Rust Ltd. is engaged in the business of manufacturing copper bottles. As a Company Secretary you are the key person and heading the taxation wing of the Company. The CFO of the Company approached you for the tax computat

Computation of Total Income of Rust Ltd. for Assessment Year 2021-22 Particulars Amount (₹) Amount (₹) Profits & Gains from Business and Profession Net profit as per Profit and Loss Account 72,00,000 Add : Items / Disallowance considered separately (i) License fees for obtaining Franchisee (₹12,00,000 less depreciation thereon ₹3,00,000) [Note 2] 9,00,000 (ii) Cash Payment exceeding ₹10,000 in aggregate in a day to a contractor for repair work [₹12,000+18,000] (Note 3) 30,000 (iii) Provision for gratuity [₹15,00,000-5,00,000] (Note 7) 10,00,000 (iv) Difference in stock valuation (Note 8) 8,000 19,38,000 Less : Items credited but to be considered separately/ permissible expenditure and allowances (i) Dividend received from a foreign company less expenditure incurred to earn dividend [₹5,50,000- ₹50,000] (Note 4) 5,00,000 (ii) Waiver of interest on Bank Loan (Note 6) 2,50,000 (iii) Provision for Audit Fees [Note 9] 30,000 (iv) Bad Debts (Note 10) 1,00,000 (v) Depreciation on Tangible fixed Assets (Note 5) 25,000 9,05,000 Profit and Gains from Business and Profession 82,33,000 Income from Other Sources (a) Dividend from Specified Foreign Company (Note 11) 5,50,000 (b) Shares of Closely held Company purchase for inadequate consideration (Note 12) 1,00,000 Income from Other Sources 6,50,000 Gross Total Income 88,83,000 Deduction under Chapter VI Nil Total Income 88,83,000 Notes: An expense on travelling of wife of Managing Director to Beijing on the invitation of Trade and Commerce Chamber, China is an allowable expense on the ground of Commercial expediency and business consideration. Alternatively may be disallowed u/s 37(1) on the assumption that it is personal nature. Franchise is in the nature of an intangible asset eligible for depreciation @ 25%. Since one time license fee of ₹12 Lakh paid to a foreign Company for obtaining franchise has been debited to profit and loss account, the same has to be added back. Depreciation @ 25% has to be provided in respect of the intangible asset, since it has been used for more than 180 days during the year. Disallowance u/s 40A(3) would be attracted in respect of cash payments of ₹12,000 and ₹18,000 paid to a contractor since the aggregate cash payments made to him in a day exceed the limit of ₹10,000. Dividend of ₹5,50,000 received from Foreign Company is to be taxed under the Head "Income from other sources" since the same has been credited to profit and loss account, it has to be deducted while computing business income. Consequently, expenditure of ₹50,000 relating to the same which has been debited to profit and loss account has to be added back. In effect, the net amount of ₹5,00,000 has to be deducted. Depreciation of ₹1,50,000 on Tangible Fixed Assets charged in the Books of accounts has to be added back. Depreciation of ₹1,75,000 computed as per Income Tax Rules, 1962 is allowable. Therefore, the net amount of ₹25,000 has to be deducted while computing business income. Waiver of principal amount of loan for trading activity is a benefit in respect of a trading liability by way of remission or cessation thereof and is hence, taxable u/s 41(1). Since the loan is for meeting working capital requirement, means it is taken for trading activity. Since the loan waiver has already been credited to profit and loss account, no adjustment is required. However, as per section 43B, since interest is allowable only on actual payment basis, deduction in respect of interest due on loan would not have been allowed as deduction in any previous year. Therefore, such interest cannot be brought to tax now by invoking section 41(1). Since such interest has now been credited to profit and loss account, the same is to be deducted while computing business income. As per Section 40A(7), any provisions made for payment of gratuity of employees on their retirement or on termination of employment for any reason is disallowed. However, any provision made for the purpose of payment of a sum by way of any contribution to an approved gratuity fund or for the purpose of payment of gratuity which has become payable during the previous year shall be allowed as deduction. The question does not mention that the provision of ₹15,00,000 is for the purpose of contribution to an approved gratuity fund. Therefore only gratuity of ₹5,00,000 paid to the retired employees is allowable as deduction. Hence, the balance provision of ₹10,00,000 (i.e., 15,00,000-5,00,000) is to be added back. If gratuity fund is approved, no adjustment is required. Difference on account of under valuation of opening stock and closing stock by 10% cost to be deducted and added respectively. Therefore, the net amount of ₹8,000 (72,000 * 10/90) has to be added. ₹30,000 being 30% of 100,000 representing provision for audit fees for the year ended 31.03.2020 for which tax was not deducted in the F.Y. 2019-20 would have been disallowed while computing deduction for FY 2019-20. Since the tax is deducted and paid in F.Y. 2020-21, ₹30,000 would be allowable as deduction in A.Y. 2021-22 as per proviso to Section 40(a)(ia). In a case where the debt ultimately recovered in less than the difference between the amount of debt and bad debt allowed, then the amount to the extent of deficiency in recovery is allowed as deduction in the previous year in which the ultimate recovery is made. Therefore, in this case, since the ultimate recovery of ₹3,00,000 is less than ₹4,00,000 (being the difference between the debit of ₹8,00,000 and the amount of ₹4,00,000 allowed as bad debts in the previous year 2019-20. The deficiency of ₹1,00,000 will be deductible in FY 2020-21 being the year in which the ultimate recovery of ₹3,00,000 is made. It may be noted that in case where the result is a deficiency the amount recovered will not be taxable in the year of recovery. Since ₹3,00,000 not credited to Profit and loss account, so no further adjustment is required. Under Section 115BBD, dividend received by an Indian Company from a Foreign Company in which it holds 26% or more in nominal value of the equity share capital of the Company would be subject to a concessional rate of tax 15% as against the tax rate of 30% applicable to other Income of a domestic company. The rate of 15% would be applied on Gross dividend, in the sense, that no expenditure would be allowable in respect of such dividend. Difference between the aggregate FMV of shares of a Company and the consideration paid for purchase of such shares is deemed as income in the hands of purchasing Company u/s 56(2)(x). Since the difference exceeds ₹50,000 the entire sum is taxable. Therefore ₹1,00,000 [5000 x (40-20)] is taxable.