ABC LLP having office located at NOIDA, constituted by a team of professionals comprising of Company Secretaries, Chartered Accountants and Others engaged in providing services for diversified activities in the field of

CS Professional · Direct Tax Law & Practice · PYQS · December 2020
ABC LLP having office located at NOIDA, constituted by a team of professionals comprising of Company Secretaries, Chartered Accountants and Others engaged in providing services for diversified activities in the field of Secretarial matters, Audit matters, Accounts and Taxation related matters to different constituents. The firm is known for the expertise services, best guidelines and for providing consultation in the field of taxation related matters. The Taxation division of the firm is being acknowledged for providing the best consultation on the issues and matters under the Income Tax Act, 1961 and relating to International taxation and on Transfer Pricing. The firm has been contacted for seeking their expert opinion on the issues and matters relating to Taxation by the various constituents/entities including the small professional firms located in the nearby areas. Some of the matters/issues referred by different entities/constituents/professionals for obtaining their expert opinion are being compiled and being listed hereunder: (A) Matter/Issue referred by Ding Dong Ltd -Mumbai Ding Dong Ltd engaged in the manufacture of textile goods since 01.04.2009 is preparing to file its tax return for the A.Y. 2020-21 and for ascertaining to have a correct computation of income provides various particulars and details. Its Statement of Profit & Loss as on 31.03.2020 shows a net profit of ₹700 lakhs after debit/credit of the following items: (i) Depreciation calculated on the basis of useful life of assets as per provisions of the Companies Act, 2013 of ₹50 lakhs. (ii) Both Employee's contribution to EPF of ₹2 lakhs and Employer's contribution of ₹2 lakhs for the month of March, 2020 were remitted on 18th May, 2020. (iii) The company had provided amount of ₹20 lakhs being sum estimated as payable to workers based on agreement entered with the workers union towards periodical wage revision once in three years. The provision is based on a fair estimation on wage and reasonable certainty of revision. (iv) The company had made a provision of 10% of its debtors towards bad and doubtful debts. Total sundry debtors of the company as on 31.03.2020 were of ₹300 lakhs. (v) A debtor who owed the company an amount of ₹30 lakhs was declared insolvent by Court and hence the amount was written off in total by debit to profit & loss account. (vi) The opening and closing stocks for the year were ₹200 lakhs and ₹255 lakhs respectively. These were overvalued by 10%. (vii) Provision for gratuity based on actuarial valuation was ₹500 lakhs. Actual gratuity paid during the year and debited to gratuity provision account was of ₹300 lakhs. (viii) Commission of ₹1 lakh paid to a recovery agent for realization of a debt. Tax was neither deducted nor remitted as per Chapter XVII-B of the Act on such amount of payment. (ix) The company has purchased 500 tons of packing material at a price of ₹30,000 per ton from Ping Pong a firm in which majority of the directors is partners. The normal selling price charged by Ping Pong for the same material when sold to others is ₹28,000 per ton. Additional Information: (i) There was an addition to Plant & Machinery for ₹50 lakhs on 10.06.2019 but the machinery was put to use on 10.8.2019. Additional deprecation on such machinery has not been charged or adjusted in the books. (ii) Normal depreciation calculated as per income-tax is ₹80 lakhs. (iii) The company had collected in past ₹7 lakhs as sales tax from its customers and paid the same on the due dates to the government. However, on an appeal made, the High Court directed the Sales Tax Department to refund ₹3 lakhs to the company. The company in turn refunded ₹2 lakhs to the customers from whom the amount was collected and the balance of ₹1 lakh is still lying under the head "Current Liabilities". Compute the total income of Ding Dong Ltd Mumbai for the year ended 31.3.2020 from the particulars/information and details given by them as compiled under 'A'. Give brief reasons for the treatment given to each of the items in the computation.

Answer & Explanation:

Computation of Total Income of Ding Dong Ltd - Mumbai Assessment Year 2020-21 Particulars Amount (₹) Profits & Gains from Business and Profession Net profit as per Profit and Loss Account 7,00,00,000 Add: Items debited but to be considered separately or to be disallowed i) Depreciation as per Companies Act, 2013 50,00,000 ii) Employees contribution to EPF [Employees contribution to EPF not been deposited on or before the due date under the PF Act, the same is not allowable as deduction as per section 36(1)(va) of the Income tax Act, 1961] 2,00,000 Employers contribution to EPF [As per section 43B of the Income tax Act, 1961, Employer's contribution to EPF is allowable as deduction since the same has been deposited on or before the 'due date' of filing of return under section 139(1) of the Income tax Act, 1961] Nil iii) Provision for wages payable to workers. [The provision based on fair estimate of wages and on reasonable certainty of revision, is allowable as deduction, since ICDS -X requires reasonable certainty for recognition of a provision] Nil iv) Provision for doubtful debts (10% of ₹300 lakhs) [Provision for doubtful debts is allowable as deduction under section 36(1)(viia) of the Income tax Act, 1961 only in case of banks, public financial investment corporations, hence to be added] 30,00,000 v) Bad debt written off [Actual Bad debts written off in the books are allowable as deduction under section 36(1)(vii) of the Income tax Act, 1961]. Nil vi) Provision for gratuity [Provision of ₹500 lakhs for gratuity though based on actuarial valuation is not allowable as per section 40A(7) of the Income tax Act, 1961. However, actual gratuity of ₹300 lakhs paid is allowable as deduction. Hence, the difference to be added back] 2,00,00,000 vii) Commission paid to the recovery agent [Commission of ₹1 lakh paid to the recovery agent for realization of a debt is an allowable expense under section 37 of the Income tax Act, 1961 as per DCIT vs. Super Tannery (India) Ltd. (2005) 274 ITR 338 (All). Since TDS was not deducted 30% of it is to be disallowed] 30,000 viii) Purchase of packing paper [As per section 40A(2), the difference between the purchase price ₹30,000 per ton and the fair market value ₹28,000 per ton multiplied by the quantity purchased 500 tons to be added back since the purchase is from a related party] 10,00,000 ix) Sales tax not refunded to customers out of sales tax refund made by department [Refund amount of sales tax by the Government is chargeable as revenue receipt under section 41(1). Deduction can be claimed of amount refunded to customers (CIT vs. Thirumalaiswamy Naidu & Sons (1998) 230 ITR 534). Hence net amount of ₹(3,00,000 - 2,00,000 = 1,00,000) be taxable and added. 1,00,000 2,93,30,000 9,93,30,000 Less: Items credited but to be considered separately / permissible expenditure and allowances. i) Depreciation as per Income-tax Act, 1961 80,00,000 ii) Over-valuation of Stock [The amount by which stock is overvalued to be reduced for computing business income. Difference between closing and opening stock, is to be adjusted to remove the effect of over valuation (255 lakhs - 200 lakhs x 10/110)] 5,00,000 iii) Additional Depreciation on new machine [Additional depreciation is allowable @ 20% on ₹50 lakhs being actual cost of new plant & machinery acquired on 10.06.2019 and was put to use for more than 180 days in the P. Y. 2019-20] 10,00,000 (95,00,000) Total Income 8,98,30,000

Topics: Income from Business or Profession

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