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Ayushi
AyushiCurious
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Brief Introduction Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law. Alternate Minimum Tax is levied to impose higherRead more

    Brief Introduction

    Alternate Minimum Tax or AMT as the name suggests, is an alternate tax that an assessee has to pay, subject to certain conditions, instead of the income tax liability which is computed as per normal provisions of the Income-tax law.

    Alternate Minimum Tax is levied to impose higher tax liability on non-corporate assessees who have claimed various profit-link deductions or investment-linked deductions in the relevant previous year.

    My answer is based on the Indian Income law i.e. Income Tax Act, 1961.

    The concept behind Alternate Minimum Tax

    Let’s start our discussion with MAT i.e. Minimum Alternative Tax. It applies to corporate entities or companies.

    Before MAT, it was seen that companies used to declare huge dividends to their shareholders. But when it came to filing income tax returns, they used to claim various profit linked and investment-linked deductions to report very low profits and even losses to arrive at negligible tax or nil tax whereas their financial statements would report huge profits.

    It is true that the government provides such profit linked or investment linked deductions to encourage business and investments, but it also needs a sufficient and regular flow of revenue in the form of tax to fund its expenditure.

    Hence, to prevent misuse of deductions to evade taxes by corporates, government introduce Minimum Alternate Tax to charge such assessees a minimum rate of tax.

    Alternate Minimum Tax is the same as Minimum Alternate Tax in terms of concept.  The provisions related to AMT are given under section 115JC of the Income Tax Act, 1961.

    Scope of AMT as per section 115JC

    Alternate Minimum Tax applies to all non-corporate assessees who claimed have claimed

    • Deduction claimed if any under Chapter VI-A from section 80H to 80RRB except section 80P
    • Exemption under section 10AA
    • Deduction under section 35AD (Investment-linked deduction)

    However, there is a threshold limit for certain non-corporates.

    By non-corporate assessees we mean:

    1. Individual
    2. Hindu Undivided Family (HUF)
    3. Firms (partnership firms)
    4. Co-operative societies
    5. Association of Persons (AOP)
    6. Body of Individuals (BOI)
    7. Artificial Juridical Person (AJP)
    8. Limited Liability Partnership (LLP)

    AMT is applicable to all except

    • Individuals
    • HUF
    • AOP
    • BOP
    • Artificial Juridical Person

    If their total adjusted income does not exceed Rs 20,00,000  in the previous year.

    Therefore, AMT is applicable to all other non-corporate assessees like LLP, firms and cooperative societies irrespective of their total adjusted income.

    Calculation of Alternate Minimum Tax

    The rate of AMT is 18.5% of the adjusted total income. This adjusted total income and the AMT on it is calculated in the following manner:

    The higher of the following becomes the tax liability of the assessee:

    • Alternate Minimum Tax calculated on adjustment income plus surcharges u/s 87A (4% Health and education cess)
    • Income Tax calculated on taxable income (as per normal provisions)

    Numerical example

    Mr X is a businessman who has earned the following income and expenditure in P.Y 2020-2021:  (Amount in Rupees)

    Income from manufacturing business                             25,00,000

    Interest on saving bank account                                               8,000

    Dividend from ABC ltd                                                              10,000

    Insurance premium paid                                                       1,00,000

    Capital expenditure made as per section 35AD               5,00,000

    Mr X  is eligible to claim a profit linked deduction of Rs 6,00,000.

    Also, the depreciation allowed (other than under 35AD) as per Income-tax Act,1961 amounts to Rs. 3,00,000.

    Following is his computation of both AMT and Income tax liability as per normal provisions.

     

     

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income. According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultuRead more

    Income derived from farming land, building constructed or associated with farming land, and commercial products from farming land is called agricultural income.

    According to Section 10(1) of the Income Tax Act, agricultural income is exempt from tax. However, the government can levy tax if agricultural income is above Rs 5,000.

    Following are the sources to be considered for agricultural income according to the conditions mentioned in Section 2 (1A) of the Income Tax Act:

    • Revenue generated through rent or lease of land in India that is used for agricultural purposes.
    • Revenue generated through the commercial sale of produce gained from agricultural land.
    • Revenue generated through the renting or leasing of buildings in and around the agricultural land subject to the following conditions:
    • The cultivator or farmer should have occupied the building, either through rent or revenue.
    • The building is used as a residential place, storeroom, or outhouse.
    • The agricultural land or the land where the building is located, is being assessed for land revenue or subject to a local rate assessed.

    If the land does not fall under the provisions stated above, the Income Tax Act requires a separate evaluation to calculate tax.

    The Income-tax Act has laid down a method to indirectly tax such income.
    This method or concept is called the partial integration of agricultural income with non-agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.

    Partial integration of agricultural income with non-agricultural income involves the following steps:

    1.  For example, the base income of the individual is Rs. 20,000 and agricultural income is Rs 10,000, then we first have to calculate tax on Rs 30,000. For convenience, we can call this tax T(30,000)
    2. Assuming that the income falls under tax slab A, this tax slab A has to be added to the agricultural income and tax has to be calculated on it as well and it is called T(S+10,000).
    3. The final tax on the individual’s income will be T(30,000)- T(A+10,000)

    The important step to keep in mind is to aggregate the agricultural income while calculating tax otherwise it can lead to double taxation, extra tax, or interest on tax.

     

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Ayushi
AyushiCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions; Condition A Stay in India for 182 days or more in the previous year, or Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 yeaRead more

    To determine if a person is a resident in India as per the Income Tax Act 1961, he has to fulfil any of the 2 following conditions;

    Condition A

    • Stay in India for 182 days or more in the previous year, or
    • Stay in India for 60 days or more in the previous year and another 365 days or more in the 4 years immediately preceding the previous year.

    The second condition above is not applicable if he is an Indian citizen leaving India for the purpose of employment, or he is a member of the crew of an Indian ship, or he is only coming to India on a visit.

    If he fails to fulfil either of the two conditions, then he is termed as a non-resident.

    In India, a resident person can be classified into two:

    • Resident and ordinarily resident
    • Resident but not ordinarily resident

     

    Condition B

    A resident is a resident and ordinarily resident if (B):

    • He has been a resident in India for at least 2 out of the previous 10 years immediately preceding the relevant previous year, and
    • He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

    If a person satisfies any one condition of (A) but does not follow all conditions of (B), then he is termed as a resident but not ordinarily resident.

     

    EXAMPLE

    If Nithin is living in India for 190 days in the previous year and was a resident for the previous two years only staying for 400 days in the previous 7 years, then he fulfils condition (A) but not both conditions of (B) and hence he is a resident but not ordinarily resident.

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Ayushi
AyushiCurious
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  2. Pooja_Parikh Aspiring Chartered Accountant
    This answer was edited.

    Under Activity-Based Costing, overheads are accurately assigned to different activities and their costs are determined through costing methods. Activities are those events that incur costs whereas overheads are expenditures that cannot be traced to any particular cost unit. A Cost driver refers to tRead more

    Under Activity-Based Costing, overheads are accurately assigned to different activities and their costs are determined through costing methods. Activities are those events that incur costs whereas overheads are expenditures that cannot be traced to any particular cost unit.

    A Cost driver refers to the factor that causes a change in the cost of an activity. Activity-Based Costing is done to establish a link between the activities and the product. The cost drivers are those links between the activities and the product.

    Cost drivers are divided into four categories:

    • Resource Cost Driver – It is a measure of the number of resources used by an activity. It assigns the cost of a resource to an activity.
    • Activity Cost Driver – It is a measure of the frequency and intensity of demand, placed on activities by cost objects. It assigns activity costs to cost objects.
    • Structural Cost Driver – It results from the economic and technological structure of the industry.
    • Executional Cost Driver – It reflects the firm’s ability to plan and operate its production operations effectively.

    A Cost Centre refers to a department in a business where costs can be allocated. These departments run various processes and incur costs. They can be related to the production of goods or the provision of services. Different centres are allocated different budgets and hence it enables the business to run efficiently by tracking its incomes and expenses easily.

    Proper management of cost centres can help the company cut additional costs from each department. It also helps in more accurate forecasts depending on future changes.

    Cost centres and Cost Drivers are both important factors while following Activity-Based Costing. Some examples of cost drivers and cost centres are as follows :

     

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    Activity-based costing (ABC) is a system used to find production costs. It breaks down overhead costs between production-related activities and other activities. The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principleRead more

    Activity-based costing (ABC) is a system used to find production costs.
    It breaks down overhead costs between production-related activities and other activities.

    The ABC system assigns costs to each activity that goes into production, such as workers testing a product. ABC is based on the principle that ‘prod­ucts consume activities.’

    Traditional cost systems allocate costs based on direct labor, material costs, revenue, or other simplistic methods. As a result, traditional systems tend to over-cost high volume products, services, and customers; and under-cost low volume.

    Hence, Activity Based Costing was developed for determining the cost. The basic feature of ABC is its focus on activities. It uses activities as the basis for determining the costs of products or services.

    Activity-Based Costing is mostly used in manufacturing industries, however, its application is not only limited to that. Various industries like, construction, health care, medical organizations also use this method of assigning costs. Industries where customized products are made also tend to use such methods as it is easier to charge appropriate overhead costs from the customer.

    Objectives of Activity-Based Costing:

    Companies adopt ABC to assign cost elements to the products, activities, or services so that it helps the management to decide:

    • which cost can be eliminated or cut back
    • which products are unprofitable
    • if a product is over-priced or under-priced
    • if any activity is ineffective
    • various processing of the same product to yield better results

    Advantages of Activity Based Costing are:

    • it takes into consideration both direct and overhead costs of creating a product.
    • it recognizes the fact that different products require different indirect expenses.
    • it sets prices more accurately.
    • it helps to see what overhead cost the company might be able to cut back on.
    • it helps to segregate fixed costs, variable cost, and overhead cost which helps to identify “cost drivers”.
    • it focuses on cost allocation in operational management.

    Before implementing ABC, a company should consider the following:

    • manually driven Activity Based Accounting cost derivers is an inefficient use of resources.
    • it is an expensive method and it is difficult to implement
    • for small gains, there are alternative costing methods available for a company to use.

    Formula=  Total Cost Pool / Cost Driver

    For example:

    For a company, the salary for workers is Rs 1,00,000 for a financial year, the number of labor hours worked is 50,00 hrs. The cost driver rate is calculated by dividing the workers’ salary by the labor hours worked, that is,

    Salary of the workers / Number of labor hours

    Rs 1,00,000 / 50,000 hrs = Rs 2 per labor hour.

    In the above example, the salary of the workers is the total cost pool or the overhead cost for which we want to find the cost driver rate and labor hours is the cost driver, that is, on the basis of what we want to find the rate.

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Ayushi
AyushiCurious
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  2. Rahul_Jose Aspiring CA currently doing Bcom
    This answer was edited.

    When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whRead more

    When a manager provides services to a company, he is expected to receive some kind of compensation. This is given in the form of managerial remuneration. Section 197 of the Companies Act allows a maximum remuneration of 11% of the net profit of the company to the directors, managing directors and whole-time directors etc. This section is applicable for public companies and not private companies

    Yes, a company can pay managerial remuneration in case of inadequacy of profits or losses, provided they follow the condition in Schedule V of the Companies Act 2013.

    Conditions

    In order to pay remuneration while the company is at a loss, it has to comply with the following:

    • Pass a resolution at the board meeting
    • The company has not defaulted in payments to any Banks, non-convertible debenture holders or any secured creditors. But in case of default, the company has obtained prior approval from such creditors or banks before obtaining approval from their general meeting.
    • Ordinary resolution or special resolution (if the limit is exceeded)

    The limit mentioned above refers to the maximum limit of Rs 60 lakhs when the effective capital is negative or less than Rs 5 Crore. Such remuneration can also only be paid if such a manager does not have any interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.

    Effective capital is the aggregate of paid-up share capital, share premium, reserves and surplus, long term loans and deposits and after subtracting Investments, accumulated losses and preliminary expenses not written off.

    Percentage of Remuneration

    When the Company earns adequate profits, they are allowed to provide remuneration up to a certain per cent. The percentage of remuneration depends on whether the directors are working whole-time or part-time according to the Companies Act.

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AbhishekBatabyal
AbhishekBatabyalHelpful
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Before answering the question let’s understand what a government grant is. Meaning of government grants Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawbacRead more

    Before answering the question let’s understand what a government grant is.

    Meaning of government grants

    Government grants are the assistance provided by the government in cash or kind to any enterprise for any past or future compliance. This assistance can be subsidies, cash incentives, duty drawback, or assets provided at concessional rate or at no cost etc.

    These grants when provided have some rules and conditions attached to them. If such conditions are not fulfilled or rules are violated, the grant becomes refundable to the government.

    Treatment

    AS-12 ‘Government Grant’ provides two approaches  for the treatment of government grants in the books of accounts of an enterprise:

    • Income approach: Under this approach, the grant is treated as income and taken to profit and loss A/c in one or more accounting periods.

    For example, X Ltd purchase an asset for ₹ 10,00,000 and the government provided a grant of ₹2,00,000 to X Ltd. The useful life of the asset is 4 years and the residual value is nil.

    Now there are two methods to treat this grant as income.

    Method – 1:  The grant amount will be deducted from the asset’s value. This will result in a decreased amount of depreciation. This is an indirect way to recognize government grants as income.

    The journal entries are as follows: (Method-1)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    In absence of a government grant, the annual depreciation would have been ₹2,50,000 (₹10,00,000 / 4). Hence, due to the grant, the profit will be 50,000 more for the 4 consecutive accounting years.

    Method – 2: The grant amount is credited to a special account called the ‘deferred government grant’ account. Over the useful life of the asset, the grant will be credited to the profit and loss account in equal instalments. This is a direct way to recognize government grants as income.

    The journal entries are as follows: (Method-2)

    The journal entries for the 3rd and the 4th years will be the same as of 2nd year.

    • Capital approach: Under this approach, the grant is treated as part of the shareholders’ funds (as capital reserve)

    When any grant is given is in nature of promoter’s contribution i.e. as a percentage of total investment to be done by an enterprise, and then such grant received from government will be treated as part of shareholder’s funds.

    The grant amount will be transferred to the capital reserve account and it will be treated neither as deferred income nor to be distributed as a dividend.

    Example: ABC Ltd has set up its business in a designated backward area which entitles the company to receive from the government a subsidy of 20% of total investment. ABC Ltd fulfilled all the conditions associated with the scheme and received ₹20 crores toward its total investment of ₹100 crores.

    This ₹20 crore will be transferred to the capital reserve account.

    Special case: If the grant is received in relation to a non-depreciable asset like land, then the entire amount of the grant will be recognized in the profit and loss account in the same year.

    Treatment of non-monetary government grant

    When a government grant is in the form of non-monetary assets like land or other resources at a concessional rate, then the assets are to be recognised at their acquisition cost.

    If the assets are acquired at no cost, then they are to be recorded at their nominal value.

    For example, if an enterprise receives land for free as a government grant, then it has to record the land at cost based on prevailing market rates.

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