I find that the question paper of DT (old syllabus) is a standard paper.It appears that the students in general have done well.
I wish to touch upon relevant points in respect of some questions.
Question No.1
(a) Each well cannot be considered as separate industrial undertaking. Explanation to section 80-IB(9) clarifies that for the purpose of claiming deduction under section 80-IB((9) all blocks licensed under a single contract awrded is to be treated as a single undertaking. Therefore, three wells in the licensed block together will constitute one "undertaking". Hence deduction is to be allowed for the block as a whole and not for each well separately.
(b) In respect of interest waived by the bank i.e.20.30 lakhs the provision of section 41(1) is not applicable. Section 41(1) applies to remission or cessation of any trading liability if such liability was allowed as deduction in any earlier year. As interest was not paid to the bank, the same must have been dislallowed in earlier years u/s 43B. Hence the outstanding interest waived cannot be deemed as income u/s 41(1).
Section 28(iv) provides that the value of any benefit or perquisite, whether convertible into money or not, arising from business is chargeable to tax under the head "profits and gains of business or profession". Principal waived by the bank cannot be perceived as any benefit or perquisite arising from business. Hence sec. 28(iv) is not applicable.
However, as the loan was taken for business activity of the assessee and ultimately upon waiver the principal amount upto Rs.5 lakhs was retained in the business by the assessee, the amount became the assessee's income and therefore the sum became assessable as income under section 4 read with section 28(i) of the Income Tax Act as business income. The same view was taken in the case of Solid Containers Ltd vs. DCIT.
In respect of outstanding interest waived the provision of section 28 is not applicable.
(c) The business started by the two sons are run by the sons independently and no part of the capital of the business was contributed by the HUF. The loan which was given by the HUF is to be repaid by the concern owned by the sons. It was taken to meet certain start-up expenses. The fact that the loan was interest-free is not relevant here. The business is carried on by the sons solely by their own efforts, skill and knowledge and the HUF is in no way involved in carrying on the business of the garrage. therefore , the income from such buusiness is assessable in the hands of the partnership firm of two sons and not in the hands of the HUF. The AO's propostion is not correct.
(d) (i) Asset transferred by an individual to his son's wife, otherwise for adequaie consideration is includible in the net wealth of that individual u/s 4 of the Wealth-tax Act. However, the transferee must be the individual's son's wife at the time of transfer of asset and also on the relevant valuation date. As Geeta was not Pankaj's daughter-in-law on 11th January 2009, the date of transfer of asset, the value of the asset is not to be clubbed with wealth of Pankaj. The same will be taxed in the hands of Geeta.
(ii) Right to live in a house is life interest in house property. Asset u/s 2(ea) includes interest in asset also. For the purpose of exemption u/s 5(vi) hosue includes interest in house. Therefore, it is an asset and the assessee can claim exemption u/s 5(vi).
(iii) In case of a company cash in hand, which is not recorded, is an asset u/s 2(ea). Cash with the cqashier i.e 2 laks is therefore an asset chargeable to wealth tax.
Q.No.2
(i) Profit from hedging contract to meet loss in foreign currency payments towards imported machinery is a capital receipt. The amount is to be reduced from the cost of machinery u/s 43A for the purpose of comuting depreciation.
(ii) Earlier CBDT in two circulars had clarified that commission received by a non-resident agent did not acrue or arise in India or was not deemed to accrue or arise in India, as there was no business connection. Those circulars have been withdrawn by CBDT. Therefore, it appears that commission paid to a non-resident travel agent attracts tax liability. As tax was not deducted or paid, commission paid to the non-resident travel agent shall be disallowed u/s 40(a)(i).
However, it is possible to argue that even after withdrawal of the old circulars the position is not altered. As the non-resident travel agent has no permanent establishment or a fixed place of business in India, commission cannot be treated as income attributable to any PE in India. hence there is no tax liabilty and the question of TDS u/s 195 or disallowance u/s 40(a)(i) does not arise.
(iii) Secret commission has been held to be admissible expenditure if such commission is payable and customery in the line of business of the assessee. However, if secret commission is paid to employees of Government, such payment is for purpose whichis offence and prohibited by law. In that case secret commission cannot be considered as expenditure wholly and exclusively incurred for the purpose of business as per Explanation to sec.37(1).
(iv) Excess freigt charge collected from from customers by C&F agents and recovered by the assessee from such agents constitutes assessee's business receipts liable to tax as business income u/s 28. The assessee can claim deduction as and when excess freight is refunded to the customers.
(v) Unpaid interest waived by SBI cannot be deemed to be income u/s 41(1), as such interest was disallowed in the years of accrual in view of the provision of section 43B.
(vi) As the assessee is a company, it follows mercantile system of accounting.Interest on loan given to the subsidiary company is chargeable to tax on accrual basis. If the company decided not to charge interest from subsidiary before end of the previous year 2009-10, then such interest will not be taxed. But if the decision was taken after 31st March, 2010, interest would be taxable in AY 2010-11, but in subsequent AY the company can claim deduction by way of bad debt on wrting off the outstanding interest.
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