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Master of Business Administration MBA Semester 3

Subject Code MF0012


Subject Name Taxation Management
4 Credits
(Book ID: B1210)
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks.
Answer all the questions.
Q.1 Tax evasion is a menace to the
people, economy and the country. In
the wake of recent Swiss bank account
scandal give your views on the
following:
a. How does it affect the Indian
economy and the growth prospects?
b. Does black money cause Inflation?
[5+5 Marks]
Answer:-Tax evasion is sheer non-payment of tax
even when it is due to be paid in the
circumstances of the case. It should be
remembered that while tax planning is perfectly
legal, Tax Evasion is illegal and can result into
penalties and prosecution for the perpetrator.
When financial transactions are arranged in a way
that it becomes obvious that they were entered
with a malafide intention of either not paying

taxes or with a view to defeat the genuine spirit of


law, they cannot be accepted as legitimate Tax
Planning.
Twisting of facts or taking a very strict and literal
interpretation of law without understanding the
basic purpose of the law can only lead to
punishable offence.
In view of the facts set out so far, it becomes
necessary to look at the extent of compliance of
tax laws in India. Though many estimates of black
money have been coming forth, an attempt was
made to determine the extent of tax evasion in
the
Mumbai Income Tax charge, which collected about
35% of the Income Tax collections of the country
and 43% of the corporate tax collections. The
study was made on the basis of results of the
survey and search cases for all the years covered
by such cases. It came to light that none of the
taxpayers concerned declared for taxation
purposes anything more than 25% of their true
incomes after 1999. The figure arrived at was
given to the press specifying the basis on which it
was so calculated. Not a single protest was
received from any of the taxpayer, including
companies. The said figure was thereafter cited
for some more time, and even thereafter no
protest was received.
There was, therefore, every reason to believe this
estimate. However, there appears 10 to be higher

tax evasion in the case of companies. Some of the


companies have shown their entire capital as
having come from the countries regarded as Tax
Havens. Considering the extent of Indian monies
stacked in Swiss Bank Accounts, and bank
accounts of the developed countries, and
comparing the same with the annual income tax
collections of the Central Government, it appears
that the real income admitted for taxation
purposes is less than 25% . The extent of evasion
appears to be very much higher in the case of
companies as the companies have resorted to
evolution of tax evasion devices in the accounts
and such methods have not yet been properly
investigated by the Income Tax Department.
There are companies which have camouflaged
their capital investments and shown it in the
books as if it is explained capital for income tax
purposes.
The Indian Scenario - Peculiar problems of
tax evasion :
It will be appropriate at this stage to highlight
some of the key problems from the view point of
computerization in India:

(a) Investments in Real Estate:


The one field where black monies have been
invested on the largest scale is that of real estate

properties. Lands were sold for only 20% of their


real values and the balance 80% given in cash out
of the tax evaded monies, ever since 1947. But
later on when the tax rates were lowered to 30%
for individuals and 35% for companies, the black
portion got reduced to 40%. It may be a difficult
task to trace such black transactions through the
computer system, suggested for adoption on the
U.S. pattern for India. But it is common knowledge
that the black monies invested in land have been
reinvested in bank accounts, shares and in other
properties, apart from real estate property. It is
now confirmed knowledge that in regard to
buildings constructed, only 40% of the cost is
shown to income tax. It is possible to detect such
investment by analysis of the data obtained from
the trade and industry governing commodities
used for construction of buildings. Further, as all
the transactions relating to sale of real estate
properties are now recorded in computers
maintained by the Registration Offices all over the
country, and if the same data is brought on the
computers of the Income Tax Department, it
should be possible to know many owners of
property who have not filed their tax returns at all
so far. In India, there are only 3 corers of tax
assesses at present, and thus a large number of
people with taxable income have evidently
chosen not to file income tax returns.
(b) Gold and Jewellery Holdings:

India is having the largest private holdings of gold


and diamond jewellery among all the countries of
the world. In the searches conducted by the
Income Tax Department, huge unaccounted cash
balances and gold and diamond jewellery have
been found in the bank lockers maintained by tax
payers in bogus names and in their own names.
At current market rates, purchases of gold, silver
and diamonds may now reach about Rs. 80,000
crores a year. Gold and diamond traders are
mostly keeping their transactions outside bank
accounts. They are also giving vouchers to the
effect that raw gold has been given by the
customers, though; in
fact, it would have come from the traders
themselves. Therefore, it is necessary to
introduce a law requiring them to transact only
through bank cheques and issue
computerized bills, to facilitate proper flow of
information to the computer system of the tax
department.
(c) Shares, Mutual Funds, etc:
There are vast investments in shares and
debentures, travelers cheques, mutual funds and
the primary bonds issued by the Reserve Bank of
India. The data regarding company shares and
other investments mentioned can be easily
transferred to the computer system of the Income
Tax Department. The Mumbai
Stock Exchange is having a separate computer
system with complete data on daily

transactions and the Income Tax Department has


so far not made use of such data.
There is also the data generated in the computers
of the organizations in charge of
demat of shares. Like-wise, the data on post office
savings and other accounts is easy to be brought
on the computers of the tax department for
verification with the
individual returns, which are available with the
Government itself.
(d) Undisclosed Stock in-trade held by
companies and traders:
Many firms and individuals have also a tendency
to keep undisclosed business assets like cars and
private assets, unaccounted cash holdings etc.,
They have ability to give extensive bribes to
protect business and other interests. All such
practices would varnish once fear is caused
among the tax payers about the use of
computerized data for taxation purposes.
(e) Benami Investments:
Benami investments are typical of the Indian
economy. Even big companies have indulged in
such practices to impart total secrecy to their
undisclosed accounts. It may be difficult to
determine whether the investment found in the
computers of the income tax department is
benami or not, and benami shares will have to be
traced sometimes by extensive studies to be
conducted by teams of revenue officers. This

problem requires comprehensive study because it


is peculiar to the Indian Taxation System.
(f) Swiss Bank and other undisclosed bank
accounts held abroad:
Swiss Bank Accounts are shrouded in secrecy and
hence no information will be available to the
computer system of the Income Tax Department.
The amounts in Swiss Bank Accounts, which are
held in foreign currency, have been utilized by big
companies and other taxpayers in India to import
huge machineries at vastly under invoiced prices.
Such practices enable payment of secret trade
commissions in foreign currency and unaccounted
funds in Indian currency to those contesting
general elections. Several major companies have
converted Swiss Account holdings into benami
shares and debentures. The large amounts of
Swiss Bank deposits have, thus, been utilized and
every year, there are additions to the Swiss Bank
Account holdings.

b. Does black money cause Inflation?

Answer:-Illegally earned money is called black


money. It is the result of hoarding, smuggling, tax
evasion and dealing in immovable property for
which the consideration is paid in black. It has
been beyond the control of the Government. The
black money has already created a serious
problem in our country. The Indian economy
stands badly shattered because of the huge
amount of this tainted wealth lying in the coffers
of the rich. It has given rise to parallel economy
operating in the country. As a result, the prices
continue to rise in spite of all government efforts
to control them. The poor go on becoming poorer
while the rich go on becoming richer. The gap
between the haves and the have nots is widening
every day.
Black money is used by the rich in various evil
activities. They use this money for corrupting and
demoralizing social and political life. They display
it in ostentatious living and wasteful luxuries.
They bribe Government officers and lead them to
corruption and dishonesty. They purchase political
bosses and control the strings of the Government.
Thus the entire social structure comes to be badly
polluted.
It is difficult to form an exact idea of the amount
of black money in circulation in the country.
Searches and raids by Income Tax authorities are
conducted from time to time. Such raids yield
crores of rupees. But the people are, at times,

cleverer than the Government. They seek the aid


of the best legal brains and get the law twisted in
their favour. Most of the offenders use all their
money and influence and go scot free whenever
they are caught. The Government has, at various
times, announced some voluntary disclosure
schemes for unearthing the black money. These
schemes have proved successful to a very limited
extent. What has come to the surface is believed
only to be the tip of the huge iceberg lying hidden
underneath. The 1997 Voluntary Disclosure
Scheme announced by the Government of India
unearthed a big amount of black money as the
tax rate in this scheme had been reduced to thirty
per cent.
The black money, according to some reliable
estimates has gone up to Rs. 10,000 crores in our
country. It is to a great extent responsible for a
great rise in prices because the purchasing power
of the people has increased. People having black
money are leading a life of luxury whereas the
poor people are leadinng a miserable life. Some
leading economists of the country have suggested
stringent measures to the government to unearth
black money but successive governments have
been rejecting those measures.
The vested interests always stand in the way of
effective measures and get them diluted. The
government of the day appears to be doing its
best to unearth black money. A number of steps

have been taken. Taxation structure and system


have been made easier. At different times, the
government has brought forward several schemes
and asked the people to declare their wealth.
There has been some success. A lot soil remains
to be done.
It must be clear to all that the nation cannot shut
her eyes to this state of affairs. Smugglers and
black-marketers can no longer be tolerated. They
are striking at the very roots of our democratic
structure. All steps to weed the black money out
of circulation must be taken as early as possible.
The government must come down with a heavy
hand on smugglers, tax evaders, black-marketers
and hoarders. Black money is a curse. It must be
rooted out from public life.

Q.2 Detail death cum retirement


gratuity under Sec 17(1)iii of IT Act. Is
commutation of pension a viable option
in terms of tax planning?
Answer:-Death-cum-retirement gratuity or any
other gratuity which is exempt to the extent

specified from inclusion in computing the total


income under clause (10) of Section 10. Any
death-cum-retirement gratuity received under the
revised Pension Rules of the Central Government
or, as the case may be, the Central Civil Services
(Pension) Rules, 1972, or under any similar
scheme applicable to the members of the civil
services of the Union or holders of posts
connected with defense or of civil posts under the
Union (such members or holders being persons
not governed by the said Rules) or to the
members of the all-India services or to the
members of the civil services of a State or holders
of civil posts under a State or to the employees of
a local authority or any payment of retiring
gratuity received under the Pension Code or
Regulations applicable to the members of the
defense service. Gratuity received in cases other
than above on retirement, termination etc is
exempt up to the limit as prescribed by the Board.
Under the provisions of Section 10(10) of the IT
Act, any death-cum-retirement gratuity of a
government servant is completely exempt from
income tax. However, in respect of private sector
employees gratuity received on retirement or on
becoming incapacitated or on termination or any
gratuity received by his widow, children or
dependants on his death is exempt subject to
certain conditions. The maximum amount of
exemption is Rs. 3,50,000;. Of course, this is
further subject to certain other limits like the one
half-month's salary for each year of completed

service, calculated on the basis of average salary


for the 10 months immediately preceding the year
in which the gratuity is paid or 20 months' salary
as calculated.
Thus, the least of these items is exempt from
income tax under Section 10(10). Any payment in
commutation of pension received under the Civil
Pension(Commutation) Rules of the Central
Government or under any similar scheme
applicable to the members of the civil services of
the Union, or holders of civil posts/posts
connected with defense, under the Union, or civil
posts under a State, or to the members of the All
India Services/Defense Services, or, to the
employees of a local authority or a corporation
established by a Central, State or Provincial Act, is
exempt under sub-clause (i) of clause (10A) of
Section 10. As regards payments in commutation
of pension received under any scheme of any
other employer, exemption will be governed by
the provisions of sub-clause (ii) of clause (10A) of
section 10. Also, any payment in commutation of
pension received from a Regimental Fund or NonPublic Fund established by the Armed Forces of
the Union referred to in Section 10(23AAB) is
exempt under sub-clause (iii) of clause (10A) of
Section 10. The entire amount of any payment in
commutation of pension by a government servant
or any payment in commutation of pension from
LIC [Get Quote] pension fund is exempt from
income tax under Section 10(10A) of IT Act.

However, in respect of private sector employees,


only the following amount of commuted pension is
exempt, namely: (a) Where the employee
received any gratuity, the commuted value of
one-third of the pension which he is normally
entitled to receive; and (b) In any other case, the
commuted value of half of such pension. It may
be noted here that the monthly pension
receivable by a pensioner is liable to full income
tax like any other item of salary or income and no
standard deduction is now available in respect of
pension received by a tax payer.
Tax planning: If an employee is due for
retirement shortly, it is better to go for
commutation of pension as per the above stated
rules. Because pension (un-commuted) received
by all employees (govt. and non govt.) during
their life time is included in the salary income and
chargeable to tax.

Q.3 Explain the essential conditions to


be satisfied by a firm to be assessed as
firm under Section 184.
Answer:-Position of Firm under the Income Tax
Act Legally, a partnership firm does not have a
separate entity from that of the partners
constituting the firm as the partners are the
owners of the firm. However, a firm is treated as a
separate tax entity under the Income Tax Act.
Salient features of the assessment of a firm are as
under:
1. A firm is treated as a separate tax entity.
2. While computing the income of the firm under
the head Profits and gains of business or
profession, besides the deductions which are
allowed u/ss 30 to 37, special deduction is allowed
to the firm on account of remuneration to working
partners and interest paid to the partners.
However, it is subject to certain limits laid down
u/s 40 (b).
3. Share of profit which a partner receives from
the firm (after deduction of remuneration and
interest allowable) shall be fully exempt in the
hands of the partner. However, only that part of
the interest and remuneration which was allowed
as a deduction to the firm shall be taxable in the
hands of the partners in their individual
assessment under the head profits and gains of
business or profession.

4. The firm will be taxed at a flat rate of 30% plus


education cess @ 3% plus for the financial year
2010-11.
5. The firm will be assessed as a firm provided
conditions mentioned under Section 184 are
satisfied. In case these conditions are not satisfied
in a particular assessment year, the firm will be
assessed as affirm, but no deduction by way of
payment of interest, salary, bonus, commission or
remuneration, by whatever name called, made to
the partner, shall be allowed in computing the
income chargeable under the head profits and
gains of business or profession and such interest,
salary, bonus, commission or remuneration shall
not be chargeable to income tax in the hands of
the partner.
Assessment of firm
From point (5) stated above, it can be concluded
that for taxation purposes, a firm can be of two
types:
1. Firm assessed as firm (provided conditions
mentioned u/s 184 are satisfied).and the firm shall
be eligible for deduction on account of interest,
salary etc while computing its income under the
head business and profession). However, it will be
subject to the maximum of the limit specified
under Section 40(b)

2. If the prescribed conditions are not satisfied, no


deduction shall be allowed to the firm on account
of such interest, salary, bonus etc.
Essential conditions to be satisfied by a firm
to be assessed as firm (Section 184)
1. In the first assessment year: The firm will be
assessed as a firm, also known as Firm Assessed
as Such (FAAS) if the following conditions are
satisfied:
(a) Partnership is evidenced by an instrument i.e.
there is a written document giving the terms of
partnership.
(b) The individual share of the partners is
specified in that instrument.
(c) Certified copy of partnership deed must be
filed: A certified copy of the said instrument of
partnership shall accompany the return of income
in respect of the assessment year for which the
assessment as a firm is first sought.
Where certified copy is not filed with the return
there is no provision for condonation of delay.
However where the return itself is filed late then
there is no problem if the certified copy is filed
along with such return as the condition that it
shall accompany the return of income is satisfied.
Further Delhi ITAT in the case of Ishar Dass Sahini
& Sons v CIT held that where uncertified Photostat
copy of the instrument of partnership is submitted
along with the return of income and the certified

copy is produced at the time of assessment, it will


satisfy this condition.
2. In the subsequent assessment years: If the
above three conditions are satisfied the firm will
be assessed as such (FAAS) in the first
assessment year. Once the firm is assessed as
firm for any assessment year, it shall be assessed
in the same capacity for every subsequent year if
there is no change in the constitution of the firm
or the share of the partners.
Where any such change had taken place in the
previous year, the firm shall furnish a certified
copy of the revised instrument of partnership
along with the return of income for the
assessment year relevant to such previous year.
Read the box for some important points to be
considered in this regard.
Circumstance where the firm will be assessed as a
firm but shall not be eligible for deduction on
account of interest, salary, bonus, etc. [Section
184(5)]
The firm will be assessed as a firm but shall not
be eligible for any deduction on account of
interest, salary and bonus etc if there is failure on
the part of the firm as is mentioned in Section 144
(relating to Best Judgment Assessment) and
where the firm does not comply with the three
conditions mentioned under Section 184.

Q.4 List out the steps to compute total


income
Answer:Step 1 Determination of residential status
The residential status of a person has to be
determined to ascertain which income is to be
included in computing the total income. The
residential statuses as per the Income tax
Act are shown below
In the case of an individual, the duration for which
he is present in India determines his residential
status. Based on the time spent by him, he may
be (a) resident and ordinarily resident, (b)
resident but not ordinarily resident, or (c) nonresident. The residential status of a person
determines the taxability of the income. For e.g.,
income earned outside India will not be taxable in
the hands of a non-resident but will be taxable in
case of a resident and ordinarily resident.

Step 2 Classification of income under


different heads
The Act prescribes five heads of income. These
are shown below
HEADS OF INCOME SALARIES
INCOME FROM PROFITS AND GAINS
CAPITAL INCOME
HOUSE PROPERTY OF BUSINESS OR
GAINS FROM OTHER PROFESSION SOURCES
These heads of income exhaust all possible types
of income that can accrue to or be received by
the tax payer. Salary, pension earned is taxable
under the head Salaries. Rental income is
taxable under the head Income from house
property. Income derived from carrying on any
business or profession is taxable under the head
Profits and gains from business or profession.
Profit from sale of a capital asset (like land) is
taxable under the head Capital Gains. The fifth
head of income is the residuary head under which
income taxable under the Act, but not falling
under the first four heads, will be taxed. The tax
payer has to classify the income earned under the
relevant head of income.
Step 3 - Exclusion of income not chargeable
to tax
There are certain incomes which are wholly
exempt from income-tax e.g. agricultural income.
These income have to be excluded and will not
form part of Gross Total Income. Also, some
incomes are partially exempt from income-tax e.g.

House Rent Allowance, Education Allowance.


These incomes are excluded only to the extent of
the limits specified in the Act. The balance income
over and above the prescribed exemption limits
would enter computation of total income and
have to be classified under the relevant head of
income.
Step 4 - Computation of income under each
head
Income is to be computed in accordance with the
provisions governing a particular head of income.
Under each head of income, there is a charging
section which defines the scope of income
chargeable under that head. There are deductions
and allowances prescribed under each head of
income. For example, while calculating income
from house property, municipal taxes and interest
on loan are allowed as deduction. Similarly,
deductions and allowances are prescribed under
other heads of income. These deductions etc.
have to be considered before arriving at the net
income chargeable under each head
Step 5 Clubbing of income of spouse,
minor child etc.
In case of individuals, income-tax is levied on a
slab system on the total income. The tax system
is progressive i.e. as the income increases, the
applicable rate of tax increases. Some taxpayers
in the higher income bracket have a tendency to
divert some portion of their income to their

spouse, minor child etc. to minimize their tax


burden. In order to prevent such tax avoidance,
clubbing provisions have been incorporated in the
Act, under which income arising to certain
persons (like spouse, minor child etc.) have to be
included in the income of the person who has
diverted his income for the purpose of computing
tax liability.
Step 6 Set-off or carry forward and set-off
of losses
An assessed may have different sources of
income under the same head of income. He might
have profit from one source and loss from the
other. For instance, an assessed may have profit
from his textile business and loss from his printing
business. This loss can be set-off against the
profits of textile business to arrive at the net
income chargeable under the head Profits and
gains of business or profession. Similarly, an
assessed can have loss under one head of
income, say, Income from house property and
profits under another head of income, say, Profits
and gains of business or profession. There are
provisions in the Income-tax Act for allowing interhead adjustment in certain cases. Further, losses
which cannot be set-off in the current year due to
inadequacy of eligible profits can be carried
forward for set-off in the subsequent years as per
the provisions contained in the Act.

Step 7 Computation of Gross Total Income.


The final figures of income or loss under each
head of income, after allowing the deductions,
allowances and other adjustments, are then
aggregated, after giving effect to the provisions
for clubbing of income and set-off and carry
forward of losses, to arrive at the gross total
income.
Step 8 Deductions from Gross Total Income
There are deductions prescribed from Gross Total
Income. These deductions are of three types.
Step 9 Total income
The income arrived at, after claiming the above
deductions from the Gross Total Income is known
as the Total Income. It is also called the Taxable
Income. It should be rounded off to the nearest
Rs. 10.
The process of computation of total income is
shown hereunder
Step 10 Application of the rates of tax on
the total income
The rates of tax for the different classes of
assesses are prescribed by the Annual Finance
Act. Taxation For individuals, HUFs etc., there is a
slab rate and basic exemption limit. At present,
the basic exemption limit is Rs. 1,00,000 for
individuals. This means that no tax is payable by
individuals with total income of up to Rs.
1,00,000. Those individuals whose total income is

more than Rs. 1,00,000 but less than Rs. 1,50,000


have to pay tax on their total income in excess of
Rs. 1,00,000 @ 10% and so on. The highest rate is
30%, which is attracted in respect of income in
excess of Rs. 2,50,000. For firms and companies,
a flat rate of tax is prescribed. At present, the rate
is 30% on the whole of their total income. The tax
rates have to be applied on the total income to
arrive at the income-tax liability.
Step 11 Surcharge
Surcharge is an additional tax payable over and
above the income-tax. Surcharge is levied as a
percentage of income-tax. At present, the rate of
surcharge for firms and domestic companies is
10% and for foreign companies is 2.5%. For
individuals, surcharge would be levied @10% only
if their total income exceeds Rs. 10 lakhs.
Step 12 Education cess
The income-tax, as increased by the surcharge, is
to be further increased by an additional surcharge
called education cess@2%. The Education cess on
income-tax is for the purpose of providing
universalized quality basic education. This is
payable by all assesses who are liable to pay
income-tax irrespective of their level of total
income.
Step 13 - Advance tax and tax deducted at
source

Although the tax liability of an assessee is


determined only at the end of the year, tax is
required to be paid in advance in certain
installments on the basis of estimated income. In
certain cases, tax is required to be deducted at
source from the income by the payer at the rates
prescribed in the Act. Such deduction should be
made either at the time of accrual or at the time
of payment, as prescribed by the Act. For
example, in the case of salary income, the
obligation of the employer to deduct tax at source
arises only at the time of payment of salary to the
employees. Such tax deducted at source has to
be remitted to the credit of the Central
Government through any branch of the RBI, SBI or
any authorized bank. If any tax is still due on the
basis of return of income, after adjusting advance
tax and tax deducted at source, the assessee has
to pay such tax (called self-assessment tax) at the
time of filing of the return Taxation

Q.5 Detail the important provisions


under Wealth tax Act.
Answer:Wealth tax is not a very important or high
revenue tax in view of various exemptions. Wealth
tax is a socialistic tax. It is not on income but
payable only because a person is wealthy.
Wealth tax is payable on net wealth on valuation
date. As per Section 2(q), valuation date is 31st
March every year. It is payable by every
individual, HUF and company. Tax rate is 1% on
amount by which net wealth exceeds Rs 30 lakhs
from AY 2010-11. (Till 31-3-2009, the limit was Rs
15 lakhs). No surcharge or education cess is
payable.
No wealth-tax is chargeable in respect of net
wealth of any company registered under section
25 of the Companies Act, 1956; any co-operative

society; any social club; any political party; and a


Mutual fund specified under section 10(23D) of
the Income-tax
Act [section 45]
Net wealth = Value of assets [as defined in
section 2(ea] plus deemed assets (as defined in
section 4) less exempted assets (as defined in
section 5), less debt owed [as defined in section
2(m)].
Debt should have been incurred in relation to the
assets which are included in net wealth of
assessee. Only debt owed on date of valuation is
deductible.
In case of residents of India, assets outside India
(less corresponding debts) are also liable to
wealth tax. In case of non-residents and foreign
national, only assets located in India including
deemed assets less corresponding debts are liable
to wealth tax
[section 6].
Net wealth in excess of Rs. 30,00,000 is
chargeable to wealth-tax @ 1 per cent (on
surcharge and education cess).
Assessment year
Assessment year means a period of 12 months
commencing from the first day of April every year

falling immediately after the valuation date


[Section 2(d)] All.).
1-1 Assets
Assets are defined in Section 2(ea) as follows.
Guest house, residential house or
commercial building - The following are treated
as assets - (a) Any building or land appurtenant
thereto whether used for commercial or
residential purposes or for the purpose of guest
house (b) A farm house situated within 25
kilometers from the local limits of any
municipality (whether known as a municipality,
municipal corporation, or by any other name) or a
cantonment board [Section 2(ea)(i)]
A residential house is not asset, if it is meant
exclusively for residential purposes of employee
who is in whole-time employment and the gross
annual salary of such employee, officer or director
is less than Rs. 5,00,000.
Any house (may be residential house or used for
commercial purposes) which forms part of stockin-trade of the assessee is not treated as asset.
Any house which the assessee may occupy for the
purposes of any business or profession carried on
by him is not treated as asset.

A residential property which is let out for a


minimum period of 300 days in the previous year
is not treated as an asset.
Any property in the nature of commercial
establishments or complex is not treated as an
asset.
Motor cars - Motor car is an asset, but not the
following - (a) motor cars used by the assessee in
the business of running them on hire (b) motor
cars treated as stock-intrade [Section 2(ea)(ii)]. In
the case of a leasing company, motor car is an
asset.
Jewellery, bullion, utensils of gold, silver,
etc. [Section 2(ea) (iii)] - Jewellery, bullion,
furniture, utensils and any other article made
wholly or partly of gold, silver, platinum or any
other precious metal or any alloy containing one
or more of such precious metals are treated as
assets [Section 2(ea)(ii)]
For this purpose, jewellery includes ornaments
made of gold, silver, platinum or any other
precious metal or any alloy containing one or
more of such precious metals, and also precious
or semi-precious stones, whether or not set in any
furniture, utensils or other article or worked or
sewn into any wearing apparel.
Where any of the above assets (i.e., jewellery,
bullion, utensils of gold, etc.) is used by an

assessee as stock-in-trade, then such asset is not


treated as assets under section 2(ea)(iii).
Yachts, boats and aircrafts - Yachts, boats and
aircrafts (other than those used by the assessee
for commercial purposes) are treated as assets
[Section 2(ea)(iv)]
Urban land - Urban land is an asset [Section
2(ea)(v)]
Urban land means land situated in the area which
is comprised within the jurisdiction of a
municipality and which has a population of not
less than 10,000 according to the last preceding
census.
Land occupied by any building which has been
constructed with the approval of the appropriate
authority is not asset.
Any unused land held by the assessee for
industrial purposes for a period of 2 years from
the date of its acquisition by him is not an asset.
Any land held by the assessee as stock-in-trade
for a period of 10 years from the date of its
acquisition by him is also not an asset.
Cash in hand - In case of individual and HUF,
cash in hand on the last moment of the valuation
date in excess of Rs. 50,000 is an asset. In case
of companies, any amount not recorded in books
of account is asset [Section 2(ea)(vi)]

1-2 Deemed assets


Often, a person transfers his assets in name of
others to reduce his liability of wealth tax. To stop
such tax avoidance, provision of deemed asset
has been made. In computing the net wealth of an
assessee, the following assets will be included as
deemed assets u/s 4.
Assets transferred by one spouse to another
- The asset is transferred by an individual after
March 31, 1956 to his or her spouse, directly or
indirectly, without adequate consideration or not
in connection with an agreement to live apart will
be deemed asset [Section 4(1)(a)(i)]
If an asset is transferred by an individual to
his/her spouse, under an agreement to live apart,
the provisions of section 4(1)(a)(i) are not
applicable. The expression to live apart is of
wider connotation and even the voluntary
agreements to live apart will fall within the
exceptions of this sub-clause.
Assets held by minor child - In computing the
net wealth of an individual, there shall be included
the value of assets which on the valuation date
are held by a minor child (including step
child/adopted child but not being a married
daughter) of such individual [Section 4(1)(a)(ii)]

The net wealth of minor child will be included in


the net wealth of that parent whose net wealth
[excluding the assets of minor child so includible
under section 4(1)] is greater.
Assets transferred to a person or an
association of persons - An asset transferred by
an individual after March 31, 1956 to a person or
an association of person, directly or indirectly, for
the benefit of the transferor, his or her spouse,
otherwise than for adequate consideration, is
deemed asset of transferor [Section 4(1)(a)(iii)]
Assets transferred under revocable
transfers - The asset is transferred by an
individual to a person or an association of person
after March 31, 1956, under a revocable transfer
is deemed asset of transferor [Section 4(1)(a)
(iv)]
Assets transferred to sons wife [Section
4(1)(a)(v)] - The asset transferred by an
individual after May 31, 1973, to sons wife,
directly or indirectly, without adequate
consideration will be deemed asset of transferor
[Section 4(1)(a)(iv)]
Assets transferred for the benefit of sons
wife - If the asset is transferred by an individual
after May 31, 1973, to a person or an association
of the immediate or deferred benefit of sons wife,
whether directly or indirectly, without adequate

consideration, it will be treated as deemed asset


of the transferor [Section 4(1)(a)(vi)].
Interest of partner- Where the assessee (may
or may not be an individual) is a partner in a firm
or a member of an association of persons, the
value of his interest in the assets of the firm or an
association shall be included in the net wealth of
the partner/member. For this purpose, interest of
partner/member in the firm or association of
persons should be determined in the manner laid
down in Schedule III to the Wealth-tax Act [Section
4(1)(b)].
Admission of minor to benefits of the
partnership firm - If a minor is admitted to the
benefits of partnership in a firm, the value of his
interest in the firm shall be included in the net
wealth of parent of minor in accordance with the
provisions of section 4(1)(a)(ii) [see para 546.2]. It
will be determined in the manner specified in
Schedule III.
Conversion by an individual of his selfacquired property into joint family property
If an individual is a member of a Hindu
undivided family and he converts his separate
property into property belonging to his Hindu
undivided family, or if he transfers his separate
property to his Hindu undivided family, directly or
indirectly, without adequate consideration, the
converted or transferred property shall be

deemed to be the property of the individual and


the value of such property is includible in his net
wealth [Section 4(1A)]
If there was such transfer and if the converted or
transferred property becomes the subject-matter
of a total or a partial partition among the
members of the family, the converted or
transferred property or any part thereof, which is
received by the spouse of the transferor, is
deemed to be the asset of the transferor and is
includible in his net wealth.
Gifts by book entries - Where a gift of money
from one person to another is made by means of
entries in the books of account maintained by the
person making the gift, or by an individual, or a
Hindu undivided family, or a firm or an association
of persons, or a body of individuals with whom he
has business connection, the value of such gift
will be included in the net wealth of the person
making the gifts, unless he proves to the
satisfaction of the Wealth-tax Officer that the
money had actually been delivered to the other
person at the time the entries were made [Section
4(5A)]
Impartible estate - For the purpose of the
Wealth-tax Act, the holder of an impartible estate
shall be deemed to be the owner of all the
properties comprised in the estate [Section 4(6)]

Property held by a member of a housing


society - Where the assessee is a member of a
co-operative housing society and a building or
part thereof is allotted or leased to him, the
assessee is deemed to be the owner of such
building and the value of such building is
includible in computing his net wealth. In
determining the value of such building, any
outstanding instalments, payable by the assessee
to the society towards the costs of such house,
are deductible as debt owed by the assessee. The
above rules are also applicable if the assessee is a
member of a company or an association of
persons [Section 4(7)]
Property held by a person in part
performance of a contract [Section 4(8)] - A
person who is allowed to take or retain possession
of any building or part thereof in part performance
of a contract of the nature referred to in section
53A of the Transfer of Property Act, 1882.
Similarly, a person can acquire any rights,
excluding any rights by way of a lease from
month to month or for a period not exceeding one
year, in or with respect to any building or part
thereof, by virtue of transaction as is referred to in
section 269UA(f) of the Income-tax Act.
In above cases, the assets are taxable in the
hands of beneficial owners, in the same manner in
which they are taxed under the Income-tax Act :

1-3 Assets which are exempt from tax


The following assets are exempt from wealth-tax,
as per section 5.
Property held under a trust - Any property
held by an assessee under a trust or other legal
obligation for any public purpose of charitable or
religious nature in India is totally exempt from tax.
[Section 5(i)].
Business assets held in trust, which are
exempt - The following business assets held by
as assessee under a trust for any public
charitable/religious trust are exempt from tax
(a) Where the business is carried on by a trust
wholly for public religious purposes and the
business consists of printing and publication of
books or publication of books or the business is of
a kind notified by the Central Government in this
behalf in the Official Gazette
(b) The business is carried on by an institution
wholly for charitable purposes and the work in
connection with the business is mainly carried on
by the beneficiaries of the institution
(c) The business is carried on by an institution,
fund or trust specified in sections 10(23B) or
20(23C) of the Income-tax Act.

Any other business assets of a public


charitable/religious trust are not exempt.
Coparcenary interest in a Hindu undivided
family - If the assessee is a member of a Hindu
undivided family, his interest in the family
property is totally exempt from tax [Section 5(ii)].
Residential building of a former ruler - The
value of any one building used for the residence
by a former ruler of a princely State is totally
exempt from tax [Section 5(iii)]
Former rulers jewellery - Jewellery in
possession of a former ruler of a princely State,
not being his personal property which has been
recognised as a heirloom is totally exempt from
tax [Section 5(iv)]
The jewellery shall be permanently kept in India
and shall not be removed outside India except for
a purpose and period approved by the Board.
Reasonable steps shall be taken for keeping that
jewellery substantially in its original shape.
Reasonable facilities shall be allowed to any
officer of the Government, or authorised by the
Board, to examine the jewellery as and when
necessary.
Assets belonging to the Indian repatriates Assets (as given below) belonging to assessee
who is a person of Indian origin or a citizen of
India, who was ordinarily residing in a foreign

country and who has returned to India with


intention to permanently reside in India, is
exempt. A person shall be deemed to be of Indian
origin if he, or either of his parents or any of his
grand-parents, was born in undivided India.
After his return to India, following shall not be
chargeable to tax for seven successive
assessment years
(a) Moneys brought by him into India
(b) Value of asset brought by him into India
(c) Moneys standing to the credit of such person
in a Non-resident (External) Account in any bank
in India on the date of his return to India and
(d) Value of assets acquired by him out of money
referred to in (a) and (c) above within one year
prior to the date of his return and at any time
thereafter [Section 5(v)]
One house or part of a house - In the case of
an individual or a Hindu undivided family, a house
or a part of house or a plot of land not exceeding
500 sq. meters in area is exempt. A house is
qualified for exemption, regardless of the fact
whether the house is self-occupied or let out. In
case a house is owned by more than one person,
exemption is available to each co-owner of the
house [Section 5(vi)]

Q.6 What is meant by Full value of


consideration? How short term capital

gains and long term capital gains are


computed using full value of
consideration?
Answer:-Full value of consideration means &
includes the whole/complete sale price or
exchange value or compensation including
enhanced compensation received in respect of
capital asset in transfer. The following points are
important to note in relation to full value of
consideration.
The consideration may be in cash or kind.
The consideration received in kind is valued at
its fair market
value.
It may be received or receivable.
The consideration must be actual irrespective
of its adequacy.
COST OF ACQUISITION
Cost of Acquisition (COA) means any capital
expense at the time of acquiring capital asset
under transfer, i.e., to include the purchase price,
expenses incurred up to acquiring date in the
form of registration, storage etc. expenses
incurred on completing transfer.
In other words, cost of acquisition of an asset is
the value for which it was acquired by the
assessee. Expenses of capital nature for
completing or acquiring the title are included in
the cost of acquisition.

Indexed Cost of Acquisition = COA X CII of Year of


transfer
CII of Year of
acquisition

Sr.
No.
1
2
3
4
5
6
7
8

The indices for the various


are given below:
Fin.
Cost inflation
Sr.
Year
Index
No.
1981100
16
82
1982109
17
83
1983116
18
84
1984125
19
85
1985133
20
86
1986140
21
87
1987150
22
88
1988161
23
89

previous years
Fin. Year

Cost inflation
Index

1996-97 305
1997-98 331
1998-99 351
19992000
20002001
20012002
20022003
20032004

389
406
426
447
463

9
10
11
12
13
14
15

198990
199091
199192
199293
199394
199495
199596

172

24

182

25

199

26

223

27

20042005
20052006
20062007
20072008

480
497
519
551

244
259
281

If capital assets were acquired before 1.4.81, the


assesses has the option to have either actual cost
of acquisition or fair market value as on 1.4.81 as
the cost of acquisition. If assesses chooses the
value as on 1.4.81 then the indexation will also be
done as per the CII of 1981 and not as per the
year of acquisition.
COST OF IMPROVMENT
Cost of improvement is the capital expenditure
incurred by an assessee for making any addition
or improvement in the capital asset. It also
includes any expenditure incurred in protecting or
curing the title. In other words, cost of
improvement includes all those expenditures,
which are incurred to increase the value of the
capital asset.

Indexed Cost of improvement = COA X CII of Year


of transfer
CII of Year of
improvement
Any cost of improvement incurred before 1st April
1981 is not considered or it is ignored. The reason
behind it is that for carrying any improvement in
asset before 1st April 1981, asset should have
been purchased before 1st April 1981. If asset is
purchased before 1st April we consider the fair
market value. The fair market value of asset on
1st April 1981 will certainly include the
improvement made in the asset.
Provisions for computation of Capital Gain
Provisions under section 48
The income under the head Capital Gains shall
be computed by deducting the following from the
full value of the consideration received or accrued
as a result of the transfer of the capital asset :
Expenditure incurred wholly and exclusively in
connection with such transfer.
The cost of acquisition of the asset and the cost
of any improvement thereto.
Computation of Short Term Capital Gains
From full value of consideration, deduct
Expenditure incurred wholly and in exclusively
Cost of acquisition

Cost of any improvement of asset


Computation of Long Term Capital Gains
From full value of consideration, deduct
Expenditure incurred wholly and in exclusively
connection with the transfer
Indexed cost of acquisition of asset
Indexed cost of any improvement of asset

Master of Business Administration MBA Semester 3


Subject Code MF0012
Subject Name Taxation Management
4 Credits
(Book ID: B1210)
Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks.
Answer all the questions.
Q.1 Prepare a ready reckoner of various
tax savings investment options
covering Section C to U. According you
what are the 5 best investment options
under these sections.

Sl
No

Answer:Reckoned of various tax savings


options covering Section C to U:
Sectio Details of deductions
n
General deduction for
investment in PPF,PF,Life
Insurance, ULIP, Stamp
duty on house, Fixed
80C
deposits for 5 years ,
bonds etc
80CCC

Deduction in case of
contribution to pension

investment
Quantum
Maximum Rs 1 ,
00,000 is
allowed.
Investment need
not be from
taxable income.
Maximum is Rs
1,00,000

80CCD

80D

fund. However, it should


be noted that surrender
value or employer
contribution is considered
income.
Deduction in respect to
contribution to new
pension scheme.
Employees of central and
others are eligible.

Maximum is sum
of employers
and employees
contribution to
the maximum :
10 % of salary.
It should be noted that as per section
80CCE , the maximum amount of
deduction which can be claimed in
aggregate of 80C ,80CCC & 80CCD is Rs
1,00,0000
Medical insurance on
Rs 15,000 for self ,
self, spouse , children or spouse & children
parents
Extra Rs 15,000 for
insurance on
parents. IF parents
are above 65
years, extra sum
should be read as
Rs 20,000
Thus maximum is
RS 35,000 per
annum

80DD

80DDB

80E

For maintenance
including treatment or
7insurance the lives of
physical disable
dependent relatives
For medical treatment of
self or relatives suffering
from specified disease

For interest payment on


loan taken for higher
studies for self or
education of spouse or
children

Donations to charitable
institution
9

80G

10

80GG

For rent paid.

Rs 50,000 . In case
disability is
severe , the
amount is Rs
1,00,000.
Acutal amount
paid to the extent
of Rs 40,000. In
case of patient
being Sr Citizen ,
amount is Rs
60,000
Actual amount
paid as interest
and start from the
financial year in
which he /she
starts paying
interest and runs
till the interest is
paid in full.
100% or 50% of
amount of
donation made to
19 entities
(National defense
fund , Prime
minister relief fund
etc. )
This is only for
people not getting
any House Rent

For donation to entities


in scientific research or
rural development f
11

80GGA

12

80GGC

13

14

15

For contribution to
political parties
Allowed only to resident
authors for royalty
80QQB
income for books other
than text book
For income receipt as
80RRB royalty on patents of
resident individuals
Deduction in respect of
permanent physical
disability including
80U
blindness to taxpayer

Five best investment options

Allowance.
Maximum is Rs
2000 per month.
Rule 11B is method
of computation.
Only those tax
payers who have
no business
income can claim
this deduction
.Maximum is
equivalent to 100
% of donation.
100 % of donations
Royalty income or
Rs 3,00,000
whichever is less.
Actual royalty or
Rs 3,00,000
whichever is less.
RS 50,000 which
goes to Rs
1,00,000 in case
taxpayer is
suffering from
severe disability.

1.Provident fund: This is deducted


compulsorily, and there is no running away from
it! So, this has to be the first. Also, apart from
saving tax now, it builds a long term, tax free
retirement corpus for you.
2.Home loan principal: If you are paring the EMI
for a home loan, this one is automatic too! So, it
comes as a close second.
3.Life insurance premiums: Every earning
person having dependents should have adequate
life insurance coverage. Therefore, life insurance
premium payments are the next.
4.Voluntary Provident Fund (VPF) / Public
Provident Fund (PPF): If you think that the PF
being deducted from your salary is not enough,
you should invest some more in VPF, or in PPF.
5.Equity Linked Savings Scheme (ELSS): After
the above, if you have not reached the limit of Rs.
1,00,000, then you should invest the remaining
amount in Equity Linked Savings Scheme (ELSS).
Equities provide the best, inflation-beating return
in the long term, and should be a part of
everyones portfolio. After all, what can be better
than something that gives great return and helps
save tax at the same time?

Q.2 Write short notes on (a) Profit in


lieu of salary (b) Sec 80D
Answer:- (a) Profit in lieu of salary:
Profit in lieu of salary is a part of salary income. It
is included in gross salary and taxed accordingly.
Profit in lieu of salary includes the following(a) Any compensation due to or received by a
employee from his employer or former employer
at or in connection with the termination of his
employment or modification of the terms &
conditions relating thereto is taxable as profit in
lieu of salary after providing exemption u/s
10(10B) or 10(10C), if any.
(b) Any payment (except to the extent it is
specifically exempt u/s 10) due to or received by

an employee from his employer or former


employer or from a provident fund, or other fund
which may otherwise be taxable as income from
salary.
(c) Payment from un-recognised provident fund
or superannuation fund to the extent it does not
consist of contribution by the employee or
interest on employees contribution.
(d) Any sum received under a keyman
insurance policy including the sum allocated by
way of bonus on such policy.
(e) Any amount received in lump sum or
otherwise from any person prior to his joining
employment or after cessation of employment
with that person.
(b) DEDUCTION IN RESPECT OF MEDICAL
INSURANCE PREMIUM SEC 80D
Conditions:
1. Payment shall be on account of insurance
premium in respect of Medical Insurance (Not life
insurance)
2. Payment shall be made by cheque.
3. Payment shall be out of income chargeable to
tax.
4. Insurance scheme shall be framed by GIC and
approved by the Central Government from A.Y.
2002-03 the amount deposited in any scheme of
any other insurer who is approved by the
Insurance Regulatory and Development Authority
shall also be eligible for deduction.

5. Deduction can be claimed only by individual (in


respect of policy taken on his health of his/her
spouse, dependent parents, dependent children)
and by the HUF (on the health of any member of
such family).
Quantum of deduction: The actual
premium/premia paid during the tear, or Rs.
15000 whichever is less.

Q.3 Explain the tax provisions for new


business in free trade zones

Answer:Income of newly established undertakings in


free trade zones
[Section 10A]
General: A deduction of such profits and gains as
are derived by an undertaking from the export of
articles or things or computer software, as the
case may be, shall be allowed from the total
income of the assessee.
Essential conditions to claim deduction: the
deduction shall apply to an undertaking which
fulfills the following condition:
i) It has begun or begins to manufacture or
produce articles during the previous year,
relevant to the assessment year
a) 1981-82 or thereafter, in any free trade zone
b) 1994-95 or thereafter, in nay electronic
hardware technology park, or as the case may be,
software technology park; or
c) 2001-02 or there after in any Special Economic
zone
ii) It should not be formed by the splitting up or
reconstruction of a business already in existence.

iii) It should not be formed by the transfer of


machinery or plant, previously used for any
purpose, to a new business.
iv) The sale proceeds of articles or things or
computer software exported out of India should
be received in, or brought into, India by the
assessee in convertible foreign exchange, within a
period of six months or, within such extended
period as the competent authority may allow.
v) The exemption shall not be admissible for any
A.Y. 2001-02 or thereafter, unless the assessee
furnishes in the prescribed form [Form No.65F]
along with the return of income, the report of the
chartered accountant certifying that the
deduction has been correctly claimed as per
provisions of this Section.
The expression Free Trade Zone means such areas
as Kandla Free Trade Zone, Santa Cruz Electronics
Export Processing Zone, Falta Export Processing
Zone, Madras Export Processing Zone, Cochin
Export Processing zone, Noida Export Processing
Zone, or situated in an Electronic Hardware
Technology Park or in a Software Technology Park.
Period of tax holiday: The profits and gain from
the exports of such undertaking shall not be
included in the total income in respect of any ten
consecutive assessment years beginning from the
year in which the unit begins to manufacture or

produce such article or things or computer


software. No deduction under this Section shall be
allowed for the Assessment year 2010-2011 and
thereafter. Therefore, any unit set up after
financial year 2000-2001 is be eligible to claim
exemption for less number of years i.e. units set
up in 2001-2002 can claim this deduction for 9
years, units set up in 2002-2003 can claim this
deduction for 8 years and so on. In case of
existing units which are already claiming this
exemption, deduction is being allowed only for the
unexpired period of the aforesaid 10 years.

Q.4 Distinguish between amalgamation,


merger and demerger. What type of
transactions is not treated as
amalgamation?
Answer:Amalgamation:1-Amalgamation is blending together of two or
more business entities in a fashion that both
lose their identities and a new separate entity
is born.
2-shareholders of both (or more) companies get
new shares allotted that are of a new
company altogether.

Amalgamation as defined in section 2 (1B) of the


Income Tax Act, 1961 means the merger of one or
more companies with another company or the
merger of two or more companies to form one
company in such a manner that the following
conditions are satisfied:
a) All the property of the amalgamating company
or companies immediately before the
amalgamation becomes the property of the
amalgamated company by virtue of the
amalgamation.
b) All the liabilities of the amalgamating company
or companies immediately before the
amalgamation becomes the liabilities of the
amalgamated company by virtue of the
amalgamation
c) Shareholders holding at least three-fourths in
value of the shares in the amalgamating company
or companies (other than shares already held
therein immediately before the amalgamated
company or its nominee) becomes the
shareholders of the amalgamated company by
virtue of the amalgamation.
Merger:1- Merger is fusion of two or more entities and it is
a process in which the identity of one or more
entities is lost (as is often seen when political
parties merge)

2- the assets and liabilities of a company get


vested into the assets and liabilities of another
company. The shareholders of the company being
merged become shareholders of the larger
company (as when two or more smaller banks
merge with a larger bank).
Classifications of mergers:

Horizontal mergers take place where the two


merging companies both produce similar
product in the same industry.
Vertical mergers occur when two firms, each
working at different stages in the production
of the same good, combine.
Conglomerate mergers take place when the
two firms operate in different industries.

Demerger:The definition of 'demerger' as given under


Section 2(19AA) of the Income Tax Act is unduly
restrictive, and subject to various conditions.
Some of the conditions mentioned are:
1. The first condition is that all the property of the
undertaking should become the property of the
resulting company.
2. Conditions of Sec 391 to Sec.394 should be
satisfied.
3. Similarly, all the liabilities relating to the
undertaking immediately before the demerger
should become the liabilities of the resulting
company.

4. Explanation 2 provides that not only identified


liabilities should be transferred to the resulting
company, but also general borrowings in the ratio
of the value of the assets transferred to the total
value of the assets of the demerged company.
5. Assets and liabilities have to be transferred at
book value.
The expression Demerger is not expressly
defined in the Companies Act, 1956. However, it
is covered under the expression arrangement, as
defined in clause (b) of Section 390 of Companies
Act.
Division of a company takes place when
1. Part of its undertaking is transferred to a newly
formed company or an existing company and the
remainder of the first companys
division/undertaking continues to be vested in it;
and
2. Shares are allotted to certain of the first
companys shareholders.
A demerger is a form of restructure in which
owners of interests in the head entity (for
example, shareholders or unit-holders) gain direct
ownership in an entity that they formerly owned
indirectly (the demerged entity). Underlying
ownership of the companies and/or trusts that
formed part of the group does not change. The
company or trust that ceases to own the entity is
known as the demerging entity.

The entity that emerge have its own board of


directors and, if listed on a stock exchange, have
separate listings. The purpose of demerger is to
revive a company's flagging commercial fortunes,
or simply to lift its share price.
Mode Of Demerger:
Under the scheme of arrangement with approval
of the court U/s 391 of the Companies Act.
Procedure For Demerger:
1. Demerger forms part of the scheme of
arrangement or compromise within the ambit of
Section 390, 391, 392, 393, 394 besides Sec 394A
2. Demerger is most likely to attract the other
provisions of the companies Act, envisaging
reduction of Share capital comprising Sec. 100 to
105
3. The company is required to pass a special
resolution which is subject to the confirmation by
the court by making an application.
4. The notice to the shareholders convening the
meeting for the approval will usually consist of the
following detail:
(a) Full Details of the scheme
(b) Effect of the scheme on shareholders,
creditors employee
(c) Details of the valuation Report
5. An application has to be made for approval of
the High Court for the scheme of arrangement

6. It is necessary that the Articles of Association


should have the provision of reduction of its
Share Capital in any way, and its MOA should
provide for demerger, Division or split of the
Company in any way. Demerger thus, resulting
into reduction of Companies share capital would
also require the Co. to amend its MOA.
Type of transactions which is not treated as
amalgamation are:Section 2(IB) specifically provides that in the
following two cases there is no amalgamation, for
the purpose of income tax though, the element of
merger exists:a)Where the property of the company which
merges is sold to the other company and the
merger is the result of transition of sale.
b)Where the company which merges is wound
up in liquidation and the liquidator distributes
its property to another company.

Q.5 What are the key factors of


dividend policy? How do dividend policy
affect financial decisions?
Answer:The following Tax considerations one need to keep
in mind:a)Meaning of dividend under Section 2 (22)
b)Tax treatment in the hands of shareholders
c) Tax deduction at source under section 194
d)Tax on dividend
Dividends can be of three types:a)Dividends declared by a domestic company
b)Dividends declared by a foreign company
c) Dividends or any other income distributed by
Unit Trust of India.
Any amount declared, distributed or paid by a
domestic company by way of dividends (whether
interim or otherwise), on or after 1.6.1997 but up
to 31.3.2002, whether out of current or
accumulated profits, shall be exempt in the hands
of shareholders under Section 10(33). Dividend
includes deemed dividend but shall not include
deemed dividend motioned in Section 2(22)
(e), i.e. loan/ advance given by a closely held
company to a specified shareholder/ concern.
Therefore w.e.f. assessment year 2003-2004, any
dividend received either by a domestic company
is taxable.

the dividend policy on the cost of equity


capital of :1. The shareholders on the current income and
future income preferences. Shareholders on the
current income and future income to the different
preferences even if faced with the same budget
constraints will also be on the timing and amount
of cash inflows have different choices. Preference
for the existing high-income shareholders prefer
dividend payout ratio of dividend policy,
preference shareholders of future income are
more willing to keep more of their retained
earnings of the company to ensure the company's
long-term development.
2. Dividends and capital gains of the risks.
Common stock returns to shareholders include
two parts, one dividend income; second is capital
gains. A bird in the hand theory suggests that a
high dividend payout ratio could enable
enterprises to maximize the value, because
investors believe that the risk of the cash
dividend is less than the potential capital gains.
Safe hand preference dividends paid to
shareholders often require a stable dividend.
3. Capital gains relative to the dividend tax
breaks. Country's tax policies would affect the
returns to shareholders, which led to the
shareholders of the dividend policy choices. Longterm capital tax preference theory suggests that
there is more benefit than the dividend tax

advantages, investors are more willing to retain


the company retained earnings. Some highdividend income to shareholders against the
company for tax avoidance is often a higher cash
dividend payment.

Q.6 Explain the tax considerations of


bonus shares to Equity shares on: Situation 1: At the time of issue of
bonus shares
Situation 2: At the time of sale of bonus
shares by shareholders
Situation 3: At the time of redemption
of bonus shares

Answer:Situation

At the time of
issue of bonus
shares
At the time of
sale of bonus
shares by
shareholders
At the time of
redemption of
bonus shares

Tax treatment
in the hands
of the
company
including
bonus shares
No tax liability

Tax treatment
in the hands
of the
shareholders

No tax liability

See next para

Under Section2
(22) (a) or
2(22) (c), it will
be treated as
dividend
distribution to
the extent of
accumulated
profits and
consequently
the prayer
company will
pay dividend
tax

Out of the
amount
received at the
time of
redemption or
liquidation
amount treated
as dividend
under section
2(22) (a)/(c) will
be exempt in
the hands of
the
shareholders,
balance will be
sale

No tax liability

consideration
to compute
capital gains.