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2 PAPER 4 : TAXATION Question No.1 is compulsory. Attempt any five questions from the remaining six questions. 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 , unless stated otherwise in the question. Question 1 (a) The following is the Profit and Loss Account of Mr. Aditya, aged 58 years, a resident, for the year ended : 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 ) 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 1,35,000 2,30,000 2,30,000 Other information: (1) Aditya bought a car during the year for ` 20,000. He charged 15% on the value of the car. The above car was sold during the year for ` 17,000. The use of the car was 3/4 th for business and 1/4 th for 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 ` 5,000 p.m., paid in cash on (5) Mr. Aditya had also let out a house property at a monthly rent of ` 25,000. The annual 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 paid by 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 amended by the Finance Act, 2012 and applicable for A.Y (in the case of Income-tax), which is the assessment year relevant for November, 2013 examination.
3 PAPER 4 : TAXATION 67 (b) (c) (6) Mr. Aditya's minor daughter received ` 75,000 from stage acting. Interest on company 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 dependant son, who has disability of more than 80%. (8) Aditya had taken a loan during the year for the education of his son, who is pursuing 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 (10 Marks) Professionals Ltd. is engaged in providing services which became taxable with effect from July 01, Compute the service tax payable by Professionals Ltd. on the following 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 28 th June, 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, ,00,000 Other receipts 12,00,000 Rate of service tax is12%, Education cess is 1%, Secondary & Higher Education cess is 1%. (5 Marks) Compute net VAT liability of Sachin from the following information: Particulars ` ` Raw materials from foreign market 1,20,000 (includes duty paid on 20%) Raw materials purchased from local market Cost of raw material 2,50,000 Add: Excise 12% 30,000 2,80,000 Add: 4% 11,200 2,91,200 Raw materials purchased from neighbouring State (includes 2%) 51,000 Storage and transportation cost 9,000 Manufacturing expenses 30,000
4 68 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Answer Sachin sold goods to Madan and earned 12% on the cost of production. VAT rate on sale of such goods is 4%. There is no opening or closing stock. (5 Marks) (a) Computation of total income of Mr. Aditya for the A.Y Particulars R` 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) 1,10,000 Total 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 Annual Letting Value) Actual Rent (` 25,000 12) 3,00,000 Annual Letting Value 2,50,000 3,00,000 Less: Municipal taxes paid by Mr. Aditya 1 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 1,10,000 Income from house property 1,90, Computation of income under the head Profits and gains of business or profession Particulars R` ` Net Profit as per profit and loss account 1,35,000 Add: Expenses disallowed: Wealth-tax 5,000 Advance income-tax 1,500 1 The 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.
5 PAPER 4 : TAXATION 69 Depreciation on car (not allowable, since the asset 3,000 does not exist at the end of the year) 2 Medical expenses of wife (personal expenses, 4,500 disallowed) Driver s salary (¼th being for personal use, 4,500 disallowed) Repair of car (¼th being for personal use, disallowed) 750 Rent paid [` 35,000 paid in cash disallowed u/s 40A(3)] 35,000 54,250 1,89,250 Less: Income not taxable/exempt under the Income-tax Act, 1961/ Income not taxable under this head Cash gift from friend (not taxable under this head) 25,000 Sale of car 17,000 Interest on income-tax refund (taxable under the head Income from other sources ) 3,000 45,000 Income under the head Profits and gains of business or profession 1,44, Computation of income under the head Income from other sources Particulars ` ` Cash gift from friend received on (not taxable - under 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. Aditya s minor 10,000 daughter [See Note below] Less: Exempt under section 10(32) 1,500 8,500 Income from other sources 11,500 Note: Income received by Aditya s 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. Aditya s income as per section 64(1A), even though the deposit was made out of income derived from special talent. 2 The 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.
6 70 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, Computation of deduction 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) 1,00,000 irrespective of the amount incurred] 80E Interest on loan for higher education of son, being a relative 10,000 Total deduction under Chapter VI-A 1,10,000 (b) Computation of service tax payable by Professionals Ltd. : Particulars Services performed before such service became taxable (Note 1) [(5,00, )/112.36] Services by way of renting of residential dwelling for use as residence (Note 2) Free services rendered to the friends of directors (Note 3) Amount (`) 4,44,998 Advance received for the services to be rendered in July, 2013 (Note 4) 5,00,000 Other receipts 12,00,000 Total 21,44,998 Less: Exemption available to small service providers (Note 5) 10,00,000 Value of taxable services 11,44,998 Service 1,37,400 Add: Education 2% 2,748 Add: Secondary and higher education 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 has been 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 been issued before such service became taxable, payment received has been presumed to be full and final. Accordingly, the same is taken as inclusive of service tax. Nil Nil
7 PAPER 4 : TAXATION 71 (c) 2. Services by way of renting of residential dwelling for use as residence are included in 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, advance received 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 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 of directors represents the value of such services. Computation of Net VAT liability of Sachin Particulars ` ` Raw materials purchased from foreign market (including duty 1,20,000 paid on 20% as input tax credit of import duty is not allowed) Raw material purchased from local market (including only 2,80,000 excise duty and not VAT as input tax credit for excise duty is not allowed, but credit for VAT is allowed) Raw material purchased from neighbouring State (including 51,000 2% as input tax credit of CST is not allowed) Storage and transportation cost 9,000 Manufacturing expenses 30,000 Cost of production 4,90,000 Add: 12% of cost of production 58,800 Sale Price 5,48,800 4% on `5,48,800 21,952 Less: Input tax credit Duty paid on imports (input tax credit is not allowed for Nil duty paid on imports) CST paid on inter-state purchases (input tax credit is not Nil allowed for CST paid on inter-state purchases) VAT paid on local purchases 11,200 11,200 Net VAT payable by Sachin 10,752
8 72 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 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. The particulars of the house for the previous year are as under: Standard Rent Municipal Valuation Fair Rent Municipal tax paid by Mr. Krishna Light and water charges Interest on borrowed capital Insurance charges Painting expenses ` 2,20,000 p.a. ` 2,44,000 p.a. ` 2,35,000 p.a. 12% of the Municipal Valuation ` 800 p.m. ` 2,000 p.m. ` 3,500 p.a. ` 16,000 p.a. Compute income from house property of Mr. Krishna for the A.Y (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 for various 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 on capital goods is available in full in the year of purchase. (4 Marks)
9 PAPER 4 : TAXATION 73 Answer (a) Computation of Income from house property of Mr. Krishna for A.Y (b) (i) (A) (B) Particulars ` ` Rented unit (50% of total area) Step I - Computation of Annual letting Value Municipal valuation (` 2,44,000 x ½) 1,22,000 Fair rent (` 2,35,000 x ½) 1,17,500 Standard rent (` 2,20,000 x ½) 1,10,000 Annual letting value is higher of municipal valuation 1,10,000 and fair rent, but restricted to standard rent Step II - Actual Rent Rent receivable for the whole year (` 12,000 x 12) 1,44,000 Step III Computation of Gross Annual Value Actual rent received owing to vacancy (` 1,44,000 1,08,000 ` 36,000) Since, owing to vacancy, the actual rent received is lower than the annual letting value, the actual rent received is the Gross Annual value Gross Annual Value (GAV) 1,08,000 Less: Municipal taxes (12% of ` 1,22,000) 14,640 Net Annual 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 income from let out portion 53,352 Self occupied 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. 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 service tax assessed or determined and paid on any taxable service from the recipient of taxable service in any manner as representing service tax;
10 74 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (b) has collected any amount, which is not required to be collected, from any other person, 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 service tax from the recipient of service is required to immediately pay the amount so collected 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 concerned accounting codes should be mentioned clearly in the column provided for this purpose in the GAR-7 challan (c) Computation of the VAT liability for the month of January, 2013: Particulars ` Input tax credit: Inputs purchased within the State (`1,00, %) 12,500 Capital goods procured during the month (`1,00, %) [full credit allowed in the year of purchase immediately at the time of purchase of capital goods] 12,500 25,000 Net VAT liability: Output VAT payable on finished goods sold within the State 8,000 (` 2,00,000 4%) 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 : Mr. Anand is a regular employee of Malpani Ltd. in Mumbai. He was appointed on in the scale of 25,000-2,500-35,000. He is paid dearness allowance (which forms part of salary for retirement 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 the Company 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:
11 PAPER 4 : TAXATION 75 (i) (ii) The Company reimbursed the medical treatment bill of ` 40,000 of his daughter, who is dependent on him. The monthly salary of ` 2,000 of a house keeper is reimbursed by the Company. (iii) He is getting telephone ` 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 the employee.) (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) Answer What happens to VAT chain when a seller opts for composition scheme? Who are not eligible for composition scheme under the VAT regime? Discuss briefly. (4 Marks) (a) Computation of taxable salary of Mr. Anand for A.Y Particulars ` Basic pay [(` 25,000 11) + (` 27,500 1)] = ` 2,75,000 + ` 27,500 3,02,500 Dearness allowance [15% of basic pay] 45,375 Bonus [` 27, ] 41,250 Employer s contribution to Recognized Provident Fund in excess of 12% (18% - 12% = 6% of ` 3,47,875) 20,873 Taxable allowances Telephone allowance 12,000 Taxable perquisites 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] 24,000 Gift voucher [See Note 4 below] - Motor car owned and driven by employee, running and maintenance charges 15,000 borne by the employer [` 36,600 - ` 21,600 (i.e., ` 1,800 12)] Value of free lunch facility [See Note 5 below ] - Salary income chargeable to tax 5,46,167
12 76 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Notes: 1. Where the accommodation is taken on lease or rent by the employer, the value of rent-free accommodation provided to employee would be actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower. For the purposes of valuation of rent free house, salary includes: (i) Basic salary ` 3,02,500 (ii) Dearness allowance ` 45,375 (iii) Bonus ` 41,250 (iv) Telephone allowance Total ` 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, Any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family is 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 the health of the employee is fully exempt. 4. If the value of any gift or voucher or token in lieu of gift received by the employee or by member of his household is less than ` 5,000 in aggregate during the previous year, the perquisite value is Nil. In this case, the gift voucher was 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 to be 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
13 PAPER 4 : TAXATION 77 (b) and capital goods; (iv) other activities, such as manufacture and sale of goods, if any. 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 inputs purchased 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 gets broken, 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 or commerce. (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 1 st December, 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 to the 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 duty was paid, accepting the said value determined. Mr. Vaibhav had purchased the land on 1 st June, 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 , 711 for the financial year and 852 for the financial year Briefly discuss the tax implications in the hands of Mr. Vaibhav for the assessment year 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 assessment year :
14 78 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (c) Nature of receipt Amount (`) Interest on enhanced compensation received on for acquisition of 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) Mr. Suresh Karthik, a service provider, received an advance of ` 3 lakhs from Mr. Dinesh Raina on Even when the advance was received, there was some doubt as to whether any service will be rendered. No services were rendered to Mr. Dinesh Raina and ultimately on , Mr. Suresh Karthik refunded the amount to him. Mr. Suresh Karthik wants to know whether: (i) (ii) any service tax is payable when the advance was received, and he can make self adjustment of service tax while remitting service tax due for the quarter ended ? (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) Answer 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) (a) Tax implications in the hands of Mr. Vaibhav As per section 50C, where the consideration received or accruing as a result of transfer of land or building or both, is less than the value adopted or assessed or assessable by the stamp valuation authority, the value adopted or assessed or assessable by the stamp valuation authority shall be deemed to be the full value of consideration received or accruing as a result of transfer. Where the assessee appeals against the stamp valuation and the value is revised in appeal 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 building for 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 chargeable to tax Particulars ` ` Long term capital gain on sale of land Consideration received or accruing as a result of transfer of land 22,00,000
15 PAPER 4 : TAXATION 79 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 13,00,000 building Less: Cost of construction 14,00,000 Short term capital loss (B) (1,00,000) Long-term capital 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 section 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 of the 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 under section 56(2)(viii) after providing deduction of 50% under section 57(iv). Therefore, ` 48,000 is chargeable to tax under the head Income 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 from letting out of agricultural land for a movie shoot, which is not an agricultural purpose. 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 for movie shooting, is not exempt under section 10(1). The same is chargeable to tax under the head Income from other sources. (c) (i) Charging section, section 66B of the Finance Act, 1994, inter alia, provides that service 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 from Mr. 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 the advance was received ( ). (ii) Rule 6(3) of the Service Tax Rules, 1994, inter alia, provides that where an assessee
16 80 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 has received any payment, against a service to be provided which is not so provided 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 service provided to the person from whom it was received. Since in the given case, Mr. Suresh Karthik has refunded the payment to Mr. Dinesh Raina, he can take the credit of the service tax paid on ` 3 lakh while remitting the service tax due for the quarter ended on (d) (i) Addition Method aggregates all the factor payments including profits to arrive at the total 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, 1961 in 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 electric power. He always opts to claim depreciation on written down value for income-tax purposes. From the following details, compute the depreciation allowable as per the provisions of the Income-tax Act, 1961 for the assessment year : (` in lacs) (i) Opening WDV of block (15% rate) 42 (ii) New machinery purchased on (iii) Machinery imported from Colombo on This 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 (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 the following details for the quarter ended : Nature of receipts Amount (` in lacs) Accounting services rendered to charitable trusts 26
17 PAPER 4 : TAXATION 81 Selling time slots for T.V. advertisements 32 Selling time slots (to be read as space) for advertisements in newspapers 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 ? (d) Fill up the blanks for the following items in the context of VAT: (i) (ii) Answer 24 (4 Marks) The most commonly used method for computing VAT is the method. 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) (a) Exemption in respect of income received by certain foreign companies in India in Indian currency from sale of crude oil to any person in India [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 (b) (a) (b) (c) The money has been received under an agreement or arrangement which is either entered into or approved by the Central Government; The foreign company, as well as the arrangement or agreement, are notified by the Central Government having regard to the national interest. The foreign company is not engaged in any other activity in India, except receipt of income under such arrangement or agreement. Computation of depreciation under section 32 for A.Y Particulars ` ` Normal Depreciation on ` 51,00,000, being machinery (put to 7,65,000 use for more than 180 days) [Opening WDV of ` 42,00,000 + Purchase cost of imported machinery of ` 9,00,000] on ` 10,00,000, being new machinery put to use for less than 180 days 75,000 8,40,000
18 82 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 on computers purchased ` 2,00,000 1,20,000 9,60,000 Additional Depreciation (Refer Note below) Additional of ` 10,00,000 [being actual cost of new machinery purchased on ] 1,00,000 Additional on new computer installed in generation 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 acquired and 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 such machinery or plant. Therefore, new computer installed in generation wing of the unit is eligible for additional Since the new machinery was purchased only on , 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, any machinery 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 allowable in respect of imported machinery, since it was used in Colombo, before its installation by the assessee. (c) Computation of value of taxable services and total service tax payable by Mr. Visvakshena for the quarter ended Particulars Amount (` 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, ,38,021 Service tax payable (rounded off) = 58,00,
19 PAPER 4 : TAXATION 83 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 are taxable. 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 exceeds `10 lakh, he is not eligible for small service provider s exemption in the financial year Mr. Visvakshena is required to e-file his service tax return for the half year ended on as now every assessee is required to submit service tax return electronically. (d) (i) The most commonly used method for computing VAT is the invoice method (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 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 ,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 for a 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
20 84 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 (b) (c) Answer Dividend on shares held as stock in trade 22,000 Dividend from a company carrying on agri business 10,000 During the previous year , Mr. Krishna has repaid ` 1,67,000 towards housing loan from a scheduled bank. Out of ` 1,67,000, ` 97,000 was towards payment of interest and rest towards principal payments. Cost inflation indices are as under: Financial Year Index (8 Marks) In the context of chargeability of service tax, what are the implications of the term "provided or agreed to be provided"? (4 Marks) List the purchases which are not eligible for input tax credit under VAT legislation. (4 Marks) (a) Computation of total income of Mr. Krishna for the A.Y I. Income from house property Particulars ` ` Gross Annual Value 4,32,000 Less: Municipal taxes paid 32,000 Net Annual Value (NAV) 4,00,000 Less: 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 of A.Y 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
21 PAPER 4 : TAXATION 85 IV. 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 Income from other sources Dividend on shares (whether held as stock-in-trade or from 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, longterm 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 of income. However, it is most beneficial to set-off unabsorbed depreciation first against 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, unabsorbed depreciation 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-term capital gains. In the alternative, the balance of ` 30,000 may also be set-off against income from house 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.
22 86 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Receipt of advances for services agreed to be provided become chargeable to service tax before the actual provision of service. Advances that are retained by the service provider in the event of cancellation of contract of service by the service receiver become chargeable to service tax as these 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 the provisions 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 or there is evidence that the same has not been issued by the registered selling dealer from 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 charge as 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, they are covered under exempted items. Note: Any four points may be given. Question 7 (a) Define the term "assessee" as per the Income-tax Act, (4 Marks) (b) (EITHER) Mr. Pranay is running two industrial undertakings, one in a SEZ (Unit A) and another in a DTA (Unit B). The brief details for the year ended are as under: Particulars Amount (` in lacs) Unit A Unit B Domestic turnover Export turnover 120 Nil Gross Profit Less: Expenses and depreciation 07 06
23 PAPER 4 : TAXATION 87 (b) (c) Profits derived from the units 13 5 The brought forward business loss pertaining to assessment year for Unit B is ` 3.2 lacs. Briefly compute the business income of the assessee. (4 Marks) (OR) 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) Describe briefly the manner of determination of value for service tax purposes, when consideration is not wholly/partly consisting of money. (4 Marks) (d) What are the deficiencies of VAT system? (4 Marks) Answer (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, (b) In addition, the term includes Every person in respect of whom any proceeding under the Act has been taken for the assessment 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. [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 [See Working Note below] Less: Set-off of brought forward business loss as per section
24 88 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013 Working Note Computation of exemption under 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 turnover of Unit A 130 Profit derived from Unit A 13 Exemption under section 10AA [See Note below] Profit of Unit A x Export turnover of unit A Total turnover of Unit A 120 = 13 х = Note - 100% of the profit derived from export of articles or things or services is eligible for deduction under section 10AA, assuming that F.Y 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 to the 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 be filed at any time after the creation of the trust or institution. (iii) Accordingly, the provisions of sections 11 and 12 shall apply from the assessment year 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 would not 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 or institution must be audited by a chartered accountant.
25 PAPER 4 : TAXATION 89 The report of such audit in the prescribed form duly signed and verified by such accountant 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 is not wholly or partly in terms of money, then the value of such service shall be such amount 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 occurs on 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 may not 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 of income 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 has increased on account of significant increase in number of dealers to be administered. Note: Any four points may be given.
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