The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Final Revision Test s- 7 – Direct Tax (old ) - Question Paper
May 2010: The Institute of Chartered Accountants of India - Revision Test ques. papers (RTPs) Final Examination: Paper seven Direct Tax (old course): May 2010 University ques. paper
PAPER- 7 : DIRECT TAXES
"The Finance (No.2) Act, 2009 has expanded the scope of definition of "charitable purpose- Elucidate.
2. Residential Status and Scope of total income
Explain the tax consequence of the following transactions -
(a) Mr.X, a non-resident, purchases goods in India for the purpose of export and earns profit on such transaction.
(b) Salary received by Mr.Y, a non-resident, from the Government of India for the services rendered by him in Canada.
3. Incomes which do not form part of total income
"The New Pension System Trust (NPS Trust) set up in February, 2008 to manage the assets and funds under the New Pension System in the interest of the beneficiaries enjoys a pass-through status - Discuss the correctness or otherwise of this statement.
4. Charitable or religious trusts and institutions
Discuss the tax treatment of voluntary contributions received by electoral trusts. Is there any deduction under the Income tax Act, 1961 in respect of donations made to electoral trusts? Explain.
Specify two fringe benefits which have been brought under the scope of perquisites taxable in the hands of employees by amending section 17(2) consequent to the abolition of fringe benefit tax.
In the following cases, state the head of income under which the receipt is to be assessed and comment -
(a) Anirudh let out his property to Abhinav. Abhinav sublets it. How is subletting receipt to be assessed in the hands of Abhinav.
(b) Anish has built a house on a leasehold land. He has let-out the above property and has considered the rent from such property under the head "Income from other sources" and deducted expenses on repairs, security charges, insurance and collection charges in all amounting to 50% of receipts.
7. Profits and gains of business or profession
(a) The Finance (No.2) Act, 2009 has introduced investment-linked tax incentives for specified businesses. In this context, explain the concept of investment-linked tax incentives and name the specified businesses eligible for such benefits.
(b) XYZ Ltd. commenced operations of the business of laying and operating a crosscountry natural gas pipeline network for distribution on 1st April, 2009. The company incurred capital expenditure of Rs.32 lakh during the period January to March, 2009 exclusively for the above business, and capitalized the same in its books of account as on 1st April, 2009. Further, during the financial year 2009-10, it incurred capital expenditure of Rs.95 lakh (out of which Rs.60 lakh was for acquisition of land) exclusively for the above business. Compute the deduction under section 35AD for the A.Y.2010-11, assuming that XYZ Ltd. has fulfilled all the conditions specified in section 35AD.
8. Profits and gains of business or profession
Mr. A, a civil contractor and builder, paid a compensation of Rs.5 lakh to the tenants for vacating the premises. This was in pursuance of an agreement for development of the property. Mr. A claimed the expenditure as revenue expenditure. Discuss the correctness of the claim of Mr.A. Would the tax treatment of such compensation be different if Mr.A was not a civil contractor?
"Section 50C can be invoked only in the case of registration of property pursuant to transfer. In a case where only an agreement for sale is entered into and no registration has taken place, the provisions of section 50C cannot be made applicable.
Discuss the correctness or otherwise of this statement.
Mr. Rajesh received interest of Rs.3 lakh on enhanced compensation on 17.8.2009. Out of this interest, Rs.75,000 relates to the previous year 2006-07, Rs.1,00,000 relates to previous year 2007-08 and Rs.1,25,000 relates to previous year 2008-09. Discuss the tax implication, if any, of such interest income for A.Y.2010-11.
11. Income from other sources/Capital Gains
Mr. Ganesh received the following gifts during the P.Y.2009-10 from his friend Mr. Sundar, -
(1) Cash gift of Rs.51,000 on his birthday, 19th June, 2009.
(2) 50 shares of Beta Ltd., the fair market value of which was Rs.60,000, on his birthday, 19th June, 2009.
(3) 100 shares of Alpha Ltd., the fair market value of which was Rs.70,000 on the date of transfer. This gift was received on the occasion of Diwali. Mr. Sundar had originally purchased the shares on 10-8-2009 at a cost of Rs.50,000.
Further, on 20th November, 2009, Mr. Ganesh purchased land from his sister's mother-in-law for Rs.5,00,000. The stamp value of land was Rs.7,00,000.
On 15th February, 2010, he sold the 100 shares of Alpha Ltd. for Rs.1 lakh.
Compute the income of Mr. Ganesh chargeable under the head "Income from other
12. Deductions from Gross Total Income
(a) The Finance (No.2) Act, 2009 has expanded the scope of deduction under section 80E - Elucidate.
(b) What are the conditions to be satisfied by an undertaking developing and building housing projects for claiming benefit of deduction under section 80-IB(10)?
Mr. Ravi, working in a public sector company, opted for voluntary retirement scheme and received Rs.8 lakh as VRS compensation. He claimed Rs.5 lakh as exemption under section 10(10C). Further, in respect of the balance amount of Rs.3 lakh, he claimed relief under section 89(1). Mr.Ravi seeks your opinion on the correctness of the above tax treatment.
(a) Explain the tax treatment of Limited Liability Partnership under the Income-tax Act, 1961.
(b) M/s.ABC, a partnership firm, has 3 partners, namely, A, B & C. The firm has paid salary of Rs.3 lakh to each of its partners during the P.Y.2009-10 and the same is authorized by the partnership deed. The net profit of the firm as shown in the profit and loss account computed in the manner laid down in Chapter IV-D is Rs.4 lakh, after providing for salary to the partners. Compute the disallowance as per section 40(b)(v).
15. Assessment of Companies - Computation of Minimum Alternate Tax
Hyper Ltd. earned a net profit of Rs.7.25 lakh after debit/credit of the following items to its
profit and loss account for the year ended on 31.3.2010:
(a) Items debited to Profit and Loss Account Rs.
Provision for income-tax 1,20,000
Interest on income-tax 11,000
Dividend distribution tax 20,000
Provision for deferred tax 12,000
Provision for doubtful debts 18,000
Securities Transaction Tax 15,000
Transfer to Special Reserve 20,000
Provision for gratuity based on actuarial valuation 30,000
Provision for losses of subsidiary company 22,000
Proposed dividend 25,000
Preference dividend 18,000
Expenditure to earn agricultural income 6,000
Expenditure to earn LTCG exempt under section 10(38) 4,000
Depreciation (including depreciation of Rs.10,000 on revaluation) 50,000
(b) Items credited to Profit and Loss Account
Amount credited to P& L A/c from General Reserve 10,000
Amount credited to P& L A/c from Revaluation Reserve 15,000
Agricultural income 30,000
LTCG exempt under section 10(38) 16,000
The company provides the following additional information:
Brought forward Business Loss/Unabsorbed Depreciation:
Assessment Year Amount as per books
Loss Depreciation
2007-08 Nil 50,000
2008-09 60,000 40,000
2009-10 20,000 30,000
You are required to examine the applicability of section 115JB of the Income-tax Act, and compute book profit and the tax credit to be carried forward, assuming that the total income computed as per the provisions of the Income-tax Act is Rs.4,00,000.
"An Additional Director and Additional Commissioner are not empowered to issue a warrant of authorization under section 132(1) to the other income-tax authorities for conducting search and seizure operations - Is this statement correct? Discuss.
Explain the significant features of Alternate Dispute Resolution Mechanism.
18. Collection and Recovery of tax
Explain whether the following contracts fall within the meaning of "work under section 194C -
(i) Manufacturing a product for A as per A's requirement using raw material purchased from B.
(ii) Manufacturing a product for A as per A's requirement using raw material purchased from A himself.
If yes, what would be the value on which tax should be deducted at source under section 194C?
An order of assessment passed under section 143(3) read with section 147 was served on Mr. X on 1.8.2009. Mr. X filed an application under section 264 for revision before the Commissioner on 17.8.2009. The Commissioner, however, refused to accept the application on the ground that it was a premature application. Discuss the correctness of the contention of the Commissioner.
"The scope of levy of penalty under Explanation 5A to section 271(1) has been expanded retrospectively with effect from 1st June, 2007" - Elucidate.
The Central Government is empowered, under section 90(1), to enter into agreement with any country outside India or a specified non-sovereign territory. What are the purposes for which the Central Government can enter into such agreement?
What are the modes by which any notice or requisition under the Income-tax Act may be served on the assessee?
What is the basic exemption limit above which wealth-tax is leviable?
Ms. Poorna has a house property at Mumbai, which she has rented out to Ms. Jayashree. The cost of acquisition of the property (acquired in the year 2000) is Rs.40 lakh. Determine the value of her property as on the valuation date 31.3.2010, from the following particulars -
(i) The annual value of the property as per municipal records is Rs.6 lakh.
(ii) The monthly rent which the property fetches is Rs.45,000.
(iii) Municipal taxes @ 10% of the municipal value of the property are paid partly by Ms. Jayashree (40%) and partly by Ms. Poorna (60%).
(iv) The cost of repairs of the house property is entirely borne by Ms. Jayashree.
(v) Ms. Jayashree has given an interest-free deposit of Rs.2 lakh to Ms. Poorna.
(vi) The unexpired period of lease on the valuation date is 20 years.
Bentac Constructions Ltd. furnishes the following particulars of its wealth for the valuation date as on 31.3.2010:
Rs.in
lacs
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Compute the net wealth of the company for the A.Y.2010-11. |
SUGGESTED ANSWERS/HINTS
1. Section 2(15) defines "charitable purpose to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility. However, the "advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.
Section 2(15) has now been amended to specifically include within its ambit, the preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest. Prior to the amendment, these would have been included under "advancement of any other object of general public utility and hence, would have been subject to the restriction mentioned above. However, now, they would not be subject to the restrictions which are applicable to the "advancement of any other object of general public utility.
2. (a) Under section 9, any income derived, inter alia, from a business connection in India
or from a source of income in India shall be deemed to accrue or arise in India Explanation 1(b) to section 9(1) makes it clear that in case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for export.
Consequently, there is no tax consequence on the transaction of purchase of goods for export by Mr.X.
(b) Salary accrues at the place where the services are rendered. However, as per section 9(1)(iii), salary payable by the Government to an Indian citizen for services rendered abroad shall be deemed to accrue or arise in India. In this case, the Government of India pays salary to Mr.Y, a non-resident, for services rendered by him in Canada. If Mr.Y is an Indian citizen, his salary would be taxable in India and if he is not an Indian citizen, then it will not be chargeable to tax in India.
3. This statement is correct.
The New Pension System (NPS), operational since 1st January, 2004, is compulsory for all new recruits to the Central Government service from 1st January, 2004. Thereafter, it has been opened up for employees of State Government and private sector.
NPS Trust has been set-up on 27th February, 2008 as per the provisions of the Indian Trust Act, 1882 to manage the assets and funds under the NPS in the interest of the beneficiaries. The Finance (No.2) Act, 2009 has exempted the NPS Trust from the applicability of-
(i) income-tax on any income received by any person for, or on behalf of, the NPS Trust [Section 10(44)]
(ii) dividend distribution tax in respect of dividend paid to any person for, or on behalf of, the NPS Trust [Section 115-O]; and
(iii) securities transaction tax on all purchases and sales of equity and derivatives by the NPS Trust.
Further, the NPS Trust shall receive all income without any deduction of tax at source.
Thus, the NPS Trust, which was set up to manage the assets and funds under the New Pension System in the interest of the beneficiaries, would enjoy a "pass-through status.
4. Tax treatment of voluntary contributions received by electoral trusts
(i) In the year 2003, by an amendment carried out by the Election and Other Related Laws (Amendment) Act, 2003, sections 80GGB & 80GGC were introduced allowing 100% deduction in respect of the contribution made to registered political parties.
(ii) The Finance (No.2) Act, 2009 has widened the scope of deductions under these sections by allowing deduction to also the contribution/donation made to the electoral trusts as may be approved by the CBDT in accordance with the scheme to be made by the Central Government.
(iii) The deduction shall be 100% of the amount donated.
(iv) Further, voluntary contribution received by such electoral trust shall be treated as its income under section 2(24), but shall be exempt under new section 13B, if the trust distributes to a registered political party during the year, 95% of the aggregate donations received by it during the year along with the surplus if any, brought forward from any earlier previous year.
(v) Another condition for availing the benefit under this section is that the electoral trust should function in accordance with the rules made by the Central Government.
5. The Finance (No.2) Act, 2009 has inserted section 115WM to provide that the provisions of Chapter XII-H relating to Fringe Benefit Tax shall not apply in relation to A.Y.2010-11 and thereafter.
Consequently, the following fringe benefits have been brought under the scope of perquisites taxable in the hands of the employees by amending section 17(2) -
(1) the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the assessee.
(2) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs.1 lakh.
6. (a) Sub-letting receipt is to be assessed as "Income from Other Sources or as "Profits
and gains of business or profession in hands of Mr. Abhinav, depending upon the facts and circumstances of each case. It is not assessable as income from house property, since one of the conditions for assessing an income under this head is that the assessee should be the owner of the property. In this case, since Abhinav is not the owner of the house property, sub-letting receipt cannot be assessed under the head "Income from house property.
(b) In this case, the receipt is assessable as "Income from house property since ownership of land is not a pre-requisite for assessment of income under this head. 30% of Net Annual Value is allowable as a deduction under section 24.
7. (a) Although there are a plethora of tax incentives available under the Income-tax Act,
they do not fulfill the intended purpose of creating infrastructure since these incentives are linked to profits and consequently have the effect of diverting profits from the taxable sector to the tax-free sector. Therefore, with the specific objective of creating rural infrastructure and environment friendly alternate means for transportation of bulk goods, investment-linked tax incentives have been introduced for specified businesses, namely, -
setting-up and operating cold chain' facilities for specified products;
setting-up and operating warehousing facilities for storing agricultural produce;
laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network.
100% of the capital expenditure incurred during the previous year, wholly and exclusively for the above businesses would be allowed as deduction from the business income. However, expenditure incurred on acquisition of any land, goodwill or financial instrument would not be eligible for deduction.
Further, the expenditure incurred, wholly and exclusively, for the purpose of specified business prior to commencement of operation would be allowed as deduction during the previous year in which the assessee commences operation of his specified business. A condition has been inserted that such amount incurred prior to commencement should be capitalized in the books of account of the assessee on the date of commencement of its operations.
(b) The amount of deduction allowable under section 35AD for A.Y.2010-11 would be-
Particulars Rs.
Capital expenditure incurred during the P.Y.2009-10 (excluding the 35 lakh expenditure incurred on acquisition of land) = Rs.95 lakh - Rs.60 lakh
Capital expenditure incurred prior to 1.4.2009 (i.e., prior to commencement of business) and capitalized in the books of account as on 1.4.2009 32 lakh
Total deduction under section 35AD for A.Y.2010-11 67 lakh
8. The Bombay High Court has, in CIT v. Shriram Builcons Ltd. (2008) 306 ITR 328, held that any compensation paid to tenants for vacating the premises in the course of business of the assessee, who was a civil contractor and builder, pursuant to an agreement for development of property, was revenue expenditure. However, if the assessee was not a civil contractor, the compensation so paid would be allowed as cost of improvement when he transfers his property.
9. This statement is not correct.
So far, the scope of section 50C did not include within its ambit, transactions which were not registered with stamp duty valuation authority, and executed through an agreement to sell or power of attorney. Therefore, in order to prevent tax evasion on this account, section 50C has been amended by the Finance (No.2) Act, 2009, to provide that where the consideration received or accruing as a result of transfer of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by an authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration received or accruing as a result of such transfer for computing capital gain. The term assessable has been added to cover transfers executed through an agreement to sell or power of attorney.
Explanation 2 has been inserted after section 50C(2) to define the term assessable' to mean the price which the stamp valuation authority would have, notwithstanding anything to the contrary contained in any other law for the time being in force, adopted or assessed, if it were referred to such authority for the purposes of the payment of stamp duty.
10. (i) As per section 145(1), income chargeable under the head "Profits and gains of
business or profession or "Income from other sources, shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(ii) Further, the Hon'ble Supreme Court has, in Rama Bai v. CIT (1990) 181 ITR 400, held that arrears of interest computed on delayed or on enhanced compensation shall be taxable on accrual basis. The tax payers faced genuine difficulty on account of this ruling, since the interest would have accrued over a number of years, and consequently the income of all the years would undergo a change.
(iii) Therefore, to remove this difficulty, clause (b) has been inserted in section 145A to provide that the interest received by an assessee on compensation or on enhanced compensation shall be deemed to be his income for the year in which it is received, irrespective of the method of accounting followed by the assessee.
(iv) Clause (viii) has been inserted in section 56(2) to provide that income by way of interest received on compensation or on enhanced compensation referred to in clause (b) of section 145A shall be assessed as "Income from other sources in the year in which it is received.
(v) Clause (iv) has been inserted in section 57 to allow a deduction of 50% of such income. It is further clarified that no deduction would be allowable under any other clause of section 57 in respect of such income.
Therefore, in this case, the entire interest of Rs.3,00,000 would be taxable in the year of
receipt, namely, P.Y.2009-10, under the head "Income from Other Sources.
Particulars Rs.
Interest on enhanced compensation taxable u/s 56(2)(viii) 3,00,000
Less: Deduction under section 57(iv) @50% 1,50,000
Interest chargeable under the head Income from other sources 1,50,000
11. Computation of Income from other sources of Mr.Ganesh for the A.Y.2010-11
Particulars Rs.
(1) Cash gift received before 1.10.2009 is taxable under section 51,000 56(2)(vi) since it exceeds Rs.50,000
(2) Value of shares of Beta Ltd. gifted by Mr.Sundar on 19th June, 2009 -is not taxable since only gift of property after 1st October, 2009 is chargeable to tax under section 56 (2)(vii).
(3) Fair market value of shares of Alpha Ltd. is taxable since the gift 70,000 was made after 1st October, 2009 and the aggregate fair market
value exceeds Rs.50,000.
(4) Purchase of land for inadequate consideration on 20.11.2009 would attract the provisions of section 56(2)(vii), since the difference between the stamp value and consideration exceeds Rs.50,000.
Sister's mother-in-law does not fall within the definition of "relative under section 56(2).
Stamp Value 7,00,000
Less: Consideration 5,00,000
Income from Other Sources
Computation of Capital Gains of Mr. Ganesh for the A.Y.2010-11
Sale Consideration 1,00,000
Less: Cost of acquisition [deemed to be the fair market value charged to tax 70,000 under section 56(2)(vii)]
Short-term capital gains 30,000
12. (a) (i) Section 80E provides for a deduction to an assessee, being an individual, on account of any amount paid by him in the previous year by way of interest on loan taken from any financial institution or any approved charitable institution for the purpose of pursuing his higher education or higher education of his relative.
(ii) Prior to the amendment by the Finance (No.2) Act, 2009, the deduction was available only for pursuing full time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics.
(iii) The scope of this section has now been expanded to cover all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so. Therefore, interest on loan taken for pursuing any course after Class XII or its equivalent, will qualify for deduction under section 80E.
(iv) Further, the definition of "relative", in relation to an individual, has been amended to include, in addition to spouse and children of the individual, the student for whom the individual is the legal guardian.
(b) Section 80-IB(10) provides for 100% deduction of the profits derived by an
undertaking from developing and building housing projects. This benefit is available
subject to fulfillment of certain conditions, namely -
(a) The project is approved by a local authority before 31st March, 2008.
(b) The project is constructed on a plot of land having a minimum area of one acre.
(c) The built-up area of each residential unit should not exceed 1,000 sq.ft. in the cities of Delhi and Mumbai (including areas falling within 25 kms. of municipal limits of these cities) and 1,500 sq.ft. in other places.
(d) The built-up area of the shops and other commercial establishments included
in the housing project should not exceed 5 per cent of the total built-up area of the housing project or 2,000 sq.ft., whichever is less.
(e) The project has to be completed within 4 years from the end of the financial year in which the project is approved by the local authority.
(f) The undertaking which develops and builds the housing project shall not be allowed to allot more than one residential unit in the housing project to the same person, not being an individual. Where the person is an individual, no other residential unit in such housing project should be allotted to any of the following persons:-
(1) the individual himself or spouse or minor children of such individual;
(2) the Hindu undivided family in which such individual is the karta;
(3) any person representing such individual, the spouse or minor children of such individual or the Hindu undivided family in which such individual is the karta.
13. An employee opting for voluntary retirement scheme receives a lump-sum amount in respect of his balance period of service. This amount is in the nature of advance salary. Under section 10(10C), an exemption of Rs.5 lakh is provided in respect of such amount to mitigate the hardship on account of the employee going into the higher tax bracket consequent to receipt of the amount in lump-sum upon voluntary retirement.
However, some tax payers have resorted to claiming both the exemption under section 10(10C) (upto Rs.5 lakh) and relief under section 89 (in respect of the amount received in excess of Rs.5 lakh). This tax treatment has been supported by many court judgements also, for example, the Madras High Court ruling in CIT v. G.V. Venugopal (2005) 273 ITR 0307 and CIT v. M. Abdul Kareem (2009) 311 ITR 162 and the Bombay High Court ruling in CIT v. Koodathil Kallyatan Ambujakshan (2009) 309 ITR 113 and CIT v. Nagesh Devidas Kulkarni (2007) 291 ITR 0407. However, this does not reflect the correct intention of the statute.
Therefore, in order to convey the true legislative intention, section 89 has been amended to provide that no relief shall be granted in respect of any amount received or receivable by an assessee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or a scheme of voluntary separation (in the case of a public sector company), if exemption under section 10(10C) in respect of such compensation received on voluntary retirement or termination of his service or voluntary separation has been claimed by the assessee in respect of the same assessment year or any other assessment year.
Correspondingly, section 10(10C) has been amended to provide that where any relief has been allowed to any assessee under section 89 for any assessment year in respect of any amount received or receivable on his voluntary retirement or termination of service or voluntary separation, no exemption under section 10(10C) shall be allowed to him in relation to that assessment year or any other assessment year.
Therefore, in view of the above amendment, Mr. Ravi's tax treatment is incorrect. He has to either opt for exemption of upto Rs.5 lakh under section 10(10C) or relief under section 89(1), but not both.
14. (a) Tax treatment for Limited Liability Partnership (LLP)
(i) Consequent to the Limited Liability Partnership Act, 2008 coming into effect in 2009 and notification of the Limited Liability Partnership Rules w.e.f. 1st April, 2009, the Finance (No.2) Act, 2009 has incorporated the taxation scheme of LLPs in the Income-tax Act on the same lines as applicable for general partnerships, i.e. tax liability would be attracted in the hands of the LLP and tax exemption would be available to the partners. Therefore, the same tax treatment would be applicable for both general partnerships and LLPs.
(ii) Consequently, the following definitions in section 2(23) have been amended -
(1) The definition of partner' to include within its meaning, a partner of a limited liability partnership;
(2) The definition of firm' to include within its meaning, a limited liability partnership; and
(3) The definition of partnership' to include within its meaning, a limited liability partnership.
The definition of these terms under the Income-tax Act would, in effect, also include the terms as they have been defined in the Limited Liability Partnership Act, 2008. Section 2(q) of the LLP Act, 2008 defines a partner' as any person who becomes a partner in the LLP in accordance with the LLP agreement. An LLP agreement has been defined under section 2(o) to mean any written agreement between the partners of the LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to the LLP.
(iii) The LLP Act provides for nomination of "designated partners who have been given greater responsibility. Therefore, clause (cd) has been inserted in section 140, which lays down the "Authorised signatories to the return of income, to provide that the designated partner shall sign the return of income of an LLP. However, where, for any unavoidable reason such designated partner is not able to sign and verify the return or where there is no designated partner as such, any partner can sign the return.
(iv) New section 167C provides for the liability of partners of LLP in liquidation. In case of liquidation of an LLP, where tax due from the LLP cannot be recovered, every person who was a partner of the LLP at any time during the relevant previous year will be jointly and severally liable for payment of tax unless he proves that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the LLP. This provision would also apply where tax is due from any other person in
respect of any income of any previous year during which such other person was a LLP.
(v) Since the tax treatment accorded to a LLP and a general partnership is the same, the conversion from a general partnership firm to an LLP will have no tax implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. However, if there is a change in rights and obligations of partners or there is a transfer of asset or liability after conversion, then the provisions of section 45 would get attracted.
(vi) The LLP shall be entitled to deduction of remuneration paid to working partners, if the same is authorized by the partnership deed, subject to the limits specified in section 40(b)(v), i.e., -
(a) On the first Rs.3,00,000 of book Rs.1,50,000 or 90% of book profit or in case of a loss profit, whichever is higher
(b) On balance book profit 60% of book profit
(vii) The LLP shall be entitled to deduction of interest paid to partners if such payment is authorized by the partnership deed and the rate of interest does not exceed 12% simple interest per annum.
(viii) The LLP shall comply with section 184, which requires that -
(1) the partnership is evidenced by an instrument;
(2) the individual shares of the partnership are specified in that instrument;
(3) a certified copy of the LLP agreement shall accompany the return of income of the LLP of the previous year relevant to the assessment year in which assessment as a firm is first sought.
(ix) If the LLP does not comply with section 184, it shall not be entitled to deduction of payments of interest or remuneration made by it to any partner in computing the income under the head "Profits and gains of business or profession.
(b) The LLP shall be entitled to deduction of remuneration paid to working partners, if the same is authorized by the partnership deed, subject to the limits specified in section 40(b)(v), i.e., -
(a) On the first Rs.3,00,000 of book Rs.1,50,000 or 90% of book profit, profit or in case of a loss whichever is higher
(b) On balance book profit 60% of book profit
Particulars
Net profit as per profit and loss account
Rs.
4.00.000
9.00.000 13,00,000
2.70.000 6,00,000
8.70.000
Add: Salary paid to partners A, B & C (3,00,000 x 3)
Book profit
Deduction in respect of partners' remuneration is subject to limits specified in section 40(b)(v) -
On first Rs.3 lakh of book profit [3,00,000 x 90%]
On balance Rs.10 lakh of book profit [10,00,000 x 60%]
The excess amount of Rs.30,000 (i.e., Rs.9,00,000 disallowed as per section 40(b)(v).
Rs.8,70,000) would be
15. Computation of book profit under section 115JB
Particulars
Rs.
Rs.
7,25,000
Net Profit as per Profit & Loss Account
Add: Net Profit to be increased by the following amounts as per Explanation 1 to section 115JB
Income-tax paid or payable or provision therefor
Provision for income-tax 1,20,000
Interest on income-tax 11,000
51.000
12.000 18,000 20,000 22,000
43,000
6,000
50,000 3,22,000 10,47,000
