7957final_dt_nov05.pdf - The Suggested Answers for Paper 7 Direct Taxes are based on the provisions applicable for A.Y 2005-06 which is the assessment

7957final_dt_nov05.pdf - The Suggested Answers for Paper 7...

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The Suggested Answers for Paper 7: - Direct Taxes are based on the provisions applicable for A.Y. 2005-06, which is the assessment year relevant for November, 2005 examinations. PAPER – 7 : DIRECT TAXES Answer all questions Question 1 The net profits of XYZ Ltd. for the year ended 31st March, 2005, after debiting/crediting the following items, were Rs.9 lakhs: (a) The company had taken on lease an old building for the purposes of locating its business. Due to old age of the building, it was demolished and a new building put up, which was used for purposes of XYZ’s business from September, 2004. The cost of the new building Rs.10 lakhs was written off as revenue expenditure. The lessor permitted the company to have an extension of the lease by another twenty years. (b) Rs.1 lakh was paid as an annual fee for technical services to a foreign collaborator under an agreement approved by the Government. (c) The company collected Rs.3 lakhs from its customers by way of sales tax in the year 1986-87 and had remitted it to the State Government in due time. On the levy being challenged in the High Court, the Court held the collection as illegal and the State Government in February, 2005 refunded the amount to the company. (d) Land development charges of Rs.1.5 lakhs were paid to the State Industrial Development Corporation on allotment of a commercial plot. (e) A criminal case was filed against a Director of the company, in his official capacity. The company spent legal expenses of Rs.50,000 defending him in the proceedings. The Director was acquitted of the charges at the end. (f) The company issued in the year bonus shares to its shareholders and for that purpose had to enhance the authorised capital. Fees of Rs.1.5 lakhs were paid to the Registrar of Companies in this regard. These have been written off in the accounts as revenue expenses. (g) The company paid Rs.70,000 as interest on deposits to some of the non-resident buyers on advances received from them. No tax at source was deducted on the payment. (h) Overdraft interest of Rs.40,000 was paid to the company’s bank to enable the company to pay its income tax dues. (i) The opening and closing stocks of the year were Rs.90,000 and Rs.1,17,000 respectively and were undervalued by 10% on cost. (j) Some investments were held by the company (not as stock in trade), which had to be depreciated by Rs.4.8 lakhs due to a directive from the Government. The balance on 1 st April, 2004 to the Profit and Loss Account, shown separately in the Balance Sheet, was a debit of Rs.2 lakhs. The company had the following claims brought forward from the prior years:
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FINAL EXAMINATION : NOVEMBER, 2005 38 Business losses relating to Assessment year 1994-95 Rs.8 lakhs Assessment year 2002-03 Rs.4 lakhs Losses under the head capital gains - Long-term Assessment year 2003-04 Rs.3 lakhs Unabsorbed depreciation (as per IT records as well as the books of the company) Rs.12.50 lakhs Required to : (a) Calculate the total income of XYZ Ltd. for the assessment year 2005-06 [Your answer should clearly indicate the reasons for the treatment of the individual items given above.] (b)
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