DCM7104 CORPORATE TAX LAWS AND PLANNING

Description

SESSION	March 2024
PROGRAM	Master of Commerce
SEMESTER	III
course CODE & NAME	DCM7104 – Corporate Tax Laws and Planning
CREDITS	4
nUMBER OF ASSIGNMENTS & Marks	02 30 Marks each

 

Assignment Set – 1

Questions

 

1. A. Specify with brief reason, whether the following acts can be considered as an act of

(i) Tax management; or

(ii) Tax planning; or

(iii) Tax evasion; or

(iv) Tax avoidance:

• To reduce tax payable, Mrs. Nancy an individual, paid ₹ 25,000 as of life insurance premium on the policy of her family.
• A foreign company has an Indian subsidiary that is selling its product to the parent company at a price of ₹ 100 per unit while the same product is sold to another foreign company at ₹ 200 per unit.
• A company is claiming depreciation on the motor car which is being used by the director for official purposes.
• Installation of Air Conditioner costing ₹ 225,000 at the residence of the Director as per terms of appointment, but treating it as Plant installed in Quality Control Section in the factory.
• D is a working partner in a firm and he is entitled to a salary of ₹ 1,20,000 per month. He treats this as salary instead of business income.

 

Ans: Here is a classification of the given acts with brief reasoning: 

1. Payment of ₹ 25,000 as life insurance premium by Mrs. Nancy Classification:

Tax Planning Reason: Tax planning involves making financial decisions to avail of tax benefits within the legal framework. Paying life insurance premiums to claim deductions under Section 80C of the Income Tax Act is a legitimate tax planning strategy. 

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2. A. Mr. Smith purchased 1,000 shares of XYZ Company on January 1, 2019, at Rs 50 per share. On February 15, 2020, he sold 500 shares at Rs 80 per share, and on December 1, 2022, he sold the remaining 500 shares at Rs 90 per share. Mr. Smith’s annual income tax rate is 30%. Calculate the Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG) for each sale and advise Mr. Smith on the tax planning implications.

 

Ans: To calculate the Short-Term Capital Gain (STCG) and Long-Term Capital Gain (LTCG) for Mr. Smith’s transactions, we need to consider the holding period of each sale and the respective tax implications. 

1. First Sale (February 15, 2020) Purchase Date: January 1, 2019

Sale Date: February 15, 2020 Holding Period: More than 12 months but less than 24 months (as it is within 24 months in India, this sale is considered short-term) 

Calculation of STCG: Cost Price of 500 shares: 500 shares × Rs 50 = Rs 25,000

Sale Price of 500 shares: 500 shares × Rs 80 = Rs 40,000

Short-Term

 

3. A. A corporation is looking to raise Rs. 50 Lakhs to fund a project that will result in pre-tax earnings equal to 40% of the total amount of capital utilized. The corporation could raise debt financing at a rate of 10% per year. The company can raise funds through any one of the following three possible options:
4. Rs. 50 lakhs in equity capital,
5. Rs. 20 lakhs in loans, and Rs. 30 lakhs in equity capital
6. 18 lakhs rupees in equity capital and 32 lakhs rupees in loans.

 

Assume that the business will distribute all profits and dividends. The tax levy is 50%. Determine which of the three options the corporation should choose to reduce its tax liability.

Ans: To determine which financing option minimizes the corporation’s tax liability, we need to calculate the tax liability and the net profit for each option.

We’ll consider the interest expense on debt, the tax savings from the interest expense, and the final net income after tax.

Given Data: Total amount of capital needed: Rs. 50

Lakhs Pre-tax earnings: 40% of total capital = 0.40 × 50, 00,000 = Rs. 20,00,000

Debt financing rate: 10% per year Tax rate: 50%

Option 1:

 

4. Mr. MAYA (a resident) purchased a house in December 2016 for Rs. 4,36,200 and incurred a cost of improvement of Rs 2,00,000 in march 2020 and sold the same, in April 2024 for Rs. 36,20,000 (brokerage Rs. 20,000). He purchased another house for Rs 20,00,000 in Dec 2023.

Cost inflation index number:                       Previous year

117                                                      2015-16

122                                                      2016-17

267                                                      2019-20

301                                                      2020-21

317                                                      2023-24

343                                                      2024-25

 

Answer following questions:

• Determine the nature of capital gain?
• Determine the amount of capital gain?
• Determine the Capital gain tax liability in this transaction?
• Can he claim the option of not availing of the indexation and paying tax @ 10% on the capital gain?
• Specify the amount he can claim as exemption U/s 54.

 

Ans: To address the questions regarding Mr. MAYA’s capital gain, we need to calculate the nature of the capital gain, the amount of capital gain, and the capital gain tax liability. We also need to check if Mr. MAYA can opt for non-indexation tax treatment and determine the exemption amount under Section 54.

Given Data:

– **Purchase Price of House**: Rs. 4, 36,200 (December 2016)

– **Cost of Improvement**: Rs. 2, 00,000 (March 2020)

– **Sale Price**: Rs. 36, 20,000 (April 2024)

– **Brokerage**: Rs. 20,000

– **Cost Inflation Index (CII)**:

– 2015-16

 

 

Mr. Yadav is offered the post of director by SGRCS Ltd, with the following two options :
	Option I	Option II
Basic Salary	8,00,000	8,00,000
Conveyance Allowance (For Private Use )	28,000
Car Facility (For Private Use) (1.6 litre cap. ) (Cost of Car 2,00,000 )		28,000
Food allowance	26000
Meal coupons (to be utilised on Meal joints)		26000
Entertainment Allowance	24,000
Entertainment Facility (Health Club)		24,000
Education Allowance for two children	12,000
Education Facility for two children (Educational institute run by employer)		12,000
HRA	3,60,000
Rent-free residential facility at Jaipur (population is below 25 lakh)		3,60,000
Which option do you recommend to Mr. Yadav as an expert tax planner?

 

Ans: To recommend the best option for Mr. Yadav from a tax planning perspective, we need to calculate the taxable income for each option, considering the applicable perquisites and allowances under the Income Tax Act. 

Option I

Salary Components: 

Basic Salary: Rs. 8, 00,000

Conveyance Allowance: Rs. 28,000

Food Allowance: Rs. 26,000

Entertainment Allowance: Rs. 24,000

Education Allowance for two children: Rs. 12,000

HRA:

 

6. Write a short note on:
7. Method used in Transfer Pricing
8. Tax Deducted at Source

• Type of Assessment in Income tax

1. DTAA
2. Belated Return of Income

Ans:

1. Method Used in Transfer Pricing Transfer pricing refers to the rules and methods for pricing transactions between enterprises under common ownership or control. The primary objective is to ensure that the transfer prices set for transactions between related entities are at arm’s length, meaning they are the same as prices that would have been agreed upon by unrelated parties in similar circumstances.

The commonly

ns.