Corporate Tax Planning AY 2020-21 Sem V B.ComH - Naveen Mittal

University of Delhi – B.Com.
(H) Sem V
Corporate Tax Planning
By Dr. Naveen Mittal
AY 2020-21
Session started from 10 August 2020 and Ended on 28 November 2020
COVID-19 Situation
Lecture 3
Double Taxation Relief [AY 2020-21 (PY 2019-20)]
90(1), 90(2), 90A(1), 90A(2),
Incidence of Tax [Sec. 5]

Income is accrued outside India/ Received outside India: Rs. 7,00,000
ROR: Taxable
RNoR: Depends whether it is from business/ profession and if the business/ profession
is controlled (or set up) in India: Taxable; otherwise, exempt
NR: Not Taxable
Case of double taxation and why do we need double taxation relief?

Example:
Mr. X (ROR and age is 67 years) during the PY 2019-20 has a rental income from a house in
Delhi Rs. 6,00,000 and Rs. 7,00,000 the income accrued in USA (and also received there).
Suppose, the tax rate in India is 40% and in USA the tax rate is 60%.
Solution:
Income accrued as well as received outside India 7,00,000
USA [60%] 4,20,000

India [40%] 2,80,000
Total tax 7,00,000
Remaining income in your hand Nil
That is why, we need double taxation relief.
Double taxation relief can be given under section 90, 90A and 91.
Section 90 and 90A are having theory applications and section 91 is having numerical
applications as has been explained below –
Section 91
Conditions:
1. Resident
2. Accrued as well as received outside India (income is not deemed to accrue in India
under section 9)
3. Income is earned in the country with which no DTAA is signed
4. Tax has been paid in that country on such income.
Relief under section 91(1) = Doubly taxed income* Lower of IRT/ FRT
Example 1 (Section 91):

Mr. X (ROR and age is 67 years) during the PY 2019-20 has a rental income from a house in
Delhi Rs. 6,00,000 and Rs. 7,00,000 the income accrued in USA (and also received there).
Tax paid in foreign country is Rs. 1,35,980. Compute the amount of tax payable by Mr. X for
the AY 2020-21.
Solution:
www.srcc.edu/e-resources Page 1 of 76
Step 1: Computation of total income of Mr. X for the AY 2020-21:
IFHP [Rs. 6,00,000 – 30% of Rs. 6,00,000] 4,20,000
IFOS:
Income accrued as well as received outside India 7,00,000
Gross total income 11,20,000
Less: Deductions under section 80 Nil
Total income 11,20,000
Step 2: Computation of tax liability of Mr. X for the AY 2020-21:

Tax on Rs. 11,20,000
[Rs. 1,10,000 + 30% of Rs. 1,20,000] 1,46,000
Less: Rebate under section 87A
(not applicable because TI exceeds Rs. 5,00,000) Nil
1,46,000
Add: Surcharge
(Nil because TI does not exceed Rs. 50 lakhs) Nil
1,46,000
Add: Cess @ 4% 5,840
1,51,840
Step 3: Compute IRT as well as FRT:

IRT = Tax liability in Step 2* 100
Total income as per Step 1
Therefore, IRT = Rs. 1,51,840* 100 = 13.56%

Rs. 11,20,000
FRT = Tax paid in foreign country * 100

Total income of foreign country
Therefore, FRT = Rs. 1,35,980* 100 = 19.43%

Rs. 7,00,000
Step 4: Compute relief under section 91(1):

Therefore relief = Rs. 7,00,000*13.56%
= Rs. 94,920
Step 5: Tax payable in India = Step 2 – Step 4

= Rs. 1,51,840 – Rs. 94,920
= Rs. 56,920
Lecture 4
Mr. Y (ROR and age is 67 years) during the PY 2019-20 has earned a royalty income of Rs.
6,00,000 in France (and also received there). Tax paid in foreign country is Rs. 1,20,000. His
taxable salary is Rs. 8,00,000 in India. Compute the amount of tax payable by Mr. Y for the
AY 2020-21.
Solution:
Step 1: Computation of total income of Mr. Y for the AY 2020-21:
Salary income 8,00,000
IFOS:
Royalty income 6,00,000
Less: Deduction under section 80QQB 3,00,000
Step 2: Computation of tax liability of Mr. Y for the AY 2020-21:

Tax on Rs. 11,00,000
[Rs. 1,10,000 + 30% of Rs. 1,00,000] 1,40,000
1,40,000
Add: Surcharge
1,40,000
Add: Cess @ 4% 5,600
1,45,600

Therefore, IRT = Rs. 1,45,600* 100 = 13.24%

Rs. 11,00,000

Therefore, FRT = Rs. 1,20,000* 100 = 20%

Rs. 6,00,000

= Rs. 39,720
Here, the foreign income is Rs. 6,00,000 out of which Rs. 3,00,000 is allowed deduction under
section 80QQB and thus, the doubly taxes income becomes Rs. 3,00,000 [Rs. 6,00,000 – Rs.
3,00,000 (Deduction under section 80QQB)].

= Rs. 1,45,600 – Rs. 39,720
= Rs. 1,05,880
How to compute 80QQB?

Case 1:
Lump sum basis received Rs. 7,00,000
Deduction under section 80QQB Rs. 3,00,000
Case 2:
18% received [Rs. 9,00,000]
On 15% basis, the royalty received would have been
[Rs. 9,00,000/18*15] Rs. 7,50,000
Deduction under section 80QQB
[Rs. 7,50,000 or Rs. 3,00,000; Lower] Rs. 3,00,000

Mr. K (ROR and age is 83 years) during the PY 2019-20 has earned a rental income of Rs.
12,00,000 in France (and also received there). Tax paid in foreign country is Rs. 1,20,000 on
this income. His taxable salary is Rs. 1,00,000 in India. Compute the amount of tax payable by
Mr. K for the AY 2020-21 assuming he has deposited Rs. 1,60,000 in his PPF account and
donated Rs. 20,000 towards PM CARES Fund during 2019-20.
Solution:
Step 1: Computation of total income of Mr. K for the AY 2020-21:
HP [Rs. 12,00,000 – 30% (Standard deduction) 8,40,000
Less: Deduction under section 80C 1,50,000*
less: Deduction under section 80G [Rs. 20,000*100%] 20,000
* The total amount of deductions under section 80CCC, 80C and 80CCD(1) cannot
exceed Rs. 1,50,000.
Step 2: Computation of tax liability of Mr. K for the AY 2020-21:

Tax on Rs. 7,70,000
[20% of (Rs. 7,70,000 – Rs. 5,00,000)] 54,000
54,000
Add: Surcharge
54,000
Add: Cess @ 4% 2,160
56,160

Therefore, IRT = Rs. 51,160* 100 = 7.29%

Rs. 7,70,000

Therefore, FRT = Rs. 1,20,000* 100 = 10%

Rs. 12,00,000
= Rs. 56,133
Here, the doubly taxed income is Rs. 8,40,000 but the total income is only Rs. 7,70,000 and
thus, relief under section 91(1) cannot be allowed on more than Rs. 7,70,000.

= Rs. 56,160 – Rs. 56,133
= Rs. 30 (Rounded off)
But in real life, when you will furnish the return of income, tax payable will be Nil.
Lecture 5
Mr. Faisal (ROR and age is 83 years) during the PY 2019-20 has earned a rental income of Rs.
12,00,000 in France (and also received there). Tax paid in France is Rs. 1,20,000 on this
income. He also earned a business income of Rs. 8,00,000 from Germany (and also received
there) on which he has paid the tax of Rs. 2,40,000. His taxable salary is Rs. 1,00,000 in India.
Compute the amount of tax payable by Mr. Faisal for the AY 2020-21 assuming he has
deposited Rs. 1,60,000 in his PPF account and donated Rs. 20,000 towards PM CARES Fund
during 2019-20. Further, he has already paid Rs. 11,000 as advance tax for the PY 2019-20.
Solution:
Step 1: Computation of total income of Mr. Faisal for the AY 2020-21:
HP [Rs. 12,00,000 – 30% (Standard deduction)] 8,40,000
PGBP 8,00,000
less: Deduction under section 80G [Rs. 20,000*100%] 20,000
Step 2: Computation of tax liability of Mr. Faisal for the AY 2020-21:

Tax on Rs. 15,70,000
[Rs. 1,00,000 + 30% of (Rs. 15,70,000 – Rs. 10,00,000)] 2,71,000
2,71,000
Add: Surcharge
2,71,000
Add: Cess @ 4% 10,840
2,81,840

Therefore, IRT = Rs. 2,81,840* 100 = 17.95%
Rs. 15,70,000
FRT= Tax paid in foreign country * 100

Therefore, FRT(France) = Rs. 1,20,000* 100 = 10%

Rs. 12,00,000
and
FRT(Germany) = Rs. 2,40,000* 100 = 30%
Rs. 8,00,000

Therefore relief(France) = Rs. 8,40,000*10%
= Rs. 84,000
and relief(Germany) = Rs. 8,00,000*17.95%
= Rs. 1,43,600
Total amount of relief under section 91(1) = Rs. 2,27,600 [Rs. 84,000 + Rs. 1,43,600].
Step 5: Tax payable in India = Step 2 – Step 4 – Prepaid taxes

= Rs. 2,81,840 - Rs. 2,27,600 – Rs. 11,000
= Rs. 43,240 (Rounded off)
Clarification is required in Example 4 because total of doubly taxed income exceeds the total
income.

Mr. Khan (ROR and age is 73 years) during the PY 2019-20 has earned a rental income of Rs.
12,00,000 in South Korea (and also received there). Tax paid in South Korea is Rs. 1,80,000
on this income. He also earned a business income of Rs. (8,00,000) from Canada (and also
received there). His taxable salary is Rs. 1,00,000 in India and interest from fixed deposits is
Rs. 9,00,000 in India. Compute the amount of tax payable by Mr. Khan for the AY 2020-21
assuming he has deposited Rs. 1,60,000 in his PPF account and has already paid Rs. 11,000 as
advance tax for the PY 2019-20.
Solution:
Step 1: Computation of total income of Mr. Khan for the AY 2020-21:
HP [Rs. 12,00,000 – 30% (Standard deduction)] 8,40,000
PGBP (Provisions of set-off applied) (8,00,000)
IFOS: Interest from fixed deposits 9,00,000
Deduction under section 80TTB 50,000
Step 2: Computation of tax liability of Mr. Khan for the AY 2020-21:

Tax on Rs. 8,40,000
[Rs. 10,000 + 20% of (Rs. 8,40,000 – Rs. 5,00,000)] 78,000
78,000
Add: Surcharge
78,000
Add: Cess @ 4% 3,120
81,120

Therefore, IRT = Rs. 81,120* 100 = 9.66%

Rs. 8,40,000
FRT= Tax paid in foreign country * 100

Therefore, FRT(South Korea) = Rs. 1,80,000* 100 = 15%

Rs. 12,00,000

Therefore relief(South Korea) = Rs. 8,40,000*9.66%
= Rs. 81,144
Step 5: Tax payable in India = Step 2 – Step 4 – Prepaid taxes

= Rs. 81,120 – Rs. 81,144* (Rounded off Issue) – Rs. 11,000
= Rs. (11,000)
There is a refund of Rs. 11,000.
Lecture 6
Example 6:
X (28 years) is ROR in India. His income is Rs. 3,46,000 from a business in India and Rs.
1,92,000 from a business in a foreign country with whom India has an ADT agreement.
According to ADT (Avoidance of Double Taxation) agreement, income is taxable in the
country in which it is earned and not in the other country. However, in the other country, such
income can be included for computation of tax rate. According to the tax laws of the foreign
country, business income of Rs. 1,92,000 is taxable @ 23 percent. During the previous year, X
has deposited Rs. 42,000 in his public provident fund account (out of which Rs. 10,000 is
deposited out of foreign income). He has also received an interest of Rs. 32,000 on Government
Securities. Find out X’s tax liability under the Income Tax Act for the assessment year 2020-
21. (Delhi 2008)
Solution:
Step 1: Computation of Net Taxable Income of X for the assessment year 2020-21:
Particulars Amount (Rs.)
Business Income 3,46,000
Income from other sources 32,000
Indian Income 3,78,000
Add: Foreign Income 1,92,000
Gross Total Income (GTI) 5,70,000
Less: Deductions under section 80C 42,000
Net Taxable Income (NTI) 5,28,000
Step 2: Tax on NTI of Rs. 5,28,000 of X for the assessment year 2020-21:
Amount (Rs.)
[Rs. 12,500 + 20% (Rs. 5,28,000 - Rs. 5,00,000)] 18,100
Add: Surcharge NIL
Total 18,100
Add: Cess @ 4% 724
Net tax liability 18,824
𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)

Step 3: Indian Rate of Tax (IRT) =𝑁𝑒𝑡 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑜𝑓 𝑠𝑡𝑒𝑝 (1) * 100
18,824/5,28,000 * 100 = 3.57%
Foreign Rate of Tax = 23%
Step 4: Relief under section 91 = Rs. 1,92,000 * 3.57% = Rs. 6,854
Step 5: Net tax to be paid in India by X for the assessment year 2020-21
= Rs. 18,824 – Rs. 6,854 = Rs. 11,970 (Rounded off)
Note: Deduction of PPF has no relation with foreign income.
Example 7:
Mr. C (age: 47 years), an Indian resident has derived the following income during the previous
year 2019-20: Amount (Rs.)
Income from profession 4,94,000
Share of profit from a partnership firm in Singapore 50,000
(Tax paid in Singapore for his income in equivalent Rupees is Rs. 10,000)
Interest from bank deposits in India 28,000
Mr. C, wants to know whether he is eligible for any double tax relief and if so, its quantum.
Also, tell Mr. C the amount of tax to be payable by him. India does not have any double taxation
avoidance agreement with Singapore. Mr. C has paid Rs. 7,000 as advance tax.
(Delhi 2007)
Solution:
Step 1: Computation of total income of Mr. C for the assessment year 2020-21:
Rs.
PGBP
Income from profession 4,94,000
Share of profit from a firm 50,000 5,44,000
Add: Income from other sources (Interest) 28,000
Gross total income/ Total income 5,72,000
Step 2: Computation of tax payable by Mr. C for the assessment year 2020-21:
Tax (including cess) on Rs. 5,72,000 [12,500 + 20% of (5,72,000 – 5,00,000)]
27,976
Step 3: IRT = Tax computed in step (2)/Total income under step (1)* 100
= 27,976/ 5,72,000* 100 = 4.90%
FRT = Tax paid in foreign country/ Foreign Income
= 10,000/ 50,000* 100 = 20%
Step 4: Relief under section 91(1) = Double Taxed income* Lower of IRT or FRT
50,000* 4.90% = 2,450
Step 5: Tax payable by Mr. C = Tax in step (2) – Relief under section 91(1) – Prepaid Taxes
= 27,976 – 2,450 – 7,000
= 18,530 (Rounded off)
Lecture 7
Specific Management Decisions
Situation 1: Purchase of an asset from own money or from borrowed money

Situation 2: Purchase of an asset or take it on lease
Situation 3: Make the product or Buy it
Situation 4: Shut down or continue
How do we decide in different situations?
Purchase of an asset from own money

For example, the machine is costing Rs. 1,00,000 and the expected life of the machine is 10
years. After 10 years, the machine will be discarded at Rs. 3,000.
Calculation of net cash outflow:
Rs.
Investment in the beginning of Year 1 XX 1,00,000
Less: PV of Tax savings on Depreciation XX
Less: PV of Sale value at the end of the useful life XX 3,000
Less: PV of Tax savings on STCL XX
Add: PV of Tax loss on STCG XX
Net cash outflow XXX
Year 1 Year 2 (Beginning) Year 10

(Beginning) Depreciation (End)
1,00,000 15,000 3,000
Note 1:
Year 1 (Beginning) = Year 0 (End)
Note 2:
Understanding the tax saving on any expenditure which is allowed as deduction under the head
PGBP:
WDV Depreciation Tax rate [30%]
Year 1 1,00,000 15,000
Profits 10,00,000 10,00,000
Less: Depreciation Nil 15,000
Taxable Profits 10,00,000 9,85,000
Tax [30%] 3,00,000 2,95,500
Tax saving [3,00,000 – 2,95,500] = Rs. 4,500 [Rs. 15,000*30%] which is
exactly equal to [Depreciation x Tax Rate]
Note 3:
Computation of depreciation under section 32:
WDV of the block on 1st day of the PY XX
Add: Actual cost of the asset acquired and put to use during the PY XX
XX
Less: Net sale value of any asset of that block during the PY
[Sale – Expenses on sale] XX
WDV of the block on 31st March of the PY XX
Less: Depreciation for the PY XX
WDV of the block on 1st day of the next year XX
Note 4:
Computation of capital gain in case of depreciable assets [Sec. 50]:
In case of depreciable assets, the capital gain/ loss is always short-term computed under section
50(1) or section 50(2), as the case may be.
Applicability of section 50(1):

Net sale value of any asset of that block during the PY
Less: WDV of the block on 1st day of the PY XX
Actual cost of the asset acquired and put to use during the PY XX
STCG [50(1)] XX
Section 50(1) is applicable only and only when Net sale exceeds the total of opening WDV +
Actual cost of asset acquired and put to use during the PY. Thus, section 50(1) always given
me a STCG.
Applicability of section 50(2):

Net sale value of any asset of that block during the PY
Less: WDV of the block on 1st day of the PY XX
Actual cost of the asset acquired and put to use during the PY XX
STCG [50(2)] XX
Section 50(2) is applicable only and only when block of assets ceases to exist on the last day
of the relevant previous year. Thus, section 50(2) can give a STCG or a STCL.
Lecture 8
Example:
A company is thinking of purchasing a machine for Rs. 1,00,000 having an expected useful life
of 10 years. The machine is expected to be discarded at the end of 10th year for Rs. 3,000. The
machine is eligible for depreciation @ 15% under section 32. Ignore additional depreciation.
Compute the cash outflow assuming the effective tax rate is 34.944% [30% + 12% + 4%]. The
cost of capital is 10%.
Solution:
Done in Excel
Lecture 9
Purchase of an asset from borrowed money

Rs.
PV of Interest Payments XX
PV of Principal Payments XX
Gross cash outflow XX
Less: PV of Tax Savings on Interest payment XX
Less: PV of Tax savings on Depreciation XX
Less: PV of Sale value at the end of the useful life XX
Less: PV of Tax savings on STCL XX
Add: PV of Tax loss on STCG XX
Net cash outflow XXX
Year 1 Year 2 (Beginning) Year 10

(Beginning) Depreciation (End)
15,000 3,000
Interest Payment Interest
` +
Principal
Down Interest
Payment Rs. 10,800 [Rs. 90,000*12%]
10,000 Principal [Rs. 90,000/10]
Rs. 9,000
Example:
A company is thinking of purchasing a machine for Rs. 1,00,000 having an expected useful life
of 10 years. The machine is expected to be discarded at the end of 10th year for Rs. 3,000. The
machine is eligible for depreciation @ 15% under section 32. Ignore additional depreciation.
The machine will be purchased from borrowed amount. Down payment will be Rs. 10,000 and
remaining amount will be taken as a loan @ 12% p.a. Further, principal will also be paid
equally at every year end during the loan term of 10 years. Compute the cash outflow assuming
the effective tax rate is 34.944% [30% + 12% + 4%]. The cost of capital is 10%.
Solution:
Done in Excel
Lecture 10
Taking the asset on lease

Rs.
PV of lease rent + PV of Lease Fee/ Gross cash outflow XX 1,04,385
Less: PV of tax savings on lease rent paid/ payable XX
[Rs. 1,04,385*34.944%] 36,476
Net cash outflow XXX 67,909
Year 1 Year 2 Year 10
Example:
A company is thinking of taking a machine on lease rent of Rs. 15,000 per year for 10 years.
Lease management fee of Rs. 3,000 is payable at the beginning only. Compute the cash outflow
assuming the effective tax rate is 34.944% [30% + 12% + 4%]. The cost of capital is 10%.
Solution:
Year Lease Lease rent Total (a) PV (.10) Total PV

(Beginning) management (Rs.) (b) of Lease
fee (Rs.) [(a)*(b)]
1 3,000 15,000 18,000 1 18,000
2 ---- 15,000 15,000 0.909 13,636
3 ---- 15,000 15,000 0.826 12,397
4 ---- 15,000 15,000 0.751 11,270
5 ---- 15,000 15,000 0.683 10,245
6 ---- 15,000 15,000 0.621 9,314
7 ---- 15,000 15,000 0.564 8,467
8 ---- 15,000 15,000 0.513 7,697
9 ---- 15,000 15,000 0.467 6,998
10 ---- 15,000 15,000 0.424 6,361
1,04,385
Choosing between Make the component/ product or buy it from the market:
Relevant cost when you make:
All Variable costs + Fixed cost (only if these are incurred additionally)
Relevant cost when you buy:
Purchasing price
Example:
XYZ Ltd. needs a component in an assembly operation. It is contemplating a proposal to either
make or buy the aforesaid component.
1. If the company decides to make the component itself, it would need to buy a machine
for Rs. 8 lakhs which would be used for 5 years. Manufacturing costs in each of the 5
years would be Rs. 12 lakhs, Rs. 14 lakhs, Rs. 16 lakhs, Rs. 20 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.
2. If the company decides to buy the component from the supplier, the component would
cost Rs. 18 lakhs, Rs. 20 lakhs, Rs. 22 lakhs, Rs. 28 lakhs and Rs. 34 lakhs respectively
in each of the five years.
The relevant discounting rate and tax rate are 14% and 34.944% respectively. Additional
depreciation is not available. Should XYZ Ltd. make the component or buy it from outside?
(Delhi 2010; 15 marks)
Solution:
If buy the component from the market (assuming the cost is incurred at year end):
Rs.
PV of Buying cost 80,26,498
Less: Tax savings on PV of Buying cost
[Rs. 80,26,498*34.944%] 28,04,779
Net cash outflow 52,21,719
If make the component (assuming the manufacturing cost is incurred at year end):
Rs.
PV of the Cost of the Machine [Rs. 8,00,000*1] 8,00,000
PV of Manufacturing cost 56,92,423
Less: PV of Tax savings on Depreciation
[Rs. 3,18,436*34.944%] 1,11,274
Less: PV of Sale value [Rs. 1,00,000*0.519] 51,900
Less: Tax savings on PV of Manufacturing cost
[Rs. 56,92,423*34.944%] 19,89,160
Net cash outflow 43,40,089
Conclusion:
It is better to manufacture the component in own factory because it results in cash savings of
Rs. 8,81,630 [Rs. 52,21,719 – Rs. 43,40,089]. Apart from this extra cash inflow, the company
can claim the benefit of tax savings on STCL of Rs. 40,627 [Rs. 2,54,964 (Rs. 1,00,000 – Rs.
3,54,964)*34.944%*0.456] in the sixth year provided it has an equal amount of STCG also.
Further, if it assumed that there a long-term capital gain, then the net tax benefit will be will be
Rs. 24,183 [Rs. 2,54,964*20.8%*0.456].
Clarification of doubt raised by a participant –

PY 2020-21 12,00,000 1 April 2020 1
PY 2021-22 14,00,000 1 April 2021 .877
PY 2022-23 16,00,000 1 April 2022 .769
PY 2023-24 20,00,000 1 April 2023 .675
PY 2024-25 25,00,000 1 April 2024 .592
PY 2025-26 (1,00,000) 1 April 2025 .519
Choosing between Repair or shut down the machine:

Depends upon case to case
Lecture 11
Business Restructuring
Some of the common examples of business restructuring for the purpose of taxation are:
1. Amalgamation
[Sec. 2, 72A and Relevant section of the topic ‘PGBP’]
2. Demerger
3. Slump sale
4. Conversion of firm into a company
5. Conversion of sole proprietorship into a company
6. Transfer of assets between holding company and a subsidiary company
Amalgamation [Sec. 2(1B)]
X Ltd. [Amalgamating Company]

30% shareholders of X Ltd. are already the shareholders in Y Ltd.
[70%*75% = 52.5% of the total shareholders] must agree for amalgamation.
Y Ltd. [Amalgamated Company]
If amalgamation is valid under section 2(1B):

All the benefits mentioned under different provisions and allowed to the amalgamating
company would now be allowed to the amalgamated company.
Lecture 12
Case 12 [20]:
X owns a block of assets (consisting of plants A and B, depreciation rate is 15%). On April 1,
2019, WDV of block of assets is Rs. 10,40,000. On July 7, 2019, block of assets is transferred
to Y by X in a scheme of amalgamation for Rs. 30,70,000. Find out tax consequences as well
as the amount of depreciation allowed, in the following two cases:
1. X is an amalgamating company and Y is an Indian amalgamated company and the block
of assets is transferred by X to Y in scheme of amalgamation as per section 2(1B). Y
does not own any other asset.
2. Y is a foreign amalgamated company (assume in the aforesaid case).
(Delhi 2010, 6 marks)
Solution:
Section 47(vi): Any transfer, in a scheme of amalgamation, of a capital asset by the
amalgamating company to the amalgamated company if the amalgamated company is an
Indian company.
1.
(a) Depreciation: Rs. 41,344 [Rs. 1,56,000/366*97].
(b) X is not required to compute any capital gain on transfer of the block because transfer to an
Indian amalgamated company is not treated as transfer.
(c) Compute WDV of the block on 1/04/2020 (in the hands of Y):
WDV of the block on 1/04/2019 Nil
Add: Cost of assets acquired (Y) Nil
Block Acquired 10,40,000
10,40,000
Less: Sale (Y) Nil
WDV of the block on 31/03/2020 10,40,000
Less: Depreciation for PY 2019-20 1,14,656
2.
(a) Depreciation: Rs. 1,14,656 [Rs. 1,56,000/366*269]
(b) Computation of capital gain in the hands of X [Sec. 50(2)]
Sale 30,70,000
Less: Expenses on sale Nil
Less: WDV on 1/04/2019 10,40,000
Less: Actual cost acquired Nil
STCG 20,30,000
(c) Compute WDV of the block on 1/04/2020 (in the hands of Y):
WDV of the block on 1/04/2019 Nil
Add: Cost of assets acquired (Y) Nil
Block Acquired 30,70,000
30,70,000
Less: Sale (Y) Nil
Less: Depreciation for PY 2019-20 1,14,656
Lecture 13
Case 1 [20]:
A Ltd. (an industrial undertaking) wants to amalgamate with B Ltd. (an Indian Company) on
June 30, 2020. You are required to find out the tax implications in respect of the following
losses/ allowances of A Ltd. in the assessment of B Ltd. (i.e., amalgamated company).
1. Unabsorbed depreciation allowance of the previous year 2018-19: Rs. 98,000;
2. Brought forward business loss of the previous year 2012-13: Rs. 15,00,000;
3. Brought forward capital loss Rs. 30,000 of the previous year 2018-19;
4. Brought forward speculative loss: Rs. 70,000 of the previous year 2018-19.
5. A Ltd. incurred capital expenses of Rs. 4,00,000 in 2017-18 for promoting family planning
amongst its employees. The company could not claim deduction in respect of such expenses in
previous years 2018-19 and 2019-20.
Solution:
It is a case of tax planning and thus, provisions applicable for assessment year 2021-22 are
discussed. Tax implications:
1. Unabsorbed depreciation of Rs. 98,000 of the amalgamating company (A Ltd.) can be treated
as the unabsorbed depreciation of the amalgamated company (B Ltd.) provided conditions of
section 2(1B) as well as section 72A are satisfied. Further, this unabsorbed depreciation can be
adjusted up to unlimited number of years by the amalgamated company as per the rules of set
off or carry forward and set off of losses.
2. The brought forward business loss (if non-speculative in nature) of Rs. 15,00,000 of the
amalgamating company (A Ltd.) can be treated as the business loss of the PY 2020-21, i.e., the
year in which the amalgamation is effected. The amalgamated company (B Ltd.) can adjust
this loss in the PY 2020-21 and if not fully adjusted, it can carry it forward till the PY 2028-29
and set off.
It is necessary that conditions of section 2(1B) as well as section 72A are satisfied.
3. Capital losses cannot be transferred to the amalgamated company even if conditions of
section 2(1B) as well as section 72A are satisfied.
4. Speculative losses cannot be transferred to the amalgamated company even if conditions of
section 2(1B) as well as section 72A are satisfied.
5. Capital expenses on family planning is allowed as deduction in 5 equal annual instalments.
Each installment is Rs. 80,000 [Rs. 4,00,000/5].
PY 2017-18: Claimed [A Ltd.]
PY 2018-19: Could not claim because there must have been insufficient profits [A Ltd.] Rs.
80,000
PY 2019-20: Could not claim because there must have been insufficient profits [A Ltd.] Rs.
80,000
PY 2020-21: Amalgamation took place. In this year, the amalgamating company has
unabsorbed depreciation of Rs. 1,60,000.
Unabsorbed depreciation of Rs. 1,60,000 of the amalgamating company (A
Ltd.) can be treated as the unabsorbed depreciation of the amalgamated
company (B Ltd.) provided conditions of section 2(1B) as well as section 72A
are satisfied. Further, this unabsorbed depreciation can be adjusted up to
unlimited number of years by the amalgamated company as per the rules of set
off or carry forward and set off of losses.
Rs. 80,000 as Capital expenses on family planning
This expense can be treated as the expense of the amalgamated company (B
Ltd.) provided conditions of section 2(1B) are satisfied.
P&L Account of B Ltd.
Capital Expenses on F/P 80,000
PY 2021-22: Rs. 80,000 as Capital expenses on family planning

This expense can be treated as the expense of the amalgamated company (B
Ltd.) provided conditions of section 2(1B) are satisfied
P&L Account of B Ltd.
Gross Profit 60,000
Capital Expenses on F/P 60,000
Unabsorbed deprecation 20,000
Demerger
Valid demerger [Sec. 2(19AA)]
Benefits to the demerged company

Benefits to the shareholders of demerged company
Benefits to the resulting company
Pending point is:

Shareholders of demerged company will demand stake in the resulting company.
To give shares to the shareholders of demerged company, it is necessary to know the Net Worth
of the undertaking of the demerged company.
Tomorrow, I will discuss the calculation of net worth of the undertaking/ unit of the demerged
company.
Lecture 14
Case 14 [20]:
From the following information determine the value of shares to be issued by resulting
company to the shareholders of demerged company (D company) assuming unit I is proposed
to be demerged:
Balance Sheet of D Company
Unit I Unit II Head Office Total
(Common to
both units)
Rs. Rs. Rs. Rs.
Assets:
Fixed Assets (WDV) 15,00,000 20,00,000 3,00,000 38,00,000
Current Assets 7,00,000 8,00,000 2,00,000 17,00,000
Total 22,00,000 28,00,000 5,00,000 55,00,000
Liabilities:
Share Capital:
2,50,000 Shares of Rs.10 each ---- ---- 25,00,000 25,00,000
General Reserve ---- ---- 10,00,000 10,00,000
Loans 3,00,000 6,00,000 3,00,000 12,00,000
Current Liabilities 2,00,000 4,00,000 2,00,000 8,00,000
Total 5,00,000 10,00,000 40,00,000 55,00,000
Also determine the value of shares to be allotted by the resulting company to a shareholder of
demerged company who is holding 100 shares of Rs. 10 each in the demerged company.
Solution:
Net Worth of Demerged company [Unit I]:
Specific Assets of Unit I 22,00,000
Less: Specific Liabilities of Unit I 5,00,000
Less: Common Liabilities share of Unit I
[5,00,000* 22,00,000]
55,00,000 2,00,000
Net Worth of Unit I 15,00,000
Therefore, the value of shares to be issued by the resulting company = Rs. 15,00,000
Value of shares to be allotted to a shareholder having 100 shares:

100/2,50,000* 100 = 0.0004% of the total shareholding
Therefore, I will get Rs. 600 [Rs. 15,00,000*0.0004%] worth of shares.
Rs. 600 can be distributed as 100 shares * Rs. 6 per share (or Rs. 60 shares * Rs. 10 share).
Section 2(19AA) "demerger", in relation to companies, means the transfer, pursuant to a

scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of
1956), by a demerged company of its one or more undertakings to any resulting
company in such a manner that—
(i) all the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting
company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged
company, immediately before the demerger, become the liabilities of the
resulting company by virtue of the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being
transferred by the demerged company are transferred at values appearing in its
books of account immediately before the demerger:
4
[Provided that the provisions of this sub-clause shall not apply where the
resulting company records the value of the property and the liabilities of the
undertaking or undertakings at a value different from the value appearing in the
books of account of the demerged company, immediately before the demerger,
in compliance to the Indian Accounting Standards specified in Annexure to the
Companies (Indian Accounting Standards) Rules, 2015;]
(iv) the resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis except where
the resulting company itself is a shareholder of the demerged company;
(v) the shareholders holding not less than three-fourths in value of the shares in the
demerged company (other than shares already held therein immediately before
the demerger, or by a nominee for, the resulting company or, its subsidiary)
become shareholders of the resulting company or companies by virtue of the
demerger,
otherwise than as a result of the acquisition of the property or assets of the
demerged company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under sub-
section (5) of section 72A by the Central Government in this behalf.
Explanation 1.—For the purposes of this clause, "undertaking" shall include any part
of an undertaking, or a unit or division of an undertaking or a business activity taken
as a whole, but does not include individual assets or liabilities or any combination
thereof not constituting a business activity.
Explanation 2.—For the purposes of this clause, the liabilities referred to in sub-clause
(ii), shall include—
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and
utilised solely for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the
amounts of general or multipurpose borrowings, if any, of the demerged
company as stand in the same proportion which the value of the assets transferred
in a demerger bears to the total value of the assets of such demerged company
immediately before the demerger.
Explanation 3.—For determining the value of the property referred to in sub-clause
(iii), any change in the value of assets consequent to their revaluation shall be ignored.
(19AAA) "demerged company" means the company whose undertaking is transferred,
pursuant to a demerger, to a resulting company;
Slump Sale:
Section 2(42C) "slump sale" means the transfer of one or more undertakings as a result of
the sale for a lump sum consideration without values being assigned to the individual
assets and liabilities in such sales.
Explanation 1.—For the purposes of this clause, "undertaking" shall have the meaning
assigned to it in Explanation 1 to clause (19AA).
Explanation 2.—For the removal of doubts, it is hereby declared that the determination
of the value of an asset or liability for the sole purpose of payment of stamp duty,
registration fees or other similar taxes or fees shall not be regarded as assignment of
values to individual assets or liabilities ;
Special provision for computation of capital gains in case of slump sale [Sec. 50B]
(1) Any profits or gains arising from the slump sale effected in the previous year shall be
chargeable to income-tax as capital gains arising from the transfer of long-term capital assets
and shall be deemed to be the income of the previous year in which the transfer took place :
Provided that any profits or gains arising from the transfer under the slump sale of any capital
asset being one or more undertakings owned and held by an assessee for not more than
thirty-six months immediately preceding the date of its transfer shall be deemed to be the
capital gains arising from the transfer of short-term capital assets.
(2) In relation to capital assets being an undertaking or division transferred by way of such sale,
the "net worth" of the undertaking or the division, as the case may be, shall be deemed to
be the cost of acquisition and the cost of improvement for the purposes of sections
48 and 49 and no regard shall be given to the provisions contained in the second proviso
to section 48.
Explanation 1.—For the purposes of this section, "net worth" shall be the aggregate value of
total assets of the undertaking or division as reduced by the value of liabilities of such
undertaking or division as appearing in its books of account :
Provided that any change in the value of assets on account of revaluation of assets shall be
ignored for the purposes of computing the net worth.
Explanation 2.—For computing the net worth, the aggregate value of total assets shall be,—
(a) in the case of depreciable assets, the written down value of the block of assets determined
in accordance with the provisions contained in sub-item (C) of item (i) of sub-clause (c)
of clause (6) of section 43;
(b) in the case of capital assets in respect of which the whole of the expenditure has been
allowed or is allowable as a deduction under section 35AD, nil; and
(c) in the case of other assets, the book value of such assets.
Case 15 [20]:
A started a unit on 7 July 2016. The Balance Sheet of the unit on 31.03.2020 is as under:
Liabilities Rs. Assets Rs.
Creditors 2,50,000 Debtors 2,00,000
Bills Payable 1,50,000 Stock 2,50,000
Revaluation Reserve 6,00,000 Bills Receivable 50,000
Capital 13,00,000 Plant and Machinery (WDV) 3,00,000
Building (WDV) 5,00,000
Land (purchased on 1.2.2019) 10,00,000
23,00,000 23,00,000
Other information:
a. Land was revalued in 2020 and the amount was credited to Revaluation Reserve
Account.
b. Sold the unit on 01.05.2020 for lump-sum consideration of Rs. 20,00,000.
Compute the capital gains in slump sale. (Delhi 2010, 5 marks) [Ans. Rs. 7,00,000]
Solution:
More than 36 months: Long-term
AY 2021-22
Sale 20,00,000
Less: Net worth
[COA + COI] 13,00,000
LTCG 7,00,000
Note: Calculation of Net worth [Assets – Liabilities]

2,00,000 + 2,50,000 + 50,000 + 3,00,000 + 5,00,000 + [10,00,000 – 6,00,000] –
2,50,000 – 1,50,000 = 13,00,000
Lecture 15
CONVERSION of firm into a company:
Section 47(xiii) Any transfer of a capital asset or intangible asset by a firm to a company
as a result of succession of the firm by a company in the business carried on by the
firm
Provided that—
(a) all the assets and liabilities of the firm or of the association of persons or body of
individuals relating to the business immediately before the succession become the
assets and liabilities of the company;
(b) all the partners of the firm immediately before the succession become the
shareholders of the company in the same proportion in which their capital
accounts stood in the books of the firm on the date of the succession;
(c) the partners of the firm do not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in
the company; and
(d) the aggregate of the shareholding in the company of the partners of the firm is
not less than fifty per cent of the total voting power in the company and their
shareholding continues to be as such for a period of five years from the date of
the succession;
Case 16 [20]:
The following is the Balance Sheet of a firm as on 31.03.2020:
Liabilities Rs. Assets Rs.
Capital Accounts Land at cost (acquired on
A 6,00,000 10.06.2013) 4,00,000
B 3,00,000
C 3,00,000 12,00,000
Creditors 4,00,000 Building (WDV) 6,00,000
Other Liabilities 2,00,000 P&M (WDV) 3,00,000
Debtors 2,00,000
Stock 3,00,000
18,00,000 18,00,000
The partners share profit/ loss in the ratio of 2:1:1.

The firm wants to be a company on 01.04.2020. Discuss what steps the firm and company
should take to avoid the tax on capital gains.
The firm revalued its assets as under for transfer to the company:
Amount (Rs.)
Land 15,00,000
Building 9,00,000
Plant & Machinery 4,00,000
Debtors 2,00,000
Stock 4,00,000
The liabilities will be transferred at the book value.
Solution:
Transferring the capital assets as well as the intangible assets in case of conversion of firm into
a company is not treated as transfer under section 47(xiii) and thus, the firm is not supposed to
compute the income under the head Capital Gains. However, to get this exemption of income
tax under the head Capital Gains, following conditions must be satisfied –
1. …………….
2. The partners must be having the shares as follows: Rs. 14,00,000 (A), Rs. 7,00,000 (B) and
Rs. 7,00,000 (C).
Capital A/C [31.03.2020]
A B C A B C
Closing 14,00,000* 7,00,000* 7,00,000* Opening 6,00,000 3,00,000 3,00,000
balance Balance
Realization 8,00,000 4,00,000 4,00,000
profit
[2:1:1]
Realization A/C
Land 4,00,000 Creditors 4,00,000
Building (WDV) 6,00,000 Other Liabilities 2,00,000
P&M (WDV) 3,00,000 PC 28,00,000
Debtors 2,00,000
Stock 3,00,000
Realization profit 16,00,000*
Calculation of Purchase Consideration:

Assets [Agreed Value]
15,00,000 + 9,00,000 + 4,00,000 + 2,00,000 + 4,00,000 34,00,000
Less: Liabilities [Agreed value]
4,00,000 + 2,00,000 6,00,000
PC 28,00,000
3. 50% or more of the shareholding must remain of these partners for at least 5 years.
4. The new company has to give shares only for Rs. 28,00,000.
How much capital gain is exempt in the hands of the firm?

Capital Assets Stock
Land 15,00,000
Building (WDV) 9,00,000
P&M (WDV) 4,00,000
Debtors 2,00,000
Stock 4,00,000
Transferred value 30,00,000 4,00,000
Less: Book Values
[4,00,000 + 6,00,000 + 3,00,000 + 2,00,000] 15,00,000 3,00,000
Capital Gain [Sec. 47(xiii) – Not a correct figure] 15,00,000
PGBP (Taxable in the hands of the firm) 1,00,000
Rs. 16,00,000 computed here is having no relation with the Realization profit of Rs.
16,00,000
Section 2(14) "capital asset" means—

(a) property of any kind held by an assessee, whether or not connected with his
business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such
securities in accordance with the regulations made under the Securities and
Exchange Board of India Act, 1992 (15 of 1992),
but does not include—
(i) any stock-in-trade [other than the securities referred to in sub-clause (b)],
consumable stores or raw materials held for the purposes of his business or
profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and
furniture) held for personal use by the assessee or any member of his family
dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
Explanation 1.—For the purposes of this sub-clause, "jewellery" includes—
(a) ornaments made of gold, silver, platinum or any other precious metal or any
alloy containing one or more of such precious metals, whether or not
containing any precious or semi-precious stone, and whether or not worked
or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil
or other article or worked or sewn into any wearing apparel.
(iii) agricultural land in India, not being land situate—
(a) in any area which is comprised within the jurisdiction of a municipality
(whether known as a municipality, municipal corporation, notified area
committee, town area committee, town committee, or by any other name)
or a cantonment board and which has a population of not less than ten
thousand; or
(b) in any area within the distance, measured aerially,—
(I) not being more than two kilometres, from the local limits of any
municipality or cantonment board referred to in item (a) and which has
a population of more than ten thousand but not exceeding one lakh; or
(II) not being more than six kilometres, from the local limits of any
a population of more than one lakh but not exceeding ten lakh; or
(III) not being more than eight kilometres, from the local limits of any
a population of more than ten lakh.
Explanation.—For the purposes of this sub-clause, "population" means the
population according to the last preceding census of which the relevant figures
have been published before the first day of the previous year;
(iv) 6 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National
Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit
certificates issued under the Gold Monetisation Scheme, 2015 notified by the
Central Government.
Explanation.—For the removal of doubts, it is hereby clarified that "property"
includes and shall be deemed to have always included any rights in or in relation
to an Indian company, including rights of management or control or any other
rights whatsoever;
CONVERSION of sole proprietary concern into a company:
Section 47(xiv) Where a sole proprietary concern is succeeded by a company in the business
carried on by it as a result of which the sole proprietary concern sells or otherwise
transfers any capital asset or intangible asset to the company :
Provided that—
(a) all the assets and liabilities of the sole proprietary concern relating to the business
immediately before the succession become the assets and liabilities of the
company;
(b) the shareholding of the sole proprietor in the company is not less than fifty per
cent of the total voting power in the company and his shareholding continues to
remain as such for a period of five years from the date of the succession; and
(c) the sole proprietor does not receive any consideration or benefit, directly or
indirectly, in any form or manner, other than by way of allotment of shares in
the company;
CONVERSION of company into LLP:

Section 47(xiiib) Any transfer of a capital asset or intangible asset by a private company or
unlisted public company (hereafter in this clause referred to as the company) to a
limited liability partnership or any transfer of a share or shares held in the company by
a shareholder as a result of conversion of the company into a limited liability
partnership in accordance with the provisions of section 56 or section 57 of the Limited
Liability Partnership Act, 2008:
Provided that—
(a) all the assets and liabilities of the company immediately before the conversion
become the assets and liabilities of the limited liability partnership;
(b) all the shareholders of the company immediately before the conversion become
the partners of the limited liability partnership and their capital contribution
and profit sharing ratio in the limited liability partnership are in the same
proportion as their shareholding in the company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit,
directly or indirectly, in any form or manner, other than by way of share in
profit and capital contribution in the limited liability partnership;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the
limited liability partnership shall not be less than fifty per cent at any time during
the period of five years from the date of conversion;
(e) the total sales, turnover or gross receipts in the business of the company in any
of the three previous years preceding the previous year in which the
conversion takes place does not exceed sixty lakh rupees;
(ea) the total value of the assets as appearing in the books of account of the company
in any of the three previous years preceding the previous year in which the
conversion takes place does not exceed five crore rupees; and
(f) no amount is paid, either directly or indirectly, to any partner out of balance of
accumulated profit standing in the accounts of the company on the date of
conversion for a period of three years from the date of conversion.
Lecture 16
TRANSFER of assets between holding and subsidiary company:
Section 47 (iv) any transfer of a capital asset by a company to its subsidiary company, if—
(a) the parent company or its nominees hold the whole of the share capital of the
subsidiary company, and
(b) the subsidiary company is an Indian company;
(v) any transfer of a capital asset by a subsidiary company to the holding company, if—
(a) the whole of the share capital of the subsidiary company is held by the holding
company, and
(b) the holding company is an Indian company :
Provided that nothing contained in clause (iv) or clause (v) shall apply to the transfer
of a capital asset made after the 29th day of February, 1988, as stock-in-trade;
Section 45(2):
Notwithstanding anything contained in sub-section (1), the profits or gains arising from the
transfer by way of conversion by the owner of a capital asset into, or its treatment by him as
stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income
of the previous year in which such stock-in-trade is sold or otherwise transferred by him and,
for the purposes of section 48, the fair market value of the asset on the date of such conversion
or treatment shall be deemed to be the full value of the consideration received or accruing as a
result of the transfer of the capital asset.
For example, converting the capital asset into stock in trade in PY 1996-97 and sells the stock
in trade in PY 2016-17, the profits and gains will be computed in the PY 2016-17 and not
when the assets were converted into stock-in-trade.
At the time of conversion, while computing income under the head Capital Gains, FMV of
the Capital Asset on the date of conversion shall be deemed to the sale value.
Section 2(47):
"transfer", in relation to a capital asset, includes,—
(iv) in a case where the asset is converted by the owner thereof into, or is treated by
him as, stock-in-trade of a business carried on by him, such conversion or
treatment ; or
Withdrawal of exemption in certain cases.

Section 47A.
(1) Where at any time before the expiry of a period of 8 years from the date of the transfer of a
capital asset referred to in clause (iv) or, as the case may be, clause (v) of section 47,—
(i) such capital asset is converted by the transferee company into, or is treated by it as, stock-
in-trade of its business; or
(ii) the parent company or its nominees or, as the case may be, the holding company ceases
or cease to hold the whole of the share capital of the subsidiary company,
the amount of profits or gains arising from the transfer of such capital asset not charged
under section 45 by virtue of the provisions contained in clause (iv) or, as the case may be,
clause (v) of section 47 shall, notwithstanding anything contained in the said clauses, be
deemed to be income chargeable under the head "Capital gains" of the previous year in which
such transfer took place.
Case 20 [20]:
S Ltd. is a wholly-owned subsidiary of A Ltd. Both are Indian companies and maintain books
of account on the basis of financial year. On April 10, 1984, S Ltd. transfers a capital asset
(i.e., unlisted shares) to A Ltd. (acquired on April 6, 1981 for Rs. 50,000, fair market value on
April 1, 2001 is Rs. 60,000) for Rs. 1,50,000. A Ltd. sells the asset on May 10, 2019 for Rs.
6,40,000. Determine the assessable profits of A Ltd. and S Ltd. under the following situations:
a. Before the sale of asset, A Ltd. has not converted it into stock-in-trade and it does not
cease to hold entire share capital of S Ltd.
b. A Ltd. has converted the capital asset into stock-in-trade before its sale on May 10,
2019 (date of conversion: June 10, 1987, fair market value: Rs. 3,10,000).
c. Though A Ltd. does not convert capital asset into stock-in-trade, it ceases to hold entire
share capital of S Ltd. on June 10, 1988 when 5% shareholding in S Ltd. is transferred
by way of sale to the public.
As per base year 1981-82, the CII for 1981-82 is 100, for 1984-85 is 125, for 1987-88 is 150
and for 1988-89 is 161. As per base year 2001-02, CII for 2019-20 is 289.
(Delhi 2014, 15 marks)
Situation (a):
Working:
S Ltd. PY 84-85 A Ltd. PY 19-20 Any
(Subsi) (Holding) Capital Asset Third Party
Rs. 50,000 Rs. 1,50,000 Rs. 6,40,000
On PY 81-82
S Ltd.: There is no need to compute capital gain by S Ltd. in the AY 1985-86 under section
47(v) because –
i) A Ltd. continues to hold entire share capital of S Ltd. and
ii) A Ltd. is an Indian company.
Since A Ltd. has neither converted the capital asset into stock in trade nor does it cease to
hold the entire share capital of S Ltd. the exemption given to S Ltd. under section 47(v) will
not be withdrawn under section 47A(1).
A Ltd.: AY 2020-21
Sale 6,40,000
Less: Indexed cost of Acquisition
[Rs. 60,000* 289] 1,73,400
100
LTCG 4,66,600
Determination of holding period to determine whether the asset is long-term or short-term:

[6 April 1981 to 9 May 2019]: More than 24 months
Sec. 49(1): Cost of asset to the previous owner:

Cost of asset to the assessee (A Ltd.) = Cost of asset to the previous owner
Rs. 50,000
Cost of Acquisition (A Ltd. ) = Cost of asset to the assessee or the FMV of the asset on 1
April 2001 (whichever is higher, depends upon the
discretion of the assessee)
= Rs. 50,000 or Rs. 60,000 (whichever is higher)
= Rs. 60,000
Lecture 17
Situation (b):
Working:
S Ltd. PY 84-85 A Ltd. PY 19-20 Any
(Subsi) (Holding) Stock Third Party
Rs. 50,000 Rs. 1,50,000 Rs. 6,40,000
On PY 81-82
PY 87-88
Conversion
From C/Asset
To Stock
FMV of C/Asset on 10 June 1987 = Rs. 3,10,000
S Ltd.:
The capital asset should not have been converted into stock in trade till 9 April 1992. But the
holding company converted it on 10 June 1987 and therefore, income under the head Capital
Gain will be computed in the hands of S Ltd. for the AY 1985-86 as follows:
AY 1985-86
Sale consideration 1,50,000
Less: Indexed cost of acquisition
[50,000 * 125] 62,500
100
LTCG 87,500
Less: Cost of Acquisition 50,000

LTCG 1,00,000
Note: Concept of indexation started from the AY 1993-94.
A Ltd.
Computation of Capital Gain for AY 2020-21:
[1,50,000* 150] 1,80,000
125
LTCG 1,30,000
Period of holding: 10 April 1984 to 9 June 1987: Long-term capital asset
Computation of PGBP for the AY 2020-21:

Sale 6,40,000
Less: Purchase value 3,10,000
PGBP 3,30,000
Situation (c)
S Ltd.:
The shareholding should not have been transferred till 9 April 1992. But the holding
company transferred 5% shareholding on 10 June 1988 and therefore, income under the head
Capital Gain will be computed in the hands of S Ltd. for the AY 1985-86 as follows:
AY 1985-86
[50,000 * 125] 62,500
100
LTCG 87,500
Less: Cost of Acquisition 50,000

LTCG 1,00,000
Note: Concept of indexation started from the AY 1993-94.
A Ltd.:
AY 2020-21
Sale 6,40,000
Less: Indexed cost of Acquisition
[Rs. 1,50,000* 289] 4,33,500
100
LTCG 2,06,500
Determination of holding period to determine whether the asset is long-term or short-term:

[10 April 1984 to 9 May 2019]: More than 24 months
Cost of Acquisition (A Ltd.) = Cost of asset to the assessee or the FMV of the asset on 1
April 2001 (whichever is higher, depends upon the
discretion of the assessee)
= Rs. 1,50,000 or Rs. 60,000 (whichever is higher)
= Rs. 1,50,000
Lecture 18
Employee Remuneration
(A topic of Tax Planning)
AY 2021-22
Salary XX
+ Allowance XX
+ Perquisites XX
Gross salary XX
- Deductions under section 16:
Standard deduction XX
Entertainment allowance XX
Tax on employment/ Professional tax XX
Taxable salary XX
Tax treatment of retirement benefits:

(1) Leave encashment:
(a) During continuity – Fully Taxable
(b) At the time of death – Fully Exempt
(c) At the time of retirement/ leaving the job:
- If a Government employee, Fully exempt
- If a non-Government employee, Least of the following is exempt:
i. AMS* Leaves standing to one’ credit (in number of months) [Leave
entitlement cannot exceeds of 30 days of actual service. Actual service/
completed year of service means any fraction of the year is ignored]
ii. Rs. 3,00,000 – Amount exempted earlier (if any)
iii. 10*AMS
iv. Leave encashment actually received
Meaning of salary:
BS + DA (FP) + Commission based on fixed percentage of turnover achieved
by the employee
Meaning of average monthly salary (AMS):

AMS is taken on the basis of 10 months immediately preceeding the
retirement. For example, if an employee retires on 31st December 2019, salary
for this purpose is taken during 1 March 2019 to 31 December 2019.
Computation of period standing to one’s credit:

Leave entitlement XX
Less: Leaves actually availed XX
Period standing to one’s credit XX
(2) Gratuity:
(a) During continuity – Fully Taxable
(b) At the time of death – ISSUES [Fully Exempt because on the basis of 2 circulars
issued by CBDT related to tax treatment of leave encashment at the time of death]
(c) At the time of retirement/ leaving the job:
- If a Government employee, Fully exempt
- If a non-Government employee,
A. Employee covered under Payment of Gratuity Act 1972
Least of the following is exempt:
i. 15 days salary last drawn based on completed years of service in excess of 6
months
ii. Rs. 20,00,000 – Amount exempted earlier
iii. Gratuity actually received
Meaning of Salary:
BS + DA (whether FP or not)
Calculation of 15 days:
Latest monthly salary * 15
26 (Maximum no. of working days)
B. Employee not covered under Payment of Gratuity Act 1972

i. Half month average salary based on completed years of service
ii. Rs. 20,00,000 – Amount exempted earlier
iii. Gratuity actually received
Meaning of Salary:
Same as that of leave encashment
10 months salary:
Salary is taken for 10 months immediately preceeding the month of
retirement.
Example, if employee retires on 31 December 2019, salary for this purpose is
taken during 1 Feb 2019 to 30 November 2019.
Calculation of half month salary:

10 Months salary = AMS
10 2
(3) Pension:
Old Pension Scheme and New Pension Scheme (NPS)
Old pension scheme:

Uncommuted pension (Monthly): Fully taxable
Commuted pension (Lump sum):

- If Government employee, Fully exempt
- If non-Government employee, depends upn the following:
(a) Whether the employee received gratuity also,
Exemption = 1/3rd of full value
(b) Whether the employee does not receive gratuity,

Exemption = 1/2th of full value
Example:
Y retired from a private job on 30 June 2020 and after retirement, he started receiving pension of Rs. 40,000 per month. On 1
February 2021, he gets 80% of the pension commuted for Rs. 16,00,000. Compute his taxable pension for the assessment year
2021-22 assuming:
a) he has received gratuity of Rs. 3,00,000; or
b) he has not received any gratuity.
Solution
a) Value of taxable pension: Rs. 12,29,333
b) Value of taxable pension: Rs. 8,96,000
NPS – Will discuss later
(4) Provident Funds
SPF RPF UPF PPF

[PF Act [PF Act [Not [Gernal PF.
1925] 1952] recognised Anyone can
by the CIT] open this
account]
Employer’s contribution E Exempt up to E Cannot
12% of
salary
Employee’s contribution Deduction Deduction Deduction Deduction
allowed U/S allowed U/S not allowed allowed U/S
80C 80C U/S 80C 80C
Interest credited annually E E only till E E
interest does
not exceed
9.5%
Lump sum payment E E provided Employer E
some contribution
conditions + Interest on
are satisfied employer
contribution
is taxable
under
Salaries.
However,
employee
contribution
is not at tall
an income.
Interest on
employee
contribution
is taxable
under Other
Sources
Meaning of salary:
Same as leave encashment.
(5) Retrenchment compensation

Maximum amount of exemption is Rs. 5,00,000
(6) Compensation on voluntary retirement

Maximum amount of exemption is Rs. 5,00,000
Lecture 19
ALLOWANCES + PERQUISITES
Taxability of allowances:
1. Exemption depends upon actual expenditure [10(14)]
a) Conveyance Allowance
b) Transfer/ Touring
c) Daily
d) Uniform
e) Helper
f) Academic/ Research
2. Exemption depends upon the provisions of the Income Tax Act

a) Children education: Exemption is Rs. 100 per month per child (maximum 2 children)
b) Hostel expenditure: 300 ……
c) Transport allowance: Rs. 3,200 per month (only for blind, deaf and dumb or
orthopaedically handicapped)
3. Exemption depends upon the actual expenditure as well as the provisions of the Act
House rent allowance
Least
1. 50%/ 40%,
2. HRA actually received
3. Rent paid – 10% of salary
Note:
1. Salary: Same as that of leave encashment/ PF.
2. Salary is taken on ‘due’ basis.
4. Fully Exempt
Covered under section 10
5. Fully Taxable
No need to learn this category
Common examples: DA, CCA, Servant Allowance, etc.
Perquisites
Meaning of Perquisites [Sec. 17(2)] –
AY 21-22 [Change is in point of RPF + NPS + Contribution to Approved Superannuation
Fund exceeds Rs. 7,50,000, then the excess is taxable]
Valuation of Perquisites:
1. Accommodation
a) Unfurnished
b) Furnished
c) Hotel
2. Interest-free loan/ Loan at concessional rate:

Computed on Maximum O/S balance each month and this balance means outstanding on the
last day of each month.
Note:
1. If amount of loan does not exceed Rs. 20,000 in aggregate per year.
2. 3A
3. Domestic servants:
Note:
Gardener’s Salary: When the accommodation is owned by the employer, gardeners expenses
(gardeners salary is provided by the employer) is not taxable as a perquisite.
4. Household amenities:
Lecture 20
5. Motor Car:
What we verify?
1. Car provided by the employer or car is of the employee
2. Expenses on running and maintenance are incurred by the employer or the employee
3. Car is used for official purpose, personal purpose or official as well as personal purpose.
Situation I: Car is provided by the employer

Use Expenses incurred? Value
1. Official Does not matter Nil provided the documents are maintained
2. Personal Employer/ Employee 10% p.a. of actual cost (if owned by the
employer) or hire charges paid/ payable (if hired
by the employer)
+ Running and maintenance Expenses (if
incurred by the employer)
+ Driver’s expenses (if driver is provided by the
employer)
- Amount recovered from the employee
3. Official Employer Rs. 1,800/ Rs. 2,400 per month depending upon
As well as the engine capacity + Rs. 900 per month (if
Personal driver is also provided)
Employee Rs. 600/ Rs. 900 per month depending upon
the engine capacity + Rs. 900 per month (if
driver is also provided)
Example from the book [Concept Building Approach]

A Maruti WagonR [1,200 cc] which is owned by the employer has been given to the employee only for
personal purposes on 8 July 2019. The actual cost of the car when purchased in November 2010 was
Rs. 3,50,000 (written down value of the car is Rs. 1,50,000 on 8 July 2019). The expenses incurred by the
employee during 8 July 2019 to 31 March 2020 on petrol Rs. 60,000, insurance Rs. 10,000, service Rs. 25,000
and driver’s salary Rs. 70,000 were reimbursed by the employer during the previous year. The employee has
paid Rs. 30,000 to the employer for the use of this car facility.
Value of car = Rs. 1,61,250

A Toyota Fortuner [2,750 cc] which is hired by the employer on a monthly hire charge of Rs. 55,000
has been given to the employee for official as well as personal purposes on 31 October 2019. The
expenses incurred by the employee during 31 October 2019 to 31 March 2020 on diesel Rs. 1,10,000,
insurance Rs. 28,000, service Rs. 43,000 and driver’s salary Rs. 1,40,000 were reimbursed by the employer
during the previous year. The employee has paid Rs. 9,000 to the employer for the use of car
facility.
Situation II: When car belongs to the employee and expenses are incurred by the employer:
Use Value
Official Nil
Personal Actual expenditure of the employer
Less: Amount recovered from the employee
Off/ Personal Actual expenditure of the employer
Less: Amount attributable towards official purpose:
Rs. 1,800/ Rs. 2,400 per month depending upon the engine
capacity
+ Rs. 900 per month (if driver is provided by the employer)
Less: Amount recovered from the employee
Note: If the assessee says that actual expenditure for official use of
care is more than the amount specified above, the more amount
is also allowed to be deducted provided specified documents
are maintained

A Toyota Fortuner [2,750 cc] is owned by the employee but used for official as well as personal
purposes from 8 November 2019. The expenses incurred by the employee during 8 November 2019 to
31 March 2020 on diesel Rs. 1,10,000, insurance Rs. 28,000, service Rs. 43,000 and driver’s salary Rs.
1,40,000 were reimbursed by the employer during the previous year. The employee has paid only Rs. 9,000 to
the employer for getting the benefit of running and maintenance expenses incurred by the employer. The
employer has maintained the log-book of the car. The employer claims that the actual expenses incurred for
official purpose is 80% of the actual expenditure.
Value is Rs. 55,200.
Note: Car facility given to commute the distance from office to residence and back is 100%
exempt from tax.
6. Education facility
Lecture 21
7. Medical facility
Case 2 [20]:
X has received offers from companies of Delhi for service as under:
Offer A (Rs.) Offer B (Rs.)
Basic Salary 10,00,000 7,50,000
House Rent Allowance ---- 1,50,000
Transport allowance
(for coming to office from residence and back) ---- 19,200
Contribution to approved superannuation fund by
the employer ---- 70,000
Mobile phone ---- 10,800
Total 10,00,000 10,00,000
Additional information:
a. His qualifying savings under section 80C will be Rs. 50,000.
b. He will pay house rent Rs. 15,000 p.m.
c. He needs a mobile phone for private purposes.
Which offer should he accept and why?
Further, is there any gain to the employer in case of offer ‘B’? The rate of tax for the employer
is 30% + surcharge @ 7% + cess @ 4% = 33.384%.
[Delhi University B.Com.(H) 2008 (Modified)]
Solution:
Computation of total income and tax liability of X for the assessment year 2021-22:
Particulars Rs. Offer A Offer B
(Rs.) (Rs.)
Basic salary 10,00,000 7,50,000
HRA received 1,50,000 45,000
Less: Exempt 1,05,000
a. HRA received is Rs. 1,50,000
b. Rent paid – 10% of salary (Rs. 1,80,000 – 10% of
7,50,000) i.e., 1,05,000
c. 50% of Rs. 7,50,000 i.e., 3,75,000
Transport allowance 19,200
Contribution to approved superannuation fund Nil
Mobile phones Exempt
Gross salary 10,00,000 8,14,200
Less: Standard deduction 50,000 50,000
Taxable salary 9,50,000 7,64,200
Add: Income from other heads Nil Nil
Gross total income 9,50,000 7,64,200
Less: Deduction under section 80C 50,000 50,000
Less: Deduction under section 80GG 60,000
a. Rs. 60,000
b. Rent paid – 10% of total income (Rs. 1,80,000 –
10% of 9,00,000) i.e., 90,000
c. 25% of 9,00,000 i.e., 2,25,000
Total income 8,40,000 7,14,200
Tax on Total income 80,500 55,340
Less: Rebate under section 87A Nil Nil
80,500 55,340
Add: Cess @ 4% 3,220 2,214
Tax payable (Rounded off) 83,720 57,550
Computation of gain/ loss to employer:

Offer A (Rs.) Offer B (Rs.)
Total remuneration 10,00,000 10,00,000
Less: Tax saved @ 33.384% 3,33,840 3,33,840
Net burden 6,66,160 6,66,160
There is a neither any gain nor any loss to the employer in any case.
Conclusion: It is better to accept offer B since tax liability is less and employer has no loss in
giving offer B.
Lecture 22
Case 8 [20]:
A Ltd. has offered you a job in Delhi at a basic salary of Rs. 15,000 per month and an option to
choose any one of the following two packages:
Package I Package II
1. HRA Rs. 4,500 per month Company owned unfurnished
(Rent to be paid Rs. 4,500 per month) accommodation
(F.R.V. Rs. 54,000 per annum)
2. Education allowance Rs. 400 per month Education facility for one child in an
(for one child) institution owned by employer provided
free of cost. However, the value of similar
education in a similar institution in a similar
locality is Rs. 300 per month.
3. Telephone allowance Rs. 1,500 per Free telephone facility at residence upto Rs.
month 1,000 per month
4. Medical allowance Rs. 2,000 per month Medical reimbursement upto Rs. 24,000 per
annum
5. Conveyance allowance Rs. 1,500 per Motor car facility for private use with
month (for private use) expenditure valued at Rs. 18,000
The company also offers the services of watchman, sweeper and gardener in both the above
packages. The salary of each is Rs. 500 per month. Which package will you choose so that your
tax liability is minimized? (Delhi 2011, 10 marks)
Solution:
Calculation of salary in case Package I is chosen:
Amount (Rs.)
Basic salary 1,80,000
HRA (4,500 – 3,000)*12 18,000
Education allowance (400 - 100)*12 3,600
Telephone allowance 18,000
Medical allowance 24,000
Conveyance allowance 18,000
Sweeper etc. [500*3*12] 18,000
Gross salary 2,79,600
Less: Standard deduction 50,000
Taxable salary 2,29,600
Calculation of salary in case Package II is chosen:

Amount (Rs.)
Basic salary 1,80,000
RFA (15% of 1,80,000) 27,000
Education facility (exempt as less than Rs. 1,000) ----
Telephone facility Exempt
Medical facility 24,000
Motor car 18,000
Sweeper etc. [500*3*12] 18,000
Gross salary 2,67,000
Conclusion: Here, package II is better.
It is assumed that gardener is not provided along with the rent-free unfurnished
accommodation.
Case 3 [20]:
A Ltd. wishes to offer an employment to a finance manager on a monthly salary of Rs. 90,000.
How would you frame the remuneration so as to minimize the tax liability of the employee and
also ensure that the employer gets full tax advantage? (Delhi 2009, 10 marks)
Solution:
Option I: Paying Rs. 90,000 per month as salary:
Gross salary [Rs. 90,000*12] 10,80,000
Add: Other income Nil
Tax on TI (including cess @ 4%) 1,26,360
Take-home pay
[10,80,000 – 1,26,360 (tax)] 9,53,640
Option II: Paying Rs. 90,000 per month not as basic salary but in different components:
Particulars Expenditure Amount
incurred by taxable in the
the employer hands of the
(Rs.) employees
(Rs.)
Basic salary 4,00,000 4,00,000
Employer’s contribution towards RPF (exempt upto 12% 48,000 Exempt
of salary)
Education allowance for two children (exempt upto Rs. 100 2,400 Exempt
per month per child upto a maximum of 2 children)
Research allowance (assumption that amount is used for 25,200 Exempt
research work)
Uniform allowance (assumption that amount is used for 5,400 Exempt
official purposes)
Rent-free house in Delhi (rent paid by employer) [15% of 3,45,000 60,000
salary of Rs. 4,00,000 or rent paid by the employer,
whichever is less] [assuming monthly rent of Rs. 28,750]
Car with driver for official and private purposes (cubic 1,80,000 32,400
capacity of the engine is 1.4 litres)
[(1,800+900)*12]
Note: Nothing is deductible in respect of any amount
recovered from the employee
Free telephone and mobile phone 40,000 Exempt
LTC (twice in a block of 4 years) [amount is actually used 34,000 Exempt
for travelling and it does not exceed economy class air fare]
[one year’s expenses are given on proportionate basis]
Gross salary 10,80,000 4,92,400
Less: Deduction under section 16 50,000
Net salary 4,42,400
Less: Deduction under section 80C
(employee’s contribution towards RPF) 48,000
Tax on net income 7,220
Less: Rebate under section 87A 7,220
Nil
Add: Cess @ 4% Nil
Net tax (Rounded off) Nil
Take-home pay
[4,00,000 + 2,400 + 25,200 + 5,400 + 34,000 (LTC) – Nil – Rs. 48,000] 4,19,000
Comparison of both the options

Option I Option II
(Rs.) (Rs.)
Take-home pay (without adjustment) 9,53,640 4,19,000
Less: Payment by an employee for:
House accommodation* 3,45,000
Car and driver 1,80,000
Telephone and mobile phone 40,000
Future savings (48,000 + 48,000) 96,000
Balance 2,92,640 4,19,000
The difference of Rs. 1,26,360 (4,19,000 minus 2,92,640) between two options is because of
lower tax bill under option 2 (option 1: Rs. 1,26,360 and option 2: Rs. Nil).
Lecture 22
Transfer Pricing:
Discussion on an example where the Indian company is a purchaser.
How I determined unreasonable/ excessive payment under Section 40A(2)?
Recorded Purchasing Cost 1,00,000

Less: Purchasing cost at ALP 60,000
Excessive Amount [40A(2)] 40,000
Lecture 23
Discussion on an example where the Indian company is a seller.

Example:
P Ltd. and Q Ltd. are Associated Enterprises
P Ltd. 80,000 Q Ltd.

(Indian) (Russia)
Seller Purchaser
1,30,000 U Ltd.
(Russia)
Purchaser
Indian Company is doing what?
Sales 80,000
Total PGBP 87,00,000
Correction required:
Reported PGBP 87,00,000
Less: Sales 80,000
Add: Sales at ALP 1,30,000
Rectified PGBP 87,50,000
Case 1 [20]:
A Ltd. (an Indian company), sells computer monitor to its 100% subsidiary X Ltd. in United
States @ $ 50 per piece. A Ltd. also sells its computer monitor to another company Y Ltd. in
United States @ $ 80 per piece. Total income of A Ltd. for the assessment year 2020-21 is
Rs. 12,00,000 which includes sales made for 100 computer monitors @ $ 50 to X Ltd.
Compute the arm’s length price and taxable income. The rate of one dollar may be assumed
to be equivalent to Rs. 49 for the sake of simplicity. (Delhi 2008)
Solution:
Sales at ALP = Rs. 3,92,000 [$ 80* Rs. 49* 100 Monitors]
Reported Total income Rs. 12,00,000

Less: Sales Recorded
[$ 50* Rs. 49*100] Rs. 2,45,000
Add: Sales at ALP Rs. 3,92,000
Total income Rs. 13,47,000
Case 2 [20]:
Situation 1:
From the following information determine the Arm’s length price and taxable income of S Ltd.,
Indian subsidiary company of a foreign Company K Ltd.:
a. K Ltd. sold 1,000 mobile phones to S Ltd. @ $ 40 per unit.
b. K Ltd. sold 2,000 mobile phones to other Indian companies @ $ 50 per unit.
c. Total income of S Ltd. for assessment year 2020-21 is Rs. 15,00,000.
Assume the rate of a dollar = Rs. 46.
Ans. Rs. 23,00,000 [$ 50* Rs. 46* 1,000]; Rs. 15,00,000 [Sec. 92(3)]
Situation 2:
From the following information determine the Arm’s length price and taxable income of S Ltd.,
Indian subsidiary company of a foreign Company K Ltd.:
a. K Ltd. sold 1,000 mobile phones to S Ltd. @ $ 50 per unit.
b. K Ltd. sold 2,000 mobile phones to other Indian companies @ $ 40 per unit.
c. Total income of S Ltd. for assessment year 2020-21 is Rs. 15,00,000.
Assume the rate of a dollar = Rs. 46.
Ans. Rs. 18,40,000 [$ 40* Rs. 46* 1,000]; Rs. 19,60,000
Lecture 24
Case 5 [20]:
A Ltd. is an Indian company. It has a manufacturing unit in Andhra Pradesh. It is a subsidiary
company of X Ltd., a US company. X Ltd. gets royalty from A Ltd. on supply of technical
information which is used by A Ltd. for manufacturing goods in its unit in Andhra Pradesh.
For similar transfer of technical information to any unrelated entity, X Ltd. charges $ 8,000
per year. However, from A Ltd. it charges (a) $ 11,000 or (b) $ 6,000 per year which is
subject to tax deduction by A Ltd. Exchange rate is Rs. 49 per US dollar. Income of A Ltd.
for the assessment year 2020-21 before deducting payment for technical information to X
Ltd. is Rs. 76,00,000. Find out the income of X Ltd. and A Ltd.
Solution:
Computation of total income of A Ltd. for the AY 2020-21:
Particulars (a) $ 11,000 (b) $ 6,000
Income before expense 76,00,000 76,00,000
Less: Actual royalty expense [$ 11,000*49; $ 5,39,000 2,94,000
6,000*49]
Income reported 70,61,000 73,06,000
Add: Actual royalty expense 5,39,000 2,94,000
Less: Royalty expense at ALP [$ 8,000*49] 3,92,000 3,92,000
72,08,000 72,08,000
Total income 72,08,000 73,06,000 [Sec.

92(3)]
Computation of total income of X Ltd. for the AY
2020-21:
Royalty income 5,39,000 2,94,000
Rs. 3,92,000
should be the
income because
this amount is
allowed as an
expense to A
Ltd.
Note:
The residential status of X Ltd. for the AY 2020-21 is non-resident because it is assumed that
the POEM is outside India.
Case 10 [20]:
Sony (a Japanese company) and Y Ltd. (an Indian company) are associated enterprises. Y Ltd.
manufactures mobile phones and sells them to Sony and LG (a Korean company). During the
year, Y Ltd. supplied 1,20,000 mobile phones to Sony at a price of Rs. 2,000 per unit and
20,000 mobile phones to LG at a price of Rs. 3,200 per unit. The transactions of Y Ltd. with
Sony and LG are comparable subject to the following differences:
1. While sale to Sony is on FOB basis, sales to LG are CIF (Cost, Insurance and Freight)
basis. The freight and insurance paid by Sony for each unit is Rs. 300.
2. The sales to LG are under a free warranty for 1 year whereas sales to Sony are without
such warranty. The estimated cost of executing such warranty may be taken at Rs. 350
per unit.
3. Sony placed large order and as such Y Ltd. offered a quantity discount of Rs. 50 per
unit to Sony.
Compute the arm’s length price and the amount of increase in the total income of Y Ltd. for
the assessment year 2020-21, if any, due to such arm’s length price.
(Delhi 2016, Nov – 10M)
Solution:
Whether the price of Rs. 2,000 and Rs. 3,200 is comparable or not?
Adjustment of prices charged from LG:

Price Charged currently Rs. 3,200
Less: Adjustment for Insurance and Freight Rs. 300
Less: Adjustment for warranty Rs. 350
Less: Adjustment for large orders placed by Sony Rs. 50
Actual adjusted price Rs. 2,500
Computation of ALP:
Rs. 2,500*1,20,000 = Rs. 30 Crores
Currently the sales shown is
Rs. 2,000*1,20,000 = Rs. 24 Crores
Thus, the total income of Y Ltd. will increase by Rs. 6 Crores [Rs. 30 Crores – Rs. 24
Crores].
Lecture 25
Some Tax Planning Aspects

1. Sale of Assets used for Scientific Research
2. Receipt of insurance compensation
3. Distribution of assets at the time of liquidation
Sale of Assets used for Scientific Research [Sec. 41(3)]

Where an asset representing expenditure of a capital nature on scientific research within the
meaning of clause (iv) of sub-section (1), or clause (c) of sub-section (2B), of section 35, read
with clause (4) of section 43, is sold, without having been used for other purposes, and the
proceeds of the sale together with the total amount of the deductions made under clause (i) or,
as the case may be, the amount of the deduction under clause (ia) of sub-section (2), or clause
(c) of sub-section (2B), of section 35 exceed the amount of the capital expenditure, the excess
or the amount of the deductions so made, whichever is the less, shall be chargeable to income-
tax as income of the business or profession of the previous year in which the sale took place.
Case 8 [20]:
R purchased an asset for scientific research for Rs. 15,00,000 in the previous year 2010-11.
During the previous year 2019-20, the said asset ceased to be used for scientific research.
The following information is also submitted to you:
Amount (Rs.)
Profit from business before depreciation 5,00,000
WDV of BOA as on 01.04.2019 (15%) 10,00,000
The scientific research asset (if used for business) shall be eligible for depreciation @ 15%.
Compute the total income, if the scientific research asset is sold for Rs. 28,00,000 assuming:
a. It is sold without using for business; and
b. It is sold after using for business.
Assume CII for 2010-11 is 167 and for 2019-20 is 289.
Solution:
a. If it is sold without using for business:
In the PY 2010-11, Deduction allowed under section 35 would have been Rs. 15,00,000.
Profits before depreciation 5,00,000

less: Depreciation – Note 1,50,000 3,50,000
Business income [Sec. 41(3)] 15,00,000
Lower of Rs. 28,00,000 or Rs. 15,00,000
PGBP (a) 18,50,000
Computation of Capital Gains:

Sale 28,00,000
Less: ICA [15,00,000/167*289] 25,95,808
LTCG (b) 2,04,192
GTI [a + b] 20,54,192
Note:
Calculation of depreciation:
WDV of the BOA on 01.04.2019 10,00,000
Add: Cost of the asset acquired during 2019-20 Nil
10,00,000
Less: Sale Nil
WDV on 31.03.2020 10,00,000
Depreciation [15%] 1,50,000
b. If it is sold after using for business:

In the PY 2010-11, Deduction allowed under section 35 would have been Rs. 15,00,000.
Profits before depreciation 5,00,000

less: Depreciation – Note Nil 5,00,000
PGBP (a) 5,00,000
Computation of Capital Gains:

Sale 28,00,000
Less: WDV opening 10,00,000
Less: Cost of asset acquired Nil
STCG [Sec. 50(1)] (b) 18,00,000
GTI [a + b] 23,00,000
Note:
Calculation of depreciation:
WDV of the BOA on 01.04.2019 10,00,000
Add: Cost of the asset acquired during 2019-20
[15,00,000 – 15,00,000 (Deduction already claimed)] Nil
10,00,000
Less: Sale 10,00,000*
WDV on 31.03.2020 Nil
Depreciation [15%] Nil
Lecture 26
Case 1 [20]:
From the following information, compute the capital gain chargeable to tax for the assessment
year 2020-21:
Amount (Rs.)
a. Residential house constructed on 10.06.2011,
(the cost of construction excluding cost of land) 3,60,000
b. House destroyed by fire on 15.04.2018
c. Compensation received on 20.12.2019 from the insurance company 8,00,000
d. CII for 2011-12: 184, for 2018-19: 280 and for 2019-20: 289.
[Ans. LTCG Rs. ]
Solution:
AY 2020-21 [PY 2019-20]
Full value of consideration 8,00,000
Less: ICA [3,60,000* 280] 5,47,826
184
LTCG 2,52,174
Case 3 [20]:
a. The written down value of the block of assets as on 01-04-2019 was Rs. 5,00,000. An
asset of the same block was acquired on 11-05-2019 for Rs. 3,00,000. There was a fire
on 18-09-2019 because of which assets were destroyed and the assessee received a sum
of Rs. 11,00,000 from the insurance company. Compute the capital gain assuming:
i. All the assets were destroyed by fire.
ii. Part of the block was destroyed by fire.
b. What will be the answer if assessee received Rs. 6,00,000 from insurance company and
assume that:
i. All the assets were destroyed by fire.
ii. Part of the block was destroyed by fire.
Solution:
a.
i. All the assets destroyed
AY 2020-21 [Sec. 45(1A)]
Full value of consideration [45(1A)] 11,00,000
Less: Expense on sale
Less: WDV on 01.04.2019 5,00,000
Less: Actual cost of asset acquired and put to use 3,00,000
STCG [50(2)] 3,00,000
ii. Part of the block is destroyed

AY 2020-21 [45(1A)]
Full value of consideration [45(1A)] 11,00,000
Less: EOS Nil
Less: WDV on 01.04.2019 5,00,000
Less: Actual cost of asset ….. 3,00,000
STCG [50(1)] 3,00,000
Note:
WDV on 01.04.2019 5,00,000
Add: Actual cost of …… 3,00,000
8,00,000
Less: Net sale 8,00,000*
WDV on 31.03.2020 Nil
Lecture 27
Financial Management Decisions
1. Capital Structure decision making

Example, Requirement of Rs. 50 Crore and which option for raising money is better.
2. Dividend
[2(22), 115-O, 115BBDA, 10(34) and 194]
3. Issuing bonus shares or Distributing dividends – Better option to be decided?
4. Issuing bonus equity shares or issuing bonus redeemable preference shares – Better option
to be decided?
5. Sec. 115……………..
1. Capital structure decision making:

That option will be considered as the best option which maximises Rate of Return on Equity
Share Capital.
Case 19 [20]:
Bharat Ltd., a company engaged in manufacturing of electrical switches is a widely-held
company. It is considering a major expansion of its production facility and import of latest
technology which is expected to improve its profitability from the present rate of 20% to at least
25% (before interest and tax). The finance manager has given the following proposals:
(Rs. in lakh)
A B C D
Share Capital 40 20 30 50
14% Preference Shares 20 20 ---- 10
16% Non-Convertible
Debentures ---- 20 ---- 40
Term Loans from Institutions
& Banks (20%) ---- 40 70 ----
Lease Finance (22%) 40 ---- ---- ----
Total 100 100 100 100
a. The rate of dividend on equity has not been below 24% in the past and date of dividend
declaration is June 30 every year.
b. The tax rate faced by the company is 31.20%.
Your opinion with detailed reasons is sought on the above.
(Delhi 2005; 2010, 10 marks)
Solution:
No existing capital.
New investment of Rs. 1 Crore
Case of Planning: Assessment Year 2021-22
Operating profits = EBIT [Sales – VC = Contribution – FC = EBIT]
AY 2021-22
A B C D
EBIT
[25% of Rs. 1 Crore] 25,00,000 25,00,000 25,00,000 25,00,000
Less: Interest
NCD (16%) ---- 3,20,000 ---- 6,40,000
Loans (20%) ---- 8,00,000 14,00,000 ----
Lease (22%) 8,80,000 ---- ---- ----
EBT 16,20,000 13,80,000 11,00,000 18,60,000
Less: Tax [31.20%] 5,05,440 4,30,560 3,43,200 5,80,320
EAT 11,14,560 9,49,440 7,56,800 12,79,680
Less: CDT Nil Nil Nil Nil
Less: Pref. Divi. [14%] 2,80,000 2,80,000 ---- 1,40,000
N/I to ESH (a) 8,34,560 6,69,440 7,56,800 11,39,680
ESC (b) 40,00,000 20,00,000 30,00,000 50,00,000
ROR on ESC
[a/b*100] 20.87% 33.47% 25.23% 22.79%
Conclusion: Option A and D cannot be accepted because the company in the past is already
earning a return for equity shareholders of around 24%. Thus, Option B is the best option of
raising Rs. 1 crore for the expansion because this option maximises the rate of return for
equity shareholders.
Let us solve the above case assuming the AY is 2020-21.

AY 2020-21
A B C D
EBIT
[25% of Rs. 1 Crore] 25,00,000 25,00,000 25,00,000 25,00,000
Less: Interest
NCD (16%) ---- 3,20,000 ---- 6,40,000
Loans (20%) ---- 8,00,000 14,00,000 ----
Lease (22%) 8,80,000 ---- ---- ----
EBT 16,20,000 13,80,000 11,00,000 18,60,000
Less: Tax [31.20%] 5,05,440 4,30,560 3,43,200 5,80,320
EAT 11,14,560 9,49,440 7,56,800 12,79,680
Less: CDT 1,90,036 1,61,882 1,29,037 2,18,189
[11,14,560 * 20.555]
120.555
Less: Pref. Divi. [14%] 2,80,000 2,80,000 ---- 1,40,000
N/I to ESH (a) 6,44,524 5,07,558 6,27,763 9,21,491
ESC (b) 40,00,000 20,00,000 30,00,000 50,00,000
ROR on ESC
[a/b*100] 16.11% 25.38% 20.93% 18.43%
Conclusion: Option B and C are acceptable keeping in mind the past return of 20%. Further,
the best option is Option B because it maximises the rate of return on equity share capital.
Refer section 115-O from theoretical/ numerical point of view.

Sec. 115-O
(1B) For the purposes of determining the tax on distributed profits payable in accordance with
this section, any amount by way of dividends referred to in sub-section (1) as reduced by the
amount referred to in sub-section (1A) [hereafter referred to as net distributed profits], shall be
increased to such amount as would, after reduction of the tax on such increased amount at the
rate specified in sub-section (1), be equal to the net distributed profits:
Provided that this sub-section shall not apply in respect of dividend referred to in sub-clause
(e) of clause (22) of section 2.
????? (3) ????? (3)
yyyy (2) xxxx Less: 15% of ????? (4)

Distributable Profits Rs. 500 (1) Rs. 500 (5)
Let us assume this Rightside top ????? (3) = Rs. 100

Less: 15% of ????? (3) [4] = Rs. 15
Distributable Profits (5) = Rs. 85
If 85 (5) = Rs. 500 (5)

Then 1 = Rs. 500/85
Therefore, 100 (3) = Rs. 500/85*100 = Rs. 588.24
Putting the values, I can say that

????? (3) Rs. 588.24(3)
yyyy (2) Rs. 88.24 15% of 588.24 (4) [Dividend tax]
Distributable Profits Rs. 500 (1) Rs. 500 (5)
Effectively, the dividend tax rate becomes 17.648% [Rs. 88.24/Rs. 500*100]. Therefore, the
effective tax rate is calculated as –
15/85*100 =17.647%
Distributable profits = Dividend tax to be payable to the GOI [15% on Distributable profits]
+
Dividend to be paid to Shareholders
Sec. 115-O
(1) Notwithstanding anything contained in any other provision of this Act and subject to the
provisions of this section, in addition to the income-tax chargeable in respect of the total income of
a domestic company for any assessment year, any amount declared, distributed or paid by such
company by way of dividends (whether interim or otherwise) on or after the 1st day of April,
2003 90[but on or before the 31st day of March, 2020], whether out of current or accumulated profits
shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the
rate of fifteen per cent:
Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this sub-
section shall have effect as if for the words "fifteen per cent", the words "thirty per cent" had been
substituted.
Lecture 28
Case 20 [20]:
Bharat Ltd., a company engaged in manufacturing of electrical switches is a widely-held
company. The company’s existing share capital is Rs. 80,00,000. It is considering a major
expansion of its production facility and import of latest technology which is expected to
improve its profitability from the present rate of 20% to at least 25% (before interest and tax).
The finance manager has given the following proposals:
(Rs. in lakh)
A B C D
Share Capital 40 20 30 50
14% Preference Shares 20 20 ---- 10
16% Non-Convertible
Debentures ---- 20 ---- 40
Term Loans from Institutions
& Banks (20%) ---- 40 70 ----
Lease Finance (22%) 40 ---- ---- ----
Total 100 100 100 100
a. The rate of dividend on equity has not been below 24% in the past and date of dividend
declaration is June 30 every year.
b. The tax rate faced by the company is 31.20%.
Your opinion with detailed reasons is sought on the above.
Solution:
The existing capital is Rs. 80,00,000.
New investment of Rs. 1 Crore
Case of Planning: Assessment Year 2021-22
Operating profits = EBIT [Sales – VC = Contribution – FC = EBIT]
AY 2021-22
A B C D
EBIT
[25% of Rs. 1.80 Crore] 45,00,000 45,00,000 45,00,000 45,00,000
Less: Interest
NCD (16%) ---- 3,20,000 ---- 6,40,000
Loans (20%) ---- 8,00,000 14,00,000 ----
Lease (22%) 8,80,000 ---- ---- ----
EBT 36,20,000 33,80,000 31,00,000 38,60,000
Less: Tax [31.20%] 11,29,440 10,54,560 9,67,200 12,04,320
EAT 24,90,560 23,25,440 21,32,800 26,55,680
Less: CDT Nil Nil Nil Nil
Less: Pref. Divi. [14%] 2,80,000 2,80,000 ---- 1,40,000
N/I to ESH (a) 22,10,560 20,45,440 21,32,800 25,15,680
ESC (b) 1,20,00,000 1,00,00,000 1,10,00,000 1,30,00,000
ROR on ESC
[a/b*100] 18.42% 20.45% 19.39% 19.35%
Conclusion: Option B is the only option of raising Rs. 1 crore for the expansion because this
option maximises the rate of return for equity shareholders.
Lecture 29
Section 2(22):
(22) "dividend" includes—
(a) any distribution by a company of accumulated profits, whether capitalised or not,
if such distribution entails the release by the company to its shareholders of all
or any part of the assets of the company ;
Example:
Issuing of bonus Redeemable Preference shares to Equity Shareholders/
Preference Shareholders/ Both
P&L
To Redeemable Preference Shares
Redeemable Preference Shares
To Bank [2(22)(a)]
(b) any distribution to its shareholders by a company of debentures, debenture-stock,
or deposit certificates in any form, whether with or without interest, and any
distribution to its preference shareholders of shares by way of bonus, to the
extent to which the company possesses accumulated profits, whether capitalised
or not ;
Example:
1. Issuing Bonus Debentures to Shareholders [Whether Equity or Preference
or both]
2. Issuing Bonus [Bonus Debentures or Bonus Preference or Bonus Equity]
to Preference Shareholders
(c) any distribution made to the shareholders of a company on its liquidation, to
the extent to which the distribution is attributable to the accumulated profits of
the company immediately before its liquidation, whether capitalised or not ;
Example:
I got Rs. 80 on liquidation out of which Rs. 10 was from accumulated profits and
Rs. 70 from the sale of assets and after meeting the liabilities.
While computing capital gain, my
Full value of consideration 70
…..
(d) any distribution to its shareholders by a company on the reduction of its capital,
to the extent to which the company possesses accumulated profits;
Example:
Distribution at the time of reduction of capital
(e) any payment by a company, not being a company in which the public are
substantially interested, of any sum (whether as representing a part of the assets
of the company or otherwise), by way of advance or loan to a shareholder,
being a 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)
holding not less than ten per cent of the voting power, or to any concern in
which such shareholder is a member or a partner and in which he has a
substantial interest (hereafter in this clause referred to as the said concern)
or any payment by any such company on behalf, or for the individual benefit, of
any such shareholder, to the extent to which the company in either case possesses
accumulated profits ;
Example:
1. Company To Person [At least 10% shares in the company
giving loan/ advance]
2. Company To Concern
A person who is having 10% shares in the company
giving loan/ advance is having substantial interest in the
concern receiving loan
3. Company To Person [At least 10% shares in the company which is
making some payment for his benefit]
Under section 2(22)(e), following are not treated as dividend:
1. any advance or loan made to a shareholder or the said concern by a company in
the ordinary course of its business, where the lending of money is a substantial
part of the business of the company ;
2. any dividend paid by a company which is set off by the company against the whole
or any part of any sum previously paid by it and treated as a dividend within the
meaning of sub-clause (e), to the extent to which it is so set off.
Example of Sec. 2(22)(e) [PY 2019-20 or AY 2020-21]:
X Ltd. (a closely held company) gave a loan of Rs. 3,00,000 to Shareholder C [8,000
shares], Rs. 40,000 to Shareholder D [1,200] and Rs. 90,000 to Shareholder E [800
shares]. Total shares of X Ltd. are 10,000. The X Ltd. is in fertilizer industry. The loan
has been given from accumulated profits.
In this case, loan of Rs. 3,00,000 to shareholder C is treated as dividend under section
2(22)(e) because having 80% shares of X Ltd.
Loan of Rs. 40,000 to shareholder D is treated as dividend under section2(22)(e)
because having 12% shares of X Ltd.
Loan of Rs. 90,000 to shareholder E is a genuine business transaction.
Assuming, X Ltd. has declared a dividend of Rs. 10 per share. The company has to give
Rs. 80,000 to C, Rs. 12,000 to D and Rs. 8,000 to E. In this case, Rs. 1,00,000 is the
amount of dividend declared by the company and provisions applicable for dividend of
Rs. 1,00,000 will apply. However, if it assumed that C asked the company to adjust Rs.
50,000 dividend against his loan and only give him Rs. 30,000, then in that situation,
the following will apply:
1. The dividend declared by the company would be Rs. 50,000.
2. Loan to C now will become Rs. 2,50,000.
but "dividend" does not include—

(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect
of any share issued for full cash consideration, where the holder of the share is
not entitled in the event of liquidation to participate in the surplus assets ;
(iv) any payment made by a company on purchase of its own shares from a
shareholder in accordance with the provisions of section 77A of the Companies
Act, 1956 (1 of 1956);
(v) any distribution of shares pursuant to a demerger by the resulting company to the
shareholders of the demerged company (whether or not there is a reduction of
capital in the demerged company).
Explanation 1.—The expression "accumulated profits", wherever it occurs in this
clause, shall not include capital gains arising before the 1st day of April, 1946, or after
the 31st day of March, 1948, and before the 1st day of April, 1956.
Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and
(e), shall include all profits of the company up to the date of distribution or payment
referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the
company up to the date of liquidation, but shall not, where the liquidation is consequent
on the compulsory acquisition of its undertaking by the Government or a corporation
owned or controlled by the Government under any law for the time being in force,
include any profits of the company prior to three successive previous years
immediately preceding the previous year in which such acquisition took place.
Explanation 3.—For the purposes of this clause,—
(a) "concern" means a Hindu undivided family, or a firm or an association of
persons or a body of individuals or a company ;
(b) a person shall be deemed to have a substantial interest in a concern, other than
a company, if he is, at any time during the previous year, beneficially entitled to
not less than 20% of the income of such concern ;
If the concern is a company, you will be having the substantial interest when you
have at least 20% shares in the company.
CDT under section 115-O in respect of dividend covered under section 2(22)(e) is
34.944% [30% + 12% + 4%].
Lecture 30
Case 3 [20]:
Mr. N holds shares carrying 25% of voting power in a domestic company in which the public
are not substantially interested. On 1 November 2019, he got a loan of Rs. 6 lakhs @ 15% from
the company and as on date the company had an accumulated profit of Rs. 5 lakhs. Explain the
tax implications in the hands of the company as well as in the hands of the shareholder.
(Delhi 2007)
Solution:
Tax implications in the hands of the company:
1. Rs. 5,00,000 is dividend under section 2(22)(e) on which the Company has to pay DDT
under section 115-O @ 34.944% for the AY 2020-21.
It is dividend under section 2(22)(e) because the company giving the loan is a closely-held
company and the shareholder who is receiving the loan is holding 10% or more (i.e., 25% in
the present case) in such company, but only to the extent of accumulated profits.
2. The company has to deduct TDS under section 194 @ 10% before giving Rs. 5,00,000 to
the shareholder.
Note: It is assumed that the company has sufficient profits to give Rs. 5,00,000 to the
shareholder.
Tax implications in the hands of shareholder:

The shareholder has to claim refund of TDS by the company.
TDS on Dividends.
194. The principal officer of an Indian company or a company which has made the prescribed
arrangements for the declaration and payment of dividends (including dividends on preference
shares) within India, shall, before making any payment 33[by any mode] in respect of any
dividend or before making any distribution or payment to a shareholder, who is resident in
India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c)
or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such
dividend, income-tax 34[at the rate of ten per cent] :
Provided that no such deduction shall be made in the case of a shareholder, being an individual,
if—
(a) the dividend is paid by the company by 35[any mode other than cash]; and
(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of
such dividend distributed or paid or likely to be distributed or paid during the financial
year by the company to the shareholder, does not exceed 36[five thousand] rupees:
Lecture 31
Practice of all sections related to dividends
Lecture 32
Discussion on Section 94(7) and 94(8)
Lecture 33
Tax on distributed income to shareholders [Sec. 115QA]

(1) Notwithstanding anything contained in any other provision of this Act, in addition to the
income-tax chargeable in respect of the total income of a domestic company for any
assessment year, any amount of distributed income by the company on buy-back of
shares from a shareholder shall be charged to tax and such company shall be liable to pay
additional income-tax at the rate of 20% on the distributed income:
[Provided that the provisions of this sub-section shall not apply to such buy-back of shares
(being the shares listed on a recognised stock exchange), in respect of which public
announcement has been made on or before the 5th day of July, 2019 in accordance with the
provisions of the Securities and Exchange Board of India (Buy-back of Securities)
Regulations, 2018 made under the Securities and Exchange Board of India Act, 1992 (15 of
1992). ]
Explanation.—For the purposes of this section,—
(i) "buy-back" means purchase by a company of its own shares in accordance with the
provisions of 89[any law for the time being in force relating to companies];
(ii) "distributed income" means the consideration paid by the company on buy-back of
shares as reduced by 90[the amount, which was received by the company for issue of
such shares, determined in the manner as may be prescribed91].
(2) Notwithstanding that no income-tax is payable by a domestic company on its total income
computed in accordance with the provisions of this Act, the tax on the distributed income
under sub-section (1) shall be payable by such company.
(3) The principal officer of the domestic company and the company shall be liable to pay the
tax to the credit of the Central Government within fourteen days from the date of payment of
any consideration to the shareholder on buy-back of shares referred to in sub-section (1).
(4) The tax on the distributed income by the company shall be treated as the final payment of
tax in respect of the said income and no further credit therefor shall be claimed by the
company or by any other person in respect of the amount of tax so paid.
(5) No deduction under any other provision of this Act shall be allowed to the company or a
shareholder in respect of the income which has been charged to tax under sub-section (1) or
the tax thereon.
Tax on distributed income to unit holders [Sec. 115R]

(2) Notwithstanding anything contained in any other provision of this Act, any amount of
income distributed by the specified company or a Mutual Fund to its unit holders [on or before
the 31st day of March, 2020] shall be chargeable to tax and such specified company or Mutual
Fund shall be liable to pay additional income-tax on such distributed income at the rate of—
(i) 25% on income distributed to any person being an individual or a Hindu undivided family
by a money market mutual fund or a liquid fund;
(ii) 30% on income distributed to any other person by a money market mutual fund or a
liquid fund;
(iii) 10% on income distributed to any person by an equity oriented fund;
(iv) 25% on income distributed to any person being an individual or a Hindu undivided family
by a fund other than a money market mutual fund or a liquid fund or an equity oriented
fund; and
(v) 30% on income distributed to any other person by a fund other than a money market
mutual fund or a liquid fund or an equity oriented fund:
Provided that where any income is distributed by a mutual fund under an infrastructure debt
fund scheme to a non-resident (not being a company) or a foreign company, the mutual fund
shall be liable to pay additional income-tax at the rate of five per cent on income so distributed:
Provided further that nothing contained in this sub-section shall apply in respect of any
income distributed,—
(a) by the Administrator of the specified undertaking, to the unit holders; or
95
[Provided also that no additional income-tax shall be chargeable in respect of any amount of
income distributed on or after the 1st day of September, 2019 by a specified Mutual Fund, out
of its income derived from transactions made on a recognised stock exchange located in any
International Financial Services Centre and where the consideration for such transaction is paid
or payable in convertible foreign exchange.]
Explanation.—For the purposes of this sub-section,—
(vi) "unit" means beneficial interest of an investor in the fund.]
(2A) For the purposes of determining the additional income-tax payable in accordance with
sub-section (2), the amount of distributed income referred therein shall be increased to such
amount as would, after reduction of the additional income-tax on such increased amount at the
rate specified in sub-section (2), be equal to the amount of income distributed by the Mutual
Fund.
(3) The person responsible for making payment of the income distributed by the Unit Trust of
India or a Mutual Fund and the Unit Trust of India or the Mutual Fund, as the case may be,
shall be liable to pay tax to the credit of the Central Government within fourteen days from the
date of distribution or payment of such income, whichever is earlier.
Lecture 34
Setting Up of New Business

Tax Planning [AY 2021-22]
Forms of organisation [2 People are thinking]:

Do remember that all the discussion is based from tax point of view.
1. Sole proprietorship:
- An owner cannot charge any interest on own capital and cannot charge any remuneration for
own work done by him in his own business.
- Interest on loan payable to another member as well as remuneration payable to another
member is allowed to be deducted while computing the income under the head PGBP.
2. HUF
- Interest on capital contributed by the family members is not allowed to be deducted while
computing the income of HUF under the head PGBP.
- Remuneration payable to the family members is allowed to be deducted while computing the
income under the head PGBP.
3. Firm
It is assumed the conditions of section 184 are fulfilled.
- A firm can pay interest on capital @ 12% p.a. to the partners [40(b)] provided the interest is
authorised by the deed.
- A firm can pay remuneration to the partners [40(b)] which is authorised by the partnership
deed or as per the book profit rule, whichever is less.
Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall
not be deducted in computing the income chargeable under the head "Profits and gains of
business or profession",—
(b) in the case of any firm assessable as such [PFAS],—
(i) any payment of salary, bonus, commission or remuneration, by whatever name
called (hereinafter referred to as "remuneration") to any partner who is not a
working partner; or
(ii) any payment of remuneration to any partner who is a working partner, or of interest
to any partner, which, in either case, is not authorised by, or is not in accordance
with, the terms of the partnership deed; or
(v) any payment of remuneration to any partner who is a working partner, which is
authorised by, and is in accordance with, the terms of the partnership deed and
relates to any period falling after the date of such partnership deed in so far as the
amount of such payment to all the partners during the previous year exceeds the
aggregate amount computed as hereunder :—
on the first Rs. 3,00,000 of the Rs. 1,50,000 or at the rate of 90 per cent of
(a)
book-profit or in case of a loss the book-profit, whichever is more;
on the balance of the book- at the rate of 60 per cent :
(b)
profit
Explanation 1.—Where an individual is a partner in a firm on behalf, or for the benefit,

of any other person (such partner and the other person being hereinafter referred to as
"partner in a representative capacity" and "person so represented", respectively),—
(i) interest paid by the firm to such individual otherwise than as partner in a
representative capacity, shall not be taken into account for the purposes of this
clause;
(ii) interest paid by the firm to such individual as partner in a representative capacity
and interest paid by the firm to the person so represented shall be taken into
account for the purposes of this clause.
Explanation 2.—Where an individual is a partner in a firm otherwise than as partner in a
representative capacity, interest paid by the firm to such individual shall not be taken into
account for the purposes of this clause, if such interest is received by him on behalf, or
for the benefit, of any other person.
Explanation 3.—For the purposes of this clause, "book-profit" means the net profit, as
shown in the profit and loss account for the relevant previous year, computed in the
manner laid down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to all the partners of the firm if such amount has been
deducted while computing the net profit.
Explanation 4.—For the purposes of this clause, "working partner" means an individual
who is actively engaged in conducting the affairs of the business or profession of the firm
of which he is a partner;
4. Company
- A company can pay any interest on the amount of loan taken.
- A company can pay dividend to shareholders.
- A company can pay remuneration to the employees also.
Conclusion:
Decision required is
Whether we should start the business as a
Sole Proprietorship vs. HUF
Or
Firm vs. Company
The form of organisation which minimises the tax liability is considered as the best option from
tax planning point of view.
Lecture 35
Example:
A and B (both aged less than 48 years) want to start a new business the profits of which are
expected to be Rs. 40,00,000. The following options are available:
1. If the business is started as a partnership firm, each partner will contribute Rs. 20,00,000 as
capital and Rs. 10,00,000 as loan. Both the capital and loan will fetch 14% p.a. interest. Each
partner will get the remuneration of Rs. 5,00,000 p.a. The profits of the firm will be distributed
between the partners in ratio of 2:1.
2. If the business is started as a company, each individual will join the company as a money-
lender, employee/ director and shareholder. Each will invest Rs. 18,00,000 as a shareholder
and will give Rs. 12,00,000 as loan @ 14% p.a. Further, each will get a basic salary of Rs.
4,00,000 and Rs 1,00,000 as rent-free unfurnished accommodation in Delhi.
Take the decision from the point of view of tax planning.
Solution:
Firm vs. Company
Tax Planning [AY 2021-22]
Option I: If the business is started as a partnership firm:
Computation of total income and tax liability of the firm:
Rs.
Expected income 40,00,000
Less: Interest on capital:
A [12% of Rs. 20,00,000] 2,40,000
B [12% of Rs. 20,00,000] 2,40,000 4,80,000
Less: Interest on loan:
A [12% of Rs. 10,00,000] 1,20,000
B [12% of Rs. 10,00,000] 1,20,000 2,40,000
Book profit 32,80,000
Less: Remuneration to partners
Remuneration as per book profit concept:
On 1st Rs. 3,00,000 of the B/P, 90% 2,70,000
On remaining balance of the B/P,
60% 17,88,000
20,58,000
Or
Remuneration as per deed 10,00,000
whichever is less 10,00,000
Income under the head PGBP 22,80,000
Add: Income from other heads Nil
Tax [30% of Rs. 22,80,000] 6,84,000

Add: Cess @ 4% 27,360
Tax liability 7,11,360
The profits after tax of 15,68,640 [Rs. 22,80,000 – Rs. 7,11,360] will be distributed
between the partners in the ratio of 2:1. So, A will get Rs. 10,45,760 [Rs.
15,68,640/3*2] and B will get Rs. 5,22,880.
Computation of total income and tax liability of partners:

A B
PGBP:
Remuneration [10,00,000] 5,00,000 5,00,000
Share of profit [Sec. 10(2A)] Exempt Exempt
Interest on capital 2,40,000 2,40,000
Interest on loan 1,20,000 1,20,000
8,60,000 8,60,000
Add: Income from other heads Nil Nil
Less: Deductions under section 80 Nil Nil
Total income 8,60,000 8,60,000
Tax [12,500 + 20% of (8,60,000 – 5,00,000)] 84,500 84,500

[total income exceeds Rs. 5,00,000] Nil Nil
84,500 84,500
Add: Cess @ 4% 3,380 3,380
Tax liability 87,880 87,880
Total tax liability in case the partnership firm is formed is Rs. 8,87,120 [Rs. 7,11,360 + Rs.
87,880 + Rs. 87,880]
Lecture 36
Option II: If the business is started as a company:

Computation of total income and tax liability of the company:
Rs.
Expected business income 40,00,000
Less: Interest on loan
A [12,00,000*14%] 1,68,000
B [12,00,000*14%] 1,68,000 3,36,000
Less: Salary to employees
A [4,00,000 + 1,00,000] 5,00,000
B [4,00,000 + 1,00,000] 5,00,000 10,00,000
Add: Any other head income Nil
Tax [30%] 7,99,200

Add: Cess @ 4% 31,968
Tax payable (Rounded off) 8,31,170
Profit after tax has to be distributed as dividend to the shareholders. Therefore, dividend
of Rs. 18,32,830 [26,64,000 – 8,31,170] will be distributed to the shareholders.
Computation of total income and tax liability of shareholders/ money lenders/ employees/
directors:
A B
Salary:
Basic salary 4,00,000 4,00,000
Rent-free unfurnished accommodation in Delhi
[15% of 4,00,000] 60,000 60,0000
Gross salary 4,60,000 4,60,000
Less: Deduction under section 16:
Standard deduction 50,000 50,000
Income from salary 4,10,000 4,10,000
Add: Income from other sources 1,68,000 1,68,000
Total income 5,78,000 5,78,000
Tax on Rs. 5,78,000

[12,500 + 20% (5,78,000 – 5,00,000)] 28,100 28,100
[Rs. 12,500 or 100% of tax, whichever is lower] Nil Nil
28,100 28,100
Add: Cess 4% 1,124 1,124
Tax payable 29,224 29,224
Total tax liability if the company is formed is Rs. 8,89,618 [8,31,170 + 29,224 + 29,224].
Conclusion:
Keeping in mind minimizing tax liability, it is better to go for a firm. However, there is a minor
difference in the tax liability in the option, so, the decision needs to be taken carefully keeping
in mind other relevant considerations than taxation.
Assuming the above case is solved as per the AY 2020-21, the entire solution remains same
except the concept of dividend distribution tax (DDT)
Option I: Remain Same
Option II: If the business is started as a company:

Computation of total income and tax liability of the company:
Rs.
Less: Interest on loan
A [12,00,000*14%] 1,68,000
B [12,00,000*14%] 1,68,000 3,36,000
Less: Salary to employees
A [4,00,000 + 1,00,000] 5,00,000
B [4,00,000 + 1,00,000] 5,00,000 10,00,000
Add: Any other head income Nil
Tax [30%] 7,99,200

Add: Cess @ 4% 31,968
Tax payable (Rounded off) 8,31,170
Profit after tax of Rs. 18,32,830 [26,64,000 – 8,31,170]has to be distributed as dividend

to the shareholders. There will be a CDT of 3,12,503 [18,32,830/ 120.555* 20.555] and
remaining amount of Rs. 15,20,327 [18,32,830 – 3,12,503] will be distributed to the
shareholders.
100 + 20.555 = 120.555
Computation of total income and tax liability of shareholders/ money lenders/ employees/
directors:
A B
Salary:
Basic salary 4,00,000 4,00,000
Rent-free unfurnished accommodation in Delhi
[15% of 4,00,000] 60,000 60,0000
Gross salary 4,60,000 4,60,000
Less: Deduction under section 16:
Standard deduction 50,000 50,000
Income from salary 4,10,000 4,10,000
Add: Income from other sources 1,68,000 1,68,000
Dividend (Exempt) Nil Nil
Total income 5,78,000 5,78,000
Tax on Rs. 5,78,000

[12,500 + 20% (5,78,000 – 5,00,000)] 28,100 28,100
[Rs. 12,500 or 100% of tax, whichever is lower] Nil Nil
28,100 28,100
Add: Cess 4% 1,124 1,124
Tax payable 29,224 29,224
Total tax liability if the company is formed is Rs. 12,02,121 [8,31,170 + 3,12,503 + 29,224 +
29,224].
Conclusion:
Keeping in mind minimizing tax liability, it is better to go for a firm.
Section 28:
Any interest, salary, bonus, commission or remuneration (by whatever name called), due to (or
received by), a partner of a firm from such firm.
Note: Where any interest, salary, bonus, commission or remuneration (by whatever name called), or any
part thereof has not been allowed as deduction on account of business expenditure in the hands of the
firm, the income taxable as business income in the hands of partners shall be only to the extent of the
amount which is allowed as business expenditure in the hands of the firm.
Lecture 37
Case 1 (Individual vs. HUF) [20]:

There are two members A and B in a joint Hindu undivided family having a capital of Rs.
25,00,000. They can run a business as a business of an individual joining the other as an
employee and money-lender (sole proprietorship) or as a Hindu Undivided Family –
▪ If the business is run as of an individual (i.e. sole proprietorship), the other member will
receive salary of Rs. 4,00,000 and interest @ 12% p.a. on Rs. 12,50,000.
▪ If the business is run as a H.U.F, each member will receive salary Rs. 3,00,000.
Suggest which form of business organization should be adopted from tax point of view, if the
expected business income is Rs. 11,00,000 and age of both A and B is less than 60 years.
Solution:
AY 2021-22
Option I: Sole proprietorship [A is the owner]
Computation of A’s total income and tax liability:
Rs.
Less: Interest payable to B on loan [12,50,000*12%] 1,50,000
Less: Salary to employee B 4,00,000
PGBP 5,50,000
Add: Other incomes Nil
Tax [12,500 + 20% (5,50,000 – 5,00,000)] 22,500

Less: Rebate under section 87A Nil
22,500
Add: HEC @ 4% 900
Tax payable 23,400
Computation of B’s total income and tax liability:

Basic salary/ Gross total income 4,00,000
Less: Deduction under section 16 50,000
Add: IFOS (Interest income) 1,50,000
Less: Deduction under section 80 Nil
Tax [5% of (5,00,000 – 2,50,000)] 12,500

Less: Rebate under section 87A 12,500
Nil
Add: Cess @ 4% Nil
Tax payable Nil
Total tax liability if the sole proprietorship is formed 23,400 [23,400 + Nil]
Option II: HUF

Computation of HUF’s total income and tax liability:
Rs.
Less: Salary to member A 3,00,000
Salary to member B 3,00,000
PGBP 5,00,000
Tax 12,500
Less: Rebate under section 87A Nil
12,500
Add: HEC @ 4% 500
Tax payable 13,000
Computation of members total income and tax liability:

A B
Basic salary/ Gross total income 3,00,000 3,00,000
Less: Deduction under section 16 50,000 50,000
Add: IFOS (Interest income) Nil Nil
Less: Deduction under section 80 Nil Nil
Total income 2,50,000 2,50,000
Tax (payable) Nil Nil
Total tax liability if the HUF is formed 13,000 [13,000 + Nil + Nil].
Conclusion: HUF is better because it minimised the tax liablity.
Relevant points of this chapter:

1. Profit before Tax is Rs. 14,00,000. In such a scenario, if interest can affect the decision
making, it is between to take this amount PBIT.
2.
Case 10 [17] – Calculation of salary point:

A, B and C decided to set-up a business. For this purpose, A, B and C are having Rs. 6,00,000, Rs.
3,00,000 and Rs. 3,00,000 respectively. They wish
a. to charge interest on their capital @ 12% p.a. Salary to A Rs. 20,000 p.m., B Rs. 10,000
p.m., C Rs. 10,000 p.m. and share profits in the ratio 2:1:1, or
b. B and C to receive half the income as salary nominating A as the sole owner of the
business.
They expect the income of Rs. 8,00,000 (before charging interest on capital/ loan) during the relevant
year.
As an income tax expert, you are approached by A, B and C for considered opinion as to whether they
should have a firm or a sole proprietary concern of A, while B and C becoming employees and money-
lenders to the concern so that they can reduce their tax liability? What is your advice and what
arguments would you give in support of your advice? (Delhi 2006)
Ans: In case of sole proprietorship (A) how much salary is given to
B
C
Computation of salary payable to B and C in case of sole proprietorship:

Income before interest 8,00,000
Less: Interest
A [6,00,000*12%] 72,000
B [3,00,000*12%] 36,000
C [3,00,000*12%] 36,000
Income before remuneration 6,56,000
Half of the above income is

[6,56,000/2] 3,28,000 to be received by B and C
B will also get [3,28,000/2] 1,64,000
C will also get [3,28,000/2] 1,64,000
Lecture 38
Case 18 [20]:
A and B want to start a business. They have two options for selecting a form of organization,
partnership firm or a private company. The estimated profits of which, before the following
deductions, are expected at Rs. 7,44,000:
a. Remuneration Rs. 12,000 p.m. each.
b. Medical facility Rs. 20,000 per annum each.
c. Car facility from residence to office and back, estimated cost Rs. 20,000 p.a. each.
d. Rent free house valued at Rs. 30,000 each (provided in Chennai).
e. Each partner will give loan to the business of Rs. 2,00,000 @ 14% p.a.
f. Contribution as capital Rs. 2,00,000 each. On this, interest will be paid @ 12% per
annum. However, the company cannot pay interest on it.
g. The profit after tax will be distributed equally as profits/ dividends.
Suggest whether they should form a partnership firm or a private company.
(Delhi 2010, 9 marks; Delhi 2014, 15 marks)
Solution:
AY 2021-22
Option I: Partnership Firm:
Expected Business income 7,44,000
Less: Interest on loan to partners
A 24,000
B 24,000 48,000
Less: Interest on capital
A 24,000
B 24,000 48,000
Book profits 6,48,000
Less: Remuneration:
As per book profit rule
On 1st Rs. 3,00,000, 90% 2,70,000
On remaining, 60% 2,08,800
4,78,800
Or
As per deed
[1,44,000 + 20,000 + 20,000
+ 30,000 = 2,14,000*2] 4,28,000 4,28,000
PGBP 2,20,000
Tax liability [31.20%] 68,640
Remaining profits after tax will be distributed to partners in their profit sharing ratio.
Computation of total income and tax liability of partners:
A B
PGBP:
Share of profit (exempt) ---- ----
Interest 48,000 48,000
Salary 2,14,000 2,14,000
PGBP 2,62,000 2,62,000
Add: Other incomes Nil Nil
Total income 2,62,000 2,62,000
Tax liability Nil Nil
Total tax if firm is formed is Rs. 68,640
Option II: If company is formed:

Less: Interest on loan 56,000
Less: Salary to employees 4,28,000
PGBP 2,60,000
Tax [31.20%] 81,120
Profit after tax will be distributed to the shareholders. Dividend distributed will be Rs.
1,78,880 [2,60,000 – 81,120].
Computation of total income and tax liability of shareholders/ employees/ money-lenders:

A B
Salary:
Basic salary 1,44,000 1,44,000
Medical facility
(assuming not covered under exemption) 20,000 20,000
Car facility
(from office to residence and back) Exempt Exempt
Accommodation
[15% of 1,44,000] 21,600 21,600
Gross salary 1,85,600 1,85,600
Less: Standard deduction 50,000 50,000
Add: IFOS:
Dividend 89,440 89,440
Interest on loan 28,000 28,000
Total income 2,53,040 2,53,040
Tax liability Nil Nil
Total tax if company is formed is Rs. 81,120
Conclusion: Firm should be formed because it minimises the tax liability.
Lecture 39
Assessment of Companies
REVISE ENTIRE PGBP FROM SEM III MATERIAL
Sec. 79:
19
[Carry forward and set off of losses in case of certain companies.
79. (1) Notwithstanding anything contained in this Chapter, where a change in shareholding
has taken place during the previous year in the case of a company, not being a company in
which the public are substantially interested, no loss incurred in any year prior to the previous
year shall be carried forward and set off against the income of the previous year, unless on the
last day of the previous year, the shares of the company carrying not less than fifty-one per
cent of the voting power were beneficially held by persons who beneficially held shares of the
company carrying not less than fifty-one per cent of the voting power on the last day of the
year or years in which the loss was incurred:
(2) Nothing contained in sub-section (1) shall apply,—
(a) to a case where a change in the said voting power and shareholding takes place in a
previous year consequent upon the death of a shareholder or on account of transfer of
shares by way of gift to any relative of the shareholder making such gift;
In my example, B sold to Q in the PY 2019-20. Had he died and Q (assuming Q is the son of B) automatically
becomes the shareholder in place of B.
(b) to any change in the shareholding of an Indian company which is a subsidiary of a foreign
company as a result of amalgamation or demerger of a foreign company subject to the
condition that fifty-one per cent shareholders of amalgamating or demerged foreign
company continue to be the shareholders of the amalgamated or the resulting foreign
company;
PY 2013-14: Loss of Rs. 10 crore in the business [Closely-held company]

X Y Z
1/3 1/3 1/3
On 31 March 2014, shareholdings
PY 2019-20: Profit of Rs. 13 crore

X P Q
1/3 1/3 1/3
On 31 March 2020, shareholdings
Case 13 [20]:
ABC Pvt. Ltd. is a company incorporated on 01.04.2015, and the only capital issued is in the
form of equity shares. The shares are held throughout by A, B and C, equally. The company
has made losses/ profits in the past as under and these have been accepted by the tax department
on assessment:
Assessment Business Unabsorbed Total
Year Loss (Rs.) Depreciation (Rs.) (Rs.)
2016-17 ---- 10,00,000 10,00,000
2017-18 ---- 8,00,000 8,00,000
2018-19 [PY 2017-18] 4,50,000 7,50,000 12,00,000
Total 4,50,000 25,50,000 30,00,000
During the previous year ended 31.03.2019, A transferred his shares to P and during the
previous year ended 31.03.2020, B transferred his shares to Q. During the year ended
31.03.2019, the company made a profit of Rs. 10,00,000 (before charging depreciation of Rs.
6,00,000) and during the year ended 31.03.2020, a profit of Rs. 30,00,000 (before charging
depreciation of Rs. 5,00,000). Compute taxable income of the company with proper working
for the assessment year 2020-21.
Solution:
Shareholding pattern
on 31/03/2016: A [1/3] B [1/3] C [1/3]
on 31/03/2017: A [1/3] B [1/3] C [1/3]
on 31/03/2018: A [1/3] B [1/3] C [1/3]
on 31/03/2019: ---- B [1/3] C [1/3] P [1/3]
on 31/03/2020: ---- ---- C [1/3] P [1/3] Q [1/3]
AY 2019-20 [PY 2018-19]

Computation of total income of the company:
Business income 10,00,000
Less: Current expenses
[Sec. 30 to 35DDA, 36, 37(1), 37(2B)] 6,00,000
Current business income 4,00,000
Less: B/F Business loss 4,00,000*
Total income Nil
Position on 31 March 2018:

Business loss: Rs. 4,50,000 [Maximum 8 years]
Unabsorbed depreciation: Rs. 25,50,000

Business loss: Rs. 50,000
Unabsorbed depreciation: Rs. 25,50,000
AY 2020-21 [PY 2019-20]

Computation of total income of the company:
Less: Current expenses
[Sec. 30 to 35DDA, 36, 37(1), 37(2B)] 5,00,000
Current business income 25,00,000
Less: B/F Business
[Not allowed as per section 79] Nil
Less: Unabsorbed depreciation 25,00,000*
Total income Nil

Business loss: Rs. 50,000
Unabsorbed depreciation: Rs. 50,000
Assuming A has joined back the company as a shareholder in place of Q with the saem
shareholding on 30 March 2023, what would be the implications assuming the business
income (after adjusting all current expenses but before applying the rules of set-off or
carry forward and set-off of losses) of PY 22-23 is Rs. 4,00,000?
Shareholding on 31 March 2023: A [1/3] C [1/3] P [1/3]

AY 23-24 [PY 22-23]
Less: B/F business loss of PY 2017-18
(assuming it has not been adjusted yet) 50,000
3,50,000
Less: Unabsorbed depreciation
(assuming it has not been adjusted till date) 50,000
Exception of Section 79:
Lecture 40
Section 2(18): Widely-held companies:

1. 100% owned by Government/ RBI
2. At least 40% shares [Equity + Preference] owned by Government + RBI + Corporation
owned by RBI
Example:
9,000 ES Rs. 100 = 9,00,000
1,000 PS Rs. 20 = 20,000
10,000 9,20,000
Assuming 3,600 ES and 390 PS are owned by the RBI.
Total number of shares are 10,000 [9,000 + 1,000] but owned by RBI are 3,990 [3,600 + 390].
% holding by RBI on the basis of number of shares is 39.90% [3,990/10,000* 100]
% holding by RBI on the basis of share capital is 39.98% [3,67,800/9,20,000*100].
3. Section 25 companies as per the Companies Act

4. 50% Equity shares/ Equity share capital are held by co-operative societies throughout the
PY
5. Nidhi or Mutual Benefit Society declared under section 620A of the Companies Act
6. Having no share capital but declared by the CBDT as a widely-held company
7. Not a private company as per the Companies Act but its equity shares/ equity share capital
were listed on the last day of the PY in the recognised stock exchange in India
8. Not a private company as per the Companies Act but at least 50% (40% in case of Indian
companies engaged in mining/ manufacturing/ power generation) equity shares/ equity share
capital are held throughout the PY by Government/ + A corporation established under the
Act/ + A widely-held company/ + A 100% Subsidiary of this widely-held company.
Example: A Ltd. (it is not a private company as per the Companies Act)?
20% ES of A Ltd.: Delhi Govt.
25% ES of A Ltd.: X Ltd. (a widely-held company)
6% ES of A Ltd.: Y Ltd. (a 100% subsidiary of X Ltd.)
A Ltd. will be a widely-held company as per point 8 [51%].
(18) "company in which the public are substantially interested"—a company is said to be
a company in which the public are substantially interested—
(a) if it is a company owned by the Government or the Reserve Bank of India or in
which not less than forty per cent of the shares are held (whether singly or taken
together) by the Government or the Reserve Bank of India or a corporation
owned by that bank ; or
(aa) if it is a company which is registered under section 25 of the Companies Act,
1956 (1 of 1956) ; or
(ab) if it is a company having no share capital and if, having regard to its objects, the
nature and composition of its membership and other relevant considerations, it
is declared by order of the Board to be a company in which the public are
substantially interested :
Provided that such company shall be deemed to be a company in which the
public are substantially interested only for such assessment year or assessment
years (whether commencing before the 1st day of April, 1971, or on or after that
date) as may be specified in the declaration ; or
(ac) if it is a mutual benefit finance company, that is to say, a company which carries
on, as its principal business, the business of acceptance of deposits from its
members and which is declared by the Central Government under section 620A
of the Companies Act, 1956 (1 of 1956), to be a Nidhi or Mutual Benefit Society
; or
(ad) if it is a company, wherein shares (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits) carrying
not less than fifty per cent of the voting power have been allotted unconditionally
to, or acquired unconditionally by, and were throughout the relevant previous
year beneficially held by, one or more co-operative societies ;
(b) if it is a company which is not a private company as defined in the Companies
Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item
(B) are fulfilled, namely :—
(A) shares in the company (not being shares entitled to a fixed rate of dividend
whether with or without a further right to participate in profits) were, as on
the last day of the relevant previous year, listed in a recognised stock
exchange in India in accordance with the Securities Contracts (Regulation)
Act, 1956 (42 of 1956), and any rules made thereunder ;
(B) shares in the company (not being shares entitled to a fixed rate of dividend
whether with or without a further right to participate in profits) carrying not
less than fifty per cent of the voting power have been allotted
unconditionally to, or acquired unconditionally by, and were throughout the
relevant previous year beneficially held by—
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of
such company if the whole of the share capital of such subsidiary
company has been held by the parent company or by its nominees
throughout the previous year.
Explanation.—In its application to an Indian company whose business consists
mainly in the construction of ships or in the manufacture or processing of goods
or in mining or in the generation or distribution of electricity or any other form
of power, item (B) shall have effect as if for the words "not less than fifty per
cent", the words "not less than forty per cent" had been substituted ;
Lecture 41
Advance Ruling
Lecture 42
Non-Resident
1. Exemption available to a NR – Sec. 10
2. PGBP – Special provisions for a NR assessee
3. Capital Gains: Very few special provisions for a NR assessee
4. IFOS: Very few provisions for a NR assessee
5. Additional Concepts which are applicable to a NR assessee
How do we understand PGBP?

Sec. 28: Basis of charge
Sec. 29: Computation of PGBP Income
Sec. 30 to 35DDA : Expenses which are allowed to be shown on the Debit side of P&L
Account [NAME and calculation]
Sec. 36 : Expenses which are allowed to be shown on the Debit side of P&L
Account [NAME but not much calculation]
Sec. 37(1) : Expenses which are allowed to be shown on the Debit side of P&L
Account [NO Names]
Sec. 37(2B) : Advertisement Expense which is allowed to be shown on the Debit
side of P&L Account
Disallowed sections:
Sec. 40(a) : Any assessee
Sec. 40(b) : Firm
Sec. 40A :
Sec. 43B : Actual Payment Basis deduction allowed
PGBP Income (Taxable)
Presumptive Taxation Sections:

Sec. 44AD
Sec. 44ADA
Sec. 44AE
Now, section 44B
Lecture 43
Section 44BB, 44BBA, 44BBB, 44C and 44D
Lecture 44
Sec. 44DA
Part I of the chapter Non-Resident is over. It covers section 44B, 44BB, 44BBA, 44BBB,
44C, 44D (Not relevant) and 44DA.
Part II of chapter Non-Resident deals with those sections of the IT Act which gives special
rates of tax. So, we will be covering such sections now. The relevant sections are 111A, 112,
112A, 115A, 115BBA, 115BBDA and 115BBE.
Sec. 115A:
Applicable to a NR assessee.
Tax rate is flat 20% on
1. Dividend income from a foreign company
2. Interest income from the GOI or from an Indian concern where they borrowed money in
foreign currency from this NR assessee
However,
No deduction under section 28 to 44C, 57 and 80 is allowed from such incomes.
Sec. 115BBA:
Applicable to the following NR assessees:
Tax rate is flat 20%.
1. Sportsman earning match fee/ advertisement/ writing articles, etc.
2. Sports association earning any income related to sports in India
3. Entertainer earning performance fees.
However,
No deduction under any section of the IT Act is allowed from such incomes.
Lecture 45
Special provisions [Chapter XIIA]
Section 115C to 115-I
Case 4 [19]:
Mahesh, a non-resident Indian, has the following income from investments in foreign exchange
assets and other income: Rs.
a. Interest on Central Government Securities 50,000
b. Interest on debentures of public limited company 1,00,000
He spent on collection of above incomes 3,000
c. Long-term capital gains on transfer of debentures mentioned
in point (b) above [computed under section 48 (second proviso)] 2,00,000
d. Other income 2,90,000
Determine his tax liability for the assessment year 2020-21 under sections 115C to 115-I of
the Income-tax Act. How can ‘X’ reduce his tax liability?
Solution:
Application of Special provisions [Chapter XIIA]
Computation of total income:
IFOS (Investment income):
Interest 50,000
Interest on debentures 1,00,000 1,50,000
LTCG 2,00,000
Other 2,90,000
GTI 6,40,000
Less: Deductions under section 80C to 80U Nil
TI 6,40,000
Computation of tax:
Tax on investment income [1,50,000*20%] [Sec. 115E] 30,000
Tax on LTCG [2,00,000*10%] [Sec. 115E] 20,000
Tax on remaining income [6,40,000 – 1,50,000 – 2,00,000]
i.e., 2,90,000 as per slab rate [(2,90,000 – 2,50,000)*5%] 2,000
52,000
Add: HEC @ 4% 2,080
Tax payable 54,080
Non-Application of Special provisions [Chapter XIIA]

Computation of total income:
IFOS:
Interest income 50,000
Interest income on debentures 1,00,000 1,50,000
LTCG (to be computed after indexation, if allowed) 2,00,000
Other 2,90,000
GTI 6,40,000
Less: Deductions under section 80C to 80U Nil
TI 6,40,000
Computation of tax:
Tax interest income [1,50,000*20%] [Sec. 115A] 30,000
Tax on LTCG [2,00,000*20%] [Sec. 112] 40,000
Tax on remaining income [6,40,000 – 1,50,000 – 2,00,000]
i.e., 2,90,000 as per slab rate [(2,90,000 – 2,50,000)*5%] 2,000
72,000
Add: HEC @ 4% 2,880
Tax payable 74,880
Conclusion: Special Chapter XIIA is beneficial for the assessee.
Case 6 [18]:
‘X’, a member of the New Zealand Cricket team, received a sum of Rs. 5 lakh for participation
in matches in India. He also received a sum of Rs. 1 lakh in India for endorsing a product on
T.V. He contributed articles in an Indian newspaper for which he received Rs. 10,000. During
the tour of India, he won a prize of Rs. 10,000 in horse race. What will be his tax liability for
the assessment year 2020-21? (Delhi 2004; Delhi 2010, 7 marks)
Solution:
6,10,000*20% 1,22,000
10,000*30% 3,000
1,25,000
Add: Cess @ 4% 5,000
1,30,000
Exemptions available to a non-resident assessee

1. Interest on notified bonds or securities held by a non-resident including income by way
of premium on the redemption of such bonds or interest on Non-Resident (External)
Account in any bank in India in accordance with the rules laid down for that purpose,
in case of an individual [Sec. 10(4)].
2. Tax payable on royalty or fees for technical service on behalf of foreign company in
pursuance of an agreement entered into before June 01, 2002 [Sec. 10(6A)].
3. Tax payable on certain income (not being salary, royalty or fees for technical services)
of and on behalf of a non-resident or a foreign company by the Government or the
Indian concern in pursuance of an agreement entered into before June 01, 2002 [Sec.
10(6B)].
4. Income of foreign companies providing technical services received in projects

connected with security of India [Sec. 10(6C)].
5. Any payment made by an Indian company to acquire an aircraft on lease from foreign
Government or enterprise under an agreement entered into before April 01, 2007 [Sec.
10(15A)].
Lecture 46
Tax planning:
Tax Planning Terms: Tax Planning, Tax Evasion, Tax Avoidance and Tax Management and
McDowell Case
Some tax planning aspects – Distribution of assets at the time of liquidation [Sec. 46(1)]
Example:
Mr. X, a shareholder in Y Ltd. receives Rs. 40 at the time of liquidation out of which Rs. 10
is from accumulated profits. He also receives a furniture whose market value at the time of
liquidation is 35. He is the holder of 1 share which he purchased in 2014-15 for Rs. 100.
Discuss the tax implications in this case assuming liquidation is done in the PY 2019-20. CII
for 2014-15 is 240 and for 2019-20 is 289. Assume that section 112A is not applicable.
Solution:
Company’s point of view: There is no computation of capital gain at the time of sale of
furniture as per section 46(1).
On dividend of Rs. 10, the company has to pay dividend tax under section 115-O provided
the company is a domestic company.
Shareholder’s point of view:

AY 2020-21
Sale [40 + 35] 75
Less: Dividend [2(22)(c)] 10
Full value of consideration [46(2)] 65
Less: ICA [100/240*289] 120
LTCG 55
Lecture 47
Assessment of Companies – Sec. 115JB [MAT]
MAT [Minimum Alternate Tax] – Sec. 115JB
AY 2020-21
Compute the tax liability of a company assessee.
Tax as per the normal provisions: Tax after applying special rates and normal slab rates
Tax as per 115JB: 15% of Book Profits
Pay higher of the above
Computation of book profits:

Net profit [P&L Account as per the Companies Act]
Add:
Less:
Book Profit
Explanation –
1. Book profit –
"book profit" means the profit as shown in the statement of profit and loss for the relevant previous
year prepared as per the relevant provisions (mentioned in the heading “preparation of annual
accounts” above), subject to following adjustments.
Adjustments –
Following amounts shall be added in the profit (if any amount referred to in point 1 to 13 given below
is debited to the statement of profit and loss or if any amount referred to in point 14 given below is
not credited to the statement of profit and loss] –
1. the amount of income-tax paid or payable, and the provision therefor; or
Note –
the amount of income-tax shall include –
(i) any tax on distributed profits under section 115-O or on distributed income under
section 115R;
Note –
- Sec. 115-O deals with tax on distributed profits of domestic companies.
- Sec. 115R deals with tax on distributed income to unit holders.
(ii) any interest charged under this Act;
(iii) surcharge, if any, as levied by the Central Acts from time to time;
(iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time;
and
(v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central
Acts from time to time.
2. the amounts carried to any reserves, by whatever name called, other than a reserve specified
under section 33AC; or
Note –
Sec. 33AC deals with reserves for shipping business.
3. the amount or amounts set aside to provisions made for meeting liabilities, other than
ascertained liabilities; or
4. the amount by way of provision for losses of subsidiary companies; or
5. the amount or amounts of dividends paid or proposed; or
6. the amount or amounts of expenditure relatable to any income to which section 10 (other
than the provisions contained in clause (38) thereof) or section 11 or section 12 apply; or
Note –
- Sec. 10 deals with incomes which do not form part of total income.
- Sec. 10(38) deals with income arising from the transfer of a long-term capital asset, being
an equity share in a company or a unit of an equity oriented fund or a unit of a business
trust.
- Sec. 11 deals with income from property held for charitable or religious purposes.
- Sec. 12 deals with income of trusts or institutions from contributions.
7. the amount of depreciation,
8. the amount of deferred tax and the provision therefor,
9. the amount or amounts set aside as provision for diminution in the value of any asset,
10. the amount standing in revaluation reserve relating to revalued asset on the retirement or
disposal of such asset,
Following amounts shall be deducted from the profit –

1. the amount withdrawn from any reserve or provision, if any such amount is credited to the
statement of profit and loss.
Note –
- The amount withdrawn from a reserve created before April 1, 1997 otherwise than by
way of a debit to the statement of profit and loss shall not be deducted.
For example, revaluation reserve which was not created by way of debit to profit
and loss account will not be deductible from book profits.
- The amount withdrawn from reserves created or provisions made in a previous year
relevant to the assessment year commencing on or after the 1st day of April, 1997 shall
not be reduced from the book profit unless the book profit of such year has been
increased by those reserves or provisions (out of which the said amount was withdrawn)
under this Explanation or Explanation below the second proviso to section 115JA, as the
case may be;
2. the amount of income to which any of the provisions of section 10 (other than the provisions
contained in clause (38) thereof) or section 11 or section 12 apply, if any such amount is
credited to the statement of profit and loss; or
3. the amount of depreciation debited to the statement of profit and loss (excluding the
depreciation on account of revaluation of assets); or
Note:
a. The cumulative impact of the addition and subtraction is that the book profit will
be increased by depreciation (pertaining to revaluation of assets).
b. Some relief is available if there is a withdrawal from the revaluation reserve account
and it appears on the credit side of the profit and loss account (mentioned in the
next point).
4. the amount withdrawn from revaluation reserve and credited to the statement of profit and
loss, to the extent it does not exceed the amount of depreciation on account of revaluation
of assets referred to in point 3 above; or
5. the amount of loss brought forward or unabsorbed depreciation, whichever is less as per
books of account.
Note –
i. the loss shall not include depreciation;
ii. the provisions of this clause shall not apply if the amount of loss brought forward or
unabsorbed depreciation is nil; or
6. the amount of deferred tax, if any such amount is credited to the statement of profit and loss.
Notes related to MAT –

1. Surcharge is applicable on book profits, if book profits exceed Rs. 1 crore (or Rs. 10
crore), as the case may be.
2. Any provision made to meet unascertained liabilities like provisions of gratuity,

provisions for future losses etc. should be added back to such net profits for calculating
book profits. However, if the provision for gratuity has been made on the basis of
actuarial valuation, it becomes an ascertained liability and hence should not be added
back.
3. No adjustment is required for income tax refund, if credited in profit and loss account
while calculating book profit.
4. Any tax or duty which is not allowed as deduction as per the provisions of section 43B
though debited to profit and loss account shall not be added back for computing book-
profit.
5. Deferred tax liability provided as per AS-22 is an unascertained liability, hence to be

added back.
6. If a sum is debited to profit and loss account under the provisions of the Companies
Act, it will not be added to compute book profit, even if the same is allowed under
section 37 or under any other provision of the Income-tax Act.
7. Provision for liability to pay wealth-tax cannot be added back to net profit for
computing book profit.
8. Current year’s depreciation, which has not been charged to profit and loss account but
has been disclosed in notes appended to accounts, would be deducted from net profit in
determining book profit for the purpose of section 115JB.
Case 34 [20]:
From the following information compute the tax liability of X Ltd. for the assessment year
2020-21:
Profit and Loss Account
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Raw material 10,00,000 Domestic sale of goods 25,00,000
Salary and wages 1,20,000 Export of goods 6,00,000
Entertainment expenditure 20,000 Other receipts 2,00,000
Travelling expenditure 30,000 Dividend from Indian 3,22,000
company
Income tax 2,00,000
Wealth tax 5,000
Outstanding excise duty 15,000
Provision for unascertained
liability 40,000
Dividend paid 52,000
Dividend distribution tax 10,689
Depreciation on assets after 6,40,000
revaluation
Net Profit 14,89,311
36,22,000 36,22,000
Other information:
For tax purposes, the company wants to claim the following:
a. Deduction under section 80-IAC (100% of Rs. 14,89,311).
b. Custom duty of Rs. 50,000 pertaining to 2017-18 paid during 2019-20.
c. Depreciation under section 32 is Rs. 6,00,000.
d. Outstanding excise duty is paid on 12 December 2020.
e. Assets whose book value was Rs. 8,00,000 was revalued at Rs. 20,00,000.
f. The company wants to set-off the following losses/ allowances:
For Tax purposes For Accounting Purposes
(Rs.) (Rs.)
B/F Loss of 2017-18 7,40,000 8,00,000
Unabsorbed Depreciation 3,00,000 4,50,000
Solution:
Computation of tax liability of X Ltd. for the AY 2020-21 as per the normal provisions:
Net profit 14,89,311
Add: Expenses disallowed:
Excess depreciation w/o 40,000
O/S Excise duty [43B] 15,000
Income tax 2,00,000
Wealth tax 5,000
Provision 40,000
Dividend 52,000
DDT 10,689 3,62,689
18,52,000
Less: Custom paid paid in PY 2019-20 [43B] 50,000
Dividend income 3,22,000
PGBP 14,80,000
Add: IFOS – Dividend income Nil
14,80,000
Less: B/F business loss 7,40,000
Unabsorbed depreciation 3,00,000
GTI 4,40,000
Less: Deductions under section 80-IAC [100% of 4,40,000] 4,40,000
TI Nil
Tax as per normal provisions is Nil
Computation of book profits of X Ltd. for the AY 2020-21 as per section 115JB:
Net profit 14,89,311
Add: Depreciation 6,40,000
Income Tax 2,00,000
Provision for unascertained 40,000
Dividend 52,000
DDT 10,689 9,42,689
24,32,000
Less: Depreciation 2,56,000
B/F business loss of B/F unabsorbed dep.
[Less] 4,50,000
Dividend income [10(34)] 3,22,000 10,28,000
Book profit 14,04,000
Tax as per Sec. 115JB [15% of 14,04,000] 2,10,600

Add: Surcharge (since book profits does not exceed Rs. 1 crore) Nil
2,10,600
Add: Cess @ 4% 8,424
Tax 2,19,020
Conclusion: X Ltd. has to pay Rs. 2,19,020 as tax.
Sec. 115JAA: If tax payable as per MAT > Tax as per normal provisions, then this excess of
Rs. 2,19,020 [2,19,020 - Nil] is allowed as tax credit in those subsequent years where tax
payable as per normal provisions > Tax as per MAT and that too, only till this excess.
Normal Tax MAT Tax Credit of last year

AY 2021-22 4,00,000 4,10,000 No
AY 2022-23 6,00,000 5,60,000 Yes
Can claim only Rs. 40,000 out of
Rs. 2,19,020
Calculation of depreciation as per MAT:

When 20,00,000 6,40,000
1 6,40,000/20,00,000
8,00,000 6,40,000/20,00,000*8,00,000
Lecture 48
Sec. 115BAA, Sec. 115BAB and Sec. 115BAC
MANY THANKS
Dr. Naveen Mittal
[email protected]
The file is available at www.srcc.edu/e-resources
Corporate Tax Planning
Session Plan
Lecture Topics Covered

1 Basics of Corporate Tax Planning
2 Computation of total income and tax liability of an individual/ HUF/ Firm/
Company for the AY 2020-21;
Special incomes and special tax rates;
Tax slabs;
3 Double Taxation Relief – Introduction
4 Double Taxation Relief – Practice
7 Specific Management Decisions – Discussion
8 Specific Management Decisions – Purchase of an asset from own money
9 Specific Management Decisions – Purchase of an asset from borrowed money
10 Specific Management Decisions – Lease rent and Make or Buy
11 Business restructuring – Introduction
12 Business Restructuring – Amalgamation
13 Business Restructuring – Amalgamation – Depreciation calculation
14 Business Restructuring – Demerger, Slump Sale
15 Business Restructuring – Conversion of firm into a company,
16 Business Restructuring – Transfer of assets between holding and subsidiary
company
17 Business Restructuring – Transfer of assets between holding and subsidiary
company
18 Employee Remuneration – Introduction, Tax treatment of Leave Encashment,
Gratuity, Pension and Provident Funds
19 Employee Remuneration – Treatment of Allowances and Valuation of perquisite
of accommodation, domestic servants and household amenities
20 Employee Remuneration – Valuation of perquisite of motor car and education
21 Employee Remuneration – Valuation of perquisite of medical. Practice
Questions
22 Employee Remuneration – Practice Questions
23 Transfer Pricing – Introduction, Practice Questions,
24 Transfer Pricing – Practice Questions
25 Some Tax Planning Aspects – Introduction, Sale of assets used for scientific
research [Sec. 41(3)]
26 Some Tax Planning Aspects – Receipt of insurance compensation [Sec. 45(1A)]
27 FM Decisions: Introduction, Case when company wants to raise the new capital,
Explanation of determining effective dividend tax rate under section 115-O
28 FM Decisions: Case when company wants to raise additional capital
29 FM Decisions: Dividend [Section 2(22), 115BBDA, 115-O, 10(34)]
30 FM Decisions: Numerical on Sec. 2(22)(e) and TDS on Dividends [Sec. 194]
31 FM Decisions: Practice of all sections related to dividends
32 FM Decisions: Discussion on Section 94(7) and 94(8)
33 FM Decisions: Sec. 115QA and Sec. 115R
34 Setting up of New Business – Introduction
35 Setting up of New Business – Numerical of Firm vs. Company
37 Setting up of New Business – Numerical of Sole Proprietorship vs. HUF
39 Assessment of companies – Section 79
40 Assessment of companies – Section 2(18)
41 Advance Ruling
42 Non-Resident: Introduction, Sec. 44B
43 Non-Resident: Sec. 44BB, 44BBA, 44BBB, 44C and 44D
44 Non-Resident: Sec. 44DA, 111A, 112, 112A, 115A, 115BBA, 115BBDA and
115BBE
45 Non-Resident: Chapter XIIA, Exemptions under section 10
46 Tax Planning Terms: Tax Planning, Tax Evasion, Tax Avoidance and Tax
Management and McDowell Case
Some Tax Planning Aspects – Distribution of Assets at the time of Liquidation
[Sec. 46(1)]
47 Assessment of companies: Sec. 115JB
48 Assessment of companies: Sec. 115JB
49 Optional Tax Scheme: Sec. 115BAA, 115BAB and 115BAC
Relevant original source:

www.incometaxindia.gov.in

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University of Delhi – B.Com.

Incidence of Tax [Sec. 5]

Case of double taxation and why do we need double taxation relief?

USA [60%] 4,20,000

Example 1 (Section 91):

Step 2: Computation of tax liability of Mr. X for the AY 2020-21:

Step 3: Compute IRT as well as FRT:

Therefore, IRT = Rs. 1,51,840* 100 = 13.56%

FRT = Tax paid in foreign country * 100

Therefore, FRT = Rs. 1,35,980* 100 = 19.43%

Step 4: Compute relief under section 91(1):

Step 5: Tax payable in India = Step 2 – Step 4

Step 2: Computation of tax liability of Mr. Y for the AY 2020-21:

Step 3: Compute IRT as well as FRT:

Therefore, IRT = Rs. 1,45,600* 100 = 13.24%

FRT = Tax paid in foreign country * 100

Therefore, FRT = Rs. 1,20,000* 100 = 20%

Step 4: Compute relief under section 91(1):

Step 5: Tax payable in India = Step 2 – Step 4

How to compute 80QQB?

Example 3 (Section 91):

Step 2: Computation of tax liability of Mr. K for the AY 2020-21:

Step 3: Compute IRT as well as FRT:

Therefore, IRT = Rs. 51,160* 100 = 7.29%

FRT = Tax paid in foreign country * 100

Therefore, FRT = Rs. 1,20,000* 100 = 10%

Step 4: Compute relief under section 91(1):

Step 5: Tax payable in India = Step 2 – Step 4

Step 2: Computation of tax liability of Mr. Faisal for the AY 2020-21:

Step 3: Compute IRT as well as FRT:

Therefore, IRT = Rs. 2,81,840* 100 = 17.95%

FRT= Tax paid in foreign country * 100

Therefore, FRT(France) = Rs. 1,20,000* 100 = 10%

Step 4: Compute relief under section 91(1):

Step 5: Tax payable in India = Step 2 – Step 4 – Prepaid taxes

Example 5 (Section 91):

Step 2: Computation of tax liability of Mr. Khan for the AY 2020-21:

Step 3: Compute IRT as well as FRT:

Therefore, IRT = Rs. 81,120* 100 = 9.66%

FRT= Tax paid in foreign country * 100

Therefore, FRT(South Korea) = Rs. 1,80,000* 100 = 15%

Step 4: Compute relief under section 91(1):

Step 5: Tax payable in India = Step 2 – Step 4 – Prepaid taxes

𝑇𝑎𝑥 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑖𝑛 𝑠𝑡𝑒𝑝 (2)

Step 4: Relief under section 91 = Rs. 1,92,000 * 3.57% = Rs. 6,854

Note: Deduction of PPF has no relation with foreign income.

Situation 1: Purchase of an asset from own money or from borrowed money

How do we decide in different situations?

Purchase of an asset from own money

Year 1 Year 2 (Beginning) Year 10

Applicability of section 50(1):

Applicability of section 50(2):

Purchase of an asset from borrowed money

Year 1 Year 2 (Beginning) Year 10

Taking the asset on lease

Year Lease Lease rent Total (a) PV (.10) Total PV

Clarification of doubt raised by a participant –

Choosing between Repair or shut down the machine:

4. Conversion of firm into a company