Samode Group, comprised of diversified business entities, is having its registered office located at Jaipur with various business verticals located at different places within and outside the country. The Board of directo

CS Professional · Direct Tax Law & Practice · PYQS · December 2019
Samode Group, comprised of diversified business entities, is having its registered office located at Jaipur with various business verticals located at different places within and outside the country. The Board of directors regularly have meetings with the heads of each of the business verticals, along with group Finance Director, Company Secretary, Director Taxation and other senior managers and consultants, for reviewing the business results of each of the units and to sort out the various issues. A meeting of all these heads was scheduled for 30th August, 2019 to discuss the various matters relating to taxation and to ascertain as to filing of the return of income of the group companies for the A.Y. 2019-20. The matters which were scheduled for discussion in this meeting, as listed were as under: (1) The main line of business activity of the group is of running of various hotels under Samode Group Hotels Ltd. located at different places in the country. The Finance Director has indicated that the statement of profit & loss drawn as on 31st March, 2019 shows a Net Profit of ₹ 172 lakhs after debiting and/or crediting the following items: (a) Payment of ₹ 35,000 and of ₹ 50,000 made in cash on 3rd December, 2018 and 10th December, 2018 for purchase of crab, lobster and squibs to Mr. Rajamani, a fisherman, and Mr. Khalid, a middleman for these products, respectively. (b) Contribution towards employees pension scheme notified by the Central Government under section 80CCD, made at 12% of the basic salary and dearness allowance (forming part of retirement benefits) payable to the employees. The total outlay of such basic salary and D.A. is ₹ 100 lakhs. (c) Payment of ₹ 5.25 lakhs towards transportation of various materials procured by one of its hotels to M/s Jaipur Transport company, a partnership firm, without deduction of tax at source. The firm declared having opted for presumptive taxation under section 44AE and has also furnished its Permanent Account Number and a declaration to this effect in the tender document. (d) Profit of ₹ 22 lakhs on sale of a piece of land to Avinash Private Limited, a domestic company, the entire shares of which are being held by Samode Group Hotels Ltd. The piece of land was acquired by Samode Group Hotels Pvt. Ltd. on 1st June, 2016. (e) Contribution of ₹ 2 lakhs to Indian Institute of Technology with a specific direction to use the amount for scientific research programme approved by the prescribed authority. (f) Expense of ₹ 15 lakhs on foreign travel of its two directors for entering into a collaboration agreement with a foreign company for a brewery project to be set up at Thane, Mumbai. However, the negotiation did not succeed and the project was abandoned. (g) Fees of ₹ 2 lakh paid to an independent director for attending board meetings, without deduction of tax at source. (h) Depreciation charged as per the Companies Act, 2013 on its assets for the year of ₹ 13 lakhs. (i) Amount of ₹ 12 lakhs being the additional compensation received from the State Government pursuant to an interim order of Court, in respect of land acquired by the State Government of Karnataka in the previous year 2013-14. (j) Dividend received from a foreign company of ₹ 7 lakhs. The Director Finance had also made available the following additional details and information relating to the year: (i) As a corporate debt restructuring, Bank Of India has converted unpaid interest of ₹ 15 lakhs upto 31st March, 2018 into a new loan account repayable in five equal annual installments. The first installment of such converted loan was paid in March, 2019 by debiting the amount to new loan account. (ii) Depreciation as per the Income-tax Act, 1961 ₹ 18 lakhs. Compute total income of Samode Group Hotels Ltd. for the Assessment Year 2019-20 from the information and details given in para (1) by giving brief reasons for the treatment given to each of the items in the computation.

Answer & Explanation:

Samode Group Hotel Ltd. AY 2019-20 Computation of Total Income Particulars Amount (₹) Profits and Gains Business and Profession 172,00,000 Profit as per Statement of profit and loss Add: Items debited but to be considered separately or to be disallowed. (a) Payment to middleman in cash for purchase of crab etc. in an amount exceeding ₹ 10,000 [Cash payment exceeding ₹ 10,000 made on a day to a person attract disallowance as per section 40A(3)] 50,000 Payment of ₹ 35,000 to fishermen for purchase of crab etc., is covered by exception under Rule 6DD. Payment of ₹ 50,000 to middlemen for purchase of crab etc. is not covered under exception-CBDT Circular 10/2008 dated 5/12/2008 --- (b) Contribution towards employee's pension scheme in excess of 10% of salary [Basic Salary + Dearness Allowance (if it is forms a part of payment for retirement benefits)] not allowed under section 36(1) 2,00,000 (c) Payment to transport contractor without deduction of tax at source of ₹ 5.25 lakh [since the contractor opts for presumptive taxation under section 44AE and furnished a declaration to this effect, tax is not required to be deducted at source under section 194C in respect of payment to transport contractor] --- (f) Expense on foreign travel of two directors for a collaboration agreement which failed to materialize [Where expenditure is incurred for a project not related to existing business and the project is abandoned without creating a new asset, the expenses are capital in nature Mc Gaw Ravinder Laboratories (India) Ltd. Vs. CIT (1994) 210 ITR 1002 (Guj). Brewery project is not related to the existing business of hotels] 15,00,000 (g) Fees paid to directors without deducting tax are source [30% of ₹ 2 lakh] [Disallowance @ 30% would be attracted under section 40(a)(ia) for non-deduction of tax at source under section 194J] 60,000 19,00,000 Less: Items credited but to be considered separately/ expenditure to be allowed (d) Profit on sale of plot of land to 100% subsidiary of the company. [Long-term capital gains arise on sale of plot of land but when the transfer is to a 100% subsidiary company which is an Indian company, the same would not constitute a transfer for levy of capital gains tax as per section 47(iv). Since this amount has been credited to the statement of profit and loss, the same has to be deducted for computing business income] 22,00,000 (e) Contribution of ₹ 2 lakhs to IIT for scientific research [Contribution to IIT for scientific research programme approved by the prescribed authority qualifies for weighted deduction @ 150% under section 35(2AA). Since 100% of contribution has already been debited to the statement of P&L, the balance 50% has to be debited while computing business income. 1,00,000 (ii) Depreciation [Depreciation allowable under the Income-tax Act, 1961 is ₹ 18 lakh where as the depreciation as per books of account debited to the statement of profit and loss is ₹ 13 Lakhs. Hence, the additional amount of ₹ 5 lakhs has to be deducted while computing business income] 5,00,000 (i) Additional compensation received from State Government. [Since the additional compensation has been received pursuance to an interim order of the Court, the same would be deemed as income chargeable to tax under the head 'Capital Gains' in the year of final order as per section 45(5). Since the compensation has been credited to the statement of profit and loss, the same has to be deducted while computing business income] 12,00,000 (j) Dividend received from foreign company [Dividend received from foreign company is taxable under the head 'Income from other sources'. Since the said dividend has been credited to Statement of P&L, the same has to be deducted while computing business income] 7,00,000 (i) Interest paid during the year. [The amount of unpaid interest converted into a new loan will be allowable as deduction only in the year in which such converted loan is actually paid. Since ₹ 3 lakhs has been paid in the P.Y, 2018-19, the same is allowable as deduction] 3,00,000 (50,00,000) Income under the head 'Profit and Gains from Business or Profession' 140,10,000 Income from other Sources Dividend received from foreign company 7,00,000 Gross Total Income 1,47,10,000 Less: Deduction under Chapter VI-A Nil TOTAL INCOME 1,47,10,000

Topics: Computation of Business Income

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