Corporate Tax Planning

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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATIONS – OCTOBER 2013
M.COM – III SEMESTER
CORPORATE TAX PLANNING
Duration: 3 Hrs Max. Marks: 100
SECTION – A
I) Answer any SEVEN questions (out of TEN). (7 x 5 = 35)
1. What is transfer pricing? What are the methods of determining arm’s length
price?
2. Explain the tax planning provisions with regard to amalgamation of two
companies.
3. Define slump sale. How do you find out the written down value in the hands
of transferor in the case of slump sale. Briefly explain the computation of
capital gain in the case of slump sale.
4. Explain the provisions u/s
• 44BBB
• 44BBA
5. Explain the provisions u/s
• 35ABB
• 35 AD
6. Explain the deduction in respect of new workmen u/s 80 JJAA.
7. Explain the capital gain exemption tax between India and Netherlands.
8. On receipt of assessment order for the assessment year 2013-2014 of X ltd the
chief accountant of that company finds that the following deductions claimed
by it in the return of total income have not been allowed:
• Expenditure of Rs. 15000 incurred on accommodations maintained, at
the place where the factory s located for the directors and other
employees of the company, who visit the factory for the purposes of the
company’s business.
• A sum of Rs. 17500 incurred for lunch at a five star hotel where seven
representatives of a prominent raw materials supplier were taken for
lunch and the purchase manager of the Assessee had accompanied
them
• Export markets development allowance on a sum of Rs. 18000 spent by
it in connection with a partly given to the overseas buyers of its
products.
• Claim for deduction of a sum of Rs. 450000 being the amount of liability
for gratuity for the calendar year 1991 calculated on actuarial basis for
which no provision was made in the books of accounts. The company
does not maintain any gratuity fund. It maintains its accounts on
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mercantile basis. So far as gratuity liability is concerned, it has made
provision for the same in the books of account for the previous year
ended Dec 31, 1976. Thereafter it stopped making provision for
gratuity liability in the books of account. However, actual payment are
debited to P and L account
• Expenditure of Rs. 10000 incurred for drilling a tube well in the factory.
The drilling operations were given up as the water was hard and not
suitable for use. The expenditure thus became in fructuous.
9. XY ltd is having business in manufacture sale and export of goods. Its profit
and loss account for the year ending 31/3/2013 disclosed a net profit of Rs. 7.5
lakhs. Compute the assessable income for the assessment year 2013-2014 from
the following data
• Tax paid on behalf of foreign collaborator, the company having failed
to deduct tax on the remittances, such tax paid being Rs .30000 debited
to P& L account
• Commission paid to foreign buyer in violation of FEMA in the course
of invoicing exports, debited to P & l Account Rs. 40000
• Commission paid to local agents of foreign principals for securing
export orders, debited to Profit and loss account Rs. 20000
• Remuneration to MD comprised of salary at Rs. 45500 per month bonus
for the year Rs. 10000 and commission Rs. 20000 all debited to Profit
and loss account. The entire remuneration has been approved by the
company law board.
• Interest paid on borrowing made in excess of the limits laid down of
companies act Rs. 50000 debited to P & L a/c
• Contribution to a political party for securing help in getting loan from a
Government financial institution, charged to Profit and loss account Rs.
1 lakh
• Surtax paid Rs. 25000
• Interest paid for belated payment of income tax Rs. 8000 debited to P &
L a/c
• Insurance compensation received RS. 2 lakhs for damage to a
machinery, the expenditure incurred for repairing the same being Rs.
1,50,000 , the balance Rs. 50,000 credited to replacement reserve account
in the balance sheet
• Amount realized on sale of import entitlement Rs. 80000 taken to
reserve account in the balance sheet.
Give reasons for the additions and deletions suggested.
10. Write the applicability of general anti avoidance rule. What are the four tests
to be satisfied to declare impermissible avoidance arrangement
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SECTION – B
II) Answer any THREE out of FIVE questions. (3 x 15 = 45)
11. Explain the Key factors for Tax Planning and key structures in Outbound
Investment in India
12. Briefly explain the implications of tax concession and incentives for corporate
decision in respect of setting up a new business. (with special reference to
location being free trade zone)
13. XYZ ltd needs a component in an assembly operation. It is contemplating the
proposal to either make or buy the aforesaid component
• If the company decides to make the product itself, then it would need
to buy a second hand machine for Rs. 8 lakhs which would be used for
5 years. Manufacturing costs in each of the five years would be Rs. 12
lakhs, Rs. 14 lakhs, Rs. 16 lakhs and Rs. 25 lakhs respectively. The
relevant depreciation rate is 15%. The machine will be sold for Rs. 1
lakh at the beginning of the sixth year
• If the company decides to buy the component from a supplier the
component would cost Rs. 18 lakhs, Rs. 20 lakhs, Rs. 22 lakhs and Rs. 28
lakhs and Rs. 34 lakhs respectively in each of the five years.
The relevant discount rate is 14% and 32.445% tax is applicable.
Additional depreciation is not available. Should XYZ ltd make the
component or buy from outside.
14. ABC ltd is an Indian company engaged in the business of manufacture and
sale of engineering goods. Its net profit for the year 2012-13 is Rs. 20000. The
following are the other particulars
a. Debits to P&L a/c include
• Penalty paid for default in payment of sales tax Rs. 10000
• Cost of machinery purchased and installed during the year Rs.
5000
• Cost of imported motor car Rs. 240000 and depreciation there on
Rs. 48000
• Rent for premised hired at Delhi for the stay of the company’s
employees when on tour for purposes of business. Rs. 10000
• Foreign tour expenses of executive director and his wife Rs.
50000 (the expenses of the wife are estimated at Rs. 24000, the
tour was undertaken for promotion of exports and the director
being a diabetic patient, it became necessary under medical
advice, for his wife to accompany him)
• Annual premium paid for personal accident insurance policy
taken by the company for its staff Rs. 10000
• Interest on deposits received by the company from public RS.
30000
• Security deposit paid for telex connection Rs. 10000
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• Interest paid on money borrowed from bank for purchase of
shares in P.Inc a company incorporated in New York Rs. 10000
• Salary etc, paid to B the executive director
Salary Rs. 72000
Commission on sales RS. 30000
House rent allowance RS. 25000
Travel concession for self and wife in connection with his
proceeding on leave Rs. 5000
Rent for office premises of the company owned by the director
Rs. 12000
• Salary paid to Y an accounts officer : Salary Rs. 75000, bonus Rs.
18000, HRA Rs. 2400, special allowance Rs. 5000
• Depreciation of plant purchased during 2012-2013 Rs. 400000
(normal depreciation @33.33% of cost Rs. 1200000)
b. Credits to P&L a/c includes dividend received from foreign company
Rs. 50000
c. Following items were credited to capital reserve account
• The Assessee Company has purchased a plant on June 3 1988 for
Rs. 250000 for its research laboratory and claimed a deduction of
Rs. 250000. The research activity for which the machine is
purchased ceases in 2010-11 and the machine s brought into
business proper on Nov1, 2011 (market value Rs. 130000). The
machine is sold for Rs. 150000 on April 4, 2012. Rs 150000 is
credited to capital reserve account
• The Assessee Company has purchased a machine on Dec 1, 1988
for Rs. 300000 and claimed a deduction of Rs. 375000 (being 1.25
of Rs. 300000) as the machine was meant for an approved in
house research. The particular research activity for which the
machine was purchased ceases on Nov 1, 2012 and the machine
is sold, without being used for any other purposes on Dec 19,
2012 for Rs. 200000. This amount is credited to capital reserve
account.
The profit of Rs. 20000 is calculated before deducting income tax
You are required to compute the total income of the company for the
AY 2013-2014. Give reasons for the adjustments that you make in the net profit.
15. A plant is purchased for Rs. 100000. The depreciation rate is 15% (additional
depreciation rate is 20% in the first year) and the corporate tax rate is 32.445%.
The weighted average cost of capital is 10%. The life of the machine is 10
years. A loan of Rs75000 can be had by accepting public deposits at the
interest rate of 9% for financing the investment in plant. It is assumed that the
public deposits are repaid after 10 years. On the other hand the asset can be
obtained on lease. The lease rentals are at the rate of Rs. 34000 per annum for
primary lease period of 5 years. Beyond this peppercorn rentals Rs. 600 per
5
annum are to be paid. A lease management fee of Rs. 1000 is payable on
inception of the lease. In all three situations suggest the best option.
Section – C
III) ONE Compulsory Case study (No choice) (1 x 20 = 20)
XYZ ltd is considering the purchase of a new machine costing Rs. 60,000 with an
expected life of 5 years and salvage value of Rs. 3000 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. 35000. Because of the purchase of
new machinery, the annual profits before depreciation are expected to increase by Rs.
12000. The relevant depreciation rate for the machine is 15% on WDV basis and tax
rate is 32.445%. Assume the after tax cost of capital (discounting rate) to be 14% and
additional depreciation is not available. Advise the company suitably

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.