St. Joseph’s College of Commerce (Autonomous)

End Semester Examinations – SEPT /Oct. 2014

M.Com – III Semester

CORPORATE TAX PLANNING

 

Duration: 3 Hrs                                                                                              Max. Marks: 100

 

Section – A

 

1. Answer any SEVEN Each carries 5 marks.                        (7 x 5  = 35)

 

1. Examine and explain in the context of provisions contained in the Act as to correctness of the action taken by the Assessing Officer of marking adjustments for the following items while assessing the Book Profits of Sonu Pvt. Ltd., for the year ended 31.03.2014 –

• Prior Period Expenses of Rs. 3 Lakhs debited in Profit and Loss Account.
• Depreciation at 9.5% as per Rates prescribed under Schedule XIV of the Companies Act, 1956 charged for whole of the year on the Car valuing Rs. 20 Lakhs purchased on 01-01-2014 in Profit and Loss Account.

 

2. Specify with brief reasons, whether the following acts can be classified as Tax Planning or Tax Evasion, Tax Management or Tax avoidance

• P deposits Rs.50,000 in PPF Account so as to reduce Total Income from Rs.3,40,000 to Rs.2,90,000
• PQR Industries Ltd., installed an Air Conditioner costing Rs.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.
• SQL Ltd maintains a register of Tax Deduction at Source effected by it to enable timely compliance.
• R Ltd., issues a Credit Note for Rs.40,000 for Brokerage payable to Suresh, who is son of R, Managing Director of the Company. The purpose of this is to increase his Income from Rs.1,40,000 to Rs.1,80,000 and reduce its income correspondingly.

 

3. JJ Limited, a company incorporated in Australia, has entered into an agreement with KK Limited, an Indian Company, for rendering Technical Services to the latter for setting up a Fertilizer Plant in Orissa. As per the agreement JJ Limited rendered both off – shore Services and on-shore Services of KK Limited, at fees of Rs.1 Crore and Rs.1.5 Crore respectively.  JJ Limited is of the view that it is not liable to Tax in India in respect of fee of Rs. 1 Crore, as it is for rendering services outside India.  Discuss the correctness of the view of JJ Limited.

 

4. What is the significance of “Arm’s length Price” in an International transaction?

 

5. R Ltd., has accumulated profits of Rs.3,00,000 excluding capitalized profits i.e., bonus shares of Rs.1,00,000 issued in the past. The company distribute assets of Rs.2,50,000 to the share holders.  Compute the amount taxable as dividend if the market value of the assets on the date of the distribution is:

• 2,00,000
• 3,50,000
• 4,50,000

Also explain the details of taxation of this amount.

 

6. MNO Ltd., has one undertaking at Special Economic Zone (SEZ) and another at Domestic Tariff Area (DTA). Following are the details given to you for the Previous Year 2013 – 2014:

Particulars	Unit in SEZ	Rs. In Lakhs
		Unit in DTA
Total Sales	200	100
Export Sales	150	80
Net Profit	40	10

Compute the eligible deduction u/s 10 AA for the Assessment Year 2014 – 2015 in the following situations –

• Both the units were set up and began manufacturing from 25.07.2008
• Both the units were set up and began manufacturing from 10.04.2010.

 

7. Draw a small note on the conditions to the satisfied and the amount of deduction available to an undertaking U/S 80 IAB.
8. Explain the provisions of set off and carry forward of losses in case of demerger.
9. What is a double taxation avoidance agreement (DTAA)? Elaborate on the purpose of a DTAA.
10. Explain with a case law, “form and substance” in tax planning.

 

Section – B

 

1. Answer any THREE Each carries 15 marks.                 (3 x 15   = 45)

 

11. The Net Profit as per Profit and Loss of XYZ Ltd., a Resident Company, for the year ended 31.03.2014 is Rs.190 Lakhs arrived at after following adjustments:

(i) Depreciation on Assets	Rs.100 Lakhs
(ii) Reserve for Currency Exchange Fluctuations	Rs.50 Lakhs
(iii) Provision for Tax	Rs. 40 Lakhs
(iv) Proposed Dividend	Rs. 120 Lakhs

Following further information are also provided by the Company

• Net Profit includes Rs.10 Lakhs received from a Subsidiary Company.
• Provision for Tax includes 16 Lakhs of Tax payable on distribution of profit and of Rs.2 Lakhs of interest payable on Income Tax.
• Depreciation includes Rs.40 Lakhs towards Revaluation of Assets.
• Amount of Rs.50 Lakhs credited to P & L Account was drawn from Revaluation Reserve.
• Balance of Profit and Loss A/c shown in Balance Sheet at the Asset side as at 31.02.2014 was Rs.30 Lakhs representing Unabsorbed Depreciation.

Compute the Income of the Company for the year ended 31.03.2014 liable to tax under MAT.

12. ABC Ltd is a manufacturer of steel and allied products. Its Income for AY 2014 – 2015 is as follows –

1. Profits and Gains from Business computed under the provisions of Income Tax Act	19,50,000
2. Book Profit	1,00,40,000

Compute the Tax Payable by the Company and the MAT Credit available to the company

 

13. (a) R Ltd., a manufacturing company needs a generator for its activities. The cost is Rs.1,00,000.  On making enquiries it is learnt that the company has two options.  The first one is buying the asset by taking a loan of Rs.1,00,000 repayable in five equal installments of Rs.20,000 each along with interest @12% p.a.  The second option is leasing the asset for which annual lease rental is Rs.30,000 up to five years.  The lessor charges 1% as processing fees in first year.

As the tax manager advise the company management on the better option to be selected.

Additional information:

• Tax rate applicable to the company is 30.9%

Yr. 1	Yr.2	Yr.3	Yr.4	Yr. 5
0.909	0.826	0.751	0.683	0.621

(b) R Ltd., manufactures electric pumping sets. The company has the option to either make or buy from the market component ‘X’ used in the manufacture of the sets.

 

The following details are furnished:

The component will be manufactured on an existing machine costing Rs.1,00,000 with a life of 10 years.  Materials required cost Rs.2 per Kg. and wages Re.0.30 per hour.

 

The salary of foreman employed is Rs.1,500 p.m. and other variable overheads include Rs.20,000 for manufacturing 25,000 nos. of component.  Material requirement is 25,000 kg and requires 50,000 labour hours.

The component is available in the market at Rs.4.30 per piece.

Will it be profitable to make or buy the component?  Discuss.

 

14. R Ltd., produces most of its own parts and components. The standard wage rate in the parts department is Rs.12 per hour.  Variable manufacturing overhead is applied at a standard rate of Rs.9 per labour hour and fixed manufacturing overheads are charged at a standard rate of Rs.10.50 per hour.

 

For its current years output, the company will require a new part.  This part can be made in the parts department without any expansion of existing facilities.  Nevertheless, it would be necessary to increase the cost of product testing and inspection by Rs.15,000 per month.  Estimated labour time for the new part is half an hour per unit.  Raw materials cost has been estimated at Rs.24 per unit.

The alternative choice before the company is to purchase part from an outside supplier at Rs.36 per unit. The company has estimated that it will need 2,00,000 new parts during the current year.

Advise the company whether it would be more economical to buy or make the new parts.

 

15. Vivitha Bio Medicals Ltd., is engaged in the business of manufacture of biomedical items. The following expenses were incurred in respect of activities connected with Scientific Research.

Year ended	Particulars	Amount (Rs.)
30.04.2011	Land	10,00,000
(Incurred after 01.09.2009)	Building	25,00,000
31.03.2012	Plant and Machinery	5,00,000
31.03.2013	Raw Materials	2,20,000
31.03.2014	Raw Materials and Salaries	1,80,000

The business was commenced on 01.09.2013

In view of availability of better model Plant & Machinery, the existing Plant & Machinery were sold for Rs.6,00,000 on 01.03.2014

1. Elaborate on Sec. 35
2. Discuss the implications of the above for AY 2014 – 2015 along with brief computation of deduction permissible u/s 35, assuming that necessary conditions have been fulfilled. You are informed that the Assessees line of business is eligible for claiming deduction u/s 35 at 200% on eligible items.
3. Compute the monetary implications of sale of the capital asset in question.

 

 

Section – C

 

• Compulsory Case study.                                                                         (1 x 20 = 20)

 

16. Case I:
17. a) A company wants to raise capital of Rs.20,00,000 for a project where earning before tax shall be 30% of the capital employed. The company can raise debt fund@12% p.a. Suggest, which of the following 3 alternatives should it opt for:

• 20,00,000 to be raised by equity capital
• 16,00,000 by equity and Rs.4,00,000 by loans
• 4,00,000 by equity capital and Rs.16,00,000 by loans.

Assume the company shall distribute the entire amount of profits as dividend and tax rate is 30%

 

Case II: What will be the option, if the earning before tax is 10% of capital employed?

2. What is deemed dividend u/s 2(22) (e)?
3. List down the tax planning considerations in a repair/renewal or replacement decision of an asset.

 

 

 

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