taxation management mf0012 spring drive assignment-2012

Spring / February 2012

Master of Business Administration- MBA Semester 3 MF0012 – Taxation Management - 4 Credits

(Book ID: B1210) Assignment Set- 1 (60 Marks)

Q1. What are the factors that are helpful for effective tax planning?

Ans: Take a Holistic ViewAccording to financial advisors, tax planning cannot work in isolation. It has to be in line with your overall financial planning. While making an investment, one should clearly weigh the return, security, liquidity, tenure of investment, tax benefits and risks and take a holistic view. "We always maintain that investors make last minute tax investments into those instruments which are most visible, than what is actually required. For instance, investors end up buying an expensive recurring product like an insurance scheme thinking the premium amount will be eligible for tax deduction every year. But this investment may not be in line with the individual's goal and the financial portfolio," says Swapnil Pawar, chief investment officer at Karvy Private Wealth.

Be careful with single-premium life covers

They have become a rage of late with a few companies launching single-premium endowment plans. Even if they seem like the right products for you, ensure that the sum assured is at least five times the annual premium. Else, you may end up foregoing certain tax benefits - in terms of exemptions under Section 80 C for premiums paid and under 10 (10D) for maturity proceeds. "For instance, a single-premium policyholder would not be eligible to receive the sum as exempt under Section 10D except where the same is received by the

legal heir in case of death of the policy holder. The amount of 20% cannot be calculated after netting off the amount of premium returned by the agent with regards to the policy sold," says Suresh Surana, founder, RSM Astute Consulting Group.

"For the purpose of deduction under Section 80C in respect of the premium for such policies, the deduction is limited to 20% of the capital sum assured."

Last minute PPF investments are not rewarding

Tax-payers tend to invest chunks in PPF in the last two months of the financial year. In such cases investors don't benefit from the annual return of 8%. Ideally, an investor should invest before the 5th of every month in PPF to earn the interest for that month. In case of cheque payments, ensure your cheque gets cleared by this date.

Joint loans can be doubly beneficial

Some couples who take joint home loans make the mistake of assuming that deductions, too, are available collectively and not individually. However, this is an incorrect impression. In fact, the deduction for interest up to 1.5 lakh on such loans can be claimed by each of the


joint owners and co-borrowers. Similarly, the deduction in respect of principal repayment can also be claimed by each of the co-owners.

Invest property sales proceeds in time

A window of two years is available to invest proceeds from property sale, but it is not unconditional. "Under Section 54, capital gains realised from sale of residential house are exempt in case of re-investment in the purchase of residential property one year before transfer or two years after transfer, or construction before three years after transfer (That is, investment has to be made within the specified time limit). If the amount is not utilised till the date of filling of return, then deposit must be made in a nationalised bank under the Capital Gains Account Scheme," says Surana.

There are many tax benefits provided in the Act over and above the 1 lakh limit under Section 80C. For instance, house rent allowance (HRA), paying rent to your parents, mediclaim and the latest tax saving instrument being the infrastructure bonds. "To give an impetus to infrastructure spending, the government introduced an additional deduction of up to 20,000 for subscription in specified long-term infrastructure bonds. This deduction was originally meant to apply for subscriptions between April 1, 2010 and March 31, 2011, but has been extended up to March 31, 2012," says Vineet Agarwal, director - tax and regulatory services, KPMG, India.

In fact, it makes sense to invest in these bonds in the current interest rate scenario and that too if you are in the highest tax bracket. "Investing in infrastructure bonds will be most useful for those in the highest tax bracket as the tax savings potential is the highest. Even for the 20% tax slab it is fine. For those in 10% tax slab, it is not really that lucrative and not recommended," says Suresh Sadagopan, certified financial planner & founder, Ladder 7 Financial Advisories.

Q2. Define the term tax holidays. What are the different tax incentives for new units established in Special Economic Zone (SEZ)?

Ans: Facilities and Incentives

Incentives and facilities offered to the SEZsThe incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include:-

o Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.

o Exemption from minimum alternate tax under section 115JB of the Income Tax Act.o External commercial borrowing by SEZ units upto US $ 500 million in a year without

any maturity restriction through recognized banking channels.o Exemption from Central Sales Tax.o Exemption from Service Tax.o Single window clearance for Central and State level approvals.o Exemption from State sales tax and other levies as extended by the respective State

Governments. o The major incentives and facilities available to SEZ developers include:-


o Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.

o Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

o Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.o Exemption from dividend distribution tax under Section 115O of the Income Tax Act.o Exemption from Central Sales Tax (CST).o Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

Q3. What are the key steps to calculate the tax liability of an individual?

Ans: Steps to compute total income The steps in which the total income for any assessment year is determined as follows: 1. Determine the residential status of the assesse to find out which income is to be included in the computation of his total income 2. Classify the income under each of the following five heads. Compute the income under each head after allowing deductions prescribed for each head of income:

a) Income from salaries Salary/Bonus/Commission, etc. _______ Taxable Allowance _______ Value of Taxable perquisites _______ Gross salary _______ Less: Deductions u/s 16 _______ Net taxable income from salary _______

b) Income from House Property Net annual value of house property _______ Less: Deduction under Section 24 _______ Income from house property _______

c) Profits & gains of business & profession Net profit as per P&L A/c _______ Less/Add: Adjustments required to be made to the profit as per provisions of Income tax Act _______ Net profit and gains of business & Profession _______

d) Capital gains Capital gains as computed Less: exemptions u/s 54/54B/54D etc. Income from capital gain

e) Income from other sources: Gross income _______ Less: Deductions _______ Net income from other sources _______ Gross Total Income [(a)+(b)+(c)+(d)+(e)] Less: Deductions available under chapter VI A Sections 80 C to 80 U _______ Total Income _______


Income computed under four heads (salary head is not applicable), is aggregated. While aggregating the income, Sections 60 and 61 shall be applicable. Further, effect to set off of losses and adjustment for brought forward losses will also be done. From the gross total income so computed, the following deductions of Chapter VIA should be allowed:

Let’s take a few examples to illustrate how you can calculate taxes based on these slabs.

Example 1:Sarita is a salaried employee, her annual income is Rs. 2,60,000. She has made no tax savings investments during the year. Let us calculate her income tax liability.

Heads AmountsGross Total Income Rs. 260,000Deductions NilTaxable Income Rs. 260,000Income Tax CalculationsTaxTax on Income upto Rs 1,90,0000% ZeroTax on the remaining Rs 70,000 10% Rs.7,000Total Income Tax Due Rs.7,000Educational Cess @ 3% Rs. 210Total Tax Payable Rs. 7,210You will notice that Sarita has not used any deduction available to all taxpayers under section 80C (for example deductions related to insurance premium or ELSS investment or home loan principal repayment among other options). If Sarita would have used part of her income towards any tax related instrument under 80C, then she could have reduced her tax liability of Rs 7,210 through this deduction.

Q4. What are the tax provisions for assessment of firms?

Ans: Assessment as a firm.

(1) A firm shall be assessed as a firm for the purposes of this Act, if-

(i) the partnership is evidenced by an instrument; and

(ii) the individual shares of the partners are specified in that instrument.

(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993, in respect of which assessment as a firm is first sought.

Explanation.-For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

(3) Where a firm is assessed as such 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 shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.

(4) 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 and all the provisions of this section shall apply accordingly.

(5) Notwithstanding anything contained in the foregoing provisions of this section, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall not be assessed as such for the said assessment year and, thereupon, the firm shall be assessed in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly.

Provisions for taxation of Partnership Firms

Partnership firm is subjected to taxation under the Income Tax Act,1961. It is the umbrella Act for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to formulate rules (The Income Tax Rules,1962) for implementing the provisions of the Act. The CBDT is a part of Department of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various direct taxes in India and is responsible for administration of direct tax laws through the Income Tax Department. The Income Tax Act is subjected to annual amendments by the Finance Act, which mentions the 'rates' of income tax and other taxes for the corresponding year.Under the Income Tax Act, the Partnership firm is taxed as a separate entity, distinct from the partners. In the Act, there is no distinction between assessment of a registered and unregistered firms. However, the partnership must be evidenced by a partnership deed. The partnership deed is a blue print of the rights and liabilities of partners as to their capital, profit sharing ratio, drawings, interest on capital, commission, salary, etc, terms and conditions as to working, functioning and dissolution of the partnership business.

Under the Act, a partnership firm may be assessed either as a partnership firm or as an association of persons(AOP). If the firm satisfies the following conditions, it will be assessed as a partnership firm, otherwise it will be assessed as an AOP:-

The firm is evidenced by an instrument i.e. there is a written partnership deed.

The individual shares of the partners are very clearly specified in the deed.

A certified copy of partnership deed must accompany the return of income of the firm of the previous year in which the partnership was formed.

If during a previous year, a change takes place in the constitution of the firm or in the profit sharing ratio of the partners, a certified copy of the revised partnership deed shall be submitted along with the return of income of the previous years in question.

There should not be any failure on the part of the firm while attending to notices given by the Income Tax Officer for completion of the assessment of the firm.It is more beneficial to be assessed as a partnership firm than as an AOP, since a partnership


firm can claim the following additional deductions which the AOP cannot claim :-

Interest paid to partners, provided such interest is authorised by the partnership deed.

Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual. The remuneration paid to such a partner must be authorised by the partnership deed and the amount of remuneration must not exceed the given limits

Q5.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?

Ans: 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.

Q6. 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?

Ans:Full value of consideration

The expression “full value” means the whole price without any deduction whatsoever and it cannot refer to adequacy or inadequacy of price. The consideration for the transfer of capital asset is what the transferor receives in lieu of the asset he parts with, namely money or money’s worth is m. It is not necessarily always the market value of the asset on the date of transfer.

However, at many places, reference is made to Free Market Value (FMV).

Expenses incurred wholly and exclusively in connection with such transferIt refer to expenses necessary for effecting transfer, e.g. brokerage, commission paid for securing a purchaser, cost of stamp, traveling expenses, incurred in connection with transfer, litigation expenditure for claiming enhancement of compensation, etc.

Short-term capital gainThe profits and gains arising from the transfer of a short-term capital asset are treated as short-term capital gains and included in the total income of the taxpayer for taxation at the rates applicable to him. Where a taxpayer incurs a loss from the transfer of a short-term capital asset (such loss is termed as short-term capital loss.) the same is allowed to be set off only against gain from the transfer of another short-term or long-term capital asset. In a case where the short-term capital loss remains unabsorbed, the same is allowed to be carried forward for set off only against gain from the transfer of another short-term and long-term capital asset in the subsequent year. However, such carry forward is restricted for a period of eight years. In other words, a short-term capital loss cannot be set off against income from salaries, house property, business or profession or income under the head other sources.

Long-term capital gainSimilarly, the profits and gains arising from the transfer of a long-term capital asset are


treated as long-term capital gains. Since long-term capital gains represent accumulation of income over a period of time, these could turn out to be illusory in real terms. Accordingly, the cost of the asset is adjusted for inflation during the period of holding. The increased cost is set-off against the sale consideration of the long-term capital asset to determine the long term capital gain. Such long-term capital gain is subjected to a concessional rate of tax to eliminate the bunching effect.

Computation of capital gains

Computation of Short-term Capital Gains Computation of Long-term Capital GainsFrom full value of consideration, deduct

1) Expenditure incurred wholly & in exclusively

2) Cost of acquisition

3) Cost of any improvement of asset

From full value of consideration, deduct

1) Expenditure incurred wholly & exclusively connection with the transfer

2) Indexed cost of acquisition of asset

3) Indexed cost of any improvement of asset


Master of Business Administration- MBA Semester 3 MF0012 – Taxation Management - 4 Credits

(Book ID: B1210) Assignment Set- 2 (60 Marks)

Q1. Describe, in brief, the provisions for set off and carry forward of losses.Ans: 72A. Provisions relating to carry forward and set off of acculamated loss and unabsorbed depreciation allowance in amalgamation or demerger etc.

(1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship with another company, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly.

(2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless the amalgamated company-

(i) holds continuously for a minimum period of five years from the date of amalgamation at least three-fourths in the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation;

(ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation;

(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.

(3) In a case where any of the conditions laid down in sub-section (2) are not complied with,the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not compiled with.

(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall-

(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the resulting company, be allowed to be carried forward and set off in the hands of the resulting company;

(b) where such loss or unabsorbed depreciation is not directly relatable to the


undertakings transferred to the resulting company, be apportioned between the demerged company and the resulting company in the same proportion in which the assets of the undertakings have been retained by the demerged company and transferred to the resulting company, and be allowed to be carried forward and set off in the hands of the demerged company or the resulting company, as the case may be.

(5) The Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.

(6) Where there has been reorganisation of business, whereby, a firm is succeeded by a company fulfilling the conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company fulfilling the conditions laid down in clause (xiv) of section 47, then, notwithstanding anything contained in any other provision of this Act, the

accumulated loss and the unabsorbed depreciation of the predecessor firm or the proprietary concern, as the case may be, shall be deemed to be this loss or allowance for depreciation of the successor company for the purpose of previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly:

Provided that if any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv) to section 47 are not complied with, the set-off of loss or allowance of depreciation made in any previous year in the hands of the successor company, shall be deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.

(7) For the purposes of this section,-

(a) "accumulated loss" means so much of the loss of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, under the head profits and gains of business or profession" (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of business or amalgamation or demerger had not taken place;

( aa) “industrial undertaking” means any undertaking which is engaged in-

(i) the manufacture or processing of goods; or

(ii) the manufacture of computer software; or

(iii) the business of generation or distribution of electricity or any other form of power; or

The following sub-clause (iiia) shall be inserted after sub-clause (iii) in clause (aa) of sub-section (7) of section 72A by the Finance Act, 2002, w.e.f. 1-4-2003:

(iiia) the business of providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband


network and internet services; or

(iv) miningor

(v) the construction of ships, aircrafts or rail systems;

(b) "unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the

reorganisation of business or amalgamation or demerger had not taken place.

Q2.Compute the net wealth and wealth tax liability of R Ltd. as on 31-3-2011. The company is engaged in jewellery business-exports and domestic sales:

Factory buildings 43,00,000

Bank balance 12,20,000

Unaccounted cash balance 6,50,000

Silver ware 94,00,000

Gold ornaments 96,00,000

Motor cars 15,00,000

Guest house in London 8,00,000

The company has taken a loan of Rs. 6,00,000 by mortgaging guest house and built the factory premises.

Hint: Net Wealth taxable Rs. 14,50,000; Wealth tax 14,500

Ans:

Assessee : Golden Jewelers Ltd

Valuation Date : 31-03-2011

Assessment Year : 2010-11

Nature of Asset Rs. Reasons

Factory Building 520000 Asset u/s 2(ea)


Bank Balance 140000 Not an asset under WT Act.

Unaccounted cash balance 25500 An asset u/s 2(ea)

Silver Ware 1200000 If Silver ware Not held as stock in trade

Gold Ornaments 3,500,000 If Gold ornaments Not held as stock in trade

Motor cars 150000 Not an asset under WT Act.

Total Asset 5,395,500

Less: Debt incurred in relation to an asset: Loan for Factory premise

600,000

Net Wealth 4,795,500

Less: Basic Exemption 3,000,000

Taxable Net Wealth 1,795,500

Tax Payable @ 1 % 17,955

Note:1.While calculating the net wealth it is assumed that gold ornaments of Rs. 35 Lacs and silver ware of Rs. 12 Lacs are not part of stock in trade so accordingly it is treated as part of the asset of Golden Jewelers Ltd.

2. It is tendered to increase the threshold limit for payment of wealth tax from Rs.15.00. lakhs to Rs. 30.00 lakhs because of inflation-adjustment, The recommended amendment will apply for the value of net wealth as on 31st March, 2010 and will apply in relation to assessment year 2010-11.

Q3. State the provisions relating to the computation of capital gains in the hands of shareholders of a company on a distribution of assets upon liquidation.

Ans: Investors considerations

· Dividends received by one domestic company from another are deductible if the recipient distributes them to its shareholders within a specified period.

· Taxable capital gains arise on the transfer of shares in Indian companies · Branch losses cannot be carried forward upon incorporation. · No capital gains are computed in amalgamation or transfer of assets between a


holding company and its wholly owned subsidiary if specified conditions are fulfilled.· Transfer abroad of shares in foreign companies that hold shares in Indian companies is not a taxable even in India.· Distributions upon liquidation can give rise to dividends and capital gains.· Step-up in tax basis of assets acquired via share acquisition is not permitted.

DOMESTIC SHAREHOLDERSDividendsDividends received by domestic shareholders, both corporate and non-corporate, are includable in gross income under the head "income from other sources," grossed up by the tax withheld. Individuals are permitted a deduction for gross dividends received from Indian companies as well as certain other types of income, such as interest from banks and dividends from cooperative societies, up to a combined maximum of Rs 13,000. Domestic companies are permitted to deduct dividends received from other domestic companies to the extent they distribute these dividends to their shareholders within a specified time. As an anti-avoidance measure, advances and loans granted by closely held companies to substantial shareholders and certain concerns are treated as dividends; stock dividends (i.e., bonus shares) are not table.India follows the classical system of corporate taxation. Shareholders get full credit for tax withheld from the dividends against their tax liability, but not for underlying tax paid by the company on its profits. Resident shareholders get credit for

Q4. Explain the different schemes of service tax planning.Ans:MUCH has been talked and written about the newly introduced Composition Scheme for works Contractors, with effect from June 1, 2007. Most of the players in the Real Estate industry have started to believe that the Composition Scheme is the best option that could be available to them. This article is an attempt to understand the various options that

are still available to the players in the industry by using which, there could be an overall optimization of the service tax payments.

Various Options Available

Before we get into this discussion, let’s understand the various options that are available to the players in the industry, under the service tax law. They can opt for any of the following schemes …

Regular Scheme, under which, the works Contractor would have to pay service tax at the applicable rate of 12.36% and would be entitled to cenvat credit in respect of inputs, capital goods and input services.

The works Contractor can opt for the benefit of Notification No. 12/2003 dated June 20, 2003, as amended from time to time read with Rule 2A of the Service Tax (Determination of Value) Rules, 2006 which has come into effect from June 1, 2007, whereby, he would be

entitled for an exclusion of the extent of the value of goods and materials used while computing the value of taxable services and would still be entitled for cenvat credit in respect of service tax paid on input services, subject to condition that there is documentary proof specifically indicating the value of the said goods and materials. This exemption will apply only in such cases where (i) no Cenvat Credit on such goods and materials had been taken by the service


provider, or (ii) if such Cenvat Credit had been taken by the service provider on such goods and materials, such service provider had paid the amount equal to such credit availed before the sale of such goods and materials. In other words, either the service provider should not have taken Cenvat Credit on such goods and materials, or, if he had taken such credit, he must reverse the credit before the sale of such goods and materials.

Abatement Scheme, under Notification No 1/2006 dated March 1, 2006, as amended from time to time, whereby, the works Contractor is entitled to claim abatement to the extent of 67% of the value of services rendered by him. In effect, the works Contractor would have to pay service tax @ 4.08% and would not be entitled for any cenvat credit on inputs, capital goods and input services.

The newly introduced Composition Scheme, effective June 1, 2007, under which the works Contractor would be required to collect service tax @ 2.06% on the value of services rendered and would be entitled for cenvat credit in respect of input services and input capital goods.

Various Players

When we talk of a works Contractor, we normally mean one of the following players, viz.

o A pure Developer/Builder, who might have outsourced or contracted out the construction activities to a Contractor, in the case of a civil works contract.

o A Developer/Builder cum Contractor, who undertakes the construction himself and consequently doubles as a Contractor.

o A Contractor, who does work for the Developer/Builder.

o A Sub-Contractor who does work for a Contractor.

Possible Planning Models

Having armed ourselves with the information relevant to the civil construction industry, let us now proceed to see how the various players in the industry can optimize their service tax liability under the parameters of the law.

Let’s first take the case of a pure Developer/Builder, who develops and sells residential units to his customers and who wants to opt for the Composition Scheme, pay service tax at minimal levels and buy sleep. Since the service tax paid by him to his contractors is available as cenvat credit, the quantum of service tax paid by him would not perhaps matter. Given this logic, the pure Developer/ Builder should look at ways of optimizing the overall service tax payments related to his project, by having his contractor select the most appropriate scheme, which could be either the Regular Scheme or the scheme covered by Notification No. 12/2003. The Contractor, by choosing to pay service tax under either the Regular Scheme or the Notification No. 12/2003, can avail of cenvat credit on inputs in addition to input services and input capital goods. In typical cases, we find that the

Contractor buys most of the inputs like cement, steel, etc., and if he were to be under the Composition Scheme, the cenvat availability on inputs would be lost, resulting in an overall increase in the project costs. On the other hand, by opting for the Regular Scheme of the Notification No. 12/2003, the Contractor could avail of higher cenvat credit, arising out of the duties paid on inputs. Though the Contractor would be charging service tax at higher levels to the


pure Developer/Builder, these higher service tax payments could in turn be utilized as cenvat credit by the pure Developer/Builder, resulting in an overall lesser cash payments to the Government on account of service tax.

Take the case of the Developer/Builder who also undertakes the construction activity by himself and consequently and doubles as a Contractor (Developer/Builder cum Contractor).

He would be entitled to opt for the Regular Scheme or for the scheme under Notification No.12/2003 or the Composition Scheme. What is good for this Developer/Builder cum Contractor would depend on the facts of his case. However, it would look like the choice would be essentially between the Regular Scheme and the Composition Scheme, as the cenvat benefits are available under both the Schemes. If the materials / goods like steel and cement (“inputs”) were to form a very high percentage of the overall costs of the project, it might turn out that the Developer/Builder cum Contractor would better off opting for the Regular Scheme and pay service tax at the full rate of 12.36%, as the benefits arising out of availment of cenvat credit might work out quite high and the consequent service tax payment (net of cenvat) working out to be lower under the Regular Scheme, as compared to the corresponding figure under the Composition Scheme.

Taking this discussion further, into the realm of commercial construction, players in the commercial space renting (who develop these commercial complexes or parks which are let out to companies) who are liable for service tax payments in respect of commercial rentals would do well to plan for the scheme in which their Contractors should fall. The planning that is applicable to pure Developers / Builders in the residential construction space is very much applicable to Developers of commercial complexes, as well and they could reduce the overall costs of the project by having their Contractors choose the most appropriate scheme. In many cases, Developers of commercial complexes would find it much more profitable to ask their Contractors to opt for the Regular Scheme and charge them (i.e. the Developers) service tax at the full rates (rather than under the Composition Scheme) and adjust their service tax payments to their Contractors against their service tax

collections arising out of commercial rentals. There is no legal bar for both the parties (i.e. the Developer of the commercial complex and the Contractor) to share the benefit arising out of the cenvat availment by the Contractor, in respect of inputs and input capital goods, as between the Contractor and the Developer.

There could be cases where the Developer could be involved both in commercial space as well in residential space. This kind of a situation provides enormous opportunities for legal planning. Either the Developer can consider the part of the turnover pertaining to the residential space, in which he is only acting as a pure developer, as exempt from service tax

or alternatively, he can opt for the Composition Scheme and pay service tax @ 2.06%. In the overall scheme of things, this kind of a player might find it better placed to avail of cenvat credit to his overall benefit.

It is needless to say that the same logic would work as between the Contractor and his Sub-Contractors. Based on our experience, we have seen that most Contractors and Builders have opted for the benefit of Notification No. 1/2006. It needs to be seen here that

this Notification does not, per se, prohibit utilization of cenvat credit vis-à-vis payment of service tax. In my opinion, a Contractor opting for 1/2006 can keep accumulating cenvat credit and adjust the same against service tax liability on any other service other than construction service.

It is very obvious then that a good strategy for service tax should take into consideration,

(a) Mr. X 6,000

(b) Mrs. X 4,000

(c) Son (not dependent) 3,000

(d) Daughter (dependent) 2,000


the various schemes that are available for the different players, with a view to optimize the overall service tax payments by all of these players combined, rather than to take a stand alone view.

Undoubtedly, the prevailing situation in respect of service tax applicability on the players of the Real Estate Sector is very complex and confusing. But, let’s not forget that the present confusion and chaos can give rise to tremendous opportunities for legal planning aimed at minimization of the overall service tax liability, by the industry players.

Q5.During the P.Y. 2010-11, the gross total income of Mr. X is Rs. 4, 00,000. During the P.Y. he pays the following premiums on Medi-claim insurance policy by cheque. Calculate the amount of tax benefit under Section 80 D.

(e) Father (not dependent) 1,500

(f) Mother (dependent) (age 68 years & resident in India) 2,000

Hint: Total deduction is Rs. 12,000Ans:The insurance premium paid for son and father will not qualify for deduction

Under section 80 D as they are not dependent upon Mr. X.

Amounts qualifying for deduction are:-

Amount (in Rs)

Mr. X 6,000

Mrs. X 4,000

Daughter 2,000

Total 12,000 (limited to 10,000)

Additional deduction for mother 2,000

Hence total deduction under section 80 D is Rs (10,000 + 2,000) = Rs 12,000

Q6. What is ‘slump sale’? Explain provisions relating to slump sale.

Ans:


Income Tax Act, 1961

Section 50B. SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAINS IN CASE OF SLUMP SALE.

(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.

(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288 indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.

Explanation. - For the purposes of this section, "net worth" means the net worth as defined in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).

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