Taxation 2013 Nov

7/27/2019 Taxation 2013 Nov

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The Institute of Chartered Accountants of India


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PAPER 4 : TAXATION

Question No.1is compulsory.

Attempt any fivequestions from the remaining sixquestions.

Working notes should form part of the answer.

Wherever necessary, suitable assumption may be made and stated clearly by way of note.

All questions pertaining to Income-tax relate to assessment year 2013-14, unless statedotherwise in the question.

Question 1

(a) The following is the Profit and Loss Account of Mr. Aditya, aged 58 years, a resident, forthe year ended 31.03.2013 :

Particulars Particulars

Rent 60,000 Gross Profit 1,85,000

Repair of car 3,000 Gift of cash from a friend 25,000

(received on 15.09.2012)

Wealth tax 5,000 Sale of car 17,000

Medical expenses 4,500 Interest on income-tax refund 3,000

Salary 18,000

Depreciation on car 3,000

Advance income-tax 1,500

Net Profit 1,35,0002,30,000 2,30,000

Other information:

(1) Aditya bought a car during the year for `20,000. He charged depreciation @ 15%on the value of the car. The above car was sold during the year for ` 17,000. Theuse of the car was 3/4thfor business and 1/4 thfor personal use.

(2) Medical expenses were incurred for the treatment of Nikita, his wife.

(3) Salary had been paid on account of car driver.

(4) Rent includes arrears of rent from April 2012 to October 2012 @ `5,000 p.m., paidin cash on 1.11.2012.

(5) Mr. Aditya had also let out a house property at a monthly rent of `25,000. Theannual letting value is considered to be ` 2,50,000. The municipal taxes are`6,000, out of which `3,000 are paid by the tenant and `3,000 are yet to be paidby Mr. Aditya. Interest on loan taken for the house property is `20,000.

The Suggested Answers for Paper 4: Taxation are based on the provisions of law as amendedby the Finance Act, 2012 and applicable for A.Y. 2013-14 (in the case of Income-tax), which isthe assessment year relevant for November, 2013 examination.



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PAPER 4 : TAXATION 67

(6) Mr. Aditya's minor daughter received ` 75,000 from stage acting. Interest oncompany deposits of Mr. Aditya's daughter (deposit was made out of income from

stage acting) was `10,000.

(7) Aditya incurred an expense of `50,000 on the medical treatment of his dependantson, who has disability of more than 80%.

(8) Aditya had taken a loan during the year 2012-13 for the education of his son, who ispursuing B.Com. in Delhi University. Interest paid on the same during the year was

`10,000.

Compute the total income of Mr. Aditya for the assessment year 2013-14. (10 Marks)

(b) Professionals Ltd. is engaged in providing services which became taxable with effect

from July 01, 2012. Compute the service tax payable by Professionals Ltd. on thefollowing amounts (exclusive of service tax) received for the month of March, 2013:

Particulars Amount ()Services performed before such service became taxable 5,00,000

(Invoice issued on 28thJune, 2012)

Services by way of renting of residential dwelling for use as 1,50,000

residence

Free services rendered to the friends of directors 20,000

Advance received for services to be rendered in July, 2013 5,00,000

Other receipts 12,00,000

Rate of service tax is12%, Education cess is 1%, Secondary & Higher Education cess is1%. (5 Marks)

(c) Compute net VAT liability of Sachin from the following information:

Particulars

Raw materials from foreign market 1,20,000

(includes duty paid on imports @ 20%)

Raw materials purchased from local market

Cost of raw material 2,50,000

Add: Excise duty @ 12% 30,000

2,80,000Add: VAT@ 4% 11,200 2,91,200

Raw materials purchased from neighbouring State (includesCST @ 2%)

51,000

Storage and transportation cost 9,000

Manufacturing expenses 30,000



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68 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

Sachin sold goods to Madan and earned profit @ 12% on the cost of production. VATrate on sale of such goods is 4%. There is no opening or closing stock. (5 Marks)

An sw er

(a) Computatio n of total inco me of Mr. Aditya for the A.Y. 2013-14

Particulars `Income from house property (Working Note 1) 1,90,000

Income from business (Working Note 2) 1,44,250

Income from other sources (Working Note 3) 11,500

Gross Total Income 3,45,750

Less: Deduction under Chapter VI-A (Working Note 4) 1,10,000Total Income 2,35,750

Working Notes:

1. Computation of income under the head Income from house property

Particulars ` `Gross Annual Value (Higher of Actual Rent and AnnualLetting Value)

Actual Rent (`25,000 12) 3,00,000

Annual Letting Value 2,50,000 3,00,000

Less: Municipal taxes paid by Mr. Aditya1 Nil

Net Annual Value (NAV) 3,00,000

Less:Deductions under section 24

(a) 30% of NAV 90,000(b) Interest on loan 20,000 1,10,000Income from house property 1,90,000

2. Computation of income under the head Profits and gains of business orprofession

Particulars ` `Net Profit as per profit and loss account 1,35,000

Add: Expenses disallowed:Wealth-tax 5,000

Advance income-tax 1,500

1The municipal taxes actually paid by the owner during the year are allowable as deduction. In this case,

since ` 3,000 is paid by the tenant and ` 3,000 is yet to be paid by Mr. Aditya, the municipal taxes of

` 6,000 are not allowable as deduction.



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Depreciation on car (not allowable, since the assetdoes not exist at the end of the year)2

3,000

Medical expenses of wife (personal expenses,disallowed)

4,500

Drivers salary (th being for personal use,disallowed)

4,500

Repair of car (th being for personal use, disallowed) 750

Rent paid [` 35,000 paid in cash disallowed u/s40A(3)] 35,000

54,250

1,89,250

Less: Income not taxable/exempt under the Income-taxAc t, 1961/ Inco me no t taxable under th is head

Cash gift from friend (not taxable under this head) 25,000

Sale of car 17,000

Interest on income-tax refund (taxable under thehead Income from other sources) 3,000 45,000

Income under the head Profits and gains of business or profession 1,44,250

3. Computation of income under the head Income from other sources

Particulars ` `Cash gift from friend received on 15.9.2012 (not taxableunder section 56(2)(vii), since the aggregate value of gifts is

less than ` 50,000)

-

Interest on income-tax refund 3,000

Interest on company deposits accruing to Mr. Adityas minor

daughter [See Note below]10,000

Less:Exempt under section 10(32) 1,500 8,500

Income from other sources 11,500

Note: Income received by Adityas minor daughter from stage acting is not includible in

the income of Mr. Aditya, since the income has been earned by her on account of her

special talent. However, interest on company deposits is includible in Mr. Adityasincome as per section 64(1A), even though the deposit was made out of income derivedfrom special talent.

2The transaction of purchase and sale of motor car during the year would result in a short-term capital loss

to be carried forward for set-off against capital gains of the subsequent year.



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4. Computation of deducti on under Chapter VI-A

Section Particulars `80DD Medical treatment of dependent disabled [flat deduction of

` 1,00,000 in case of severe disability (80% or more)irrespective of the amount incurred]

1,00,000

80E Interest on loan for higher education of son, being a

relative __10,000

Total deduc tio n und er Chapter VI-A 1,10,000

(b) Computatio n of service tax payable by Professi onals Ltd. :

Particulars Amount(`)

Services performed before such service became taxable (Note 1)

[(5,00,000 100)/112.36]

4,44,998

Services by way of renting of residential dwelling for use as residence(Note 2)

Nil

Free services rendered to the friends of directors (Note 3) Nil

Advance received for the services to be rendered in July, 2013 (Note 4) 5,00,000

Other receipts 12,00,000

Total 21,44,998Less:Exemption available to small service providers (Note 5) 10,00,000

Value of taxable services 11,44,998

Service tax @12% 1,37,400

Add: Education cess @ 2% 2,748

Add: Secondary and higher education cess @ 1% 1,374

Total service tax payable 1,41,522

Notes:

1. As per rule 5 of the Point of Taxation Rules, 2011, where a service is taxed for the

first time, no tax is payable if the invoice has been issued and the payment also hasbeen received against such invoice before such service became taxable. Therefore,in this case since the payment has been received after the service became taxable;

the same will be liable to service tax.

However, since the service had been performed and the invoice had also beenissued before such service became taxable, payment received has been presumedto be full and final. Accordingly, the same is taken as inclusive of service tax.



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2. Services by way of renting of residential dwelling for use as residence are includedin the negative list of services. Hence, they are not subject to service tax.

3. Service is an activity carried out inter alia for a consideration. Therefore, since no

consideration is involved in case of free services, service tax is not payable thereon.

4. Since, services agreed to be provided are also chargeable to service tax, advancereceived will also be liable to service tax.

5. Since, services provided by Professionals Ltd. became taxable on July 01, 2012,aggregate value of taxable services rendered in preceding financial year 2011-12 is

Nil. Hence, Professionals Ltd. is eligible for exemption for small service providers.

Notes:

1. The above solution has been worked out by taking correct rate of education cess

i.e., 2%.

2. The amount of ` 20,000 in respect of free services rendered to the friends ofdirectors represents the value of such services.

(c) Computation of Net VAT liabili ty of Sachin

Particulars ` `Raw materials purchased from foreign market (including dutypaid on imports @ 20% as input tax credit of import duty is not

allowed)

1,20,000

Raw material purchased from local market (including onlyexcise duty and not VAT as input tax credit for excise duty is notallowed, but credit for VAT is allowed)

2,80,000

Raw material purchased from neighbouring State (including

CST @ 2% as input tax credit of CST is not allowed)51,000

Storage and transportation cost 9,000

Manufacturing expenses 30,000

Cost of production 4,90,000

Add:Profit @ 12% of cost of production 58,800

Sale Price 5,48,800

VAT @ 4% on `5,48,800 21,952

Less:Input tax credit

Duty paid on imports (input tax credit is not allowed for

duty paid on imports)Nil

CST paid on inter-State purchases (input tax credit is not

allowed for CST paid on inter-State purchases)Nil

VAT paid on local purchases 11,200 11,200

Net VAT payable by Sachin 10,752



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Question 2

(a) Mr. Krishna owns a residential house in Delhi. The house is having two identical units.

First unit of the house is self-occupied by Mr. Krishna and another unit is rented for

` 12,000 p.m. The rented unit was vacant for three months during the year. Theparticulars of the house for the previous year 2012-13 are as under:

Standard Rent ` 2,20,000 p.a.

Municipal Valuation ` 2,44,000 p.a.

Fair Rent ` 2,35,000 p.a.

Municipal tax paid by Mr. Krishna 12% of the Municipal Valuation

Light and water charges ` 800 p.m.

Interest on borrowed capital ` 2,000 p.m.

Insurance charges ` 3,500 p.a.

Painting expenses ` 16,000 p.a.

Compute income from house property of Mr. Krishna for the A.Y.2013-14. (8 Marks)

(b) (i) What will be the obligation of service provider in respect of excess service tax collected

from the recipient under the service tax law ?

(ii) Can a multiple service provider use a single challan for payment of service tax forvarious services rendered by it? (4 Marks)

(c) Mayank, a dealer, furnished the following details for the month of January, 2013:

Inputs purchased within the State `1,00,000

Finished goods sold within the State `2,00,000

Goods sold in the course of inter-State trade `1,00,000

Capital goods procured during the month `1,00,000

VAT paid on capital goods 12.5%

Input VAT rate 12.5%

Output VAT rate 4%

Central Sales Tax rate 2%

Compute the total tax liability under the State VAT law.

Note: The capital goods are not the goods included in the negative list. Input tax credit oncapital goods is available in full in the year of purchase. (4 Marks)



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An sw er

(a) Computation of Income from house property of Mr. Krish na for A.Y. 2013-14

Particulars ` `(A) Rented uni t (50% of total area)

Step I - Computation o f Annual letti ng Value

Municipal valuation (`2,44,000 x ) 1,22,000

Fair rent (`2,35,000 x ) 1,17,500

Standard rent (`2,20,000 x ) 1,10,000

Annual lett ing value is higher of municipal valuationand fair rent, but restricted to standard rent

1,10,000

Step II - Actual RentRent receivable for the whole year (`12,000 x 12) 1,44,000

Step III Comput ation of Gross Ann ual Value

Actual rent received owing to vacancy (`1,44,000 `36,000)

1,08,000

Since, owing to vacancy, the actual rent received islower than the annual letting value, the actual rentreceived is the Gross Annual value

Gross Annual Value (GAV) 1,08,000

Less: Municipal taxes (12% of `1,22,000) 14,640

Net Annu al Value (NAV) 93,360

Less: Deductions under section 24(a) 30% of NAV 28,008

(b) Interest on borrowed capital (`1,000 x 12) 12,000 40,008

Taxable incom e from let out porti on 53,352

(B) Self occu pied unit (50% of total area)

Annual value Nil

Less: Deduction under section 24:

Interest on borrowed capital (`1,000 x 12) 12,000 (12,000)

Income from house property _41,352

Note: No deduction will be allowed separately for light and water charges,insurance charges and painting expenses.

(b) (i) As per section 73A of the Finance Act, 1994, an obligation is cast on every person,who:

(a) is liable to pay service tax and has collected any amount in excess of servicetax assessed or determined and paid on any taxable service from the recipient

of taxable service in any manner as representing service tax;



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(b) has collected any amount, which is not required to be collected, from any otherperson, in any manner as representing service tax to forthwith pay the amount

so collected to the credit of the Central Government.

On account of this provision, a service provider who has collected excess servicetax from the recipient of service is required to immediately pay the amount socollected to the credit of the Central Government.

(ii) Yes, a multiple service provider can use single GAR-7 challan for payment of

service tax on different services.

However, amounts attributable to each such service along with concernedaccounting codes should be mentioned clearly in the column provided for this

purpose in the GAR-7 challan(c) Computatio n of the VAT liabili ty for the month of January, 2013:

Particulars `Input tax credit:

Inputs purchased within the State (`1,00,000 12.5%) 12,500

Capital goods procured during the month (`1,00,000 12.5%) [full creditallowed in the year of purchase immediately at the time of purchase ofcapital goods] 12,500

25,000

Net VAT liabilit y:Output VAT payable on finished goods sold within the State

(`2,00,000 4%)

8,000

Less: Input tax credit 25,000

Net State VAT liability (`8,000 `25,000) Nil

Question 3

(a) From the following details, find out the salary chargeable to tax of Mr. Anand for the

assessment year 2013-14:

Mr. Anand is a regular employee of Malpani Ltd. in Mumbai. He was appointed on 01-03-

2012 in the scale of 25,000-2,500-35,000. He is paid dearness allowance (which formspart of salary for retirement benefits) @ 15% of basic pay and bonus equivalent to one

and a half month's basic pay as at the end of the year. He contributes 18% of his salary(basic pay plus dearness allowance) towards recognized provident fund and theCompany contributes the same amount.

He is provided free housing facility which has been taken on rent by the Company at

`15,000 per month. He is also provided with following facilities:



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(i) The Company reimbursed the medical treatment bill of `40,000 of his daughter,who is dependent on him.(ii) The monthly salary of `2,000 of a house keeper is reimbursed by the Company.(iii) He is getting telephone allowance @ `1,000 per month.

(iv) A gift voucher of `4,700 was given on the occasion of his marriage anniversary.(v) The Company pays medical insurance premium to effect an insurance on the health

of Mr. Anand `12,000.(vi) Motor car running and maintenance charges of ` 36,600 fully paid by employer.

(The motor car is owned and driven by Mr. Anand. The engine cubic capacity is

below 1.60 litres. The motor car is used for both official and personal purpose by theemployee.)

(vii) Value of free lunch provided during office hours is `2,200. (8 Marks)(b) List out the documents to be submitted along with the first service tax return. (4 Marks)

(c) What happens to VAT chain when a seller opts for composition scheme? Who are noteligible for composition scheme under the VAT regime? Discuss briefly. (4 Marks)

An sw er

(a) Computation of taxable salary of Mr. Anand for A.Y. 2013-14

Particulars `Basic pay [(` 25,00011) + (` 27,5001)] = ` 2,75,000 + ` 27,500 3,02,500Dearness allowance [15% of basic pay] 45,375

Bonus [` 27,500 1.5] 41,250

Employers contribution to Recognized Provident Fund in excess of 12%(18% - 12% = 6% of `3,47,875) 20,873

Taxable allo wances

Telephone allowance 12,000

Taxable perquisi tes

Rent-free accommodation [See Note 1 below] 60,169

Medical reimbursement (` 40,000 - ` 15,000) [See Note 2 below] 25,000

Reimbursement of salary of housekeeper [`

2,000 12] 24,000Gift voucher [See Note 4 below] -

Motor car owned and driven by employee, running and maintenance chargesborne by the employer [`36,600 - `21,600 (i.e., `1,800 12)]

15,000

Value of free lunch facility [See Note 5 below ] -

Salary in come chargeable to tax 5,46,167



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Notes:

1. Where the accommodation is taken on lease or rent by the employer, the valueof rent-free accommodation provided to employee would be actual amount oflease rental paid or payable by the employer or 15% of salary, whichever islower.

For the purposes of valuation of rent free house, salary includes:

(i) Basic salary

(ii) Dearness allowance

(iii) Bonus

(iv) Telephone allowance

Total

`3,02,500

` 45,375

` 41,250

` 12,000

`4,01,125

15% of salary = `4,01,125 15/100 = ` 60,169

Value of rent-free house will be

- Actual amount of lease rental paid by employer (i.e. ` 1,80,000) or- 15% of salary (i.e., `60,169),whichever is lower.

Therefore, the perquisite value is `60,169.

2. Any sum paid by the employer in respect of any expenditure actually incurred bythe employee on his medical treatment or treatment of any member of his familyis exempt to the extent of ` 15,000. Therefore, in this case, the balance of`25,000 (i.e., `40,000 `15,000) is a taxable perquisite.

3. Medical insurance premium paid by the employer to effect an insurance on thehealth of the employee is fully exempt.

4. If the value of any gift or voucher or token in lieu of gift received by theemployee or by member of his household is less than ` 5,000 in aggregateduring the previous year, the perquisite value is Nil. In this case, the gift voucherwas received on the occasion of marriage anniversary and the sum is less than`5,000. Therefore, the perquisite value of gift voucher, is Nil.

5. Free lunch provided by the employer during office hours is not a perquisite,assuming that the value does not exceed `50 per meal.

(b) As per rule 5(2) of the Service Tax Rules, 1994, following documents (in duplicate) are tobe furnished to the Superintendent of Central Excise at the time of filing the first service

tax return:

(a) all the records prepared or maintained by the assessee for accounting of

transactions in regard to -

(i) providing of any service;

(ii) receipt or procurement of input services and payment for them;

(iii) receipt, purchase, manufacture, storage, sale or delivery in regard of inputs



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and capital goods;

(iv) other activities, such as manufacture and sale of goods, if any.

(b) all other financial records maintained by him in the normal course of business.

(c) The selling dealer, who opts for composition scheme, loses input tax credit on inputspurchased and thus, cannot pass on the benefit of input tax credit to the buyer.

Consequently, the purchasing dealer buying goods from a dealer operating under

composition scheme does not get any tax credit for the goods purchased.

Therefore, as soon as a seller opts for the composition scheme, the VAT chain getsbroken, and the benefit of tax paid earlier cannot be passed on to the subsequent

buyers.

The following are not eligible for composition scheme under the VAT regime:-

(i) a dealer whose turnover exceeds `50 lakh in the last financial year.

(ii) a manufacturer or a dealer who sells goods in the course of inter-State trade orcommerce.

(iii) a dealer who sells goods in the course of import into or export out of the territory of

India.

(iv) a dealer transferring goods outside the State otherwise than by way of sale or for

execution of works contract.

Question 4

(a) Mr. Vaibhav sold a house, held as a capital asset, to his friend Mr. Dhanush on 1stDecember, 2012 for a consideration of ` 25,00,000. The Sub-Registrar refused to

register the document for the said value, as according to him, stamp duty valuation based

on State Government guidelines was `45,00,000. Mr. Vaibhav preferred an appeal tothe Revenue Divisional Officer, who fixed the value of the house as ` 35,00,000

(`22,00,000 for land and the balance for building portion). The differential stamp dutywas paid, accepting the said value determined. Mr. Vaibhav had purchased the land on1stJune, 2006 for `5,19,000 and completed the construction of the house on 1 October,2010 for ` 14,00,000.

Cost inflation indices maybe taken as 519 for the financial year 2006-07, 711 for the

financial year 2010-11 and 852 for the financial year 2012-13.Briefly discuss the tax implications in the hands of Mr. Vaibhav for the assessment year2013-14 and compute the capital gains chargeable to tax. (4 Marks)

(b) State with brief reasoning whether the following receipts are chargeable to income-tax or

are exempt (if chargeable, the amount taxable is to be mentioned) for the assessmentyear 2013-14 :



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Nature of receipt Amount ()Interest on enhanced compensation received on 12-3-2013 for acquisitionof urban land, of which 40% relates to the earlier year. 96,000

Rent received for letting out agricultural land for a movie shooting. 72,000

Computation is NOT required. (4 Marks)

(c) Mr. Suresh Karthik, a service provider, received an advance of `3 lakhs from Mr. Dinesh

Raina on 12-4-2012. Even when the advance was received, there was some doubt as towhether any service will be rendered. No services were rendered to Mr. Dinesh Rainaand ultimately on 12-3-2013, Mr. Suresh Karthik refunded the amount to him. Mr. Suresh

Karthik wants to know whether:(i) any service tax is payable when the advance was received, and

(ii) he can make self adjustment of service tax while remitting service tax due for thequarter ended 31-3-2013 ? (4 Marks)

(d) (i) What are the items aggregated in the Addition Method to calculate the VAT payable?When is this method mainly used? (2 Marks)

(ii) Is any threshold exemption limit fixed for dealers to obtain VAT registration, as per the

White Paper? If yes, why is the same provided? (2 Marks)

An sw er

(a) Tax impli cations in the hands of Mr. Vaibhav

As per section 50C, where the consideration received or accruing as a resul t of transferof land or building or both, is less than the value adopted or assessed or assessable bythe stamp valuation authority, the value adopted or assessed or assessable by the s tamp

valuation authority shall be deemed to be the full value of consideration received oraccruing as a result of transfer.

Where the assessee appeals against the stamp valuation and the value is revised inappeal by the appellate authority (Revenue Divisional Officer, in this case), such value

will be regarded as the consideration received or accruing as a result of transfer.

In the given problem, land has been held for a period exceeding 36 months and buildingfor a period less than 36 months immediately preceding the date of transfer. Therefore,

land is a long-term capital asset, whereas building is a short-term capital asset.

Computation of Capital Gains ch argeable to tax

Particulars ` `Long term capit al gain on sale of land

Consideration received or accruing as a result of transfer

of land22,00,000



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Less:Indexed cost of acquisition ` 5,19,000 x 852/519 8,52,000

Long-term capital gain (A) 13,48,000

Short-term capital loss on sale of building

Consideration received or accruing from transfer of

building13,00,000

Less: Cost of construction 14,00,000

Short term capital loss (B) (1,00,000)

Lon g-term capi tal gain (A-B) 12,48,000

As per section 70, short-term capital loss can be set-off against long-term capital gains.Therefore, the net taxable long-term capital gains would be ` 12,48,000(i.e., ` 13,48,000 ` 1,00,000).

(b) (i) Yes, it is chargeable to tax.

As per sect ion 145A, interest received by the assessee on enhanced compensation

shall be deemed to be the income of the year in which it is received, irrespective ofthe method of accounting followed by the assessee.

Interest of ` 96,000 on enhanced compensation is chargeable to tax in the year of

receipt i.e. P.Y.2012-13 under section 56(2)(viii) after providing deduction of 50%

under section 57(iv). Therefore, ` 48,000 is chargeable to tax under the headIncome from other sources.

(ii) Yes, it is chargeable to tax.

Agricultural income is exempt from tax as per section 10(1). Agricultural income

means, inter alia, any rent or revenue derived from land which is situated in India

and is used for agricultural purposes. In the present case, rent is being derived fromletting out of agricultural land for a movie shoot, which is not an agriculturalpurpose. In effect, the land is not being put to use for agricultural purposes.

Therefore, ` 72,000, being rent received from letting out of agricultural land formovie shooting, is not exempt under section 10(1). The same is chargeable to taxunder the head Income from other sources.

(c) (i) Charging section, section 66B of the Finance Act, 1994, inter alia, provides thatservice

tax is leviable on the value of services provided or agreed to be provided. Hence,service tax is payable on the advance of `3 lakh received by Mr. Suresh Karthik fromMr. Dinesh Raina before the actual provision of service.

Further, the point of taxation for the advances received is the date of receipt of such

advance. Thus, in the given case, service tax is payable on the date when theadvance was received (12.04.2012).

(ii) Rule 6(3) of the Service Tax Rules, 1994, inter alia, provides that where an assessee



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has received any payment, against a service to be provided which is not soprovided by him for any reason, the assessee may take the credit of such excess

service tax paid by him if he has refunded the payment so received for the serviceprovided to the person from whom it was received.

Since in the given case, Mr. Suresh Karthik has refunded the payment to Mr. DineshRaina, he can take the credit of the service tax paid on `3 lakh while remitting the

service tax due for the quarter ended on 31.03.2013.

(d) (i) Addition Method aggregates all the factor payments including profi ts to arrive at thetotal value addition on which the VAT rate is applied to calculate the VAT.

This method is mainly used with income variant of VAT.

(ii) Yes, a threshold exemption limit of `5 lakh has been provided in the White Paper,to obtain VAT registration. However, subsequently this threshold limit has been

increased to `10 lakh.

The threshold exemption limit is provided in order to provide relief to small dealers.

Question 5

(a) Briefly explain the exemption available under section 10(48) of the Income-tax Act, 1961in respect of income received by certain foreign companies from sale of crude oil.

(4 Marks)

(b) Mr. Abhimanyu is engaged in the business of generation and distribution of electricpower. He always opts to claim depreciation on written down value for income-tax

purposes. From the following details, compute the depreciation allowable as per theprovisions of the Income-tax Act, 1961 for the assessment year 2013-14:

( in lacs)(i) Opening WDV of block (15% rate) 42

(ii) New machinery purchased on 12-10-2012 10

(iii) Machinery imported from Colombo on 12-4-2012. 9This machine had been used only in Colombo earlier and

the assessee is the first user in India.

(iv) New computer installed in generation wing of the unit on 15-7-2012 2

(4 Marks)

(c) Mr. Visvakshena, who has been regularly assessed to service tax for the past four years,with taxable service tax receipts of `21 lacs in the earlier financial year, furnishes thefollowing details for the quarter ended 31-3-2013:

Nature of receipts Amount ( in lacs)Accounting services rendered to charitable trusts 26



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Selling time slots for T.V. advertisements 32

Selling time slots (to be read as space) for advertisements innewspapers

24

Compute the value of taxable services and the total service tax payable by him.

Is he required to e-file his service tax return for the half year ended on 31-3-2013? (4 Marks)

(d) Fill up the blanks for the following items in the context of VAT:

(i) The most commonly used method for computing VAT is the ____________ method.

(ii) The most widely used variant amongst the various ones is the ___________ variant.

(iii) When a dealer opts for Composition Scheme, the VAT chain __________(continues/gets broken).

(iv) __________ amongst the following is not an applicable VAT rate:

0%, 1%, 8% and 12.5%. (4 Marks)

An sw er

(a) Exemption in respect of incom e received by certain foreign companies in India inIndian currency from s ale of crude oil to any p erson in Indi a [Section 10(48)]

(i) Section 10(48) exempts any income of a foreign company received in India in Indian

currency on account of sale of crude oil to any person in India.

(ii) The following conditions have to be fulfilled for claim of such exemption

(a) The money has been received under an agreement or arrangement which iseither entered into or approved by the Central Government;

(b) The foreign company, as well as the arrangement or agreement, are notified

by the Central Government having regard to the national interest.

(c) The foreign company is not engaged in any other activity in India, except

receipt of income under such arrangement or agreement.

(b) Computation of depreciation under section 32 for A.Y.2013-14

Particulars ` `Normal DepreciationDepreciation@15% on ` 51,00,000, being machinery (put touse for more than 180 days) [Opening WDV of ` 42,00,000+ Purchase cost of imported machinery of ` 9,00,000]

7,65,000

[email protected]% on ` 10,00,000, being new machineryput to use for less than 180 days 75,000

8,40,000

mailto:[email protected]%25mailto:[email protected]%25


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Depreciation@60% on computers purchased ` 2,00,000 1,20,000 9,60,000

Ad dit ion al Depreci at io n (Refer Note below)

Additional Deprec iation@10% of ` 10,00,000 [being actualcost of new machinery purchased on 12-10-2012]

1,00,000

Additional Deprec iation@20% on new computer installed ingeneration wing of the unit [20% of ` 2,00,000] 40,000 1,40,000

Depreciation on Plant and Machinery 11,00,000

Note:-

The Finance Act, 2012 has extended the benefit of additional depreciation to new plant

and machinery acquired and installed in power sector undertakings. Accordingly,additional depreciation is allowable in the case of any new machinery or plant acquiredand installed by an assessee engaged, inter alia, in the business of generation or

generation and distribution of power, at the rate of 20% of the actual cost of suchmachinery or plant.

Therefore, new computer installed in generation wing of the unit is eligible for additionaldepreciation@20%.

Since the new machinery was purchased only on 12.10.2012, it was put to use for less

than 180 days during the previous year, and hence, only 10% (i.e., 50% of 20%) is

allowable as additional depreciation.However, additional depreciation shall not be allowed in respect of, inter alia, anymachinery or plant which, before its installation by the assessee, was used either within

or outside India by any other person. Therefore, additional depreciation is not allowablein respect of imported machinery, since it was used in Colombo, before its installation bythe assessee.

(c) Computatio n of value of taxable services and total service tax payable by Mr.

Visvakshena for the quarter ended 31.03.2013

Particulars Am oun t (`Accounting services rendered to charitable trusts 26,00,000

Selling time slots for T.V. advertisements (Note 1) 32,00,000

Selling space for advertisements in newspapers (Note 2) Nil

Value of taxable services (inclusive of service tax) 58,00,000

Service tax payable (rounded off) =12.36

58,00,000112.36

6,38,021



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Notes:

1. Services of selling of time slots for advertisements to be broadcasted on T.V. are

specifically excluded from the negative list of services. Consequently, they aretaxable.

2. Services of selling space for advertisements in newspapers are included in the

negative list of services. Hence, they are not taxable.

3. Since the value of taxable services of Mr. Visvakshena in the financial year 2011-12

exceeds `10 lakh, he is not eligible for small service providers exemption in thefinancial year 2012-13.

Mr. Visvakshena is required to e-file his service tax return for the half year ended on

31-3-2013 as now every assessee is required to submit service tax return

electronically.

(d) (i) The most commonly used method for computing VAT is the invoicemethod

(ii) The most widely used variant amongst the various ones is the consumption variant

(iii) When a dealer opts for Composition Scheme, the VAT chain gets broken.

(iv) 8%amongst the following is not an applicable VAT rate:

0%, 1%, 8% and 12.5%.

Question 6

(a) Compute the total income of Mr. Krishna for the assessment year 2013-14 from the

following particulars:

Particulars Amount ()Income from business before adjusting the following items: 1,75,000

(a) Business loss brought forward from assessment year 2011-12 70,000

(b) Current depreciation 40,000

(c) Unabsorbed depreciation of earlier year 1,55,000

Income from house property (Gross annual value) 4,32,000

Municipal taxes paid 32,000

Mr. Krishna sold a plot at Noida on 12th September, 2012 fora consideration of `6,40,000, which had been purchased by

him on 20th December, 2009 at a cost of `4,10,000.

Long-term capital loss on sale of shares sold through 75,000

recognized stock exchange (STT paid)

Long-term capital gain on sale of debentures 60,000



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Dividend on shares held as stock in trade 22,000

Dividend from a company carrying on agri business 10,000

During the previous year 2012-13, Mr. Krishna has repaid `1,67,000 towards housingloan from a scheduled bank. Out of ` 1,67,000, ` 97,000 was towards payment ofinterest and rest towards principal payments. Cost inflation indices are as under:

Financial Year Index

2009-10 632

2012-13 852 (8 Marks)

(b) In the context of chargeability of service tax, what are the implications of the term

"provided or agreed to be provided"? (4 Marks)

(c) List the purchases which are not eligible for input tax credit under VAT legislation. (4 Marks)

An sw er

(a) Computation of total income of Mr. Krishna for the A.Y 2013-14

Particulars ` `I. Income from house property

Gross Annual Value 4,32,000

Less:Municipal taxes paid 32,000

Net Annual Value (NAV) 4,00,000Less:Deductions under section 24

(a) 30% of NAV 1,20,000(b) Interest on housing loan 97,000 1,83,000

II. Income from business

Income from business 1,75,000

Less: Current year depreciation under section 32(1) 40,000

1,35,000

Less: Set-off of brought forward business loss ofA.Y.2011-12 under section 72 70,000

65,000

Less: Unabsorbed depreciation set-off [See Note 3] 65,000 Nil

III. Capital gains

Long term capital gain on sale of debentures 60,000



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Less: Unabsorbed depreciation set-off [See Note 3] 60,000 Nil

Short term capital gain on sale of land [See Note 2] 2,30,000

Less: Unabsorbed depreciation set-off [See Note 3] 30,000 2,00,000

IV. Income from other sources

Dividend on shares (whether held as stock-in-trade orfrom a company carrying on agricultural operations) exempt under section 10(34) - Nil

Gross total income 3,83,000

Less: Chapter VI-A deduction

Section 80C [Principal repayment of housing loan] 70,000

Total income 3,13,000

Notes:

(1) Loss from an exempt source cannot be set-off against gains from a taxable source.Since long-term capital gains on sale of listed equity shares through a recognized

stock exchange is eligible for exemption under section 10(38), consequently, long-term capital loss on sale of listed equity shares, being loss from an exempt source,

cannot be set-off against long-term capital gains on sale of debentures.

(2) Since land is held for a period of less than 36 months, the gain of `2,30,000 arising

from sale of such land is a short-term capital gain.

(3) Brought forward unabsorbed depreciation can be adjusted against any head ofincome. However, it is most beneficial to set-off unabsorbed depreciation firstagainst long-term capital gains, since it is taxable at a higher rate of 20% (the other

income of the assessee falling in the 10% slab rate). Therefore, unabsorbeddepreciation is first set-off against long-term capital gains to the extent of ` 60,000.The remaining unabsorbed depreciation is adjusted against business income to the

extent of ` 65,000 and the balance of ` 30,000 is adjusted against short-termcapital gains.

In the alternative, the balance of ` 30,000 may also be set-off against income fromhouse property, in which case, the net income from house property would be

` 1,53,000 and short-term capital gains would be ` 2,30,000. The gross total

income and total income would, however, remain unchanged.(b) Section 66B, the charging section of the Finance Act, 1994, inter alia, provides that

service tax shall be levied on the services provided or agreed to be provided. Therefore,

the phrase provided or agreed to be provided has the following implications:-

Services which have been provided are chargeable to service tax. Services which have only been agreed to be provided but are yet to be provided,

are also chargeable to service tax.



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Receipt of advances for services agreed to be provided become chargeable toservice tax before the actual provision of service.

Advances that are retained by the service provider in the event of cancellation ofcontract of service by the service receiver become chargeable to service tax asthese represent consideration for a service that was agreed to be provided.

(c) The following purchases are not eligible for input tax credit under VAT legislation:

(i) purchases from unregistered dealers;

(ii) purchases from registered dealers who opt for composition scheme under theprovisions of the Act;

(iii) purchase of goods as may be notified by the State Government;

(iv) purchase of goods where the purchase invoice is not available with the claimant orthere is evidence that the same has not been issued by the registered selling dealerfrom whom the goods are purported to have been purchased;

(v) purchase of goods where invoice does not show the amount of tax separately;

(vi) purchase of goods which are being utilized in the manufacture of exempted goods;

(vii) purchase of goods used for personal use or consumption or provided free of chargeas gifts;

(viii) goods imported from other States viz. inter-State purchases;

(ix) goods imported from outside the territory of India;

(x) goods in stock which have suffered tax under an earlier Act but under VAT Act, theyare covered under exempted items.

Note: Any four points may be given.

Question 7

(a) Define the term "assessee" as per the Income-tax Act, 1961. (4 Marks)

(b) (EITHER)

Mr. Pranay is running two industrial undertakings, one in a SEZ (Unit A) and another in aDTA (Unit B). The brief details for the year ended 31.03.2013 are as under:

Particulars Amount ( in lacs)Unit A Unit B

Domestic turnover 10 100

Export turnover 120 Nil

Gross Profit 20 10

Less: Expenses and depreciation 07 06



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Profits derived from the units 13 5

The brought forward business loss pertaining to assessment year 2010-11 for Unit B is`3.2 lacs. Briefly compute the business income of the assessee. (4 Marks)

(OR)

(b) What are the conditions to be fulfilled by a charitable trust under section 12A for

applicability of exemption provisions contained in sections 11 and 12 of the Income-tax

Act, 1961? (4 Marks)

(c) Describe briefly the manner of determination of value for service tax purposes, whenconsideration is not wholly/partly consisting of money. (4 Marks)

(d) What are the deficiencies of VAT system? (4 Marks)An sw er

(a) As per section 2(7), assessee means a person by whom tax or any other sum of money

is payable under the Income-tax Act, 1961.

In addition, the term includes

Every person in respect of whom any proceeding under the Act has been taken for theassessment of

his income; or the income of any other person in respect of which he is assessable; or the loss sustained by him or by such other person; or the amount of refund due to him or to such other person.

Every person who is deemed to be an assessee under any provision of this Act; Every person who is deemed to be an assessee in default under any provision of

this Act.

(b) [First Alternative]

Computation of business income of Mr. Pranay

Particulars ` (in lacs)Total profit derived from Units A & B (` 13 lacs + ` 5 lacs) 18.0

Less: Exemption under section 10AA [SeeWorking Note below ] 12.06.0

Less: Set-off of brought forward business loss as per section 72 3.2

2.8



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Working Note

Computation of exemption un der section 10AA in respect of Unit A located in a SEZ

Particulars ` (in lacs)Domestic turnover of Unit A 10

Export turnover of Unit A 120

Total turn over of Unit A 130

Profit derived from Unit A 13

Exemption u nder sectio n 10AA [See Note below]

Profit of Unit AxUnit AofturnoverTotal

unit AofturnoverExport= 13

130

120=

12

Note - 100% of the profit derived from export of articles or things or services is eligiblefor deduction under section 10AA, assuming that F.Y.2012-13 falls within the first five

year period commencing from the year of manufacture or production of articles or things

or provision of services by Unit A in SEZ.

(b) [Second Alternative]

Conditions for applicability of sections 11 and 12 [Section 12A]

The exemption provisions contained in sections 11 and 12 shall not apply in relation tothe income of any trust or institution unless the following conditions are fulfilled

(i) An application for registration of the trust or institution should be made to the

Commissioner in the prescribed form and in the prescribed manner.

The trust or institution should be registered under section 12AA.

(ii) There is no time limit for filing an application for registration. The application can befiled at any time after the creation of the trust or institution.

(iii) Accordingly, the provisions of sections 11and 12 shall apply from the assessmentyear relevant to the financial year in which the application is made i.e. the

exemption would be available only with effect from the assessment year

immediately following the previous year in which the application is made. It wouldnot be available in respect of any earlier assessment year.

(iv) Where the total income of the trust or institution, without giving effect to the

provisions of sections 11 and 12, exceeds the maximum amount which is not

chargeable to income-tax in any previous year, the accounts of the trust orinstitution must be audited by a chartered accountant.



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The report of such audit in the prescribed form duly signed and verified by suchaccountant setting forth such prescribed particulars, should be furnished along with

the return of income for the relevant assessment year.

(c) As per section 67 of the Finance Act, 1994, if the consideration for a taxable service isnot wholly or partly in terms of money, then the value of such service shall be suchamount in money, with the addition of service tax charged, is equivalent to the

consideration.

(d) The deficiencies of VAT system are as under:

(i) There is lack of uniformity in the rates of VAT in different States. Distortion occurson account of different rates of VAT, composition scheme, exemptions, difference in

classification of goods, etc.(ii) Central Sales Tax is not integrated with the State VAT. Therefore, it is difficult to put the

purchases from other States at par with the purchases within the State. Consequently,the advantage of neutrality is confined only for purchases within the State.

(iii) For complying with the VAT provisions, the accounting cost increases which maynot commensurate with the benefit to traders and small firms.

(iv) VAT is paid at various stages and not at last stage. This has increased the

requirement of working capital and the interest burden on the same.

(v) VAT, being a consumption tax, tends to be regressive since the proportion ofincome spent on consumption is large for the poor than the rich.

(vi) As a result of introduction of VAT, the administration cost of the States hasincreased on account of significant increase in number of dealers to be

administered.

Note: Any four points may be given.

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