ASSIGNMENT SET II

MF0003: TAXATION MANAGEMENT

Q1.A What are the difference between direct tax and

indirect tax?

Ans. Direct Tax: Direct Tax are those tax which are directly

paid to the government. Direct Tax are those tax which are

directly charged on salary, house property, profit on business,

etc.

Indirect Tax: Indirect Tax are those tax which are

indirectly paid to the government. Indirect Tax are those tax

which includes tax on custom duty, central sales tax, central

excise duty, etc.

Q1.B What rules of Income Tax you adopt for reducing the

tax on the income from house property.

Ans. The income chargeable under the head income from the

House Property (in case of let-out house) shall be computed

after making the following deduction from its annual value.

 i) a sum equal to 30% of annual values standard

deduction for expenses (except interest).

ii) Interest on loan taken in respect of house property.

Interest on loan taken for the purpose of purchasing,

constructing, reconstructing or repairing the house

property is allowable as a deduction on accrual basis.

Interest for pre-acquisition or pre-construction period

Interest payable in respect of funds borrowed for the acquisition

or construction of house property and pertaining to the period

prior to the previous year in which such property has been

acquired or constructed shall be deducted in 5 equal annual

installments commencing from the previous year in which the

house was acquired or constructed. The amount of interest shall

not include any amount of such interest allowed as a deduction

under any other provisions of the Act. The interest of the

previous year prior to the current year, which is to be deducted

in 5 equal annual installments, shall be deducted in addition to

the interest of the current year. The “pre-construction period”

means the period commencing on the date of borrowing and

ending on (a) March 31st immediately prior to the date of

completion of construction/ date of acquisition or (b) date of

repayment of loan whichever is earlier.

Q2.A Mr. Jayanth settled in Japan comes back to India on

25 August 2007 to settle down here permanently. He

purchased a house property on 2 October 2007. He started

a business on 1 November 2007. He disclosed following

incomes/outgoing during the financial years 2007 or

a. income from house property 25,000

b. business profits 3,50,000

c. loss from speculation business 58,000

d. dividends from Japanese company 60,000

e. profits from Japanese business, controlled

from India but received there 1,00,000

f. deposits in public provident fund 40,000

Determine his residential status, total income and tax

liability for the previous year 2007 or would you change

your answer if house property is purchased on 1 October

2007?

Ans.

1. He is a resident of India but not an ordinary resident.

2. No, the answer will not be changed because of house

property.

Statement of total income Rs.

Income from house property 25,000

Business profits 3,50,000

profits from Japanese business, controlled

from India 1,00,000

Gross Total Income 4,75,000

Cess: deduction under section 80C

Deposits in public provident fund 40,000

Total Income 4,35,000

Computation of tax liablility

Tax on net income 4,35,000

Cess: rebate under section 80E ____xxx

Balance 4,35,000

Add: surcharge ____xxx

 Tax and surcharge 4,35,000

Add: Education cess@2% of tax & surcharge ___8,700

Tax Liablilty 4,43,700

Q2.B State with reasons, how the following will be dealt

with, by you in your company’s tax returns while computing

the income under the head Profits & Gains of Business.

a. Write off advances paid to sugarcane growers who

used to sell sugarcane crop exclusively to the

company.

Ans. No deduction will be allowed as only those

expenses or losses are allowed as “Deduction” if they

were earlier considered as Income. These will not be

considered as Expenditure, it’s just an Advance given to

suppliers.

b. Expenditure on replacement of old roofs of the

employee’s quarters owned by the company by using

new tiles.
 Ans. These expenses will be allowed as Deduction

while computing income from Business & Profession, as

the expenses incurred are for the benefits of the

employees & is directly related to business.

c. Cost of shifting a part of factory to another site.

Ans. Under section 37(1) these expenses are

disallowed as they are Capital Expenditures and can’t be

considered while computing Income from Business &

Profession.

d. Contribution made towards construction of

government owned roads which would facilitate

supply of sugarcane to factories.

Ans. Again these expenses are Capital in nature and

hence disallowed under section 37 (1) while computing

from Business and Profession.

e. Interest paid on outstanding amount of cess,

imposed under the State Sugarcane Cess Act.

 Ans. The interest payable on arrears of cess is in the

nature of compensation paid to govt. for the delay in

payment of cess & not as penalty hence the above

mentioned exp is deductible under section 37 (1).

Q3.A

Ans. Exchange rate declared by RBI = 70 pounds

Computation of Assessable Value

Rate of exchange = 68.50

Pounds

Invoice value of machine 16000 10,96,000

Design expenditure charged separately 2000 1,37,000

Raw material to foreign manufacture

Packing and insurance 150 10,275

Freight charges 300 20,550

CIF Value 12,63,825

Add: landing charges (1% of CIF Value) 12,638

Assessable Value 12,76,463

Computation of Customs Duty

Basic Custom Duty

(25% of Assessable value) 3,19,116

Additional Duty NIL

Custom Duty 3,19,116

Add: Education Cess 3% 9,573

Total Duty Payable 3,28,689

Q3.B State in brief the rule relating to fringe benefit tax?

Ans. Fringe Benefit means any consideration on for

employment provided by way of: “any privilege, service, facility

or amenity, directly or indirectly provided by an employer

whether by way of reimbursement or otherwise to his employees

(including employee or employees).” However, the privilege,

service, facility or amenity does not include pre requisites in

respect of which tax is paid or payable by the employee.

The main provisions of this chapter are as under:

Employer (section 115W): For the purpose of FBI, the term

employer means AOP or BOI, whether incorporated or not, a

firm, a company, a local authority: and every artificial juridicial

person, not falling within any one of the preceding items who is

not liable to pay FBI.

An individual; or Hindu Undivided Family; or a person

whose income is exempted under section 10(23C); or a person

who is registered under section 12AA; or a political party person

who is not an employer; or a person who has no employee

based in India.