Mr. Raman, a resident individual aged 62 years, is engaged in the business of manufacturing and sales of spare parts for motor bikes, as a…

CA Intermediate · Taxation · PYQS · September 2024
Mr. Raman, a resident individual aged 62 years, is engaged in the business of manufacturing and sales of spare parts for motor bikes, as a proprietor. He prepares his accounts on mercantile basis. This business is carried out on the ground floor of a two storied commercial building owned by him, the written down value of which is 8 lakhs as on April 1, 2023. He prepares his accounts on accrual basis. The Statement of Profit and Loss for the previous year ended on March 31, 2024 shows a net profit of 9.25 lakhs (before taxation and depreciation) after debiting/crediting the following items: (i) Travelling expenses includes - 2,40,000 being expenditure incurred on a foreign tour to Taiwan for attending a business exhibition and meeting with vendors, out of which - 40,000 is incurred in Indian currency and - 2,00,000 in foreign currency. Mr. Raman has spent 10 days in Taiwan, out of which 4 days were utilized by him for attending marriage ceremony of a vendor's son. (ii) Administrative expenses include - 9,525 paid towards interest on delay in deposit of GST. (iii) General expenses include a sum of 3,88,000 paid to a non-resident as fee for technical services without deduction of tax at source. (iv) Fire insurance premium of 66,000 for the entire building remained unpaid till 31 st March, 2024. (v) Expenditure of 75,000, was paid to a scientific research association approved under section 35. Out of 75,000,50,000 was utilised towards the purchase of land by the research association. (vi) He let out first floor of his commercial building to Mr. Aman on April 1, 2023 and received rent of 35,000 per month. Municipal taxes - 20,000 relating to the building were paid equally by both Mr. Raman and Mr. Aman. Rent received was credited and municipal taxes of 10,000 (relating to ground floor) was debited to the statement of profit and loss. (vii) He sold a piece of land for 44 lakhs on 12 th April, 2023. He had acquired the land for 40 lakhs on 1 st January, 2022. The gain of 4,00,000 is credited to the statement of profit and loss. (CII for F.Y. 2021-22-317; F.Y. 2023-24-348) Additional Information: (i) Mr. Raman purchased raw material from M/s. Paul Industries, a micro enterprise, for 49,000 on March 10, 2024. However, the payment to M/s. Paul Industries was made on April 5, 2024 by cheque. No written agreement for payment existed between M/s. Paul Industries and Mr. Raman. Another supplier M/s. Kal Industries, a small enterprise, with whom also no written agreement existed for payment, was paid - 1,34,000 in cash on April 5, 2024 for purchase of raw material on March 31, 2024. Both M/s. Paul Industries and M/s. Kal Industries follow mercantile system of accounting. (ii) Mr. Raman acquired a registered trademark on July 15, 2023 for 2,00,000. Mr. Raman started using this trademark for his business from January 15, 2024. Mr. Raman omitted to enter any transaction relating to this trademark in his books of accounts. (iii) Mr. Raman bought a car for personal use on 12 th April, 2020 for 5,40,000. He started using this car for business purposes from 01.04.2023. As on that day, the market value of the car was - 2,10,000. Assume the rate of depreciation to be 15%. (iv) He incurred - 2,50,000 on the purchase of a new machinery to be used in the production of spare parts for motor bikes on May 15, 2023. (v) He has paid tuition fees of 25,000 for the education of his daughter to a college. (vi) During the year, Mr. Raman has incurred - 9,500 in cash for preventive health check-up where - 5,000 was for himself and - 4,500 was for his parents who are super senior citizens. (vii) Donation paid to a registered political party by way of cheque - 20,000. Compute the total income and tax payable for assessment year 2024-25 by Mr. Raman under default tax regime and optional tax regime as per normal provisions of the Act. Which option is advantageous to Mr. Raman?

Suggested Answer and Working Notes:

Computation of total income and tax payable by Mr. Raman for A.Y. 2024-25 under default tax regime Particulars Particulars ₹ I Income from house property Gross Annual Value of first floor (Rent received has been taken as gross annual value in the absence of other information) [₹ 35,000 x 12] 4,20,000 Less: Municipal taxes (paid by tenant, Mr. Aman, hence not deductible) Nil Net Annual Value 4,20,000 Less: Deduction @30% of NAV 1,26,000 2,94,000 II Profits and gains of business or profession Net Profit 9,25,000 Add: Expenses debited to Profit and loss A/c but not allowable as deduction or to be considered under other heads of income Travelling expenses [Allowable since the same is incurred wholly and exclusively for business purpose] Nil [Note - Alternatively, it is possible to assume that the proportionate foreign tour expenditure attributable to attending the marriage ceremony of a vendor's son is a personal expenditure. In such case,2,40,000 X 4 /10 = 96,000 would be disallowed.] Interest on delay in deposit of GST [Interest on delay in deposit in GST is compensatory in nature and hence, allowable as expenditure] Nil Fee for technical services to non-resident [100% disallowed under section 40(a)(i) since the TDS was not deducted] 3,88,000 Fire insurance premium [Fire insurance premium for ground floor which is occupied for business purpose is allowed since Mr. Raman is following mercantile system of accounting. Remaining half for let out portion is disallowed] [₹ 66,000/2] 33,000 Contribution to scientific research association approved u/s 35 [Not allowable under section 35(1) (ii) as per default tax regime] 75,000 Municipal taxes for ground floor [Allowable since the ground floor is occupied for business purpose] Nil Sum payable for purchase of raw material from M/s Paul Industries, a micro enterprise [Not allowable as per section 43B(h) since payment was made to a micro enterprise on 5.4.2024 which is beyond the time limit specified u/s 15 of the MSMED Act, 2006 i.e., within 15 days from 10.3.2024] 49,000 Sum payable for purchase of raw material from M/s Kal Industries, a small enterprise [Allowable as per section 43B(h) since payment was made to a small enterprise on 5.4.2024 i.e., within 15 days from 31.3.2024. However, since the payment is made in cash on 5.4.2024,1,34,000 for purchase of raw material would be the deemed income of P.Y. 2024-25 as per section 40A(3A)] Nil 14,70,000 Less: Incomes credited to profit and loss account but not taxable as business income Rent received for let out portion 4,20,000 Gain on sale of land 4,00,000 6,50,000 Less: Depreciation On trademark [₹ 2,00,000 x 25% x 50%, since trademark is put to use for less than 180 days] 25,000 On Car [₹ 5,40,000 x 15%] 81,000 On new Plant & machinery [₹ 2,50,000 x 15%] 37,500 On Building [₹ 8,00,000 x 10%] 80,000 Additional depreciation On new Plant & machinery [Not allowable under default tax regime] Nil Income from Business 4,26,500 III Capital Gains Full value of consideration 44,00,000 Less: Cost of acquisition 40,00,000 Short term capital gains on land [Since land is held for less than 24 months] 4,00,000 Gross Total Income 11,20,500 Less: Deduction under Chapter VI-A [Not allowable under default tax regime] Nil Total Income 11,20,500 Tax Payable Up to 3,00,000 Nil From 3,00,001 to 6,00,000 @5% 15,000 From 6,00,001 to 9,00,000 @10% 30,000 From 9,00,001 to 11,20,500 @15% 33,075 78,075 Add: Health and education cess @4% 3,123 Tax Payable 81,198 Tax Payable (Rounded off) 81,200 Computation of total income and tax payable by Mr. Raman for A.Y. 2024-25 under normal provisions of the Act Particulars Particulars ₹ Gross Total Income as per default tax regime 11,20,500 Less: Additional depreciation on new Plant & machinery [₹ 2,50,000 x 20%] 50,000 Less: Contribution to scientific research association approved u/s 35 75,000 Gross Total Income as per normal provisions of the Act 9,95,500 Less: Deduction under Chapter VI-A Deduction under section 80C Tuition fees to a college for daughter's education 25,000 Deduction under section 80D Preventive health check-up for self and parents restricted to 5,000 Deduction under section 80GGC Donation to a registered political party since the payment is made otherwise than by cash 20,000 50,000 Total Income as per normal provisions of the Act 9,45,500 Tax Payable Up to 3,00,000 Nil From 3,00,001 to 5,00,000 @5% 10,000 From 5,00,001 to 9,45,500 @20% 89,100 99,100 Add: Health and education cess @4% 3,964 Tax Payable 1,03,064 Tax Payable (Rounded off) 1,03,060 Since tax payable under default tax regime is lower than the tax payable under normal provisions of the Act, it would be beneficial for Mr. Raman to pay tax under default tax regime u/s 115BAC.

Topics: Paper 3A: Income Tax Laws

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