proposed dividend : 5,000
Loss of subsidiary A Ltd. : 2,000
Interest on term loan from nationalised bank (Not yet paid) : 1,20,000
Income
Dividend received from C Ltd. : 1,000
Compute the Book profit u/s 115JB and the Minimum Alternate Tax (MAT) liability. (Dec 2019, 5 marks)
Answer:
Computation of Book Profit u/s 115JB of X Ltd. a Resident Company:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 42
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 43

Note : Delayed or non remittance of interest to bank attracts disallowance u/s 43B only. No adjustments required u/s 115JB.

Question 55.
Examine in the context of provisions contained under the Income Tax Act, 1961 in each of the following independent cases and State in brief whether there exists business connection in each of the cases in India so as to bring the income earned in the previous year, if any to be taxed in India:

(i) AI Rahim Ltd a company resident ¡n Dubai had setup a liaison office at Mumbai to receive trade enquines from the customers in India. The work of the liaison office ¡s not only restricted for forwarding the trade enquiries to the company In Dubai but was also to negotiates and enters into the contracts on behalf of AI Rahim Ltd with the customers in India.

(ii) John Muller Pty Inc a resident company of USA has Set up a branch office at Delhi for the purpose of purchase of various materials which are being used for manufacturing its products. The branch office is engaged in selling the products manufactured by John Muller Pty Inc and also In providing the sales related services to the customers in India on behalf of John Muller Pty Inc.

(iii) Rajendra, a resident in India and based at NOIDA is appointed as agent by KOK Pty Inc a company incorporated in USA for exploring the Indian markets. He had not been given any authority to accept the
orders but was allowed for canvassing the orders and then to communicate the same to company in USA. All the orders were directly received and accepted by the company and after receiving the price/value thereof, the delivery of goods was given directly by the company from any of its outlets outside India. None of the activities
either of purchase of raw material or of manufacturing of finished goods took place in India. The agent was entitled to receive the commission as a percentage on the sales so concluded by KOK Ply Inc of USA. (Dec 2020, 2 marks each)
Answer:
(i) All income accruing or arising directly Of indirectly through or from any business connection in India is chargeable to tax in India as per section 9(1)(i) of the Income Tax Act, 1961. In the given case AI Rahim Ltd. (Non-resident Company) is having a liaison office in India which is also having authority to negotiate and conclude the contracts on behalf of the non- resident company. As per Explanation 2 of section 9 of the Income tax Act, 1961, there exists a business connection and therefore the income of the liaison office located at Mumbai shall be taxable in India in the hands of AI Rahim Ltd.

(ii) The branch office of John Muller Ply Inc located at Delhi constitutes a business connection in India as per section 9(1)(i) of the Income tax act, 1961 since there is an element of continuity in the business transactions with the USA based company John Muller Pty Inc. The branch office, besides the purchase of raw material, is also engaged in selling the products manufactured by the company and in providing sales related services to customers in India on behalf of USA Company. Branch is considered as an extended arm of the company and a PE in India. Therefore, in this case, the profits attributable to the operations conducted in India by the branch will be taxable in India in the hands of John Muller Ply Inc as per Income Tax Act, 1961.

(iii) All Income accruing or arising directly or indirectly through or from any business connection in India is chargeable to tax in India as per section 9(1)(i) of the Income tax Act, 1961. In the given case, Mr. Rajendra does not have any authority to accept or conclude any contracts on behalf of the company or to procure any raw material. All the orders were directly received and accepted by the company and after receiving the price/value thereof, the delivery of goods was given directly by the company from any of its outlets outside India.

It means that business connection does not exist in India in the case of KOK Ply Inc. and the income of the work done by the agent shall not be taxable in India in the hands of KOK Pty Inc. of USA. The commission on the sales received by Mr. Rajendra from KOK Pty Inc shall be taxable in India in his hands.

Question 56.
Explain the taxability or otherwise of the following transactions entered into during the previous year 2020-21 in the hands of the recipients as per provisions contained under the Income – tax Act, 1961;

(i) Nistha, a member of her fathers HUF, transferred a house property owned by her to the HUF of her father without taking any consideration. The stamp duty value of the house property so transferred by her on the date of transfer is assessed at ₹ 15,00,000. The property so transferred by her was given on rent by the HUF.

(ii) Akshat received 1000 shares as a gift of ATOZ Ltd. having face value of ₹ 10 each from his friend on the occasion of his 25th marriage anniversary. The fair market value on the date of gift of the shares of ATOZ Ltd. was of ₹ 100 per share. He also received a car from his nephew on the same day and the fair market value of the car on the date of gift was assessed at ₹ 5,25,000. (Dec 2020, 4 marks)
Answer:

Taxable or Non-Taxable Amount liable to Tax (₹) Reasons as per provisions of Income tax Act, 1961 as to Taxability or Non­Taxability
(i) Non-Taxable Nil Any Immovable property received without consideration by a HUF from any of its members covered under the definition of relative and therefore not taxable under section 56(2) (x) of the Income tax Act, 1961.
(ii) Taxable 1,00,000 Since Ms. Nistha is a member of the HUF, she is a relative of her fathers HUF. Hence the stamp duty value of ₹ 15,00,000 of House Property on the date of transfer is not taxable in the hands of HUF.
The Income of rent derived from such transferred house property by the HUF would be clubbed in the hands 0f Ms.
Nistha under section 64(2) of the Income tax Act, 1961.
As per provisions of section 56(2)(x) of the Income tax Act, 1961, in case the aggregate fair market value of property
other than immovable property, received without consideration exceeds ₹ 50,000 the whole of the aggregate value shall be taxable.
In this case, the aggregate fair market value of shares (1000 × 100 = ₹ 1,00,000) exceeds ₹ 50,000. Hence the entire amount of ₹ 1,00,000 shall be taxable.
Since, Car is not included in the definition of property for the purpose of section 56(2)(x) of the Income tax Act, 1961, therefore, the value of same of ₹ 5,25,000 shall not be taxable.

Question 57.
“Live Tele Films” is a UK base foreign company not having any Indian citizen/ resident of India holding its shares. It has shot a TV film during the year ended on 31-03-2022 entirely on the Indian locations so as to show the Indian cultural heritage. The film is to be telecast exclusively in the foreign countries, but it has also been agreed with the Government of India to give the right of telecast of the film in India to “DD-II” tree of charge. The A.O. issued a show cause notice asking the foreign company to pay tax in India on the income derived by it from the telecast of the film for AY. 2023-2024. Company claims that it is not liable to pay any tax in India and therefore seeks your opinion. (Dec 2020, 5 marks)
Answer:
Section 9(1) of the Income Tax Act, 1961 states that any income accruing or arising whether directly or indirectly from any business connection in India shall be the income deemed to accrue or arise in India. However,
Explanations (a) to (d) to this clause illustrate about the cases which will not be regarded as business connection in India.

According to Explanation (d) to this clause, no income shall be deemed to accrue or arise in India through or from operations which are confined to the showing of any cinematograph film in India provided the assessee who is
non-resident is;

(a) an individual who is not a citizen of India,
(b) a firm which does not have any partner who is a citizen of India or who is resident of India,
(C) a company which does not have any shareholders who is a citizen of India or who is resident in India.
In the instant rise, the assessee is a foreign company who does not have any shareholder who is either citizen of India or resident of India and as such no income of the foreign company shall be deemed to accrue or arise in India.

Therefore the action of Assessing Officer is not correct In putting to tax income of the company for the Assessment Year 2023-2024 in India.

Question 58.
A person whose turnover during the previous year ended 31.03.2020 was ₹ 55 crores. From 01.04.2021 to 30.09.2021 he received ₹ 55 lakhs from A against sales made by him. During the month of October, 2021
he receives another ₹ 3 lakh from A against consideration from sales. What amount of TCS is required to be deducted in this case if:
(i) A has a PAN number.
(ii) A does not have any PAN number. (Aug 2021, 3 marks)
Answer:
As per section 206C (1H) of the Income-tax Act, 1961, every person, being a seller, who receives any amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub—section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1 % of the sale consideration exceeding fifty lakh rupees as Income-tax.

‘seller” means a person whose total sales or gross receipt or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out. If the buyer has not provided the Permanent Account Number or the Aadhaar ñumber to the seller, then the rate of TCS will be 1% under this section.

The above provision has been effective w.e.f. 1st October, 2021. Therefore, amount received on or after 1st October, 2021 will be considered for the TCS purpose.

  1. ₹ 300 if purchaser having PAN. [0.1% of ₹ 3,00,000]
  2. ₹ 3000 if purchaser not having PAN [1% of ₹ 3,00,000]

Note:
Since, the rate of TCS has been reduced by 25% during the Covid pandemic period, therefore, answers considering the reduced rate of TCS as follow:

  • ₹ 225 if purchaser having PAN. [0 .075% of ₹ 3,00,000]
  • ₹ 2250 if purchaser not having PAN [.75% of ₹ 3,00,000]

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 59.
Discuss the relevant provisions of Income Tax Act, 1961 in respect of the following transaction:
(i) Mr. Aslam purchased a house property in Ajrner from Mr. Salim on 28.08.2021 for a consideration of ₹ 70 lakhs. The stamp duty value of the property was ₹ 75 lakhs. Explain biefly what will be the value of sales consideration of the property for Income Tax purpose in Mr. Salim’s hands. (Aug 2021, 2 marks)
Answer:
As per section 50C of the Income-tax Act, 1961. the sale consideration in the hands of the seller will be the amount of the stamp duty value if it exceeds 110% of the actual sale consideration.

In the given question, the actual sale price is ₹ 70 lakh, while the stamp duty value is ₹ 75 lakh which is less than 110% of the actual sale consideration (i.e. ₹ 77 lakh). Hence, the sale consideration in the hands of Mr. Salim shall be ₹ 70 lakh.

Question 60.
Find out the amount of advance tax payable by Mr. A on specified dates under the Income Tax Act, 1961 for the financial year 2022-23 from the following information:

Business Income Long Term : ₹ 4,00,000
Capital Gain (on 31.05.2022) : ₹ 60,000
Winning from Lotteries (on 31.12.2022) : ₹ 50,000
Interest on Loan : ₹ 10,000
Other Income : ₹ 5,000
Investment in notified equity shares : ₹ 10,000
Tax deducted at source : ₹ 29,000 (Aug 2021, 5 marks)
Answer:
Calculation of Total Tax F.Y. 2022-23

Particulars Amount (₹)
Business Income 4,00,000
Long Term Capital Gain (31.05.2022) 60,000
Winning from Lotteries (31.12.2022) 50,000
Interest on Loan 10,000
Other Income 5,000
Gross Total Income 5,25,000
Less: Deduction u/s 80C [Investment in notified equity shares] (10,000)
Total income 5,15,000
Tax on Total Income
Long Term Capital Gain (31.05.2022) @20% 12,000
Winning form Lotteries (31.12.2022) @ 30% 15,000
Tax on ₹ 4,05,000 as per normal slab rate (5,15,000-60,000­50,000) 7,750
Total tax 34,750
Add: HEC @ 4% Total Tax including HEC 36140
Less: TDS 29,000
Total Advance Tax Payable 7,140

(Since, the amount of advance tax payable is less than ₹ 10,000 Mr. A is not liable to pay advance tax.)
Note: It is assumed that the assesse has not opted for Section 115BAC of the income tax Act, 1961.

Question 61.
For the Assessment Year 2023-24 DD Ltd. paid Tax @ 15% on its book profit computed under section 115 JB. During the assessment proceedings the Assessing officer wants to charge interest under Section 234A and 234B as the company did not pay advance tax during the financial year 2022-23. The company seeks your advice in this regard. (Aug 2021, 5 marks)
Answer:
The issue in this case is whether interest is charged under section 234B and 234C, if the Company istaying tax on the basis of book profit under section 115JB of the Income-tax Act, 1961.

Though 115JB is a self-contained section pertaining to Minimum Alternate Tax ‘MAT’ provision but sub-section (5) of section 115JB specifies that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company mentioned in that section. Therefore, except for substitution of tax payable and the manner of computation of book profits, all the provisions relating to charge, definitions, recoveries, payment, assessment, etc., would apply in respect of the provisions of this Section. Accordingly, the payment of Advance Tax would be required.

Further, according to section 207 of the Income-tax Act, 1961, tax shall be payable in advance during any financial year in accordance with the provisions of section 208 to 2019. As book profit is deemed to be total income, therefore as per the provisions of section 207, advance tax is required to be paid. If a Company defaults in payment of advance tax under section 115JB, it would be liable to pay interest under section 234B and 234C.
From the above analysis, it is concluded that Assessing Officer is right in charging interest under section 234B and 234C.

Question 62.
Ghanshyam Goswami, a NRI aged 83 years, wishes to file his return of Income for A.Y. 2023-24. His Gross Income in India including interest received on his SB accounts in India total is ₹ 7,50,000. Determine and workout the tax liability of Ghanshyam Goswami for A. Y. 2023-24. Give Working notes. (Dec 2021, 3 marks)
Answer:
Computation of Tax Liability of Mr. Ghanshyam Go swami for AY 2023-24
Gross Total Income ₹ 7,50,000
Less: Deduction u/s 80TTA (Refer Note 1) (₹ 10,000)
Total Income ₹ 7,40,000
Tax on Total Income of ₹ 7,40,000 ₹ 60,500
Add: Cess @ 4% ₹ 2,420
Total Tax Payable ₹ 62,920

Note 1 : Deduction u/s 80TTB – Individual who is a resident senior citizen aged 60 years and above at any time during the previous year can claim a deduction of maximum ₹ 50,000 from his Gross Total income on account of interest received on deposits including interest on saving bank accounts. Since Mr. Go swami is Non-Resident, therefore deduction is restricted upto ₹ 10,000 only u/s 50TTA.

Note 2 : The basic exemption limit for an individual depends on his/her age as well as Residential Status. According to age, Mr. Ghanshyam Go swami falls into category of “Super Senior Citizen” being above 80 years of age. For NRI individuals, the basic exemption limit is ₹ 2,50,000 in a financial year irrespective of their age. Therefore, the basic exemption limit for Mr. Ghanshyam Go swami will be ₹ 2,50,000 only.

Assumption: The amount of interest on saving bank accounts are not specifically mentioned. Therefore, it is assumed that the interest received on saving bank account is ₹ 10,000 or more.

Question 63.
For the Assessment year 2023-24, Shankar is a non-resident in India. From the information given below, find out his income chargeable to tax for the Assessment year 2023-24:

(i) Technical fees received from an Indian Company in Japan for advice given by him in respect of a project situated in China ₹ 3,68,000.
(ii) Income from a business situated in Sri Lanka (goods are sold in Sri Lanka, sale consideration is received in Sri Lanka but business is partly controlled in Sri Lanka and partly in India) ₹ 3,25,000.
(iii) Income from rent of vacant plot in Mumbai given to a foreign company is ₹ 2,44,000, such income is received in foreign currency in Japan. (Dec 2021, 3 marks)
Answer:
Computation of Taxable Income of Mr. Shankar (Non-Resident) for AY 2023-24

(i) Technical fees received from an Indian company In Japan for advice given by him in respect of a proect situated in China shall not be chargeable to tax because it is not deemed to accrue or arise in India and not received in India. Nil
(ii) Income from a business situated in Sri Lanka, partly controlled in India. (This income is taxable in case of Resident and Ordinarily Resident (ROR) and Resident but not Ordinarily Resident (RNOR). Since, Mr. Shankar is non resident, the same will not chargeable to tax in India) Nil
(iii) Income from rent of vacant plot in Mumbai (such Income is 2,44,000 accrued in India, hence taxable) 2,44,000
Income Chargeable to Tax 2,44,000

Question 64.
A limited liability partnership (LLP) has following income for the Assessment year 2023-24:

Particulars Amount (₹)
Profit from business eligible for deduction @ 100% of profits under section 80-1A 12,50,000
Profit from other business 17,50,000
Long term capital gain on sale of house property 11,20,000

Compute the tax payable by the LLP for assessment year 2023-24, assuming that LLP has available AMT Credit for financial year 2021-22 is ₹ 14,650. It has no other income during the Assessment year 2023-24. Also compute the total carry forward of AMT Credit (it any). (Dec 2021, 5 marks)
Answer:
Computation of Taxable Income of LLP AY 2023-24
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 44
Computation of Tax Liability (as per normal provision)
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 45
Computation of Adjusted total income u/s 115JC
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 46
Computation of Tax (as per AMT)
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 47
Computation of Net Tax Liability of LLP
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 48

Set-off and Carry forward of AMT Credit:
Opening AMT Credit of ₹ 14,650 will not be set-ott from current year tax liability because AMT Credit shall be allowed to set-off in a year when tax as per normal provision is higher than AMT Tax.

In the given question, AMT Tax is higher than Normal tax, so opening AMT is not to be set-ott in current year Tax liability.
Current year AMT Credit = ₹ 7,92,688 – ₹ 7,78,960 = ₹ 13,728
Total AMT Credit carry forward = ₹ 14,650 + ₹ 13,728 = ₹ 28,378

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 65.
XYZ Ltd. makes the following payments to Rahim, a contractor, for contract work during the P.Y. 2022-23:
₹ 20,000 on 1.05.2022
₹ 25,000 on 1.08.2022
₹ 28,000 on 1.12.2022
On 1.03.2023, a payment of ₹ 30,000 is due to Rahim on account of a contract work. Discuss whether XYZ Ltd. is liable to deduct tax at source under section 194C from payments made to Rahim. (June 2022, 3 marks)
Answer:
As per section 194C of the Income tax Act, 1961, the tax will be required to be deducted at source where the amount credited or paid to a contractor or sub-contractor exceeds ₹ 30,000 at one time or ₹ 1,00,000 in aggregate during the financial year.

In the given case, the individual contract payments made to Mr. Rahim does not exceed ₹ 30,000. However, the aggregate amount paid / credited to Mr. Rahim during the P.Y. 2022-23 exceeds ₹ 1,00,000 (on account of the last payment of ₹ 30,000 due on 1.3.2023, taking the total from ₹ 73,000 to ₹ 1,03,000), the TDS provisions under section 194C would get attracted and TDS is required to be deducted @ 1% on the entire amount of ₹ 1,03,000 from the last payment of ₹ 30,000 and the balance of ₹ 28,970 (i.e. ₹ 30,000 – ₹ 1,030) is to be paid to Mr. Rahim.

Question 66.
The net profit as per Statement of Profit and Loss of Stable Ltd., a resident company for the year ended 31.03.2023 is ₹ 390 lakh after arrived the following adjustments:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 62

Following further information are also provided by the company :

(a) Net profit includes loss of ₹ 40 lakh from a subsidiary company.
(b) Provision for tax includes ₹ 2 lakh of interest payable on Income Tax.
(c) Depreciation on assets includes ₹ 30 lakh towards revaluation of assets.
(d) Amount of ₹ 50 lakh credited to P & L account was drawn from revaluation reserve.
(e) Brought forward business loss and unabsorbed depreciation as per books are ₹ 60 lakh and ₹ 45 lakh respectively for the year ended 31.03.2022.
Compute the Book profit of the company u/s 115JB while calculating MAT under the Income Tax Act, 1961 for the year ended 31.03.2023. (June 2022, 5 marks)
Answer:
Computation of Book Profit u/s 115JB of Stable Ltd, for AY 2023-24:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 49
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 50

Question 67.
The net result of the business carried on by a branch of foreign company in India for the year ended 31st March, 2023 was at a loss of ₹ 150 lakh after charging off head office expenses of ₹ 220 lakh allocated to the branch.
Explain with reasons the income to be declared by the branch in its Income tax return for the assessment year 2023-24. (Dec 2022, 3 marks)

Question 68.
On 31st December, 2022, Miss Saroj paid a sum of 6,000 USD to Sarnarveera, a management consultant practicing in Tokyo (Japan), specializing in project financing. The payment was made in Japan.
Samarveera is q non-resident. The consultancy is related to a project in India with possible Ceylonese collaboration.
Is this payment chargeable to Income Tax in India In the hands of Samarveera for the assessment year 2023-24? (Dec 2022, 3 marks)

Question 69.
SKK Pvt. Ltd. has prepared its Statement of Profit and Loss as per Schedule III to the Companies Act, 2013. The net profit for the year ended 31st March, 2023 as per Statement of Profit and Loss was ₹ 220 lakh. Following are the details furnished:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 51
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 52
You are required to compute book profit under section 115JB of the Income Tax Act, 1961 for the assessment year 2023-24. (Dec 2022, 5 marks)

Question 70.
XYZ Limited’s Profit & Loss Account for the period ended 31st March, 2023 shows a net profit of ₹ 75 lacs after debiting/crediting the following items:

(i) Depredation ₹ 24 lacs (including 4 lacs on revaluation).
(ii) Interest to financial institution not paid before due date of filing return of income ₹ 6 lacs.
(iii) Provision for doubtful debts ₹ 1 lac.
(iv) Provision for unascertained liabilities ₹ 2 lacs.
(y) Transfer to General Reserve ₹ 5 lacs.
(vi) Net-Agricultural Income ₹ 6 lacs.
(vii) Amount withdrawn from Reserve created during 2018-19 ₹ 3 lacs.
(Book profit was increased by the amount transferred to such reserve in Assessment year 2020-21).

Other Information:
Brought forward loss and unabsorbed depreciation as per books are ₹ 12 lacs and ₹ 10 lacs, respectively.
Compute minimum alternate tax under section 115JB for AY. 2023-24.
Answer:
Computation of Book Profit of XYZ Limited under section 115JB:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 53
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 54

Computation of Minimum Alternate Tax (MAT) under section 115JB:

Particulars
15% of Book Profit (15% of ₹ 68 lacs)

Add: Health and Education cess @ 4%

Minimum Alternate Tax payable under section 115JB

10,20,000

40,800

10,60,800

Note: Explanation 1 to Section 115JB does not require adjustment of interest not paid before due date of filing return of income while computing book profit.

Question 71.
ABC Limited has claimed exemption on the income from long-term capital gains under section 54EC by investing in bonds of National Highway Authority of India within the prescribed time, in the computation of ‘book profit’ under section 115J8. The company claimed exclusion of long-term capital gains because of exemption available on it by virtue of Section 54EC. The Assessing Officer reckoned the book profit including long-term capital gains for the purpose of levy of minimum alternate tax payable under section 115JB. In the action of the Assessing Officer justified in law?
Answer:
The issue under consideration in this case is whether long-term capital gain exempted by virtue of Section 54EC can be included In the boàk-profit computed under sectIon 115JB for levy of minimum alternate tax.
It may be noted that minimum alternate tax is attracted under section 115JB, on account of tax on total income being less than 15% of book profit.

Chapter XII-B is a self contained code for computation of book profit. The net profit as per the profit and loss account for the relevant previous year prepared in accordance with Schedule III of the Companies Act, 2013, as increased/reduced by the specific adjustments provided for in Explanation I to Section 115JB would be the book profit for levy of MAT under section 115JB. Therefore, if an assessee has claimed exemption under section 54EC by investing in bonds of National Highway Authority of India within the prescribed time, the long-term capital gain so exempt would still be taken into account for computing book profit under section 115JB for levy of MAT.

Since, Explanation I to Section 115JB does not provide for such deduction. As long as long term capital gains are part of the profits included in the profit and loss account prepared in accordance with Schedule III of the Companies Act, 2013. Capital gains cannot be excluded unless provided under Explanation I to Section 115JB. It was so held by the Kerala High Court in N.J. Jose and Co. Ltd. v ACIT(2010) 321ITR0132.
Therefore, the action of Assessing Officer is justified in law.

Question 72.
ABC (P) Ltd. made a provision of ₹ 30 lacs for doubtful debts by debit to profit & loss account. The Assessing Officer while computing book profit under section 115 JB, wants to add back the provisions. Is the Assessing Officer justified in making such addition for computing book profit?
Answer:
Explanation (1) below Section 115JB (2) has been amended to provide that the net profit should be increased by inter alia, the amount set aside as provision for diminution in the value of any asset, if the same has been debited to profit and loss account, for computing the book profit.
Therefore, the Assessing Officer is justified in adding back the provisions of ₹ 30 lacs for doubtful debts while computing book-profit.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Question 73.
(i) Who shall verify the return of income of a limited liability company?
(ii) XYZ LLP is liquidated. What is the liability of partners of XYZ LLP in respect of its tax dues?
(iii) PQR LLP has a profit of ₹ 500 lacs after charging interest on capital for P amounting to ₹ 15 lacs calculated at 15% p.a. as per the agreement, but before considering remuneration to partners. What is the maximum admissible amount of remuneration to partners assuming all the partners are working partners and remuneration is authorised by the LLP instrument?
Answer:
(i) Under section 140 in the case of Limited Liability Partnership (LLP), the return of income shall be verified by the designated partner. Where for any unavoidable reason such designated partner is not able to verify the return, or where there is no designated partner as such the return of LLP can be verified by any partner.

(ii) Section 167C provides for the liability of partners of LLP in liquidation. In the case of liquidation of an LLP and where tax due from the LLP cannot be recovered, every person who was partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP.

(iii) Computation of maximum admissible remuneration to working partners:
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 55
Taxation of Companies, LLP and Non-resident - CS Professional Study Material 56

Question 74.
Explain the doctrine of form and substance in the context of tax planning?
Answer:
The following are certain principles enunciated by the courts on the question as to whether it is the form or substance of a transaction, which will prevail in income-tax matters.

(i) Form of transaction is to be considered in case of genuine transactions: It is well settled that when a transaction is arranged in one form known to law it will attract tax liability whereas, if it is entered into in another form which is equally lawful it may not. Therefore, in considering whether a transaction attracts tax or not, the form of the transaction put through is to be considered and not the substance. However, this rule applies only to genuine transactions. [CIT v. Motor and General Stores (P) Ltd. (1967) 66ITR 692 (AP)J.

(ii) True legal relation is the crucial element for taxability: It is open for the authorities to pierce the corporate veil and look behind the legal facade at the reality of transaction. The taxation authority is entitled as well as bound to determine the true legal relation resulting from a transaction. The true legal relation arising from a transaction alone determines the taxability of a receipt arising from the transaction [CIT v. BM Kharvar (1969) 72 ITR 603(SC)].

(iii) Substance (i.e. actual nature of expense) is relevant and not the form:

(a) In the case of an expenditure, the mere fact that the payment is made under an agreement does not preclude the department from enquiring into the actual nature of the payment [Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63ITR (SC)].
(b) In order to determine whether a particular item of expenditure is of revenue or capital nature the substance and not merely the form should be looked into. [Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC)].

Question 75.
Specify with reason whether the following acts can be considered as
(i) tax management; or
(ii) tax planning; or
(iii) tax evasion:
(i) Mr. P deposits ₹ 1 lac in PPF account so as to reduce his total income from ₹ 3.40 lacs to ₹ 2.40 lacs.
(ii) PQR Industries Ltd. installed an air conditioner costing ₹ 75,000 at the residence of a director as per terms of his appointment; but treats it as fitted in quality control section in the factory.
This is with the objective to treat it as plant for the purpose of computing depreciation.
(iii) SQL Limited maintains register of tax deduction at source effected by it to enable timely compliance.
(iv) R Ltd. issue a credit note of ₹ 90,000 for brokerage payable to Suresh, who is son of R, Managing Director of the company. The purpose is to increase his total income from ₹ 1,60,000 to ₹ 2,50,000 and reduce its income correspondingly.
Answer:
(i) It is a case of tax planning, since depositing money in PPF and claiming deduction under section 80C is as per the provision of law.
(ii) It is a case of tax evasion as the air conditioner fitted at residential place is furniture depreciable @ 10% whereas the rate of depreciation applicable for plant and machinery is higher. The wrong treatment unjustifiably increases the amount of depreciation and consequently, reduce profit.

Taxation of Companies, LLP and Non-resident Notes

Company
As per Section 2(17) of the Income-tax Act, 1961 (‘the Act’), company means:

  • any Indian company as defined in section 2(26); or
  • anybody corporate incorporated by or under the laws of a country outside India, i.e., any foreign company; or
  • any institution, association or body which is assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 or for any assessment year commencing on or before 1.4.1970 under the present Act; or
  • any institution, association or body, whether incorporated or not and whether Indian or non- Indian, which is declared by a general or special order of the CBDT to be a company. Such institution, association etc. shall be deemed to be a company for such assessment years as may be specified in the CBDT’s order.

Taxation of Companies, LLP and Non-resident - CS Professional Study Material

Corporate tax
Corporate tax means any tax on income, so far as that tax is payable by companies and is a tax in case the following conditions are fulfilled:

  • It is not chargeable in respect of agricultural income;
  • No deduction in respect of tax paid by companies is by any enactments which may apply to the tax authorised to be made from dividends payable by the companies to individuals;
  • No provision exists for taking the tax so paid into account in computation for the purposes of Indian income tax, the total income of individuals receiving such dividends, or in computing the Indian income tax payable by, or refundable to, such individuals.

Foreign Company
Section 2(23A) defines foreign company as a company which is not a domestic company. However, all non- Indian companies are not foreign companies as a non-indian company can be a domestic company if it makes the above-mentioned prescribed arrangements for the declaration and payment of dividends in India.

“Place of effective management”
“Place of effective management” to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made [Explanation to section 6(3)]

Tax Incidence on Non-Resident [Section 5]
Total income of any previous year of a person who is a non-resident includes all income from whatever source derived which;

  • is received in India
  • is deemed to be received in India
  • is accrued or arisen in India
  • is deemed to accrue or arise in India
Amendment regard to Section Existing (Till 31-Mar- 2020) Amended (W.e.f. 01-Apr- 2020)
1. DDT by domestic compa 115-O(1) Amended Payable @15% in respect of dividends declared, distributed or paid on or after 01-Apr-2003 Payable @ 15% in respect of dividend declared, distributed or paid on or after 01 -Apr-2003 but on or before 31-Mar-2020
2. Exemption in the hands of shareholder 10(34) Proviso Inserted Exempt from tax (However, dividend in excess of ₹ 10 lakhs taxable in the hands of resident specified assessee) No exemption for dividend received on or after 01- Apr-2020 (However, exemption continues for dividend on which tax u/s 115-O and 115BBDA has been paid)
3. Tax on dividend in excess of ₹10 lakhs in the hands of shareholders 115BBDA (1) – Amended Dividend in excess of ₹ 10 lakhs taxable @ 10% in the hands of resident specified assessee on or after 01-Apr-2017 Dividend in excess of @ ₹ 10 lakhs taxable @10% in the hands of resident specified assessee on or after 01 – Apr-2017 but on or before 31-Mar-2020
4. Tax on distributed income to unit holders by specified company / mutual fund 115R(2) – Amended Payable at specified rate on distributed income Payable at specified rate on distributed income on or before 31-Mar-2020
5. Tax on income received from mutual funds/ specified company in the hands of recipient 10(35) – Proviso Inserted Exempt from tax No exemption for income received on or after 01 – Apr-2020 (i.e. Taxable)
6. Dividend received by a business trust 10(23FC)(b) – Amended Dividend received from specified domestic company referred to in 115- O(7) exempt from tax Clause (b) replaced with dividend received or receivable from special purpose vehicle – exempt from tax
7. Tax on distributed income – Sec 115UA received by a unit holder from the business trust 10(23FD) – Amended Exempt from tax except interest income referred u/s 10(23FC)(a) or income from renting/leasing / letting out any real estate asset referred u/s 10(23FCA) Exempt from tax except (added to existing provision) dividend income referred u/s 10(23FC)(b) (in case where the special purpose vehicle choosen to pay tax u/s 115BAA – 22%)
8. Deduction in respect of inter-corporate dividends 80M- Reintroduced Deduction for dividends distributed by it on or before due date against dividend received from Any other domestic company a foreign company a business trust
9. Deduction against dividend income 57(i) – Amended and proviso inserted Dividends, other than other than referred to in section 115-O Substituted with dividends

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