Income Tax Implication On Specified Transactions – Advanced Tax Laws and Practice Important Questions
Question 1.
- State the period of holding for considering the shares in a private j limited company to be treated as a long-term capital asset.
- An assessee has purchased a car for business purposes on 10th June 2019 for ₹ 10 lakhs. This is the only asset in the block of assets. In the previous years, 2019-20 and 2020-21, 25% of the usage of cars was for personal purposes. What is the depreciation allowable for the assessment year 2021-22? You may take the rate of depreciation as 15%.
- Vikas, a resident in India, has received a dividend of ₹ 13 lakhs from A Ltd., an Indian company. He has incurred an expenditure of ₹ 1 lakh for earning such a dividend. What.is the tax payable by him in respect of such dividend income?
Answer:
(1) The period of holding of shares of a private limited company to be treated as Long term capital assets is 24 months i.e. the shares should be held for more than 24 months to qualify as long-term capital assets.
(2) Computation of Depreciation on Car allowable for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount (₹) | Amount (₹) |
| Purchase price of Car | 10,00,000 | |
| Less: Depreciation @ 15% for P.Y. 2019-20 | 1,50,000 | |
| Depreciation not allowable for personal use | (37,500) | (1,12,500) |
| Written Down Value as on 1 -4-2020 | 8,87,500 | |
| Less: Depreciation at 15% for P.Y. 2020-21 | 1,33,125 | |
| Depreciation not allowable for personal use (25%) | (33,281) | 99,844 |
Note: The car after purchase being used for business purposes is 75% and personal purpose is 25%. Therefore, depreciation allowable as per section 32 read with section 37(1) is 75% of the depreciation to be calculated at 15% on the value of the car.
(3) Assuming that the Dividend of ₹ 13,00,000 for Indian companies is received during the Previous Year 2020-21, it will be taxable in the hands of recipient shareholders. It should be noted that w.e.f. A.Y. 2021-22 (Relevant to P.Y. 2020-21), there will be no Dividend Distribution Tax under section 115-0 and the entire dividend will be taxable in hands of the recipient shareholder only.
Here Tax shall be payable as per normal rates of tax for the individual assessee as the dividend income will form part of his total income. However, it should be noted that tax will be payable on a dividend of ₹ 12,00,000 (₹ 13,00,000 – deduction of ₹ 1,00,000 being expenses incurred to earn such income.)
Question 2.
Distinguish between Slump sale and demerger.
Answer:
Slump Sale:
As per Section 2(42C) of the Income-tax Act slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Any profits or gains arising from the slump sale, affected in the previous year, shall be chargeable to income tax as capital gains and shall be deemed to be the income of the previous year in which the transfer took place. Slump sale can be between any person and consideration is always in cash.
Demerger:
As per section 2(19AA) of the Income-tax Act demerger, in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956. The transfer is an ongoing concern basis and all the property and liabilities of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property and liabilities of the resulting company by virtue of the demerger. The demerger is between companies only and consideration is in form of shares only.
Question 3.
ABC Finance Corp., a finance company had received a certain amount from its subsidiary, under a scheme of arrangement sanctioned by the High Court under sections 391 to 394 of the Companies Act, 1956. Can this scheme of arrangement be treated as a slump sale to attract capital gains provisions? Discuss in the light of decided case law.
Answer:
The facts of the case are similar to that of SREI Infrastructure Finance Ltd. v. Income-tax Settlement Commission [2012] 207 Taxman 74 of Income-tax Act (Delhi), where the Delhi High Court held that it would be wrong to infer that section 50B is applicable only in case of actual “sale” of assets. Moreover, section 50B of the Income-tax Act shall be applicable in all types of “transfer” mentioned in section 2(47). When a scheme under sections 391 to 394 of the Companies Act, 1956 is sanctioned by the Court, it is treated as a binding statutory scheme because the scheme has to be implemented and enforced. However, this cannot be a ground for the assessee to escape tax on ‘transfer’ of a capital asset under the provisions of the Income-tax Act, 1961. The taxability of the said transaction is to be decided as per the provisions of the Income-tax Act, 1961.
Therefore, although the scheme is approved by the court under sections 391 to 394 of the Companies Act, 1956 it shall be treated as slump sale and capital gains provisions would be attracted.
Question 4.
ABC Ltd. proposes to sell one unit XYZ which was set up in 2011 (out of 10 units) and it is not related to the company’s main line of business. Total consideration for the sale of XYZ unit as a going concern by way of slump sale is ₹ 3,50,000. The summarised financial position of XYZ Unit as of 31st Jan. 2021 (Date of sale) is as under:
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Paid up capital | 50,000 | Fixed Assets | 70,000 |
| General Reserve | 40,000 | Debtors | 40,000 |
| Revaluation Reserve | 30,000 | Inventories | 40,000 |
| Current Liabilities | 30,000 | ||
| Total | 1,50,000 | Total | 1,50,000 |
Additional information as under:
Do fixed assets include land purchased at ₹ 5,000 in May 2013, revalued at ₹ 50,000.
For the remaining fixed assets, their Written Down Value as per Income-tax Act is ₹ 10,000.
Cost Inflation Indices are as under:
Financial Year 2013-14: 220, Financial Year 2020-21: 301
Compute the capital gains arising on sale of XYZ unit of ABC Ltd.
Answer: Computation of Long-Term Capital Gains under section 50B i.e. Slump sale for ABC Ltd. on the transfer of XYZ unit for Assessment Year 2021-22 (Relevant to the Previous Year 2020-21)
| Particulars | Amount(₹) |
| Full Value of consideration for slump sale on the transfer of unit XYZ | 3,50,000 |
| Less: Cost of Acquisition and cost of the improvement (Being Net Worth of the unit transferred Le. XYZ) | (65,000) |
| Therefore, Long Term Capital Gains u/s 50B | 2,85,000 |
Working Note:
Computation of Net Worth of XYZ unit of ABC Ltd.
| Particulars | Amount(₹) |
| A. Assets: | |
| Land (excluding revaluation) | 5,000 |
| Other Fixed Assets (WDV as per Income-tax Act) | 10,000 |
| Inventories | 40,000 |
| Debtors | 40,000 |
| Total Assets | 95,000 |
| B. Liabilities: | |
| Current Liabilities | 30,000 |
| Total Liabilities | 30,000 |
| C. Net Worth (A-B) | 65,000 |
Note:
Since Unit XYZ is in existence for more than 36 months, the resultant capital gains are Long Term Capital gains. However, it should be noted that for computing Capital gains under section SOB of the Income Tax Act, the benefit of indexation shall not be available.
Question 5.
ABC Ltd. is a public company but shares are not listed in any stock exchange in India as of 31st December 2020. On 1st January 2021, the company issued 10 lakh shares of the face value of ₹ 10 per share, the fair market value of which is ₹ 130, at an issue price of ₹ 150 per share. Discuss the applicability of section 56 of Income-tax Act, 1961 where shares are issued to:
- Resident Indians
- Non-resident Indians
- Venture Capital Undertakings
Answer:
According to section 56(2)(viib) of the Income-tax Act, where a company, not being a company in which the public are substantially interested, I receive, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be treated as Income from Other Sources. However, this clause shall not apply where the consideration for the issue of shares is received:
- by a venture capital undertaking from a venture capital company or venture capital fund or specified fund or;
- by a company from a class or classes of persons as may be notified by the Central Government on this behalf.
In case the investors/subscribers are Resident Indian, then tax liability will be issue price ie. ₹ 150 per share less ₹ 130 per share being fair market value = ₹ 20 per share. Total tax needs to be paid on ₹ 2,00,00,000 (₹ 20 per share × 10,00,000 shares).
In case the investors/subscribers are non-resident Indian and Venture Capital undertaking then there shall be no tax liability as they are exempted under section 56 of the Income-tax Act.
Question 6.
On 11-5-2020, Rama Ltd. purchased its own shares having a face value of ₹ 10. Amount offered to shareholders was ₹ 80 per share. The total amount distributed by Rama Ltd. on buyback of 15,000 shares is ₹ 13,50,000. These shares were issued in the year 2007-08 at a premium of ₹ 15. Kaka one of the shareholders holding 1,500 shares (cost of acquisition ₹ 25 per share, year of acquisition 2010-11) got ₹ 1,35,000. Determine tax consequences in the hands of Kaka (Shareholder) and Rama Ltd. under section 115QA for AY 2021-22, assuming shares are unlisted.
Answer:
Tax liability of Kaka (shareholder):
As a share of Rama Ltd. is unlisted, Kaka is not chargeable to tax for capital gains which is exempt under section 10(344) of the Income-tax Act, 1961.
Tax liability of Rama Ltd. as per section 115QA
| Particulars | Amount(₹) |
| Amount paid to shareholders at the time of buyback | 13,50,000 |
| Less: Amount received at time of issue of shares (? 25 X15,000 shares) | (3,75,000) |
| Distributed Income to shareholders on account of buyback | 9,75,000
|
| Tax on distributed income at 20% | 1,95,000 |
| Add: Surcharge @ 12% | 23,400 |
| Sub Total | 2,18,400 |
| Add: Health & Education Cess @ 4% | 8,736 |
| Therefore, Tax liability under section 115QA | 2,27,136 |
| Rounded off to nearest of ₹ 10 u/s 288B | 2,27,140 |
Note: The offered price is ₹ 80 per share but the actual amount paid for 15,000 shares is ₹ 13,50,000 which gives the rate per share as paid by the company of ₹ 90 per share.
Question 7.
Alfa Ltd., a domestic company purchased its own unlisted shares on 4th July 2020. The consideration for buy-back amounting to ₹ 10.50 lakh was paid on the same day. The amount received by the company two years back for the issue of such shares was ₹ 6.5 lakh. The Assessing Officer has issued a notice to tax the gains on shares to which the company denies. State the correctness of the contention of the Assessing Officer and also compute the tax payable, if any. Also, compute the amount of interest, if any, payable by the company assuming that the tax due is paid to the credit of the Central Government on 29th September 2020.
Answer:
As per section 115QA of the Income-tax Act, 1961, any amount of distributed income by the company on buyback of shares (not being shares listed on a recognized stock exchange) from a shareholder shall be charged to tax.
Further, such a company shall be liable to pay additional income tax at the rate of 20% on the distributed income. Thus, the contention of the Assessing Officer relating to the taxability of the gains resulting from the buyback of shares is correct.
| Particulars | Amount(₹) |
| Consideration for buyback | 10,50,000 |
| Consideration received for issue of shares | (6,50,000) |
| Distributed income | 4,00,000 |
| Additional Tax at 20% | 80,000 |
| Surcharge at 12% | 9,600 |
| Sub-Total | 89,600 |
| Add: Health and Education Cess @ 4% | 3,584 |
| Total Tax payable | 93,184 |
| Rounded off to nearest of ₹ 10 u/s 288B | 93,180 |
The above tax should be paid on or before 18th July 2020. However, it was paid on 29th September 2020. Thus, for this delay interest is payable @ 1% per month for each month in whole or part. Therefore, interest is payable for 3 months. Interest = ₹ (93,180 × 1 /100 × 3) = ₹ 2,795.
Question 8.
XYZ Pvt. Ltd. has converted itself into a Limited Liability Partnership (LLP) on 1-4-2018 and at the time of conversion, all the conditions speci¬fied in section 47(xiiib) have been fulfilled. The unabsorbed business loss and depreciation of the company as of the date of conversion were ₹ 40 lakhs and ₹ 27 lakhs respectively. The business profits of the LLP for the previous year 2018-19 were ₹ 75 lakhs. However, on 5-9-2019 two partners (who were erstwhile shareholders of XYZ Pvt. Ltd.) having in aggregate 51% of the profit-sharing in LLP, resigned. Discuss the tax consequences of the conversion of the company into LLP and the subsequent resignation of partners.
Answer:
As per section 72A(6A), the LLP would be able to carry forward and set-off the unabsorbed depreciation and business loss of ₹ 40 lakhs and ₹ 27 lakhs, respectively, of XYZ Pvt. Ltd. since at the time of conversion, all the conditions specified in section 47(xiiib) have been fulfilled. Further, the LLP can set off the unabsorbed depreciation and business loss aggregating to ₹ 67 lakhs against its business profits of ₹ 75 lakhs for A.Y. 2019- 20.
However, if in any subsequent year, the LLP fails to fulfill any of the conditions mentioned in section 47(xiiib), the business loss or unabsorbed depreciation of the company already set off by the LLP would be deemed to be the income chargeable to a tax of the LLP for the year in which it fails to fulfill such conditions. One of the conditions mentioned in section 47(xiiib) is that the erstwhile shareholders of the company continue to be entitled to receive at least 50% of the profits of the LLP for a period of 5 years from the date of conversion. Since two partners (who were erstwhile shareholders of ABC Pvt. Ltd.) holding in aggregate, 51% of the profit-sharing in the LLP have resigned on 5-9-2019, thus the LLP has failed to fulfill this condition.
Therefore, the amount of ₹ 67 lakhs representing unabsorbed depreciation and business losses set off against profits of the LLP for the A.Y. 2019-20, would be deemed to be the income of the LLP for the A.Y. 2020-21, being the year in which it failed to fulfill the conditions.
Question 9.
A resident by the name of Mr. Ram received gifts during the financial year 2020- 21 as follows:
- ₹ 1,00,000 from his friend residing in the USA,
- ₹ 20,000 from his elder brother residing in Lucknow,
- ₹ 50,000 from his friend residing in Mumbai (received on the occasion of the birthday of Mr. Ram),
- Shares received from his father, the fair market value (i.e. value as per stock exchange) of the shares on the date of the gift was ₹ 2,00,000
- ₹ 50,000 from his friend residing in Mumbai (received on the occasion of the marriage of Mr. Ram).
- Jewelry received from his friend; the fair market value of the jewelry is ₹ 84,000.
We need to advise Mr. Ram with regard to the tax treatment of the above items in the hands of Mr. Ram.
Answer:
The tax treatment of gifts in the hands of Mr. Ram will be as follows:
- ₹ 1,00,000 received from his friend will be fully included in income because a friend is not covered in the definition of ‘relative’.
- ₹ 20,000 received from elder brother will not be charged to tax because elder brother is covered in the definition of ‘relative’.
- Birthday is not covered in the list of the prescribed occasions on which gift is not charged to tax, hence ₹ 50,000 received on the occasion of birthday will be included in income.
- Nothing will be included in income in respect of shares received from his father since father comes under the definition of the term ‘relative’
- Marriage is covered in the list of the prescribed occasions on which gift is not charged to tax, hence 150,000 received on the occasion of marriage will not be taxed.
- A friend is not covered in the definition of relative and hence, in respect of jewelry received from his friend, the fair market value, ie., ₹ 84,000 will be included in income.
Question 10.
An Ltd. incurred an expenditure of ₹ 50 lakhs on glow-sign boards displayed at dealer outlets. Examine with the help of decided case law, whether the above expenditure is revenue or capital in nature.
Answer:
The facts of the case are similar to that of the CITv. Orient Ceramics and Industries Ltd. [2013] 358 ITR 49 where the Delhi High Court noted the following observations of the Punjab and Haryana High Court, in CIT v. Liberty Group Marketing Division [2009] 315 ITR 125, while holding that such expenditure was revenue in nature. The expenditure incurred on the glow sign boards is revenue in nature as these were incurred with the object of facilitating the business operation and not with the object of acquiring an asset of enduring nature.
Thus, the expenditure incurred by A Ltd. on glow-sign boards are revenue in nature
Question 11.
Bace Drinks Ltd. was carrying more than one business activity, namely manufacturing soft drinks and trading in soft drinks. However, the manufacturing activity was not profitable and was hence, discontinued. The employees who were directly connected with this manufacturing activity were laid off and severance cost was paid to those employees. The same was claimed by the assessee as revenue expenditure. The Assessing Officer disallowed the same treating it as capital expenditure, on the argument that it was incurred as a result of the closure of business of the assessee. Discuss what would be the nature of expenditure.
Answer:
The facts of the case are similar to that of the CIT v. KJS India P. Ltd [2012] 340 ITR 380 (Delhi), where the Delhi High Court, held that though one of the business activities was suspended, it cannot be construed that the assessee has closed down its entire business. The assessee still continues to trade in soft drinks. Therefore, the said expenditure will be allowed as revenue expenditure even though it was related to a manufacturing activity that was suspended.
Question 12.
Sharad Hospitals purchased second-hand medical equipment for use as spare parts of existing equipment. Examine with the help of decided case law, that whether the above expenditure is revenue or capital in nature.
Answer:
The Karnataka High Court, in Dr. Aswath N. Rao v. ACIT [2010] 326 ITR 188, held that since the second-hand machinery purchased by the as¬sessee was for use as spare parts for the existing old machinery, the same had to be allowed as revenue expenditure.
Question 13.
Sukriti Ltd. incurred expenses of ₹ 76,000 for the issue of shares. However, the public issue could not materialize on account of non-clearance by SEBI. Examine with the help of decided case law, whether the above expenditure is revenue or capital in nature.
Answer:
The facts of the case are similar to that of the Mascon Technical Services Ltd. v. CIT[2013] 358ITR 545, where the Madras High Court observed that the assessee had taken steps to go in for a public issue and incurred share issue expenses. However, it could not go in for the public issue by reason of the orders issued by the SEBI just before the proposed issue. The High Court observed that though the efforts were aborted, the fact remains that the expenditure incurred was only for the purpose of expansion of the capital base. The capital nature of the expenditure would not be lost on account of the abortive efforts. Thus, the expenditure incurred by Sukriti Ltd. constitutes capital expenditure.
Income Tax Implication On Specified Transactions Notes
- Slump Sale under section 50B of Income-tax Act
- Buy back of shares – Tax on distributed income to shareholders: Sec¬tion 115QA of Income-tax Act
- Issue of shares at a premium (section 56 of Income-tax Act)
- Cash Credit (section 68 of Income-tax Act)
- Unexplained Money (section 69A of Income-tax Act)
- Capital Gain on Amalgamation/Mergers
- Capital gains on demerger
- Gifts (section 56 of Income-tax Act)