ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – SEPT/OCT. 2015

M.COM – III SEMESTER

P111304: CORPORATE TAX PLANNING

Duration: 3 Hours Max. Marks: 100

SECTION – A

Answer any SEVEN questions. Each carries 5 marks. (7×5=35)

The total income of Robin Ltd, a foreign company, computed under the normal provisions of the Income tax Act, 1961 is Rs 3,00,000. However the Book Profits of the company (calculated as per section 115JB) amounted to Rs 12, 50,000. Calculate tax liability of the company for the Assessment year 2015-16.

Compute MAT credit available u/s 115JAA at the end of the following years (taxes are inclusive of applicable surcharge and cess)

Assessment year	2010-11	2011-12	2012-13	2013-14	2014-15
Tax on total income (Rs)	6,00,000	8,00,000	3,00,000	15,00,000	12,00,000
MAT u/s 115JB (Rs)	10,00,000	5,00,000	5,50,000	20,00,000	2,00,000

Specify with reasons whether the following acts can be considered as

(i) tax management or (ii) tax planning or(iii) tax evasion?

a) X Ltd deposits Rs 50, 000 in RPF a/c thereby its income reduced from Rs 3, 40,000 to Rs 2, 90,000

b) PQR Ltd installed an a/c costing Rs 75,000 at the residence of a director as per the terms of his appointment, but it treats it as if fitted in the factory for the purpose of computing depreciation.

c) SQL Ltd maintains a register of TDS affected by it to enable timely compliance

d) R issues a credit note of Rs 50,000 for brokerage payable to Santhosh, who is son of R, Managing director of the company so as to increase his income from Rs 1,40,000 to Rs 1,90,000

Z Ltd is engaged in manufacturing paints. For its research and development, the company installed a machine costing Rs 8, 00,000 on 1^st April 2009. The company charged full cost of machine as an expense U/S 35 (2) while calculating business for P.Y. 2009-10. The research work got completed on 15^th March 2014 and the company sold the machine on 1^st May 2013 without using it for any other purpose of business. The business income of the company P.Y. ending 31/03/2013 was Rs 75, 00,000 before giving any effect to sale of above asset.

Analyze the tax treatment on sale of above machine and also calculate the taxable income of the company for A.Y. 2014-15, if the machine is sold for a) Rs 6,00,00

b) Rs. 2,50,000.

Assume CII for 2009-10 is 632 and CII for 2013-14 is 939.

XYZ is considering the purchase of a new machine costing Rs 60,000 with an expected life of 5 years and salvage value of Rs 3,000 in replacement of an old machine purchased 3 years ago for Rs 30,000 with expected life of 8 years. The present market value of this old machine is Rs 35,000. Due to purchase of new machine the annual profits before depreciation are expected to increase by Rs 12,000. The relevant rate of depreciate is 25% on WDV basis and tax rate is 35%. Assume discounting rate to be 14%. Advise the company suitably

Peter Parker Ltd, USA supplies Pen to its wholly owned subsidiary Parker India Ltd, during F.Y. 2014-15. These pens are supplied at Rs 2,000 per box. Parker India incurs Marketing and Distribution cost of Rs 10 per box and sells the same at Rs 3,000 per box.

Parker India Ltd also imports pens from SK Ltd Singapore for Rs 1500 per box.

The Marketing and Distribution cost works out to Rs 5 per box and the boxes are sold at Rs 2000 per box.

Compute Arm Length price for the international transaction and incremental income of Parker India Ltd.

X Ltd and Indian company owns an industrial undertaking (date of commencement – July 2008) on 31/03/2009 it has 414 employees (Category A – 25, Category B – 36, Category D – 353). During the P.Y. 2009-10 it gives employment to following persons (Salary being Rs 2200 per month/per person except in the case of Category A)

Particulars	Situation 1 (No of employees)	Situation 2 (No of employees)
Managerial Personnel (Category A)	2	4
Casual Workmen (Category B)	10	18
Other Workmen (Category D)(employed w.e.f 01/05/2009)	37	40
Other Workmen (Category C) (employed w.e.f 01/12/2009)	19	25
No of new employees employed during F.Y. 2009-10	68	87

Find out the amount of deduction U/S 80 JJA for the A.Y. 2010-11

What is Double Taxation avoidance agreement (DTAA)? Elaborate the purpose of DTAA.

What is meant by a company in which public are substantially interested?

10.

Write a note on tax concession given to an amalgamating company.

SECTION – B

II.

Answer any THREE questions. Each carries 15 marks. (3×15=45)

11.

Explain deduction U/S 80 IA and U/S 10A

12.

XYZ needs a component in its assembly operation. It is contemplating a proposal to either buy or make the aforesaid component.

1. If the company decides to make the product itself than it would have to buy a machine for Rs 8 lakhs which would be used for 5 years. Manufacturing cost in each of the 5 years would be Rs 12 lakhs, Rs 14 lakhs, Rs 16 lakhs, Rs 20 lakhs and Rs 25 lakhs respectively. The relevant depreciation rate would be 15% and the machine would be sold to Rs 1 lakh at the beginning of the 6^th Year.

2. If the company decides to buy the component from a supplier than the component would cost Rs 18 lakhs, Rs 20 lakhs, Rs 22 lakhs, Rs 28 lakhs and Rs 34 lakhs respectively in each of the 5 years.

The relevant discounting rate is 14% and tax rate is 31.2175%. Should the company make or buy the component assuming additional depreciation is not available.

X Ltd an Indian company is engaged in the business of transformers and switch gears. It is negotiating for purchase or taking on hire a machine from a concern in UK. If it acquires the machine than the total cost would be Rs 60 lakhs payable in 5 annual interest free installments of Rs 12 lakhs each (payments to be made on July 1^st every year starting from 2010)

If it takes the machine on hire, it has to pay an annual rent of Rs 8 Lakhs which is also payable on 1sy July each year starting from 2010. The company proposes to use the machine for 10 years from 2010. Assume tax rate to be 33.2175%, depreciation rate to be 15%, cost of capital to be 10%. Should the company purchase or hire.

13.

What is ‘Arm’s Length Price’ in an international transaction? Briefly explain the various methods for computing ALP?

14.

PK Ltd is company in which the public are substantially interested. During the current year it has derived the following incomes.

a) Profit from manufacturing unit at Lucknow- Rs 3,20,000

b) Profit from Trading activities at Lucknow- Rs 1,00,000

c) Interest on debentures issues by another company which is producing cement- Rs 25,000

d) Dividend from a foreign company- Rs 10,000

e) Profits from an approved hotel started in 01/Feb/2001 at Kanpur Rs 210,500. Capital Employed being Rs 15 Lakhs and normal depreciation- Rs 60,000 has not been charged while calculating the above profits. The company passed on a certain formula for manufacturing tiles to another company in Uganda and received royalty of Rs 210,000 from it.

f) Brought forward unabsorbed- Rs 39,000

g) Book profits as per section 115 JB -Rs 25 lakhs

You are required to calculate total income and tax of the company

15.

Alpha Ltd is considering acquisition of 5 identical personal computers costing Rs 1, 75,000. The effective life of computers is 5 years. The following 3 options are available:

a. To purchase the computers by taking a loan of Rs 1,75,000 at 13% p.a. repayable in 5 years/end installment of Rs 35,000 along wth interest starting from end of 1^st year. File charges are Rs 1750.

b. To acquire computers on lease from A Ltd at a lease rent of

(1) Rs 350 per Rs 1000 of original asset value for first 3 years and

(2) Rs 250 per Rs 1000 of original asset value for next 2 years. File charges Rs 500

(3) To acquire computers on lease from B Ltd at a flat lease rent of Rs 300 per Rs 1000 of original asset value. File charges Rs 1000.

Additional information:

· Tax Rate applicable to the company 30%

· Depreciation applicable on computer 60% on WDV

· After tax cost of capital 12%

· File charges are payable at the end of first year only

· Present value of Re 1 at 12% was found to be 0.893, 0.797, 0.712, 0.636 and 0.567 at end of I, II, III, IV and V years

Which option should the company choose?

SECTION – C

III.

Case Study (1×20=20)

16.

Following is the P&L a/c of YZ Ltd, an Indian company or the P.Y 2013-14

Profit and Loss A/c

To materials consumed	22,50,000	By Sales	90,00,000
To salaries	37,50,000
To advertisement	3,75,000
To provision for doubtful debts	37,500
To insurance	52,500
To Audit fees	1,20,000
To depreciation	1,05,000
To provision for Income Tax	75,000
To Provision for contingent liabilities	30,000
To transfer to general reserve	1,50,000
Proposed dividend	3,00,000
To office expenses	4,50,000
To losses of subsidiary Company	3,00,000
To legal fees	1,12,500
To repair to P& M	82,500
To Net profit	8,10,000
Total	90,00,000		90,00,000

Additional information:

a) Provision for doubtful debts includes bad debts of Rs 20,000

b) The company has various depreciable assets. During the year a block of P&M (15%) was revalued at the start of current P.Y. from Rs 2, 00,000 to Rs 3,00,000. However, depreciation U/S 32 of IT Act is Rs 1,00,00

c) Income tax includes advance IT for P.Y. 2013-14 – Rs 25,000

	As per books	As per IT Act
B/F business losses	2,20,000	2,70,000
Unabsorbed depreciation	62,500	2,00,000

Calculate for A.Y. 2014-15

1) Total income as per normal provisions of IT Act

2) Book profits under MAT

3) Final tax liability

4) Tax credit available to the company U/S 115 JAA

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