Depreciation U/s 32

Illustration 1: Mr. S owns 2 buildings A and B on 1st April 2019, (rate of

Depreciation : 10%, depreciated value – 14,15,700. He purchases on
December 1, 2019 Building C for Rs. 3,10,000 (rate of depreciation-
10%) and sells building A during the PY 2019-20 ( on 1.10.2019) for Rs.
8,70,000. Determine the amount of depreciation.

Solution:

Particulars Amount
WDV at the beginning of the year (building A and B) 14,15,700
+ new purchases (building C) (1.12.2019) (less than 310,000
180 days ) 17,25,700
- Sales during the year (building A) 8,70,000
WDV of the block of assets 8,55,700
Depreciation at normal rate :
855,700- 310,000 = 545,700 X 10% 54570

Normal depreciation on new asset at 5% on 310,000 15500

WDV of the block of asset at the end of the year 785,630//

Illustration 2:

The particulars of depreciable assets of Mr. Suresh for the PY 2019-20

are given below:

Asset WDV as on Additions Date of Rate of

1.4.2019 purchase depreciation
Plant & 30,00,000 15,00,000 1.6.19 15%
machinery
Furniture 3,00,000 200,000 31.8.19 10%
Motor cars 600,000 3,00,000 31.12.2019 15%

During the year 2019-20, the entire stock of furniture was sold for Rs.
4,00,000 and out of six motor cars, two were sold for Rs. 4,00,000. The
selling expenses were 40,000; 20,000; 10,000; and 16,000 respectively.
The machinery was sold for Rs 25,00,000 during the PY 2019-20.
Calculate the depreciation for the AY 2020-21.

Solution:

Particulars Amount
1. Plant and machinery (15%)
WDV at the beginning of the year 30,00,000
+ new purchases (1.6.2019) (more than 180 days) 15,00,000
45,00,000
- Sales during the year 25,00,000
20,00,000
Normal rate of Depreciation (20,00,000X 15%) 3,00,000
Additional depreciation ( 15,00,000X 20%) 3,00,000
WDV of the block of asset at the end of the year 14,00,000//

Furniture (particulars) – 10% amount

WDV at the beginning of the year 3,00,000
+ purchases (31.8.2019) 200,000
5,00,000
- Sales during the year (entire stock) 4,00,000
STCL -100,000//

Motor cars (particulars) – 15% Amount

WDV at the beginning of the year 600,000
+ purchases (31.12.2019) (less than 180 days) 300,000
9,00,000
- Sales during the year ( 2 cars sold) 400,000
5,00,000
Normal depreciation 500,000- 300,000= 2,00,000X 15% 30,000
On balance 300,000 X 15% X 50% 22,500
4,47,500//

Total depreciation= 6,00,000 + 0 + 52,500 = 652500//

Illustration 7 (pg no. 278)

1. Plant and Machinery

Particulars (rate of depreciation = 15%) Amount

WDV at the beginning of the year 250,000
+ New purchases 3,00,000
5,50,000
- Sales during the year 6,00,000
STCG 50,000//

2. Building (Rate of depreciation= 10%)

Particulars Amount
WDV at the building 10,00,000
+New purchases Nil .
10,00,000
Less: sales during the year 2,00,000
WDV 8,00,000
Less: Normal depreciation (8,00,000X10%) 80,000
WDV of the block of asset at the end of the year 7,20,000//
Illustration 8 (pg no. 279)

1. Computer (I Block of Asset)

Particulars Amount
WDV at the beginning of the year 140,000
+ new purchases 60,000
2,00,000
Less: sales during the year Nil .
2,00,000
Less: normal depreciation (2,00,000X 40%) 80,000
WDV at the end of the year 120,000//

2. Typewriter (II Block of asset)

Particulars Amount
WDV at the beginning of the yr 30,000
+ new purchases Nil .
30,000
Less: sales during the year Nil .
30,000
Less: normal Depreciation (30,000X 15%) 4,500
WDV at the end of the year 25,500//

3. Furniture and fitting (rate of depreciation 10%)

Particulars Amount
WDV at the beginning of the yr 1,00,000
+ new purchases Nil .
1,00,000
Less: sales during the year Nil .
 1,00,000
Less: normal Depreciation (1,00,000X 10%) 10,000
WDV at the end of the year 90,000//

4. Office building (rate of depreciation -10%)

Particulars Amount
WDV at the beginning of the yr 5,00,000
+ new purchases (Dec 18)( less than 180 days) 40,00,000
45,00,000
Less: sales during the year 15,00,000
30,00,000
Less: normal Depreciation on 30,00,000 X5% 1,50,000
WDV at the end of the year 28,50,000//

5. Staff Quarters (rate of depreciation- 5%)

Particulars Amount
WDV at the beginning of the yr 15,00,000
+ new purchases Nil .
15,00,000
Less: sales during the year Nil .
15,00,000
Less: normal Depreciation on 15,00,000 X5% 75,000 .
WDV at the end of the year 14,25,000//

6. Professional books (depreciation rate- 40%)

Particulars Amount
WDV at the beginning of the yr --
+ new purchases 40,000 .
 40,000
Less: sales during the year Nil .
40,000
Less: normal Depreciation on 40,000 X40% 16,000 .
WDV at the end of the year 24,000//

Unabsorbed Depreciation:

If the whole amount of current depreciation allowance is not

deductible on the account of the insufficiency of income, the remaining
unabsorbed amount is called unabsorbed depreciation.

Set-off and Carry forward of unabsorbed depreciation:

Business profits before depreciation for CY XXX

Less: current year Depreciation XXX

XXX

Less B/F business Loss XXX

XXX

Less: unabsorbed Depreciation XXX

balance XXX//

Illustration no.9 (pg no 280)

Solution :

2018-19
Particulars Amount
Income from HP 10,000
Business Loss (35,000-10,000= 25,000//- carried 10,000
frwd)
Total income nil
Unabsorbed depreciation c/f = 25,000

2019-20

Particulars Amount
Income from Business 50,000
- CY depreciation 30,000
20,000
Less: c/F business loss (25,000-20,000= 5,000 carried 20,000
frwd to next year)
Nil
Income from House Property 30,000
30,000
Less: carried frwd unabsorbed depreciation 25,000
TOTAL INCOME 5,000//

Illustration no. 11 (pg no. 281)

Solution:

1. Block of Asset (Building and Godown)

Particulars Amount
WDV at the beginning of the year 17,63,120
(15,47,380+2,15,740)
+ new purchases Nil .
 17,63,120
Less: Destroyed due to fire 1,00,000
16,63,120
Less: normal depreciation 16,63,120X10% 1,66,312
WDV at the end of the year 14,96,808//

2nd block of Asset – Machinery

Particulars Amount
WDV at the beginning of the year 35,00,000
+ new purchases (31.10.2019)(less than 180 days) 5,00,000
40,00,000
Less: sales during the year Nil .
40,00,000
Less: Normal depreciation:
(40,00,000-5,00,000= 35,00,000X 15%) 5,25,000

Less: additional depreciation

5,00,000X 10% 50,000
WDV at the end of the year 34,25,000//

3rd block of asset- motor bus

Particulars Amount
WDV at the beginning of the year 150,000
+ new purchases NIL .
150,000
Less: sales during the year Nil .
150,000
Less: Normal depreciation:
(150,000X 30%) 45,000
WDV at the end of the year 1,05,000//
4th Block of Asset – furniture

Particulars Amount
WDV at the beginning of the year 25,170
+ new purchases NIL .
25,170
Less: sales during the year Nil .
25,170
Less: Normal depreciation:
(25170X 10%) 2517
WDV at the end of the year 22,653//

Total Depreciation allowance:

1st block of Asset( building and Godown) = 166,312

2nd Blosk of Asset ( machinery) = 5,75,000

3rd Block of Asset (Motor Bus) = 45,000

4th Block of Asset (furniture) = 2517________

TOTAL 7, 88,829//

Illustration no. 12:

Solution

Particulars (Block of Asset 1- Building A- 10%) Amount

WDV at the beginning of the year 8,10,000
+ new purchases (building D) (1.3.2020)(<180 days) 7,00,000
15,10,000
Less: sales during the year 9,00,000
 6,10,000
Less: Normal rate of depreciation
(6,10,000 X 5%) 30,500
WDV at the end of the year 5,79,500//

Particulars (Block of Asset 2- Building B- rate:5% Amount

WDV at the beginning of the year 15,04,800
+ new purchases (building C) (1.5.2019) (>180 days) 300,000
18,04,800
Less: sales during the year (building B) 18,04800
Nil//
STCG = 19,00,000- 18,04,800= 95,200//

Particulars (Block of Asset 3- P &M- P & R – rate: 15%) Amount

WDV at the beginning of the year (3,00,000+3,37,500) 6,37,500
+ new purchases (Plant S) (1.12.2019) (<180 days) 3,00,000
9,37,500
Less: sales during the year (plant R) (1.9.2019) 4,50,000
4,87,500
Less: Normal rate of depreciation (4,87,500- 3,00,000) 28,125
= 1,87,500 X15%
Normal rate on new asset (3,00,000X 7.5%) 22,500

Less: additional depreciation (3,00,000 X 10%) 30,000

WDV at the end of the year 4,06,875//

Particulars (Block of Asset 4- P& M –Q ; rate – 40%) Amount

WDV at the beginning of the year 2,88,000
+ new purchases (P& M-T) (1.8.2019) (>180 Days) 2,00,000
4,88,000
Less: sales during the year (Plant Q) (1.2.2020) 4,88,000
Nil//
STCG = (5,00,000-4,88,000= 12,000//)

Total Amount of Depreciation:

30,500+ 0+80,625+0 = 1,11,125//

Income from Business

Computation of income from Business

Illustration no. 10 (pg no. 192 – swaminathan)

Particulars Amount
N/P as per P & L account 6,40,000
+ inadmissible expenses:
Salary to proprietor 1,20,000
General exps for daughter’s wedding 2,00,000 3,20,000
9,60,000
+ business income not credited to p& L account Nil
9,60,000
Less: admissible exps not debited to P & L account Nil
Less: non business income credited to p & l account :
Interest on POSB a/c 40,000
Taxable Income from Business 9,20,000//

Illustration 10 (pg no. 231) (M&G- DTP)

Solution:

Particulars Amount
N/P as per P and l account 2,80,840
+ Disallowed exps:
Rent paid for residence (2400 /2) 1200
Household exps 51,730
Provision for Bad debts 1,200
Repairs and renewals 630
Loss on sale of motor car 1800
LIC premium 1790
Interest on capital 1090
Provision for depreciation 2,500
Provision for IT 3,900 65,840

+ Business Income not credited to P & L account nil

3,46,680

- Allowed exps not debited to P& L account:

Bad debts written off 550
Depreciation as per IT rules 1,700 2,250
 - Non Business Income credited to P & L account:
Interest on govt securities 5,400
Rent from House Property 5,400 10,800

Taxable income from Business 3,33, 630//

Computation of Total income

Particulars Amount
Income from Salary Nil
Income from House property:
Rent from HP (NAV) 5,400
Less: std deduction at 30% on NAV 1,620 3780
Income from Business 3,33,630
Income from Other Sources 5,400
GTI 3,42,810
Less: Deductions U/S 80 C to 80 U:
80 C: LIC premium (either premium amount or 1,790
20% of Sum assured w.e.l)

Total Income 3, 41,020//

Illustration no. 12 (pg no. 649) (M & G ) (DTP)

Particulars Amount
n/p as per P & L account 1,00,000
+ disallowed expenses :
General charges (charity- 1000 + motor car exchange-
3,000 + charity- 1,000) 5,000
Reserve for Depreciation 25,000
Prov. For IT (19-20) 2,00,000
Tax paid (18-19) 50,000 2,80,000
+ Business Income not credited to P & L account NIL
3,80,000

Less: admissible expenses not debited to P & L

account:
Depreciation 15,000
Less: Non – business income credited to P & L
account:
Interest on govt securities 10,000
STCG 15,000 40,000
3,40,000//

Computation of taxable Income/ Total Income

Particulars Amount
Income from Salary Nil
Income from HP Nil
Income from Business 3,40,000
Income from Capital gains- STCG 15,000
Income from Other source – Interest on govt securities 10,000
GTI 3,65,000
Less: Deductions U/S 80 C to 80 U:
80 G : charitable donations (with limit- 50%)
1000X 50% 500
Taxable Income 3,64,500//

Illustration no. 7 (pg no. 235) (IT- law & accounts) ( M &G)
Solution:

Computation of taxable income from business of banking company

Particulars Amount
N/P as per P & L account 62,000
+ disallowed exps/ business income not credited to P & L
account:
Proposed dividends 80,000
Provisions for Income tax 1,50,000
Provision for bad debts
(40,000- 8.5% of total income)
(40,000 – 8.5% of 62,000+80,000+150,000+ 40,000)
(40,000- 8.5% of 3,32,000)
(40,000- 28,220) 11,780 2,41,780
3,03,780
Less: allowed expes not debited to p & L account/ non-
business Income : Nil
Taxable income from business 3,03,780

Illustration no. 15 (DTP- M & G) (pg no. 236)

Computation of taxable income from business

Particulars Amount
n/p as per p & l account 89,000
+ disallowed expenses and Business income not credited
to P & L account:
¼ th wages (driver’s salary)
(250pm X 10 months)= 2500 – 1/4th of 2500(personal use)
625
½ of rent (residence) 23,000
¼ th repairs of car 750
Medical expenses for treatment 3,000
Depreciation on car (disallowed as the car
Has been sold off) 4,000 31,375
1,20,375
Less: allowed expenses not debited to P & L account and
non- business incomes:
Gift from father 10,000
Sale of car 17,000
Income tax refund 3,000 30,000
Taxable income from business 90,375//

Calculation of depreciation:

WDV at the beginning of the year 20,000

+ new purchases nil

20,000

- Sales during the year 17,000

Loss on sale 3,000//

Illustration 29 (DTP- M & G) ( pg no. 250)

Bad debts – determine deemed income:

1. Bad debts claimed in the PY 2018-19- Rs. 80,000. Deduction

actually allowed Rs. 80,000. Bad debts finally recovered Rs. 75,000
in the PY 2019-20.
Solution

Bad debts claimed 80,000

Bad debts allowed 80,000
nil
bad Debts recovered 75,000

deemed income 75,000//

Q: bad debts claimed in the PY 2018-19 Rs. 80,000. Deductions actually

allowed Rs. 60,000. Bad debts finally recovered in the PY 2019-20 Rs.
25,000.

Solution:

Bad debts claimed 80,000

Bad debts allowed 60,000
Bad debts disallowed 20,000
Bad debts recovered 25,000
Deemed Income 5,000//

Q: bad debts claimed in the PY 2018-19 Rs. 80,000. Deductions actually

allowed Rs. 60,000. Bad debts recovered in the PY 2019-20 Rs. 15,000.

Solution:

Bad debts claimed 80,000

Bad debts allowed 60,000
Bad debts disallowed 20,000
Bad debts recovered 15,000
Deemed income nil//

Illustration no. 31 (pg no. 251) (DTP- M & G)

Solution

Particulars Amount
N/P as per P & L Account 1,82,000
+ Disallowed exps/ business income note credited to p &
L account :
Extension of building (capital) 6,000
Depreciation on P & M 23,000
Unapproved gratuity fund 4,000
Penalty for evading GST 10,000
Payment to NL 49,600 92,600
2,74,600
Less: allowed expenses or non- biz incomes:
Depreciation 19,000
Payment to NL (150% of 49,600) 74,400
Purchase of plant for scientific research(100%) 30,000
Bad debts recovered (disallowed earlier) 7,100
Gift from father 1,43,000 2,73,500
Taxable income from business 1,100//

Illustration no. 30 (pg no. 250) (DTP- M & G)

Solution

Particulars Amount
N/P as per p & l account 1,66,000
+ disallowed expenses/ business income note credited to
P 7 L account:
Rent (50 % for residence) (42,000X50%) 21,000
Donations (general exps) 10,000
Advertisement paid in cash(excess of 10,000) 25,000
Legal exps( capital ) 15,000
Provision for BD 30,000
Advance IT 20,000
Depreciation 38,000
Municipal taxes 10,000 1,69,000
3,35,000

Less: allowed exps/ non- biz incomes :

Depreciation 46,000
Dividends 40,000
Rent of building let out 44,000 1,30,000
Taxable Income from business 2,05,000//
Illustration no. 13 (pg no. 650) ( M & G) (DTP)

Solution:

Particulars Amount
N/P as per P & L account 5,78,095
+ Disallowed expenses:
Depreciation 69,000
General charges (legal charges for agriculture
Land) 750
Cultivation exps 4,57,500
Taxation reserves 25,000 5,52,250
+ Business income not credited to P & L account: Nil
11,30,345

Less: Allowed exps not debited to P & L account:

Depreciation 50,000 50,000

Less: Non- Business Income credited to P & l account:

Rent from agriculture land 950
Revenue from fisheries 3,700
Sale of cane 6,07,055
Avrg mrkt price of cane produced and consumed
In factory 6,75,000
(-) cost is debited to
Mnfacturing exps a/c 6,12,000 63,000
Profit on sale of motor 1230 6,75,935
TAXABLE INCOME FROM BUSINESS 4,04,410//

Computation of Total Income

Particulars Amount
Salary Nil
HP Nil
Business/ profession 4,04,410
Capital gains : Sale of Motor 1230
Other sources : fisheries 3700
GTI/ total Income 4,09,340//

Computation of tax Liability

Particulars Amount
4,09,340 @ flat 25% 1,02,335
+ surcharge Nil
+ cess at 4 % on 102335 4,093
1,06,428//

Less: advance tax paid 1,00,000

TAX LIABILITY 6428//

Minimum Alternative Tax ( Sec 115 JB)- MAT

STEPS IN COMPUTATION OF TAX LIABILITY OF COMPANY ASSESSEE

STEP 1 – Computation of Total income and tax liability as per normal

provisions of Income Tax act, 1961.

STEP 2 – Computation of Book Profit u/s 115JB and tax liability on

book profit as per section 115JB (MAT).

STEP 3 - Compare Step No 1 and Step No 2, WHICH EVER IS HIGHER IS

Tax Liability of the Company.

STEP 4- If Step 2 is greater than step 1, the difference between step 2

and step 1 is called as Tax Credit u/s 115JAA.

Illustration no. 2 ( pg no. 633) ( (M & G) ( DTP)

Solution:

Step 1: Computation of total income and tax liability as per provisions

of Income Tax Act

Particulars Amount
N/P as per P & L account 190,000
+ disallowed expenses:
Donation to charitable institution 30,000
Taxable Income from business 2,20,000//

Particulars Amount
Salary Nil
House property Nil
Business/ Profession 2,20,000
Capital gains 50,000
Other sources:
Interest on Govt securities 10,000
Dividends from domestic co exempt 10,000
Gross Total Income 2,80,000
Less: deductions U/S 80 C to 80 U:
80 G: donations to Charitable institutions ( with limit –
50%)
Qualifying amount= 10% of adjusted GTI or total of
with limit w.e.l)
Adjusted GTI = GTI- [80c to 80 u (except 80 G)+
LTCG+STCG subject to STT+ rebate)]
280,000-[0+50,000+0+0] = 2,30,000 X 10%= 23,000//
OR
30,000// (w.e.l) 11,500
= 23,000 X 50%
Taxable Income 2,68,500//

Computation of tax Liability

Particulars Amount
Taxable income= 2,68,500
Tax on LTCG @ 20% (50,000X 20%) 10,000
Tax on balance at flat 25%
(268500- 50,000 = 2,18,500X 25% 54,625
64625
+ surcharges (if applicable) nil
64625
+ cess @ 4 % 2585
Tax Liability 67,210//
Step 2:

Computation of Tax Liability on Book Profit

Particluars AMOUNT
Book profit= 8,00,000
Tax on 8,00,000 @ 15 % 1,20,000
+ surcharge Nil
120,000
+ Cess 4% 4,800
Tax Liability 1,24,800//

Step 3:

Tax Liability = 67210 or 124,800 (w.e.h)

= 1,24,800//

Step 4: Tax Credit

Step 2- step1 = 1,24,800-67,210 = 57,590//

Illustration no. 3 (pg no.634) (M & G- DTP)

Step 1: compute total Income and tax liability as per provision of IT Act

Computation of Total income

Particulars Amount
Income from business 5,00,000
Income from Capital gains:
STCG (not subject to STT) 15,000
LTCG 33,000
Income from other sources:
Interest on govt securities 20,000
Dividends from Indian co. exempt
Dividends from foreign co. 10,000 30,000
Gross Total Income / Total Income 5,78,000//

Computation of Tax liability

Particulars Amount
Tax on LTCG @ 20% 6,600
(33,000X 20%)
Tax on STCG subject to STT @ 15% NIL

Tax on Balance @ flat 25%

5,78,000- 33,000 = 5,45,000 X 25% 1,36,250
1,42,850
+ surcharge (if applicable) Nil
1,42,850
+ Cess at 4% on 142850 5,714
TAX LIABILITY 148,564//

STEP 2: computation of tax liability on book profits

Particulars Amount
Book profit = 9,00,000

Tax on 9,00,000 @ 15% MAT 1,35,000

+ surcharge Nil
1,35,000
+ Cess @ 4% 5,400
Tax liability as per book profit 1,40,400//

Step 3: determining the actual tax payable to the government

1,48,564 or 1,40,400 (w.e.h)

Therefore, Tax payable is 1,48,564//

Illustration no. 4 (pg no. 635) (M & G) (DTP)

Particulars Amount
N/P as per P and L account 2,05,000
+ disallowed expenses:
Depreciation 1,50,000
Income tax paid 1,00,000
Proposed dividend 2,50,000 5,00,000
7,05,000

Less: allowed expenses not debited to P & L a/c:

Interest on securities 25,000
Depreciation 80,000 80,000
CY’s Business income 6,00,000
Less: B/F business loss Nil
6,00,000
Less: b/f unabsorbed depreciation 1,00,000
Taxable Business income 5,00,000//

Computation of Total income

Particular Amount
 Salary Nil
House property Nil
Business and profession 5,00,000
Capital gains Nil
Other sources 25,000
GROSS TOTAL INCOME 5,25,000
Less: deductions u/s 80 C to 80 U Nil
TOTAL INCOME 5,25,000//

Computation of Tax liability

Particulars Amount
Tax on STCG @ 15% (subject to STT) Nil
Tax on LTCG @ 20% Nil
Tax on balance @ 25%
5,25,000 X 25% 1,31,250
1,31,250
+ surcharge Nil
1,31,250
+ cess @ 4 % on 1,31,250 5,250
Tax Liability 136,500//

Step 2: Computation of Tax liability as per Book profits

Computation of Book Profit

Particulars Amount
N/P as per P & L account 2,05,000
+ Disallowed expenses:
Depreciation 1,50,000
Income tax paid 1,00,000
Proposed dividend 2,50,000 5,00,000
7,05,000
(-) allowed expenses:
Depreciation 3,00,000X 25% 75,000
B/F loss or depreciation (w.e.l)
2,00,000 or 50,000 (w.e.l) 50,000 1,25,000
BOOK PROFIT 5,80,000//

Computation of Tax liability as per books of accounts

Particulars Amount
Book profit = 5,80,000
Minimum Alternative Tax on 5,80,000 @ 15% 87,000
+ surcharge Nil
87,000
+ Cess at 4% on 87,000 3,480
Tax Liability 90,480//

Step 3: Actual amount of tax payable

1,36,500 or 90,480 (w.e.h)

Therefore, tax liability = 1,36,500//

Illustration no. 1 (pg no. 631) (M & G) (DTP)

Step 1: computation of tax liability as per IT Act provisions

Particulars
N/ p as per P & L account 2,50,000
+ disallowed expenses :
Provision for contingent liability 40,000
Provision for diminution in value of asset 50,000
Income tax paid 20,000
Proposed dividends 50,000
Transfer to general reserve 40,000 2,00,000
4,50,000
- Allowed expenses/ non- business income :
Deferred tax 1,00,000
Long term capital gain 1,00,000 2,00,000
CY,s Business income 2,50,000
Less: B/F business Loss Nil
2,50,000
Less: b/f unabsorbed depreciation
(unabsorbed depreciation = 50,000) 2,50,000
NIL//
Computation of Gross Total income

Salary nil

HP nil

Business nil

Capital gain 1,00,000

- Unabsorbed dep 50,000

50,000
- Capital loss 50,000

(C/f loss= 10,000)

Nil//
Other sources nil

GROSS Total income Nil

Total income nil

Tax liability = NIL//

Step 2: Computation of tax liability as per book profit

Particulars
N/ p as per P & L account 2,50,000
+ disallowed expenses :
Provision for contingent liability 40,000
Provision for diminution in value of asset 50,000
Income tax paid 20,000
Proposed dividends 50,000
Transfer to general reserve 40,000 2,00,000
4,50,000
- Allowed expenses:
Deferred tax 1,00,000 1,00,000
3,50,000
Less: B/F business Loss / depreciation as per books of 80,000
accounts ( 1,00,000 or 80,000 ) w.e.l

BOOK PROFIT 2,70,000//

Tax Liability on book profit

MAT @ 15% on 2,70,000 40,500
+ surcharge Nil
+ Cess @ 4% 1620
Tax Liability as per book profit 42,120//

Step 3: Actual amount of tax payable

0 or 42,120 (w.e.h).. Therefore, tax liability = 42,120//

Illustration no. 5 ( pg no. 637) ( M & G) (DTP)

Solution :

Step 1: computation of tax liability as per IT provisions

Particulars Amount
N/P as per P& L account 8,40,000
+ disallowed exps:
Provision for unascertained liability 40,000
Income tax paid 75,000
Proposed dividend 8,05,000
Transfer to general reserve 60,000 9,80,000
18,20,000

Less: allowed exps but not debited at P & L account/

Non Business income credited to P & L account:
LTCG 5,70,000
VAT 50,000
Transfer from General reserve 20,000 6,40,000
11,80,000
 - b/f business loss Nil
11,80,000
- b/f unabsorbed depreciation 4,60,000
Business income 7,20,000//

Computation of Total Income

Salary Nil
HP Nil
Business 7,20,000
Capital gains :
LTCG 5,70,000
- b/f capital loss 3,50,000 2,20,000
Other sources Nil
GTI/ Total Income/ taxable income 9,40,000//

Computation of tax Liability

Tax on STCG subject to STT @ 15% Nil

Tax on LTCG @ 20% (2,20,000X 20%) 44,000
Tax on balance (940,000- 2,20,000)
= 7,20,000X 25%
+ surcharge
+ cess

Book profit = 17,40,000//

Q: illustration no. 6 (pg no. 638) (DTP- M & G)

Solution:

Step 1: Tax liability as per IT provision

Total income 3,50,000

Tax @ 25%
(3,50,000X25%) 87,500
+ surcharge nil
87,500
+ cess @ 4% 0n 87,500 3,500
Tax Liability 91,000//

Step 2: Tax liability as per Book profit

Total Income 12,00,000

MAT @ 15% 1,80,000
+ surcharge nil
1,80,000
+ cess @ 4% 0n 1,80,000 7,200
Tax Liability 1,87,200//

Step 3:
Tax payable = 91,000 or 1,87,200 (w.e.h)
Therefore = 1,87,200//
Question:

R Ltd, a domestic company provides the following P& L account for

computation of tax liability for the AY 2020-21

Particulars Amount Particulars Amount

To purchases 18,75,000 By sales 75,25,000
To Daily wages 8,45,000 By closing stock 1,10,000
To freight 12,500
To G/P 49,02,500 _________
76,35,000 76,35,000

To salaries 18,50,000 By G/P 49,02,500

To General exps 4,35,000 By dividends from
To sales exps 2,15,000 Indian company 17,500
To directors
remuneration 8,22,000
To IT 180,000
To penalty (excise 10,000
duty)
To proposed dividend 3,20,000
To provision for loss
of subsidiary 2,00,000
company
To N/P 18,88,000 _________
49,20,000 49,20,000
Additional information :

1. Purchase includes 1 bill of Rs 60,000 against which payment was

made in cash.
2. General expenses include Rs. 15,000 as interest on loan taken
from scheduled bank. This interest has not been paid so far.
3.

As per IT laws As per books of

accounts
B/f business loss 2,80,000 14,000
Unabsorbed depreciation 1,70,000 50,000

Solution:

Step 1: Computation of tax liability as per IT provisions

Computation of Taxable Business income

Particulars Amount
N/P as per p & l account 18,88,000
+ disallowed expenses/ Business income not
credited to P & L account:
Purchases by cash (since the payment is more than
10,000/-) 60,000
O/S interest amount 15,000
Income tax 1,80,000
Penalty 10,000
Proposed dividend 3,20,000
Provision for loss 2,00,000 7,85,000
26,73,000
 - Admissible expenses/ Non- Business Income
credited to P & L account :
Dividends from Indian company 17,500 17,500
26,55,500
- b/f business loss 2,80,000
23, 75,500
- b/f unabsorbed depreciation 1,70,000
Taxable Income from Business 22,05,500//

Computation of Total Income

Particulars Amount
Salary Nil
HP Nil
Business 22,05,500
Capital gains Nil
Other sources:
Dividends from India company Exempt
GTI / Total Income 22,05,500

Computation of tax liability

Particulars Amount
Tax on 22,05,500 @ 25% 5,51,375
+ surcharge nil
5,51,375
+ cess @ 4% 22,055
Tax Liability 5,73,430//

Step 2: computation of tax liability as per book profit

Particulars Amount
n/ p as per P & L account 18,88,000
+ disallowed expenses:
Income tax paid 1,80,000
Proposed dividend 3,20,000
Provisions for loss 2,00,000 7,00,000
25,88,000
- allowed expenses:
Dividends from Indian company 17,500
b/f loss or depreciation (w.e.l)
(1,40,000 or 50,000) 50,000 67,500
BOOK Profit 25,20,500//

Computation of tax Liability

Particulars Amount
MAT @ 15% on book profit
25,20,500X 15% 3,78,075
+ surcharge @ 7 % Nil
3,78,075
+ Cess @ 4 % 15,123
Tax Liability 3,93,198//

Step 3:

Tax payable = 5,73,430 or 3,93,198 (w.e.h)

= 5,73,430//

Illustration no. 8 (pg no. 236) (IT laws) (M & G) – Compute tax liability
Solution:

Step 1: computation of tax liability as per IT laws

Particulars Amount
N/P as per p & L account 2,32,850
+ disallowed exps/ business income not credited to P &
L account
Income tax 700
Charities 375
Donations 400 1475
2,34,325
Less: allowed exps not debited to P & L account / non
business incomes credited to P & L account
Dividends from co-operative society 2,600
Rent from property 500 3,100
Taxable income from business 2,31,225

Computation of total income

Particulars Amount
Salary Nil
Income from HP :
500 – deduction u/s 24 ( std deduction at 30% on
NAV) = (500- 150) 350
Income from business 2,31,225
Capital gains Nil
Other sources (dividends form cooperative society) 2,600
Gross total income / Total income 2,34,175
Tax liability as per IT provisions

Particulars Amount
Tax on 2,34,175 @ 25% 58,544
+ surcharge Nil
58,544
+ cess @ 4% 2,342
Tax liability 60,886//

Step 2: Tax liability as per book profit

Particulars Amount
N/P as per p & L account 2,32,850
+ disallowed exps/ business income not credited to P &
L account
Income tax 700
Charities 375
Donations 400 1475
2,34,325
Less: allowed exps not debited to P & L account / non
business incomes credited to P & L account
Dividends from co-operative society 2,600
Rent from property 500 3,100
Book Profit 2,31,225

Tax liability on book profit

Particulars Amount
MAT @ 15% on book profit (2,31,225X 15%) 34,684
+ surcharge (if applicable) Nil
34,684
+ cess @ 4% 1,387
36,071

Step 3: conclusion

i.e., 60886 or 36,071 (w.e.h)

therefore, tax payable is 60,886//

Tax Credit

STEP 1 – Computation of Total income and tax liability as per normal

provisions of Income Tax act, 1961.

STEP 2 – Computation of Book Profit u/s 115JB and tax liability on book
profit as per section 115JB.

STEP 3 - Compare Step No 1 and Step No 2, WHICH EVER IS HIGHER IS

Tax Liability of the Company.

STEP 4- If Step 2 is greater than step 1, the difference between step 2

and step 1 is called as Tax Credit u/s 115JAA.

Illustration no. 7 (pg no. 639) ( DTP – M & G)

Tax liability as per IT provision = 5,20,000

Tax liability as per Book profit = 7,80,000

Tax credit carried forward to next year = 780,000 – 5,20,000 =
2,60,000//

Q. from the following information compute tax payable by Z ltd for the
AY 2020-21.

1. Total income of the company for the PY 2019-20 6,00,000

2. Book profit u/s 115JB of the company for the PY 2019-20 8,00,000

3. Brought forward credit u/s 115 JAA form the AY 2019-20 1,50,000

Solution:

Tax liability as per IT provisions

6,00,000 X 25% = 150,000 + cess (4%) (i.e., 6000) = 1,56,000

Tax liability as per Book profit

8,00,000 X 15% = 120,000 + cess @ 4 % (4,800) = 1,24,800

Tax credit = 156,000 – 124,000 = 31,200

MAT credit carried forward for the AY 2021-22

= 150,000 – 31,200 = 1,18,800//

 Unit -4 Tax Management
Own or Lease:

Q1: From the following information, determine whether the assess

must purchase or lease the asset.

1. Cost of asset – Rs.100,000

2. Rate of depreciation – 15%
3. Rate of interest 10%
 4. Repayment of loan by the assesse – Rs.20,000 PA
5. Rate of tax 30.9%
6. Residual value (scrap value)- Rs.20,000 after 5 years
7. Profit of the assesse Rs.100,000 before depreciation, interest/
lease rent and tax
8. Lease rent Rs.30,000 PA.

Solution:

1. Purchase of asset
Particulars I year II year III year IV year V years Total
Profits 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 5,00,000
before
dep and (15,000) (27,750) (38,588) (47,800)
tax (EBIT 85,000 72,250 61,412 52, 200
& dep)
Less: Dep 15,000 12,750 10,838 9,212 7,830 55,630
@ 15% 85,000 87,250 89,162 90,788 92,170 4,44,370

Less:
Interest 10,000 8,000 6,000 4,000 2,000 30,000
@ 10%
EBT/PBT 75,000 79,250 83,162 86,788 90,170 4,14,370

Less: Tax 23,175 24,488 25,697 26,817 27,862 1,28,040

@ 30.9%

EAT 51,825 54,762 57,465 59,971 62,308 2,86,330

Working note:

Calculation of Interest @ 10%

Loan amount = 100,000

1st year = 1,00,000 X10% = 10,000

2nd year = 1,00,000- 20,000 = 80,000X10% = 8000

3rd year = 80,000- 20,000 = 60,000X 10% = 6,000

4th year = 60,000 – 20,000 = 40,000X 10% = 4,000

5th year = 40,000-20,000 = 20,000X10% = 2000

Profit/ Loss on sale of asset =

1,00,000 – 55,630 = 44,370 – 20,000(residual value) = 24,370// (Loss)

Total profit after interest and tax =2,86,330 – 24,370

Profit= 2, 61,960//

2. Asset taken on lease

Particulars I year II year III year IV year V year TOTAL

Profit 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 5,00,000
before
dep,
interest &
tax
Less:
Lease rent 30,000 30,000 30,000 30,000 30,000 150,000
EBT/PBT 70,000 70,000 70,000 70,000 70,000 3,50,000

Less: Tax
@ 30.9% 21,630 21,630 21,630 21,630 21,630 1,08,150
EAT/PAT 48,370 48,370 48,370 48,370 48,370 2,41,850

Profit = 2,41,850//

Conclusion: Since profit earned in case of purchase is higher (261,960)

when compared to lease (2,41,850), the assesse must decide to
purchase the asset.

Q 2: From the following information, determine whether the assess

must purchase or lease the asset.

1. Cost of asset – Rs.100,000

2. Rate of depreciation – 15%
3. Rate of interest 10%
4. Repayment of loan by the assesse – Rs.20,000 PA
5. Rate of tax 30.9%
6. Residual value (scrap value)- Rs.20,000 after 5 years
7. Profit of the assesse Rs.100,000 before depreciation, interest/
lease rent and tax
8. Lease rent Rs.30,000 PA.
9. If the PV factor at 10% is:

Years 1 2 3 4 5
PV factor 0.909 0.826 0.751 0.683 0.621

Solution :

1. if Asset is purchased

Particulars 1 year 2 year 3year 4 year 5 year

1.Loan 20,000 20,000 20,000 20,000 20,000
repayment
2.+ Interest 10,000 8,000 6,000 4,000 2,000
@ 10% (2)
3.Cash 30,000 28,000 26,000 24,000 22,000
outflow (A)
(1+2)

4.Less : 15,000 12,750 10,838 9,212 7,830

depreciation

5.Total 25,000 20,750 16,838 13,212 9,830

outflow(B)
(2+4)

6.Tax saved 7725 6412 5203 4083 3037

on 5 @
30.9%

7.Net cash 22,275 21,588 20,797 19,917 18,963

outflow (3-
6)

8.Discout 0.909 0.826 0.751 0.683 0.621

factor @
10%

PV of net 20, 248 17,832 15,619 13,603 11,776

cash out
flow

Total PV on cash outflow = 79,078

Less: PV of residual value
(20,000 X 0.621) = 12,420
NPV if purchased 66,658//

2. if taken on lease

1 year 2 year 3 year 4 year 5 year

Cash 30,000 30,000 30,000 30,000 30,000
outflow
(lease
rent)
Less: Tax 9270 9270 9270 9270 9270
savinf @
30.9%
Net Cash 20,730 20,730 20,730 20,730 20,730
outflow

Discount 0.909 0.826 0.751 0.683 0.621

factor @
10%

PV of cash 18,844 17,123 15,568 14,159 12,873

outflows

NPV of total cash outflow = 78,567//

Conclusion: Since the PV of asset if taken on lease is higher than

(78,567) the value if purchased (66,658), the assesse must purchase the
asset.

Q3: Decide which one is better alternative- lease or buy- in the

following situations:
Tax rate- 35%

Cost of capital- 12%

Depreciation rate- 25% (Income Tax)

Lease rent – 32,000 pa for 5 years ( per Rs. 1 lakh)

PV of Rs. 1 discounted @ a2% is as follows:

1 year 2 year 3rd year 4th year 5th year

0.893 0.797 0.712 0.636 0.567

Make any other suitable assumption if necessary.

Solution:

Assumptions:

1. cost of the asset is Rs. 1,00,000

2. It is sold for Rs. 5,000 at the end of five years

Particulars 1 year 2 year 3 year 4 year 5 years Total

Cost of 1,00,000
machinery
(cash
outflow)

Depreciation 25,000 18750 14,063 10,547 7,910

@ 25%
X
PV factor 0.893 0.797 0.712 0.636 0.567

PV of depre. 22,325 14,944 10,012 6,708 4,485

PV of Tax 7,814 5,230 3,504 2,348 1,570 20,466

saving (@
35%)

Cash outflow = 1,00,000

Less: PV of tax savings = 20,466

79,534

Less: sale (5,000 X0.567) 2,835

(Loss) Net cash outflow 76,699//

If taken on lease
Particulars 1 year 2nd year 3rd year 4th year 5th year Total
Lease rent 32,000 32,000 32,000 32,000 32,000
paid
(Cash out
flow)
X
PV Factor 0.893 0.797 0.712 0.636 0.567

PV of cash
outflow 28,576 25,504 22,784 20,352 18,144 1,15,360

PV of
Tax savings 10,002 8,926 7,974 7,123 6350 40,375
(@35%)

Cash outflow 115,360

Less: Tax savings 40,375
74,985//
Conclusion:

When asset is purchased, Net cash outflow is 76, 699

When asset is taken on lease, net cash outflow is 74,985
Hence, the assesse must take the asset on lease.

Q 4: written notes (Heera Ltd)

Solution:

Situation 1: Purchase

Particulars 1 year 2 year 3 year 4year 5year total

1. Loan 1,60,000 160,000 1,60,000 1,60,000 1,60,000
repaymen
t
2. Interest 88,000 70,400 52,800 35,200 17,600
@ 11%
(8,00,000)
2,48,000 2,30,400 2,12,800 1,95,200 1,77,600
3. Cash
outflow
(1+2)’
120,000 1,02,000 86,700 73,695 62,641
4.Depreci
@ 15%
(8,00,000)
2,08,000 1,72,400 1,39,500 1,08,895 80,241
5.Total of
(2 +4)

6.tax 64,272 53,272 43,106 33,649 24,794

savings @
30.9% on
(5)

Net Cash
outflow
(cash
outflow-
tax 1,83,728 1,77,128 1,69,694 1,61,551 1,52,806
savings)(3-
6)
X 0.909 0.826 0.751 0.683 0.621
PV factor
@ 10%
1,67,008 1,46,308 1,27,440 1,10,339 94,893 6,45,988
PV of net
cash
outflow

Total PV of net Cash outflow = 6,45,988

Situation2: If taken on lease

Illustration no. 5 (pg no. 952 – M & G – DTP)

Solution :

1. If the Asset is purchased:

Particulars 1 2 3 4 5
1. Loan repayment 20,000 20,000 20,000 20,000 20,000
2. Interest @14% 14,000 11,200 8,400 5,600 2,800
3. Cash
outflow(1+2) 34,000 31,200 28,400 25,600 22,800
4. Depreciation @ 15,000 12,750 10,838 9,212 7,830
15%
5. Total of (2+4) 29,000 23,950 19,238 14,812 10,630
 6. Tax savings on
(5) @ 33.99% 9857 8141 6,539 5,035 3,613
7. Net cash outflow
(3-6) 24,143 23,059 21,861 20,565 19,187
X
PV factor @ 10% 0.909 0.826 0.751 0.683 0.621

PV of net cash
outflow 21,946 19,047 16, 418 14,046 11,915

Total NPV of cash outflows = 83,372//

2. If asset taken on lease

Particulars 1 2 3 4 5
1. Lease rent 30,000 30,000 30,000 30,000 30,000
2. Processing fees
(1,00,000 X 1%) 1,000 Nil Nil Nil Nil
3. Cash outflow 31,000 30,000 30,000 30,000 30,000
4. Less: tax saved @ 10, 537 10,197 10,197 10,197 10,197
33.99%
5. Net cash outflow 20,463 19,803 19,803 19,803 19,803
X
6. PV factor at 10% 0.909 0.826 0.751 0.683 0.621
7. PV of cash 18, 601 16,357 14,872 13, 525 12, 298
outflows

Total NPV of cash outflows = 75,653

Conclusion: since the NPV of the cash outflow, if purchased is 83,337 which is
higher than the NPV of cash outflows if taken on lease( 75,653). Hence, A ltd is
advised to take the asset on lease.
 MAKE OR BUY DECISIONS

There are many costing and non- costing considerations guiding the decision
towards make or buy products. Some of the important factors affecting such
decisions are:

1. Whether for manufacture, infrastructure facilities are available or not.

2. Whether the present capacity of the undertaking is fully utilized. If not, it
can be utilized in making the required product.
3. If an additional unit is required for manufacture the required product, the
concern possesses adequate funds for establishing the unit and the whole
production of the unit will be consumed by the concern or there is market
for sale of extra production
4. Whether the product is available in the market easily and at reasonable
terms.
5. If the cost of the manufacture of a product/ component is lower than the
cost of purchase, it may be manufactured.
6. If the product is not manufactured, it has to be imported. Then import
trade control regulations and foreign exchange control regulations have
also a role in making decisions.
7. If there is change in technology in production of that product, the concern
be in a position to acquire the new technology without much difficulty. If
the product has to be imported, if not manufactured, and such product
may tell upon the security of the country, it must be manufactured in the
country, whatever the cost of manufacture may be.

Problems:

Q1. A motor car company requires 10,000 units of a part of car engines. From the
following information, suggest to the company whether it should make the part
itself or buy it from the market.

Particulars Total cost of 10,000 units (Rs)

Direct material 20,000
Direct labour 80,000
Variable factory OHs 40,000
Fixed factory OHs 80,000
220,000//

A manufacturer offers to sell the same parts @ Rs. 20 per unit. If the company
manufactures the part, it does not require any additional facility.

Solution:

Cost per unit if manufactures/ part is made

total cost incurred = 2,20,000 – 80,000 = 1,40,000
cost per unit = 1,40,000/10,000units = Rs. 14.

Note: factory fixed OH is irrelevant cost because the same will be incurred by the
company irrespective of the decision to make or buy the part.

Cost per unit if purchased = Rs. 20/-

Conclusion : since the cost incurred is less (Rs. 14) if manufactured the part when
compared to purchase of the same (Rs. 20) , the company is advised to make the
product.

Q2. A company requires 20,000 units of a component every year for next 5 yrs.
The component can either be manufactured by the company in its factory or be
purchased from the market. From the following information, suggest the
company whether it should make the product or buy it from the market:

- Material cost per unit Rs. 4

- Labour cost per unit Rs. 6
- Variable OH cost per unit Rs. 2.
 - If the company manufactures the part, it has to purchase a machine by taking
a loan from the bank. The PV of net cash outflow in this regard in 5 years will
be Rs. 1,00,000.
- The component is available in the market at a) Rs. 12.50 per unit , b) Rs. 14
per unit.

Solution:

Situation 1:
Cost per unit if manufactured by the company itself

Material cost (Rs. 4 X 20,000 units) = 80,000

Labour cost (Rs. 6 X 20,000 units) = 1,20,000
Variable OHs (rs. 2 X 20000 units) = 40,000
NPV of Cash outflow (1,00,000/5 years) = 20,000
Total cost if manufactured 2,60,000//

Therefore, cost per unit = 2,60,000/ 20,000units

= Rs. 13/-

Situation 2: Market value if purchased = Rs.12.50

Situation 3: market value if purchased = Rs.14

Conclusion : situation 2 (i.e., purchase that component for Rs. 12.50/-) is the
better alternative as the cost per unit is less when compared to other 2 situations.

Q3: A company requires a component. From the following information, suggest to

the company whether it should make the component or buy it from the market:

A. Making the component:

- A new machine will be purchased for Rs. 10,00,000. After 5 years it will be
sold for Rs. 2,00,000. If there is any loss on sale of machine, it will be set off
against any short-term capital gain.
- Rate of depreciation- 15%
- Manufacturing cost of component :
 I year – Rs, 14,00,000 ; II year – 16,00,000; III year – 18,00,000; IV year –
20,00,000 ; V year – 24,00,000
- Rate of tax @ 30%

B. Buying the component:

- Cost : I year – 20,00,000 ; II year – 22,00,000 ; III year – 24,00,000 ; IV year –
26,00,000 ; V year – 30,00,000.

Solution :

A. Making the Component

Year Mftr cost Depreciation Total cost Tax saving Net cost
(2) (3) (4) (5) (2-5)
0 -- -- -- -- 10,00,000
1 14,00,000 1,50,000 15,50,000 4,65,000 9, 35,000
2 16,00,000 1,27,500 17,27,500 5,18,250 10,81,750
3 18,00,000 1,08,375 19,08,375 5, 72,513 12,27,487
4 20,00,000 92,119 20,92,119 6,27,636 13,72,364
5 24,00,000 78,301 24,78,301 7,43,490 16,56,510
GROSS 72,73,111
Less: sale of the asset 2,00,000
Less : tax savings on STCL * 73,111
NET TOTAL COST 70,00,000//

Working note:

Depreciation @ 15%
1 year = 10,00,000 X 15% = 1,50,000
2 year = 8,50,000X 15% = 1,27,500
3 year = 7,22,500 X 15% = 1,08,375
4 year = 6,14,125 X 15% = 92,119
5 year = 5,22, 006 X 15% = 78,301

WDV at the end of 5 years = 4,43,705

But, asset is sold as Rs. 2,00,000
 Therefore, loss on sale of asset = 2,43,705//

*Note: company will also have tax saving on STCL .

Therefore, Tax savings on STCL
i.e., 2,43,705 X30% = 73,111//

B. Buying the Component

Year Cost of purchase Tax saving @ 30% Net cost

1 20,00,000 6,00,000 14,00,000
2 22,00,000 6,60,000 15,40,000
3 24,00,000 7,20,000 16,80,000
4 26,00,000 7,80,000 18,20,000
5 30,00,000 9,00,000 21,00,000
85,40,000//

Conclusion:

Since the Net cost is less if the component is manufactures (70,00,000)

compared to buying the component (85,40,000). It is suggested to make the
product.

Q 4: The Company needs 200,000 units per annum. The company has two
options
1. Manufacture the product: The following costs are incurred
Raw materials per unit = Rs.24
Standard wages to be paid to workers per unit = Rs. 12
It would take ½ hour to produce one unit.
Variable cost = Rs. 9 per unit
Testing and inspection is conducted once in a month on one product
and the cost incurred on the same is Rs. 15,000 per unit.
 2. If the product is purchased from an outsider, the price charged by
the supplier is Rs. 36 per unit.
Suggest the company about make or buy decision based on the above
information

Solution:
Option – I: If the product is bought from outsider
Cost of buying = Rs. 36 per unit

Option – II: If the product is manufactured:

Raw material cost Rs. 24 per unit

Standard wage rate(Rs.12p.h x ½ hr p.u) Rs. 6 per unit
Variable overhead(Rs.9 p.h x ½ hour) Rs. 4.50 per unit
Cost of testing & inspection Rs. 0.90 per unit
Rs. 15000 p.u x 12months
200000 units
Total cost of manufacturing per unit = Rs. 35.40 p.u
Conclusion:
It is suggested that the management of R.ltd to manufacture the
product, since the cost per unit of manufacturing is less than buying it from
outsider, and they can save Rs. 1,20,000(0.60 x 200000)

Q5: X ltd, has plan to manufacture 25000 units of a product per annum. The
company decides to use an existing machinery to produce the products. The
cost incurred are as follows:
Material cost per unit – Rs. 2
50,000 labour hours are involved in manufacturing process through out the
year at Rs 0.30 per hour.
Foreman salary – Rs.1500 pm
Variable overheads – Rs.20,000 pa
However, the company also considers to replace the existing machinery
with a new one, whose cost of investment is Rs.1,00,000. Depreciation is
chargeable on the new machine at 15%. Life span of the asset is 10 years.
The asset has been discarded for zero price at the end of 10 years. If any
loss incurred at the end of 10 years, it can be set off against short-term
capital gain. Rate of tax – 30.9%.
 PV factor @ 10% is as given below:

1 2 3 4 5 6 7 8 9 10
0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386
The third option available with the company is to purchase the products
from a supplier who quotes Rs. 4.30 per unit. Advise the company the best
alternative

Solution :

Option I: when product is manufactured in new machine

Cost of manufacturing Rs
Material cost ( Rs. 2 x 25000 units) 50,000
Labour (Rs. 0.30 per hr x 50000 units) 15,000
Foreman salary(Rs. 1500 p.m x 12 18,000
months)
Variable overheads 20,000
Depreciation (78494/10year) 7849
Total cost 1,10,849
 Cost of manufacturing p.u = 1,10,849 = Rs. 4.43 p.u
25000
Option – II: When product is manufactured in existing machine:

Material cost (Rs.2 x 25000 units) 50000

Labour (0.30 per hr x 50000 units) 15000
Foreman salary (1500 p.m x 12 18000
months)
Variable overheads 20000
Total cost 103000

Cost of manufacturing p.u = 103000 = Rs. 4.12 p.u

25000

Option III : Cost of buying = Rs. 4.30 p.u

Conclusion:

Options Cost of Cost of Suggestion

manufacturing buying
When component is Rs. 4.43 Rs. 4.30 Buy the
manufactured in new component
machine
When component is Rs. 4.12 Rs. 4.30 Make the
manufactured in existing product
machine

Working note: Calculation of depreciation

Cost 100000
(-) Normal depreciation(100000 x 15%)
15000
Additional depreciation(100000 x 20%) 35000
20000
WDV for 2nd year 65000
(-) 2nd year Depreciation (65000 x 15%) 9750
WDV for 3rd year 55250
(-) 3rd year depreciation (55250 x 15%) 8288
WDV for 4th year 46962
(-) 4th year depreciation (46962 x 15%) 7044
WDV for 5th year 39918
(-)5th year depreciation (39918 x 15%) 5988
WDV for 6th year 33930
(-) 6th year depreciation (33930 x 15%) 5090
WDV for 7th year 28840
(-) 7th year depreciation (28840 x 15%) 4326
WDV for 8th year 24514
(-) 8th year depreciation (24514 x 15%) 3677
WDV for 9th year 20837
(-) 9th year depreciation (20837 x 15%) 3126
WDV for 10th year 17711
(-) 10th year depreciation (17711 x 15%) 2657
WDV for 11th year 15054
(-) Scrap 0
STCL 15054

Calculation of net cash outflow:

a. PV of cash outflow
Cost of the asset = Rs. 1,00,000
b. PV of cash inflow

Year Depreciation Tax savings PVIF of Re. 1 PV of tax

at 30.90% at 10% savings
1 35000 10815 0.909 9831
2 9750 3013 0.826 2489
3 8288 2561 0.751 1923
4 7044 2177 0.683 1487
5 5988 1850 0.621 1149
6 5090 1573 0.564 887
7 4326 1337 0.513 686
8 3677 1136 0.467 531
 9 3126 966 0.424 410
10 2657 821 0.386 317
Total PV of tax savings 19710
(+) STCL (15054 x 30.90% x 0.386) 1796
Total PV of cash inflow 21506

c. Net cash outflow = PV of cash outflow – PV of cash inflow

= 100000 – 21506
= Rs. 78,494

ADVANCE TAX
Q1: Sri Bose has estimated the following incomes for the FY 2020-21:
Income from HP (Taxable) 75,000
Income from profession (taxable) 7,07,500
Dividend from X & Co., 10,000

Determine the amount of installments payable as advance tax during

the FY 2020-21.

Solution:

Computation of taxable Income

Particulars Amount
Income from Salary Nil
Income from HP 75,000
Income from Business And Profession 7,07,500
Income from capital gains Nil
Income from other sources (Dividends from Exempt
Indian Company)
GROSS SALARY 7,82,500
Less: Deductions u/s 80 C to 80 U Nil
TOTAL INCOME 782,500//

Computation of tax liability – Individual less than 60 yrs age

Particulars Amount
Upto 2 50,000 Nil
250,000 to 5,00,000 = 250,000 @ 5% 12,500
5,00,000to 7,82,500= 2,82,500@ 20% 56,500
69,000
+ Surcharge (if applicable) Nil
69,000
+ Cess @ 4% 2760
71,760
Less: TDS Nil
Advance tax payable 71,760

Installments of Advance tax:

Upto 15th June 15% on 71,760 10,764

Upto 15th September @ 30% (45-15)

On 71,760 21,528

Upto 15th Dec @ 30% (75-45) on 71,760 21,528

Upto 15th March @ 25% (100-75) on

71,760 17,940

Q 2: illustration no. 2 ( DTP- M & G ) (Pg. no . 775)

Solution : calculate the Total Income

Particulars Amount
Income from salary Nil
Income from Hp Nil
Income from Business 12,00,000
Income from capital gains 25,000
Income from other sources:
- Interest (Gross) from PNB 26,000
- Dividends Nil
Gross Income 12,51,000
Less: deductions u/s 80 C to 80 U
80 C: LIP on own life (premium or 20% of sum
assured w.e.l) 25,000
Deposits in PPF 70,000 95,000

80 G: without limit 100%

PM relief fund 25,000

80 D: medical insurance premium (paid in cash) NIL

80 TTB: deduction on bank deposit (PNB) 26,000

TOTAL INCOME 11,05,000//

Note: 80 TTB : can claim a deduction upto Rs. 50,000 for i) interest on
bank deposits, ii) interest on deposits in cooperative societies , iii)
interest on Post office deposits

Computation of Tax liability for Shrimathi Joshi (age 82 yrs) for the Ay
2020-21

Particulars Amount
Tax on LTCG @ 20% (25,000X 20%) 5000
(11,05,000 – 25,000)
Balance 10,80,000 @ slab rates
Upto 5,00,000 Nil
5,00,000 to 10,00,000 @ 20% (5,00,000X 20%) 1,00,000
10,00,000 to 10,80,000 @ 30% (80,000 X 30%) 24,000
1,29,000
+ surcharge (if applicable) Nil
1,29,000
+ cess @ 4% on 1,29,000 5,160
Advance tax payable / tax liability 1,34,160//
Tax liability upto 10.10.2020 = 1,00,000+ 24,000 = 1,24,000 + surcharge
(if) + cess @ 4 %

= 124,000 + 4,960 = 1,28,960//

Installments of Advance Tax

Upto 15th June - 15% of 1,28,960 = 19,344

Upto 15th Sep - 30% of 1,28,960= 38,688

Upto 15th Dec – 75% of 1,34,160

= 100620 – 19,344 - 38,688 = 42,588

Upto 15th March – 100% of 1,34,160

(1,34,160 – 19,344 – 38,688 – 42,588) = 33, 540

= 1,34,160//

Q 2: Illustration no. 3 (pg no. 776) (DTP- M & G)

Solution :

Computation of Total income for the AY 2020-21

Particulars Amount
Income from Salary Nil
Income from house property 70,000
Income from business and Profession 6,02,500
Income from capital gains Nil
Income from other sources ( interest of FD) 10,000
GTI 6,82,500
Less: Deductions u/s 80 C to 80 U
80 DD : medical maintenance of disabled person 75,000
Taxable Income 6,07,500//

Computation of Tax liability

Particulars Amount
Tax on 6,07,500 @ slab rates
Upto 2,50,000 Nil
2,50,000 to 5,00,000 @ 5% (2,50,000X 5%) 12,500
5,00,000 to 6,07,500 @ 20% ( 1,07,500X 20%) 21,500
34,000
+ surcharge (if applicable) Nil
34,000
+ cess @ 4% on 34,000 1,360
Tax Liability/ Tax Payable 35,360//

Computation of installments of Advance Tax

Upto 15th June @ 15% on 35,360 (15%) = 5,304

Upto 15th Sep @ 30% on 35,360 (45%-15%) = 10,608

Upto 15th Dec @ 30% on 35,360 (75%-45%) = 10,608

Upto 15th March @ 25% on 35,360 (100%-75%) = 8,840

= 35,360//

Q3: The total income of Mr. X, resident of India is Rs. 5,27,500.

Calculate Advance Income Tax payable during the FY 2020-21. And find
out installments if Tax deducted at source (TDS) is Rs. 180
Solution:

Computation of tax liability for the AY 2020-21

Particulars Amount
Tax @ slab rates on 5,27,500
Upto 2,50,000 Nil
2,50,000 to 5,00,000@ 5% (2,50,000X 5%) 12,500
5,00,000 to 5,27,500 @ 20% (27,500 X 20%) 5,500
18,000
+ cess @ 4% on 18,000 720
18,720
Less: TDS 180
Advance tax payable 18, 540//

Computation of installments of Advance Tax

Upto 15th June @ 15% on 18,540 (15%) = 2,781

Upto 15th Sep @ 30% on 18,540 (45%-15%) = 5,562

Upto 15th Dec @ 30% on 18,540 (75%-45%) = 5,562

Upto 15th March @ 25% on 18,540 (100%-75%) = 4,635

= 18,540 //

Wealth tax
1. Compute the net wealth of R as on 31-3-13 for the assessment year 2013-
14.The individual is engaged in the business of processing and selling gold
and silver articles in India and outside India:  
Bank Balance-                       Rs,4,30,000
Unaccounted Cash Balance  Rs. 70,000
Gold Articles                         Rs.25,00,000
Silver Jewellery                      Rs.14,00,000
Guest House                          Rs.35,00,000
Motor Cars                           Rs.  6,40,000
Factory Building                    Rs. 8,00,000

R has taken a loan of Rs.8,00,000 by mortgaging guest house for purchasing

factory building. 

Solution:
Bank Balance (Not an asset) : 0.00
Cash (excess of 50,000)       : 20000.00
Gold (if held as Stock in trade) :  0.00
Silver (if held as Stock in trade) : 0.00
Guest House                            : 35,00,000.00
Motor Cars                           : 640,000.00
Factory Building (used for business) :  0.00 
Total                                        : 41,60,000.00
Less: Debt owned               : 8,00,000.00
Net Wealth                           = 33,60,000.00

Guest House can be exempted u/s 5(vi). Then total wealth would be 660000.00.

Illustration 2:

X Ltd. is engaged in construction of Residential flats:

a)      Land in urban area (construction is not permissible as per municipal
laws in force) Rs.35 Lacs
b)      Motor-Cars (used in business of running them on hire) Rs.700000
c)      Jewellery Rs. 15,00,000. Loan taken for purchasing this Rs.
10,00,000
d)      Cash balance (as recorded in books) Rs.22,500
e)      Bank Balance Rs.3,50,000
f)        Guest house Rs.6,00,000
g)      Residential flats occupied by the Managing Director Rs. 10,00,000.
The managing director is on a whole time appointment and is drawing a
salary of Rs. 3 Lacs per month.
h)      Residential house were let out on hire for 200 Days of Rs. 8,00,000
Compute Taxable Wealth on 31st march.

solution
I.        Land in urban area                                      Not an asset
II.      Motor-Cars                                                          Not an asset III.   
Jewellery                                                               15,00,000
IV.    Cash balance                                                          Not an asset
V.      Bank Balance                                                         Not an asset
VI.    Guest house                                                            6,00,000
VII.  Residential flats                                                       10,00,000
VIII.Residential house    (assume it not to be SIT)          8,00,000
Total                                                                            39,00,000
Less: Debt                                                                 (10,00,000) Net
Wealth                                                                    29,00,000  

Taxable wealth upto 30,00,000 = NIL//                                               

Illustration 3:

Mr. X an individual is engaged in construction of residential flats:  

a)      Land in urban area (construction is not permissible as per municipal
laws in force) Rs.35 Lacs
b)      Motor-Cars (used in business of running them on hire) Rs.700000
c)      Jewellery Rs. 1500000. Loan taken for purchasing this Rs. 1000000
d)      Cash balance (as recorded in books) Rs.2,25,000
e)      Bank Balance Rs.350000
f)        Guest house Rs.600000
g)      Residential flats occupied by the manager Rs. 1000000. The
manager is on a whole time appointment and is drawing a salary of Rs. 3
Lacs per annum.
h)      Residential house were let out on hire for 200 Days of Rs. 800000
Compute Taxable Wealth on 31st march. Assume no exemption is
considered by Mr.X  

Solution
I.        Land in urban area                                      Not an asset
II.      Motor-Cars                                                            Not an asset III.   
Jewellery                                                               15,00,000
IV.    Cash balance                                                          175000
V.      Bank Balance                                                         Not an asset
VI.    Guest house                                                            6,00,000
VII.  Residential flats                                                       10,00,000
VIII.Residential house (assume it not to be SIT )           8,00,000
Total                                                                             40,75,000
Less: Debt                                                                    (1000000)
Net Wealth                                                                   30,75,000

Taxable wealth upto 30,00,000                            NIL

On excess of 30,00,000 Wealth Tax @1%
(30,75,000 – 30,00,000) = 75,000X1% 750//