problem1. describe clearly the tax treatment to be given to compensation received by a taxpayer for the loss of the following asset of his business:
(i) A current or circulating asset (e.g. trading stock);
(ii) A tangible noncurrent or fixed capital asset;
(iii) An intangible asset (e.g. a contract).
problem2. A company trades as a ship owner and recovered damages from ship repairers that exceeded the time stipulated for overhaul. How would you treat the damages received for income tax purposes? Give reasons for your answer.
problem3. A fire damaged a warehouse and a machine shop housing the production plant of an engineering company. Some of the plant was totally destroyed but the remainder was capable of repair as were the buildings. An insurance claim was settled on the closing date of the accounts for Rs 512,000 which was credited to a suspense account in the Balance Sheet. The amount recovered is made up as shown below:
Rs
(i) Damage to warehouse 50,000
(Actually spent on repairs Rs 55,200)
(ii) Damage to factory workshop 70,000
(Actually spent on repairs Rs 62,000)
(iii) Plant & Machinery destroyed 112,000
(But book value in company books Rs120, 000 transferred to a "Destroyed Plant A/c" and then debited to Profit & Loss. Tax written down value or base value for capital allowance purposes: Rs 100,000)
(iv) Cost of repairs to Plant & Machinery 64,000
(Actually spent)
(v) Cleaning and other expenses 12,000
(Carried out by company's own workmen)
(vi) Loss of profit (due to temporary stoppage of production for 3 months) 74,000
(vii) Loss of stock destroyed or damaged 130,000
512,000
Required: Say how you would deal with each of the above items in the computation of the company's income tax liability, giving your reasons.