TAXATION MANAGEMENT

Q1. Give any twenty important examples of admissible general deductions

under Sec37 of Income tax Act.

Ans: The following are the few examples of admissible general

deduction under Sec 37 of income tax act:

1) Expenses incurred in the purchase, manufacture and sale of

goods.
2) General expenses incurred in the day to day running to the
business.
3) Expenses incurred in defending a case for damages for breach
of contract.
4) Amount of sales-tax paid and expenses incurred in connection
with sales-tax proceedings including appeals.
5) Compensation paid to an undesirable employee for the
retrenchment of his services or to a director to get rid of his
services.
6) Contribution made to provident fund maintained for the benefit
of employees under an act and with the previous approval of a
state government may not be allowable u/s 36(1)(iv) but allowable
u/s 37(1).
7) Commission, etc paid for securing orders for the business.
8) Compensation paid to employees in connection with injury
sustained by them or accident met by them while on duty.
9) Royalties paid in connection with mines.
10) Insurance premium paid under a policy ensuring its employees
against injury or against liability for compensation in respect of
accident to its workmen.
11) Reasonable expenses incurred on the occasion of Dussehra,
Diwali, commencement of the business, etc.
12) Compulsory subscription or a subscription given to an association
in the interest of the business.
13) Legal expenses incurred in connection with the business or
profession.

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14) Interest on unpaid purchase price of any business assets
purchased by an assessee and put to use will be allowed.
15) Expenditure incurred to oppose nationalization or to prevent
extinction of business.
16) Under executive instructions, cost of installing new telephone.

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17) Normal advertisement expenditure incurred to maintain the sales.

18) Penalty paid by the assessee for saving from confiscation the good
which he purchased from a third party without knowing that they
had been illegally imported.
19) Welfare expenditure incurred by the assessee.
20) Payment of excise duty.

Q2. What is unabsorbed depreciation? Mention the tax planning on

depreciation.
Ans:
Unabsorbed Depreciation:
Depreciation allowance for a particular previous year is first deductible
from the profits and gains of the business or profession. If the profits
and gains of the same business or profession are insufficient for this
purpose, the balance of the amount of current depreciation allowance
is deductible from the profits of any other business or profession of the
assessee. If the profits of any other business or profession are also
unable to absorb the whole amount of depreciation allowance, the
balance of such allowance which remains unabsorbed can be set-off
against any other taxable income of the same year. If still, the whole
amount of current depreciation allowance is not deductible on account
of the insufficiency of the other taxable income, the remaining
unabsorbed amount is called “Unabsorbed Depreciation”.

If unabsorbed depreciation cannot be wholly set-off, the amount of

depreciation not set-off shall be carried forward to the following
assessment year.

The unabsorbed depreciation shall be added to the depreciation

allowance for the following previous year or for the succeeding
previous years till such time it is fully deducted. In other words the
unabsorbed depreciation shall be treated as part of the current year’s
depreciation.

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Tax Planning on Depreciation:

Capital assets may be purchased even on the last day to claim 50% of
normal depreciation. Business assets if are to be purchased during
Sept. or Oct., one may see that it is used for a minimum period of 180
days to claim full depreciation allowance. Since no depreciation on the
assets sold during the previous year is allowed, the sale of the asset
may be postponed to the beginning of the next year.

Q3. Mr. AMAR purchased a house on 1.4.2000 for Rs.250000. On

1.7.2002 he incurred Rs.50000 towards improvements. He sold the
above house on 30.7.2006. Compute the indexed cost of acquisition
and indexed cost of improvement.

[CII; 2000-2001 – 406, 2002-2003- 447, 2007- 2008 –551]

Ans:
i) Indexed cost of acquisition = cost of acquisition*C.I.I of sale
year/C.I.I of purchase year
= 2,50,000*551/406
= 3,39,286

ii) Indexed cost of improvement = C.O.I*C.I.I of sale year/ C.I.I

of improvement
= 50,000*551/447
= 61,633

Q4. Explain different types of securities.

Ans:
Securities are of four types:

1) Tax –free Government Securities. These securities are those, the

interest on which is fully exempt from tax under section 10(15).

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Interest on such securities is neither included in total income nor it
is taxed.

2) Government Securities: Such securities are issued either by the

Central Government or a State Government. These are taxable
securities but no tax is deducted at source on such securities.
Hence, the interest on such securities will not be grossed up. The
amount received or due as the case may be shall be included in
the total income.

3) Tax-free Commercial Securities. These are issued by a local

authority or statutory corporation or a company, in the form of
debentures or bonds. Really speaking their interest not tax-free,
because tax due on this interest is payable by the company, or
local authority or corporation concerned. These are called tax-free,
because the assessee has not to pay tax on it from his own
pocket. The tax paid by the company(10.2% in case of listed
securities, 20.4% in case of unlisted securities) on this interest is
deemed to have been paid on any interest due to an assessee,
hence the amount of tax paid on any interest due to an assessee
added to his interest income. i.e., the interest due to an assessee
is grossed up and then this grossed up amount is included in his
total income. The amount of tax paid by the company on this
interest is deducted from the total tax payable by the assessee.

4) Less-Tax Commercial Securities. These may be called “Taxable

Securities”. In the case of these securities, income tax is deducted
at source on the amount of interest calculated at the percentage
stated on the securities and balance of the amount of interest
calculated at the percentage stated on the securities and balance
of the amount of interest left after deduction of the aforesaid
income tax is paid to the security-holder. (The rate of tax deducted
at source is 10.2% in case of listed securities, 20.4% in case of
unlisted securities) if the rate percent of interest is given it is not

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grossed up as it is already the gross amount of interest, and
income tax is to be deducted there from. If in the case of these
securities, the net amount of interest received is given, it has got
to be grossed up. In any case, it is the gross amount of interest
that is included in the total income of an assessee.

Q5. From the following particulars of SHRI MAHESH compute his income
from other sources:
Ground rent of Rs.5000
Following interest received
a. On fixed deposits from bank Rs.400
b. From POSB A/c Rs.300
c. Interest on deposit with a firm Rs.600
Income from subletting of house taken on rent Rs.5000. Rent paid
Rs.3000
Gift from brother in law 30000. Gift from other persons 40000
Spent Rs.400 for collecting the rent of the house

Ans:
Calculation of Income from other sources of Shri Mahesh:

Rs. Rs.

Ground Rent 5000

Interest Received:
On Fixed Deposits from Bank 400
From POSB A/c 300
Interest on Deposit with a Firm 600 1300

Subletting of House:
Rent Received 5000
Less: Expenses
Rent Paid 3000
Collection Charges 400 1600

Gift:

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Gift from brother in law (Gift from relative is not taxable) Nil
Gift from Other Person 40000
Total 40000
As it not exceeds Rs 50000/- not chargeable to tax Nil

Income from Other Sources 7900

Ans: Income from other sources of Shri Mahesh is Rs.7900/-

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Q6. What is Minimum Alternative Tax (MAT)? How to compute tax as

provisions of MAT?

Ans: Minimum Alternative Tax (w.e.f. A.Y. 2001-02)

Where in the case of company the income-tax payable on its total
income in respect of any previous year relevant to assessment year is
less than 10% (plus surcharge, if any + Education cess) of its book
profit, such book-profit shall be deemed to be the total income and the
tax payable on such total income shall be the amount of income-tax @
10% (plus surcharge, if any + Education cess) of such book profit.

MAT (Sec 115 JB) under this tax payable by a company for any A.Y.
cannot be less than 10% of book profit.

How to compute tax as provisions of MAT:

(A) Find out Normal Tax Liability (ignoring MAT)
(B) MAT
1. Find out Book Profit
2. Find out MAT Tax at 10%
If (A) is more MAT is not applicable.
If (B) is more MAT is applicable.

Points to be kept in mind while computing the profit

The profit and loss account shall be prepared in accordance with the
provisions of Parts II and III of Schedule VI to the Companies Act,
1956.

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