Sikkim Manipal University 3rd Semester Fall 2010

MBA – III SEM

Taxation Management – MF0003

SET - 2

Q. 1. Mr. Alok is a practicing accountant. He also took 40 lectures in

college at Rs.100 per lecture. His receipt and payment account is given
below;

Receipts Rs. Payments Rs.

To bal b/d 9500 By office expenses 25000
Audit fees 160000 Municipal taxes 600
Remuneration lectures 4000 Personal expenses 5000
Examiner’s fees 1500 Membership fees 500
Interest on securities 1550 LIC Premium 3000
Rent from LOP 3000 Scooter purchased 45000
Royalty on book 6000 Scooter expenses 6000
Balance c/d 185550
270650 270650

i) Office expenses include Rs. 1000 paid as typing charges for preparing
manuscript of his book.

ii) ½ of the scooter expenses relate to personal use.

iii) Scooter being P& M depreciation is allowed at per rate 15 %

iv) Interest of securities includes Rs. 774 being interest on tax free
government securities.

Answer:

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Computation of Income from Profession of Mr. Alok

PARTICULARS Amount Amount

Rs. Ps. Rs. Ps.

Professional Receipts:
1,60,000.0
Audit Fees 0
Remuneration Lectures 4,000.00
Examiner’s Fees 1,500.00
Royalty on Book 6,000.00 1,71,500.00

Less: Professional Payments or Allowable Expenses

Office Expenses 25,000.00
Membership Fees 500.00
Depreciation of Scooter – 45000 / 100 X 15 = 6750 6,750.00
Scooter Expenses – 6000 / 2 = 3000 3,000.00 35,250.00

Income from Professional 1,36,250.00

Q. 2. Enumerate at least 10 items which can be included under the head

‘income from other sources’.

Answer: This is the last and residuary head of income. Any income which is taxable
under the Act but does not find place under any of the first four heads of income (i.e.
Salaries, House Property, Business and Capital Gains) will be assessable under this
residuary head ‘Income from other Sources’.

Incomes chargeable under this head:-

Incomes chargeable under this head of income [Sec. 56(2)]:-

The following incomes shall be chargeable to income tax under the head ‘Income
Other Sources’:

Income from winnings from lotteries, crossword puzzles, races including horse races,
card games and other games of any short or from gambling or betting of any form or
nature whatsoever.

Any sum received by the assessee from his employees as contributions to any
provident fund or superannuating fund or any fund set-up under Employees’ State
Insurance Act, 1948 or any other fund for the welfare of such employees, provided
that it is not chargeable under the head ‘ Profits and Gains of Business or
Profession’.

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Income by way of interest on securities, if the income is not chargeable to income tax
under the head ‘Profits and Gains of Business or Profession’.

Income from machinery, plant or furniture belonging to the assessee and let on hire if
the income is not chargeable to income tax under the head ‘Profits and Gains of
Business or Profession’.

Income of an assessee from letting on hire machinery, plant or furniture belonging to

him and also buildings, and the letting of the buildings is inseparable from the letting
of the said machinery, plant or furniture, if it is not chargeable to income tax under
the head “profits and Gains of Business or Profession’. Income received under a
Keyman insurance policy including bonus on such policy if such income is not
chargeable to income tax under the head ‘Profit and Gains of Business or Profession’
or under the head ‘Salaries’.

Dividend on Shares in Foreign Companies:-

Any fees or commission received by an employee from a person other than his
employer.

 All interest including interest on securities.

 Income of a tenant from subletting.

 Director’s fees. Rent of land not appurtenant to buildings. Agricultural income

from land situated outside India.

 Income from markets, ferries, fisheries etc.

 Income from leasehold properties.

 Remunerations for writing articles in Journals.

 Income from undisclosed sources (unexplained investments, unexplained

money, unexplained expenditure etc.).

 Interest on employees own contribution to URPF.

 Casual income.

 Salary of M.P, M.L.A., M.L.C.

Interest received on securities of co-operative society. Family pension received by

the widow and heirs of deceased employee (Standard deduction permissible in
respect of family pension is Rs. 15,000 or 1/3 of such pension whichever is less)

Director’s Commission for underwriting shares of a new company, Insurance

Commission not chargeable under the head ‘business or profession’.

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Any sum of money exceeding Rs. 25,000 (Rs. 50,000 on or after

01-04-2006) received without consideration by an individual or a HUF from any
person, the whole of such sum is taxable under this head.

But it does not apply to any sum of money received:

(a) from a relative; or

(b) under a will or by way of inheritance; or

(c) on the occasion of the marriage of the individual; or

(d) in contemplation of death of the payer

For this purpose relative means:

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual; and of the spouse also

(vi) spouse of the person referred to in (i) to (v)

Interests on Securities:-

The following amounts due to an assessee in the previous year shall be chargeable
to income tax as interest on securities:

(i) Interest on any security of the Central or State Governments;

(ii) Interest on debentures or other securities issued by a local authority;

(iii) Interest on debentures issued by a company (whether Indian or foreign); and

(iv) Interest on debentures or other securities issued by a Statutory Corporation.

Basic of Charge:-

Interest on securities does not accrue from day to day but becomes due on certain
fixed dates only, which are mentioned on the securities. Interest on securities is
chargeable to tax on the basis of accounting method (cash or mercantile) followed by
the assessee. However, where no method of accounting is regularly employed by the
assessee, the income from interest on securities shall be chargeable to tax as the
income of the previous year in which it becomes due though it may be received later.

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Where the assessee adopts cash system of accounting the interest will be taxed on
receipt basis.

Cum interest or Ex-interest Transaction:-

When securities are bought or sold between the two interest dates, the transaction is
either cum-interest or ex-interest. Whatever be the nature of the transaction, the rule
is that interest on securities is regarded as wholly the income of the person who
happens to be the owner at the time when the interest becomes due, irrespective of
whether he was the owner throughout the period of which the interest is paid or not,
and also whether the transaction has been cum-interest or ex-interest.

Securities are of four types:-

(i) Tax-free Government Securities: These securities are those, the interest on
which is fully exempt from tax under section 10(15). Interest on such securities is
neither included in total income nor it is taxed.

(ii) Government Securities: Such securities are issued either by the Central
Government or a State Government. These are taxable securities. But no tax is
deducted at source on such securities. Hence, the interest on such securities will not
be grossed up. The amount received or due as the case may be shall be included in
the total income.

(iii) Tax-free Commercial Securities: These are issued by a local authority or

statutory corporation or a company, in the form of debentures or bonds. Really
speaking their interest not tax-free, because tax due on this interest is payable by the
company, or local authority or corporation concerned. These are called tax-free,
because the assessee has not to pay tax on it from his own pocket. The tax paid by
the company (10.2% in case of listed securities, 20.4% in case of unlisted securities)
on this interest is deemed to have been paid on behalf of the assessee, hence the
amount of tax paid on any interest due to an asseessee added to his interest income.
i.e, the interest due to an assessee is grossed up and then this grossed up amount is
included in his total income. The amount of tax paid by the company on this interest
is deducted from the total tax payable by the assessee. For example, if a company
has issued 10% Tax-free Debentures, the debenture-holder will receive the entire
amount of interest calculated at 10% but the amount to be included in the total
income of the debenture holder will be the amount actually received by him as
interest plus income tax thereon paid by the company.

(iv) Less-Tax Commercial Securities: These may be called “Taxable Securities”. In

the case of these securities, income tax is deducted at source on the amount of
interest calculated at the percentage stated on the securities and balance of the
amount of interest left after deduction of the aforesaid income tax is paid to the
security-holder. (The rate of tax deducted at source is 10.2 % in case of listed
securities, 20.4% in case of unlisted securities) If the rate percent of interest is given
it is not grossed up as it is already the gross amount of interest, and income tax is to
be deducted there from. If in the case of these securities, the net amount of interest
received is given, it has got to be grossed up. In any case, it is the gross amount of
interest that is included in the total income of an assessee.

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Q. 3. How is tax liability of a company is computed.

Answer:

Computation of Total Income of a Company:-

Particulars Amount Amount

Ascertain the income under the different heads HP + Business XXX

Income + Capital Gain + Other Sources
Add: Income of other persons (if any) u/s 60 & 61 XXX

XXX

Adjustment on account of:

Current losses (if any) XXX

B/forward losses (if any) XXX XXX

(According to section 70 to 80)

Gross Total Income XXX

Less: Deductions under sections (if any)

 80G Donations XXX

 80GGA Donations to SR & RD XXX

 80GGB Contributed to Political parties XXX

 80IA Profits from Infrastructure develop XXX

 80IAB profits from company engaged in develop of SEZ XXX

 80IB Certain industrial undertakings XXX

 80IC Certain States XXX

 80JJA bio-degradable waste XXX

 80JJAA Employment of new workmen XXX

 80LA Offshore banking XXX

Net Income XXX

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Computation of Tax Liability of a Company

(A) Under Normal Circumstances/or

Provisions (B) Under MAT

Particulars Amount Particulars Amount

Step I: Find out taxable Income XXX Step I: Find out book profit XXX

Step II: Ascertain 10% of Book

Profit XXX
Step II: Find out tax at 30% on
taxable
income (40% in case of a foreign
company) XXX Add: Surcharge at 10%
(Income Likely to exceed Rs.1
Crore)

Step III: Less: Rebate U/s 88E (if

any) XXX (2.5 % for foreign company) XXX

Tax XXX XXX

Add: Surcharge at 10% Tax + Surcharge XXX

(Income Likely to exceed Rs.1 Crore)
XXX
(2.5 % for foreign company) XXX

Tax + Surcharge
Add: Education Cess on Tax
Surcharge (at 3%) XXX Add: Education Cess at 3% on
Tax + Surcharge (Always Tax
Liability
Less: Tax Rebate or tax credit XXX as per MAT) XXX

Tax Liability XXX

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