ICWAI - Applied Direct Taxation - Group - I - Dec 2010, Study notes of Business Taxation and Tax Management

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REVISIONARY TEST PAPER

THE INSTITUTE OF

COST AND WORKS ACCOUNTANTS OF INDIA

12, SUDDER STREET, KOLKATA-700 016

GROUP I

DECEMBER 2010

DIRECTORATE OF STUDIES

100 Revisionary Text Paper (Revised Syllabus-2008)

GROUP - I

Paper-7 : APPLIED DIRECT TAXATION

102 Revisionary Text Paper (Revised Syllabus-2008)

(d) The total income from the commencement of previous year upto the date of proceedings u/s 175 is taxable in that year itself. (e) This assessment is mandatory.

5. Discontinued business [Section 176] :

(a) Business or profession carried on by the assessee is discontinued during the previous year. (b) The income from the first day of the previous year upto the date of discontinuation may be assessed in the previous year itself. (c) The assessee discontinuing the business/profession shall give within 15 days of such discontinuance a notice about the discontinuance to the Assessing Officer. (d) This assessment is discretionary.

Q. 2. (a) What does “Substantial Interest” mean under the Income Tax Act?

(b) Mr. Tamang born and brought up in the State of Sikkim had Net Profit of Rs. 2,25,000 from the business located in Sikkim and Interest of Rs. 55,000 on the Securities/Bonds issued by the Government of Rajasthan.

Answer 2. (a)

According to Sec. 2 (32) of the Income Tax Act, a person has “Substantial Interest” in the following cases–

For a Person having “Substantial Interest” Company Person who is the beneficial owner of Shares, not being Shares entitled to a fixed rate of dividend, whether with or without a right to participate in profits, carrying not less than 20% of the voting power. Non-Corporate Entity Person holding not less than 40% of the share of the profits.

Substantial Interest is attracted in the following situations :

(i) Taxability of deemed dividend u/s 2(22)(e). (ii) Definition of Specified Employee u/s 17(2)(iii)

(iii) To determine relative u/s 40A(2) for the purpose of disallowance of excessive or unreasonable expenditure.

(iv) Clubbing of Salary Income of the spouse u/s 64(1)(ii).

[ Note : Only for this Section, the interest of not only the assessee but also the relative of the assessee shall be considered.]

Answer 2. (b)

Income received by Sikkimese : In case of Individual, being a Sikkimese, any income which accrues or arises to him—

(a) from any Source in Sikkim (or) (b) as Dividend or Interest on Securities.

Therefore the Net Profit of Rs. 2,25,000 from the business located in Sikkim and interest of Rs. 55,000 on Securities / Bonds issued by the Government of Rajasthan shall be exempt u/s 10(26AAA).

Group-I : Paper-7 : Applied Direct Taxation 103

Q. 3. (a) The books of account maintained by a National Political Party registered with Election Commission for the year ending 31.3.2010, disclose the following receipts : Rs. (i) Rent of Property let out to a Departmental Store at Chennai 3,00, (ii) Interest on Deposits other than Banks 6,00, (iii) Contributions from 200 persons (who have secreted their names) 42,00, of Rs. 21,000 each (iv) Contribution at Rs. 11 each from 1,00,000 members in cash 11,00, (v) Net Profit of cafeteria run in the premises at Delhi 1,00, Compute the total Income of the political party for Asst. Year 2010-2011, with reasons for inclusion or otherwise.

(b) Examine the correctness of the statement that “there exists no difference in the treatment of income claimed uls 10 will those under Chapter VI-A of the Income Tax Act”?

Answer 3. (a)

Assessee: Registered Political Party Previous Year: 2009-2010 Assessment Year: 2010-

Computation of Total Income

Particulars Rs.

Income from House Property : Rental Income from Property at Chennai 3,00, Less : Exempt u/s 13A (3,00,000) Nil Profits and Gains of Business or Profession – Net Profit from canteen Business 1,00, Income from Other Sources : Interest on Deposits 6,00, Less : Exempt u/s 13A (6,00,000) Nil

Contributions from Secret Members 42,00, Contributions from Other Members 11,00, Total Contribution from Members 53,00, Less : Exempt u/s 13A - (Amount received from secret members is greater than Rs. 20,000 and is taxable. Hence, Rs. 11,00,000 only is exempt) (11,00,000) 42,00,000 42,00, Total Income 43,00,

Answer 3. (b) The following is the difference between

Exemption u/s 10 Deduction under Chapter VI-A Income exempt does not form part of the Income forms part of Total Income. Total Income. Expenditure in relation to income exempt not Expenditure in relation to income deductible. deductible. It will not enter the calculation of Total Income. It is a deduction from Gross Total Income. Income is normally exempt subject to certain Deduction is normally allowed based on payment conditions. or fulfillment of conditions.

Group-I : Paper-7 : Applied Direct Taxation 105

(c) Calculation of Value of Fringe Benefits :

Particulars Computation Value

Opening Market Value on Date of Exercise Given Rs. 400 Closing Market Value on Date of Exercise Given Rs. 450 FMV on date of Exercise of option (assumed) Average of above = (400+450) ÷ 2 Rs. 425 No. of shares on which option exercised 300 shares FMV of the above shares 300 shares × Rs. 425 Rs. 1,27, Amount recovered from Mr. Nandy 300 shares × Rs. 80 Rs. 24, Value of Perquisite Rs. 1,03,

2. Cost of Acquisition of above shares :

(a) U/s 49(2AB), Cost of Acquisition of shares so allotted for the employee shall be the value considered for valuing such shares for the purposes of perquisite. (b) Hence Rs. 425 shall be considered as the Cost of Acquisition of such shares.

Q. 6. Aman, an Employee furnished the following particulars for previous year ending 31.3.

(a) Salary Income as computed Rs. 2,52, (b) Arrears of Salary received (not included in the above) relating to FY 2007-08 Rs. 15, (c) Assessed Income for Financial Year 2007-08 Rs. 55, (d) On 25.3.2010, amount deposited in Public Providend Fund Rs. 50, You are requested to compute relief u/s 89 in terms of Tax Payable.

Rates to tax for Assessment Year 2008-09 are — On First Rs. 1,00,000 — Nil, On next Rs. 50, — 20%, On the balance — 30%. Surcharge at 10% if Total Income exceeds Rs. 8,50,000.

Answer 6.

Name : Mr. Aman Previous Year: 2009-2010 Assessment Year: 2010-

Table 1 : Computation of Relief u/s 89

Step Particulars Rs.

1 Total Income for the year (excluding Arrears of Salary) [2,52,000 – 50,000] 2,02, 2 Arrears of Salary received relating to Prior Previous Years 15, 3 Total Income for the year (including Arrears of Salary) 2,17, 4 Tax on Total Income (Item No. 3) after Cess 5, 5 Tax on Total Income (Item No. 1) after Cess 4, 6 Difference between (4) and (5) 1, 7 Total Tax computed as per Column 7 of Table 2 below Nil 8 Relief u/s 80 [(6)–(7)] 1, 9 Net Tax Payable (rounded off) 4,

106 Revisionary Text Paper (Revised Syllabus-2008)

Table 1 : Computation of Relief u/s 89

Total Tax on Income in Tax on Income in Difference Previous Total Earlier income Col. 4 Col. 2 between Col. (5) & year Income years including (After Deduction Plus SC & Cess) Col. (6) arrears arrears (1) (2) (3) (4) (5) (6) (7) 2008-09 55,000 15,000 70,000 Nil Nil Nil

Note : Computation of Tax Payable for AY 2010-2011, If Salary Income is –

Particulars Including Arrears (Rs.) Excluding Arrears (Rs.) Gross Total Income 2,67,000 2,52, Less : Deduction u/s 80C = Contribution to PPF (50,000) (50,000) Total Income 2,17,000 2,02, Tax on Total Income 5,700 4, Add : Education Cess at 2% 114 84 Add : Secondary and Higher Education Cess at 1% 57 42 Total Tax Payable (Rounded Off) 5,870 4,

Q. 7. Mr. B is the owner of a commercial property let out at Rs. 20,000 p.m. The municipal tax on the property is Rs. 25,000 annually, 50% of which is payable by the tenant. This tax was actually paid on 15.4.2010 He had borrowed a sum of Rs. 8 Lakhs from his cousin, resident in USA (in dollars) for the construction of the property on which interest at 12.5% is payable. He has also received arrears of rent of Rs. 20,000 during the year, which was not charged to tax in the earlier years. What is the Property Income of X for AY 2010-11?

Answer 7.

Name : Mr. X Previous Year: 2009-2010 Assessment Year: 2010-

Computation of Income from House Property

Particulars Rs. Rs. Let Out : So, Annual Value u/s 23(1)(a)/(b) = Actual Rent = Rs. 20,000×12 2,40, Less : Municipal Taxes Paid during the FY 2009-10 Nil Net Annual Value 2,40, Less : Deduction u/s 24 — @ 30% of NAV — Rs. 2,40,000 × 30% 72, — Interest on Housing Loan (Note) — Rs. 8,00,000 × 12.5% 1,00,000 (1,72,000) Income from House Property before considering Arrears of Rent 68, Arrears of Rent Received 20, Less : Deduction u/s 25B — 30% of Arrears received — Rs. 20,000 × 30% (6,000) 14, Net Income from House Property 82,

Note : It is presumed that the tax has been deducted at source on the amount of interest payable outside India.

108 Revisionary Text Paper (Revised Syllabus-2008)

Answer 9. (a)

The principles relating to apportionment are :

Apportionable Depreciation = [(WDV as on 1.4.2009 + Additions in April 2009)] × 15%

= (Rs. 3,00,000 + Rs. 1,20,000) × 15% = Rs. 63,

Apportionment of Depreciation and Allowable Depreciation :

Depreciation on Depreciation on assets Total Assessee No. of days Assets on the date acquired after Depreciation for of succession succession AY 2010- Sole Proprietary 01.04.09 to 30.08.09 Rs. 63,000 × 152/ Concern = 152 days = Rs. 26,236 N i l Rs. 26, Company 31.08.09 to 31.03.10 Rs. 63,000 × 213/365 Rs. 1,60,000 ×15%×50% = 213 dyas = Rs. 36,764 = Rs. 12,000 (period of 36,764 + 12, use < 180 days). = Rs. 48,

Answer 9. (b) Computation of Allowable Deduction

Particulars Rs. (in crores) Normal depreciation [90 crores × 15%] 13. Additional depreciation (only for new plant and Machinery) [80 crores × 20%] 16. Assets utilized for scientific research (not eligible for depreciation u/s 32) Nil Total admissible depreciation u/s 32 29. Deduction in respect of Scientific Research Expenditure u/s 35 10.

Q. 10. X Ltd is a Company engaged in the business of growing, manufacturing and selling tea. For the accounting year ended 31st March, 2010, its composite business profits, before adjustment u/s 33AB of the Income-tax Act, were Rs. 80 Lakhs. In the year, it deposited Rs. 25 Lakhs with NABARD. Following are some additional information : (a) The Company has a business loss of Rs. 15 Lakhs brought forward from the previous year. (b) The Company withdrew in February 2011 Rs. 30 Lakhs from the deposit account to buy a non- depreciable asset for Rs. 18 Lakhs 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. Indicate the tax consequences of the above transaction and the total income for the relevant years.

Answer 10.

Assessee : X Ltd. Previous Year: 2009-2010 Assessment Year: 2010-

Computation of Profits & Gains of Business of Profession

Particulars Rs. Rs. Composite Business Profits 80,00, Less : Deduction u/s 33AB – Least of the following : (a) 40% of Current Year Business Profits (40% × Rs. 80,00,000) 32,00, (b) Amount deposited in NABARD 25,00,000 (25,00,000) Profit and Gains of Business or Profession 55,00,

Group-I : Paper-7 : Applied Direct Taxation 109

Assessee is engaged in the business of growing and manufacturing tea and hence income shall be apportioned as per Rule 8 as follows :

Particulars Rs. Rs. Profits and Gains from Business or Profession – 40% of Rs. 55,00,000 22,00, Less : Brought Forward Business losses to the extent set off u/s 72 (Note) (15,00,000) 7,00, Income from Other Sources Agricultural Income (60% of Profits from Tea Business) – 60% of Rs. 55,00,000 33,00, Less : Exempt u/s 10(1) (33,00,000) Nil Total Income 7,00,

(b) Taxability of Unutilised amount

Previous Year : 2010-11 Assessment Year : 2011-

1. If the amount withdrawn during any previous year is not utilised within the previous year or utilised for any purpose other than those specified in the scheme, then it shall be treated as income and charged to tax in that previous year.
2. Unutilised amount of Rs. 12 Lakhs [Rs. 30 Lakhs (amount withdrawn) - Rs. 18 Lakhs (purchase of eligible asset)] shall be treated as Business Income in the AY 2011-12.

Q. 11. (a) X Ltd. incurs an expenditure of Rs. 200 crores for acquiring the right to operate telecommunication services for Bihar and Jharkhand circles. The payment of Rs. 200 crores was made in September 2008 and the licence to operate the services was valid for 8 years. In December 2009, the Company transfers part of the licence, in respect of Bihar, to Excel Ltd. for a sum of Rs. 30 crores and continues to operate the licence in respect of Jharkhand. What is the amount allowable as deduction u/s 35ABB to X Ltd. in respect of the licence fee, for Assessment Year 2010-2011?

(b) Dream Ltd. is an existing Indian Company, which sets up a new Project Unit. It incurs the following expenditure in connection with the new unit :

Rs. Preparation of Project Report 14,00, Market Survey Expenses 15,00, Legal and other charges for issue of additional capital required for the new unit 11,00, Total 40,00,

The following further data is given : Cost of Project 3,00,00, Capital Employed in the new project 4,00,00,

What deduction is admissible to the Company u/s 35D for Assessment Year 2010-2011?

Group-I : Paper-7 : Applied Direct Taxation 111

Compute the income chargeable to tax arising as a result of these transactions in the A.Y. 2010-11.

Answer 12. (a)

The following are the details analysis on chargeability of Capital Gains if a property is sold at a price which is lower than Govt. Value.

1. Nature of Asset : The assessee transfers Land, or Building, or both.
2. Applicability : Sale Consideration is less than the value adopted or assessed or assessable by the State Government Authority (referred to as ‘‘Stamp Valuation Authority”) for the purpose of payment of Stamp Duty. Note : The word “Assessable” means the price which the Stamp Valuation Authority would have adopted or assessed, if it were referred to such authority for the purpose of the payments of Stamp Duty (W.e.f. 01.10.2009).
3. Consideration adopted for Capital Gains : Value adopted by the Stamp Valuation Authority.
4. Under the following conditions, a reference is made to the valuation officer :

(a) The assessee can claim that the value adopted or assessed by the Stamp Valuation Authority exceeds the Fair Market Value of the property as on the date of transfer. (b) Value adopted by the Stamp Valuation Authority is not disputed before any authority or Court. (c) Where the value determined by the Valuation Officer exceeds the value adopted by the Stamp Valuation Authority, the Capital Gain shall be considered as follows — Capital Gains = Value adopted by Stamp Valuation Authority Less Cost or Indexed Cost of Acquisition.

Answer 12. (b)

Assessee : Mr. Adhikari Previous Year: 2009-2010 Assessment Year: 2010-

Computation of Long Term Capital Gains on sale of land (Amount in Rs.) Particulars Durgapur Expressway Asansol Nature of transfer Compulsory Acquisition Part performance of contract Year of taxability Year of receipt Year of transfer of possession Financial Year taxable 2009-10 2009- Indexation Benefit available with Compulsory Acquisition (519) Transfer (632) respect to year of — Consideration for transfer 5,00,000 38,00, Value adopted for consideration Sale Value (Note 1) Stamp Value (Note 2) Less : Expenses on transfer (Nil) (Nil) Net Sale consideration 5,00,000 38,00, Less : Indexed Cost of Acquisition (41,520) (32,87,861) (Notes 1 and 2) [Cost of acquisition × CII of year (8,000×519/100) (27,00,000×632/519) of acquisition/100] Long Term Capital Gains on sale of Land 4,58,480 5,12, Income under the head Capital Gains Rs. 9,70,

Notes : 1. Sale of land on Durgapur Expressway — Cost of Acquisition : Where the asset is a acquired prior to 1.4.1981, cost of acquisition shall be Fair market value on 1.4.1981 or actual cost whichever is higher. Therefore, the actual cost of acquisition of land (i.e. Rs. 8,000) is taken for the purposes of computation of Indexed Cost of Acquisition.

2. Sale of land at Asansol — Consideration for transfer : U/s 50C, where the sale consideration received is less than the value adopted by the Stamp Valuation authority , the value so adopted by the Stamp Valuation authority shall be considered for the computation of income under the head “Capital Gains’. It is assumed in the given case that the possession of the property is handed over to the purchaser.

112 Revisionary Text Paper (Revised Syllabus-2008)

Q. 13. Amit discloses following particulars of his receipts during the previous year 2009-2010 :

(i) Salary income earned at Aligarh but received in Bangladesh 2,00, (ii) Profits earned from a business in Kenya which is controlled in India, half of the profits being received in India. 3,00, (iii) Income from property, situated in France and received there 1,75, (iv) Income from agriculture in Sri Lanka and brought to India 70, (v) Dividend-paid by an Indian company but received in London on 15 May 2009. 15, (vi) Interest on USA Development Bonds and one half of which was received in India 30, (vii) Past foreign untaxed income brought to India 4,00, (viii) Gift of $2000 from Grandfather, reseding in UK, received in India 98, (ix) Land sold in Delhi, consideration received in Canada, resulting into capital gain 5,20, (x) Income from structure-designing constancy service, set up in Germany, controlled from India, profits being received outside India 1,90, (xi) Loss from foreign business, controlled from India, sales being received in India (-) 4,00,

Determine his taxable income for the previous year 2009-2010 if he is (i) resident and ordinarily resident, (ii) resident but not ordinarily resident, (iii) non-resident.

Answer 13.

Resident and Resident but Non- Particulars of Income ordinarily not ordinarily resident resident resident Rs Rs Rs (i) Salary earned at Aligarh but received at Bangladesh: 2,00,000 2,00,000 2,00, Salary is deemed to accrue or arise at a place where services are rendered, place of receipt being immaterial [Sec. 9(1)(ii)]. Hence, it is taxable in all cases (ii) Profits earned from a business in Kenya, controlled in India : (a) One half of profits are taxable on receipt basis 1,50,000 1,50,000 1,50, (b) Other half profits—from foreign business controlled 1,50,000 1,50,000 — in India (in case of resident and ordinarily resident, place of control is of no relevance) (iii) Income from property in France and received there : Income accruing or arising outside India 1,75,000 — — (iv) Income from agriculture in Sri Lanka and brought 70,000 — — to India: It is not income received in India as receipt means first receipt. Hence, it is not taxable in case of not ordinarily resident” and “non-resident”. In case of “ordinarily resident”, it is income accruing or arising outside India. Hence, it is taxable. It should be noted that it is not agricultural income/as it is not derived from land, situated in India, and hence not derived from under Sec. 10(1).

114 Revisionary Text Paper (Revised Syllabus-2008)

Q. 14. M & Co. is a partnership firm. It satisfies all conditions of the Income-tax Act. It discloses the following particulars of income for the previous year 2009-2010.

Particulars Rs.

(i) Interest received in Australia on monies sent to Z Inc., a company registered 8,00, in Australia, which utilised the borrowings in its business in India. 80% Business of Z Inc. is controlled from India (ii) Royalty received in Newzealand from a cooperative society for using patent rights 2,00, of the firm in its usiness in India, 30% affairs of the society are controlled from India (iii) Income from house property in Bhutan, remitted to the firm in India through 60, State Bank of India as per instructions of the firm (iv) Interest on Development Bonds of Sri Lanka Government remitted to the firm 40, in India through Bank of Ceylon (v) Profit on sale of goods to a new customer in Myanmar, cargo documents were 70, sent through SBI (vi) Profit on sale of goods FOB, to a customer in Singapore, cargo documents were 2,00, directly dispatched to him (vii) Long-term capital gain received on sale of Bonds and Debentures of Indian 4,00, companies in Myanmar, Bonds and Debentures were purchased in convertible foreign exchange. Capital gain, if computed in foreign currency will be 60% less than what it is in Indian currency

(viii) Under-writing commission for guaranteeing the public issue of a Malaysian 3,00, company to be paid and received there subject to the condition that 20% commission will be paid either within 6 months from the end of the financial year Or within 3 months from the end of the month in which the approval of the Company Law Board is obtained, whichever period expires later

Determine the total income of the firm in the following case :

(i) Mr. Ashis is the managing partner of the firm. He controls the affairs of the firm from Malaysia.

(ii) Mr. Ashis comes to India for 182 days during the previous year. He has appointed Mr. Bimal as his agent in Malaysia to take all decisions in his absence regarding affairs of firm. However, Mr. Bimal has been directed to keep Mr. Ashis fully informed while he is in India.

(iii) Mr. Ashis comes to India for 150 days. He has appointed Mr. Bimal as his attorney to manage the affairs of firm in his absence in consultation with him.

Answer 14.

(a) Determination of residential status of the firm during PY 2009-2010 :

Control and management of the firm is wholly situated outside India. The firm is non-resident in India. Physical presence of managing partner for 182 days in India during the previous year 2009-2010 is of no consequence. Situation (iii): Control and management is partly situated in India and partly outside India. The firm is “resident” in India during the previous year.

Group-I : Paper-7 : Applied Direct Taxation 115

Computation of total income

Particulars When firm is When firm is nonresident in resident in India India Rs. Rs.

(i) Interest on loan-advances, made outside India, received outside 8,00,000 8,00, India but loan was utilised for business in India, Accordingly, interest is deemed to accrue or arise in India (ii) Royalty received in New Zealand from a cooperative society, 2,00,000 2,00, for using patent rights of the firm in its business in India. Royalty is deemed to accrue or arise in India (iii) Income from house property in Bhutan, received by SBI in — 60, Bhutan as the agent of firm (iv) Interest on Development Bonds of Sri Lanka Government 40,000 40, remitted to the firm in India— Bank of Ceylon being agent of its Government (v) Profit on sale of goods to a customer in Myanmar, title deeds — 70, sent through SBI (vi) Profits on sale of goods to a customer in Malaysia, cargo 2,00,000 2,00, documents directly dispatched to the buyer—profit arises at seller’s place (vii) Capital gain on sale of bonds and debentures of Indian 1,60,000 4,00, companies in Myanmar: It is deemed to accrue or arise in India (viii) Under-writing commission 80% of Rs 3,00,000 — 1,80,

Total Income 14,00,000 19,50,

Q. 15. Mr. Khan is getting a salary of Rs. 5,400 pm since 1.1.08 and dearness allowance of Rs. 3,500 pm, 50% of which is a part of retirement benefits. He retires on 30th November 2009 after 30 years and 11 months of service. His pension is fixed at Rs. 3,800 pm. On 1st^ February 2010 he gets 3/4ths of the pension commuted at Rs. 1,59,000. Compute his gross salary for the previous year 2009-10 in the following cases : (i) If he is a government employee, getting gratuity of Rs.1,90, (ii) If he is an employee of a private company, getting gratuity of Rs.1,90, (iii) If he is an employee of a private company but gets no gratuity.

Answer 15.

Previous Year 2009-10. Tenure of Service: 1.4.09 to 30.11.09 = 8 months

Post-retirement period: December 2009 to March 2010 = 4 months

Particulars Case (i) Case (ii) Case (iii) Salary 43,200 43,200 43, D.A 28,000 28,000 28, Taxable Gratuity Exempted 82,750 Nil Uncommuted Pension [(3,800×2)+(950×2)] 9,500 9,500 9, Commuted Value of Pension Exempted 88, Gross Salary

Group-I : Paper-7 : Applied Direct Taxation 117

Leave encashed during the year-60 days. Determine the gross salary in the following cases :

(i) He retires from government service (ii) He retires from the service of Delhi Municipal Corporation (iii) He retires from the service of Life Insurance Corporation of India (iv) He retires from private sector

Answer 16.

Particulars Case (i) Case (ii) Case (iii) Case (iv)

Salary for 6months & 16 days 1,30,667 98,000 98,000 98,

Dearness Allowance 65,333 65,333 65,333 65,

Taxable amount of Leave encashment Exempted 1,70,800 1,70,800 1,70,

Gross Income from Salary 1,96,000 3,66,800 3,66,800 3,66,

Working Notes :

Average monthly salary for 10 months, prior to retirement:

Salary of 6 months 16 days: (1st^ April 2009 to 16th^ October 2009) @ Rs. 20,000 pm = 1,30,

Salary of 3 months 14 days: (14th^ December 2008 to 31st^ March 2009) @ Rs. 15,000 pm = 52,

Total Basic Salary 1,82,

Add: Dearness allowance For 6 months 16 days: (1st^ April 2009 to 16th^ October 2009) @ Rs. 10,000 pm = 65, For 3 months 14 days: (14th^ December 2008 to 31st^ March 2009) @ Rs. 7,500 pm = 26,

Total D.A. 91,

D.A. [40% of 91,333, forming part of retirement benefits] 36,

Total salary of 10 months 2,19,

Average Salary = 2,19,200/10 = 21,920.

Taxable amount of Leave Encashment :

Amount of encashment received:

(30 x 20) – (150 +60) × (20,000 + 10,000)/ 30 = 3,90, Less: Exempted u/s 10(10AA) [Least of the followings]

(i) Actual amount received 3,90,

(ii) 10 months salary(preceeding the month 2,19,

of retirement)

(iii) Leave credit on the date of retirement

[(30 × 20) – (150 + 60) × (21,920/ 30)] 2,84,

(iv) Maximum Limit 3,00,000 2,19,

Taxable amount of Leave encashment 1,70,

118 Revisionary Text Paper (Revised Syllabus-2008)

**Q. 17. P Ltd. provides electricity to its employee, Mr. Avijit. Electricity consumption for the year as per meter reading comes to 2,250 units. Determine the value of the perquisite in the following cases:

1. Electricity meter is in the name of Mr. Avijit and the rate of electricity is Rs. 3 per unit
2. Electricity meter is in the name of P Ltd. the rate of electricity is Rs. 3 per unit.
3. P Ltd. is a power-generating company. Manufacturing cost is 90 paise per unit but supplied to public @ Rs. 2 per unit. However, it charges 30 paise per unit from employees.**

Answer 17.

With reference to Rule 3(4)

1. Perquisite value of free electricity is Rs. 6,750 (2,250 × 3 ). As the electric meter is in the name of the employee, it is his obligation to pay the bill. However, as the bill has been paid by the employer, it is an obligation of employee, discharged by the employer. It is always taxable u/s 17(2)(iv).

2. Perquisite value of free electricity will be Rs. 6,750. It shall be assessed to tax, if the employee is a specified employee as per Sec.17(2)(iii)

3. Perquisite value of electricity supplied = 2,250 ( 0.90 – 0.30) = Rs. 1,

Q. 18. Determine the value of education facility in the following cases :

1) Three children of Mr. R, an employee of S Ltd., are studying in a school, run by S Ltd. School fees is Rs. 3,500 pm and hostel fees is Rs. 4,000 pm. But the employer recovers only Rs. 1, pm and Rs. 1,500 pm respectively. However, a similar school or a hostel around the locality charges Rs. 2,500 pm and Rs. 1,800 pm respectively.

2) The employer has also reimbursed the school fees of Rs. 1,200 pm of his nephew, fully dependent on him after the death of his widow sister.

Answer 18.

Computation of taxable value of education facility [As per Rule 3(5)]

Particulars Taxable value of perquisite

1. (a) School fees of his children, studying in a school run by employer : (Rs. 2,500 × 3 × 12) – (1,000 × 3 × 12) – (1,100 × 3 × 12) 14, (b) Hostel fees: (4,000 × 3 × 12) – (1,500 × 3 × 12) 90,
2. School fee of nephew (1,200 × 12) 14,

Total value of taxable perquisite 1,18,

Q. 19. Mr. Kalidas is the owner of a house property. Its municipal valuation is Rs. 7,00,000. It has been let out for Rs. 9,00,000. The local taxes payable by the owner amount to Rs. 40,000 but as per agreement between the tenant and the landlord, the tenant has paid them direct to the municipality. The landlord, however, bears the following expenses on tenants amenities during the year 2009-2010.