Tax Planning For Business Decisions (Elective Paper IV Finance)

1. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)

END SEMESTER EXAMINATION – APRIL 2013

B.COM / B.B.M. – VI SEMESTER

TAX PLANNING FOR BUSINESS DECISIONS (ELECTIVE PAPER-IV – FINANCE)

Duration: 3 hours                                                                                             Max. Marks: 100

 

SECTION – A

 

1. Answer ALL the following questions. Each carries 2 marks.           (10×2=20)

 

1. What differentiates tax planning from tax avoidance?
2. X Ltd is considering a proposal to manufacture a component or purchase it from market. Manufacture can be done with an existing machine whose net fixed cost on usage will be Rs.20 per unit of the component.  The component is available in the market for Rs.79 per unit.  What will your decision be if the variable cost of manufacturing the component be Rs.74 per unit.
3. A company wants to purchase a plant (cost Rs. 80 crore) outrightly. Alternatively it can take the plant on lease.  List the factors to be considered by the company while choosing on a better alternative.
4. Briefly list the need for Presumptive Taxation.
5. X Ltd. intends to start operations during the assessment year 2013-2014. It wishes to produce bio gas for making pellets or briuveltes.  In the light of the provisions of the I.T act 1961, Advice the company on benefits (if any) applicable for the A.Y.2013-14.
6. During the year ended 31.03.2012, GJ Marine pdts ltd. has paid Rs.72,000 on a single day to local fishermen who supplied fish & prawns regularly to GJ LTd. Will 40A(3) be applicable?  Give reasons.
7. Elaborate on the tax considerations in the capital structure decision of a firm.
8. A Ltd. purchases goods on credit from a relative of a director on June 20^th 2011 for Rs.50,000 (Market value Rs.42,000). The amount is paid in cash on June 25^th  Discuss the allowability or otherwise of the following payment u/s 40A (2) only.
9. How is cost of project computed by a corporate assessee while amortising preliminary expenses.
10. What is the tax treatment of dividend received by the assessee –company from its subsidiary company.

 

 

 

SECTION –B

1. Answer any FOUR questions. Each carries 5 marks.                          (4×5=20)

 

11. A company is engaged in the development and sale of computer software applications. It has started a new undertaking in a Special Economic Zone.  It furnishes the following data and requests you to compute the deduction allowable to it under section 10AA is respect of assessment year 2012-13.

(Rs. in lacs)

Total profit of the company for the previous year                     50

Total turnover, i.e. Export, Sales and Domestic Sales for

the previous year                            500

Consideration received in respect of export of software           300

Telecom and insurance charges attributable to export of

software                               10

Staff costs and travel expenses incurred in foreign exchange

to provide technical assistance outside India to a client           40

 

12. The following are the details furnished by Orchid India Ltd. engaged in the business of pharmaceuticals products for the year ending 31.03.2012:

 

Particulars	Rs. in Lakhs
a.       Sales for the year	500
b.      Manufacturing & Administration Expenses	100
c.       Research & Development for in-house training i)Research Equipments acquired during the year ii)Remuneration to Scientists iii)Expenses for research & development iv)Contribution to approved scientific research institution	60 10 30   10

 

Compute the taxable income of the company for the Assessment year 2012-13.

 

13. Parimal, Managing Director of Heavens Engg. Pvt. Ltd. holds 70% of its paid up capital of Rs.20 lacs.  The balance as at 31-03-2011 in General Reserve was 6 lacs.  The company on 1-7-2011 gave an interest-free loan of Rs.5 lacs to its Supervisor having salary of Rs.4,000 p.m., who in turn on 15-8-2011 advanced the said amount of loan so taken from the company to Shri Parimal.  The Assessing Officer had taxed the amount of advance in the hands of Parimal.  Is the action of Assessing Officer correct? Give reasons.

 

14. X Ltd. is an Indian company. It owns an industrial undertaking (date of commencement being July 1, 2010).  On March, 31, 2011, it has 414 employees (Category A:25; Category B:36; Category D:353).  During the previous year 2011-12, it gives employment to the following persons (salary being Rs.2,200 per month per person except in case of Category A)-

 

	Situation one (No. of employees)	Situation one (No. of employees)
Managerial personnel (Category A)	2	4
Casual workmen (Category B)	10	18
Other workmen(Category D) (employed with effect from May 1, 2011)	37	40
Other workmen (Category C) (employed with effect from December 1, 2011)	19	25
No. of new employees employed during the financial year 2011-12	68	87

Find out the amount of deduction under section 80JJAA for the assessment year 2012-13.

 

15. Draw an account of the deduction available to certain undertakings u/s 80IC.
16. Discuss the Income Tax implications to companies on the use of ownership capital and borrowed capital.

 

SECTION – C

 

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

 

17. A plant is to be purchased for Rs.1,00,000, with own funds. The depreciation rate is 15 per cent and the corporate tax rate33.99 per cent.  The weighted average cost of capital is 10 per cent.  The life of the machine is 10 years.  On the other hand, the asset can be obtained on lease.  The lease rentals are at the rate of Rs.34,000 per annum for the primary lease period of 5 years.  Beyond this peppercorn rentals of Rs.600 per annum are to be paid.  A lease management fee of Rs.1,000 is payable on inception of the lease. Recommend to the company, based on your workings, the best alternative.

 

18. X Ltd. is planning to raise Rs.75,00000/- for expansion of business. Three financial plans are under consideration to raise the additional finance.
19. a) Issue equity shares of Rs.100 each for Rs75,00,000/-
20. b) Equity shares for Rs.30,00000 and loan funds Rs.45,00,000/- @15%per annum.
21. c) Equity shares for 2,00,0000/- 9% DebenturesRs.2000000/- and
22. d) Loan from IFCI Rs.35,00000/- @12% per annum.

 

The expected rate of return is 20%. The company is paying dividend@20% during the last 5 years. Corporate tax rate is 30%.  Assume during the current year also company will pay dividend @ 20%.  Keeping in view the income tax implications advice the company the better option to raise additional funds.

 

19. Give the meaning of Dividend under section 2(22) (e).

Critically analyse the tax treatment of bonus shares issued to

1. Equity shareholders          b)  Preference shareholders.

 

20. X Ltd., is a company engaged in the business of growing, manufacturing and selling of tea.

For the accounting year ended 31^st March, 2012, its composite business profits, before an adjustment under section 33AB of the Income-tax Act, 1961, were Rs.60 lacs.  In the year, it deposited Rs.25 lacs with NABARD.

The company has a business loss of Rs.10 lacs brought forward from the previous year.

The company withdrew in February, 2012 Rs. 20 lacs from the deposit account to buy a non-depreciable asset for Rs.18 lacs and could not use the balance before the end of the accounting year.  The withdrawal and the purchase were under a scheme approved by the Tea Board.

 

The non-depreciable asset was sold in November, 2012 for Rs.29 lacs.

Indicate clearly the tax consequences of the above transactions and the total income for the relevant years.

 

21. a)  X Ltd., a company providing telecommunication service, obtains a telecom licence on April 20, 2008 for a period of 10 years which ends on March 31, 2018 (licence fee being Rs.18 lakh).  Find out the amount of deduction under section 35ABB if
22. The entire amount is paid on May 6, 2008; or
23. The entire amount is paid on April 1, 2009;
24. The entire amount is paid in three equal instalments on April 30, 2008, April 30, 2009 and April 30, 2010.

 

 

1. What are the conditions to be satisfied by an assessee to avail deduction u/s 35ABB.

 

 

 

SECTION –D

 

1. Compulsory question    (15 marks)

 

Comment with reasons, if in the following situations, the assessee has resorted to Tax Planning or other measures.

 

Case 1 – X is an individual.  For the assessment year 2010-11, his gross total income is Rs.12,40,000.  Tax on Rs.12,40,000 is Rs.2,84,280.  To reduce his tax liability, he deposits Rs.70,000 in public provident fund account.  Consequently, his taxable income and tax liability thereof will be reduced to Rs.11,70,000 and Rs.2,62,650 respectively.

 

Case 2 – X Ltd. is a chemical manufacturing company.  It has a factory in Haryana near Delhi border.  Within the factory campus a piece of land of 2000 square metre is lying unutilized.   The company wants to start a new unit to manufacture computer components.  If this manufacturing unit is started in the existing factory campus, deduction under section 80-IB is not available.  However, if the new unit is started in Jammu & Kashmir, the company can claim deduction under section 80-IB.  To get the benefit of deduction under section 80-IB, the company starts the new unit in a village near Jammu.

 

Case 3- Suppose in Case 2, the process of manufacturing actually takes place in Haryana.  To get the benefit of deduction under section 80-IB, the company takes a factory building on rent in a village in Jammu and only on paper it is shown that the new manufacturing unit is situated in a village near Jammu., what would your answer be?

 

 

Case 4- If Rs.50,000 is gifted by a husband to his wife, income generated therefrom is taxable in the hands of husband under the clubbing provisions of section 64(1).  Section 64(1) is not applicable if gift is made by the same person out of the funds of his Hindu undivided family in capacity as karta of the family, Hence, gift is made by Karta of the family to his wife.

 

 

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