BATCH : LI 1, 2, 3, 4, 5, 6, 7 & 8

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1 BATCH : LI 1, 2, 3, 4, 5, 6, 7 & 8 DATE: MAXIMUM MARKS: 100 TIMING: 3 Hours PAPER 4 : TAXATION Question No. 1 is Compulsory Answer any five questions from the remaining six questions. Wherever necessary, suitable assumptions should be made by the candidates. Answer 1: ANSWERSHEET Business income 19,40,000 Add: Excess payment to brother ( 9,60,000-1,40,000) 8,20,000 Less: Agricultural income (-) 4,00,000 23,60,000 Income from other sources Purchase of equity shares [( 1, ) x 500 shares] 6,50,000 Dividend on units (exempt) Bank interest 8,000 Interest on deposit of dependent mother (not taxable as income of Mrs. X) Birthday gift received by minor son of Mrs. X ( 65,000-1,500) 63,500 Interest income of minor son (6% of 65,000 x 5 12) 1,626 7,23,125 Gross total income 30,83,125 Less: Deduction under section 80C 1,10,000 Net income (rounded off) 29,73,130 Tax liability of Mrs. X will be calculated as under- Non-agricultural income 29,73,130 Agricultural income 4,00,000 Total 33,73,130 Tax on total 8,36,939 Less: Tax on 6,50,00(i.e., agricultural income of 4,00,000 + exemption limit of 2,50,000) 55,000 Balance* 7,81,939 Add: Education cess 15,639 Add: Secondary and higher education cess 7,819 Tax liability (rounded off) 8,05,400 X (30 years) has prepared the following Profit and Loss Account for the year ending March 31, 2016: Salaries 2,12,000 Gross profit 7,55,800 Sundry expenses 3,03,000 Rental income (50 per cent portion) 2,40,000 Office expenses 1,05,000 Dividends from a foreign company 30,000 Interest on capital of X 54,000 Winnings from horse races (gross) 1,04,000 1 P a g e

2 Fire insurance of house property Wealth-tax Provision for bad debts 42,400 Repairs of house property 2,16,000 Municipal tax of house property 50,000 4,000 Winnings from lottery (gross) 2,20,000 1,01,000 Interest on Government securities 2,51,000 Insurance premium on own 16,000 life Donation to CPI, a political party 14,000 Depreciation (allowable) 53,000 Net Profit 4,30,400 16,00,800 16,00,800 X owns a house property having three independent units (erection of which was completed on April 14, 1998) which is being used by him for the following purposes : A. 25 per cent of carpet area for business purposes : B. 25 per cent of carpet area for self-residence ; and C. 50 per cent of carpet area is let out for commercial purposes. Determine the net income of X for the assessment year assuming that standard rent of the property under the Rent Control Act is 4,00,000 and X deposits 1,20,000 on March 31,2016 with SBI for the purpose of claiming deduction under section 80C. (10 Marks) (b) 1. Conducting admission test service - FMS (Delhi University) Provides management education recognized by the University Grants Commission. If an educational institute provides qualification recognized by law, and the job of conducting admission test is outsourced, service tax is not applicable. Amount paid by FMS (Delhi University) to the service provider for conducting admission test on its behalf, is not chargeable to service tax. 2. Fees collected by recognized college - It is a negative list item under Category 12. It is not chargeable to tax. 3. Commission charges by bank - Negative list covers sale and purchase of foreign exchange between banks or authorized dealers of foreign exchange or between banks and such dealers. Consequently, it is not chargeable to tax. 4. Transportation between Port Bbbbblair and Chennai - Service by way of transportation of passengers on a vessel, from Chennai to Port Blair (mainland - island) is covered in the negative list (under Category 15). Normal public ships/other vessels that sail between places located in India would be covered in the negative list entry even if some of the passengers on board are using the service for tourism (in such case the service is not predominantly for tourism purpose). X. Ltd. is engaged in the business of manufacture of goods. Find out service tax liability of X Ltd. in respect of the following - 1. Interest on loan/advances given to different persons : 11,12,000 (funds not immediately required for business purposes is given as loan or advance to different persons and interest is collected).. 2 P a g e

3 2. Rent of furnished flats given to employees for residential purposes : 6,00,000 (municipal tax paid is 40,000). 3. Rent of commercial property: 18,00,000 (municipal tax paid is 30,000). Find out service tax payable (ignore Swachh Bharat Cess) by X Ltd. Above figures are inclusive of service tax. If any service tax is there, it wil be paid by X Ltd. without collecting from recipients of service. (5 Marks) (c) Value of taxable services provided by Y (Pvt.) Ltd.- It is not given whether the different figures given in the problem are inclusive (or exclusive) of service tax. It is assumed that advance received during March 2016 is inclusive of service tax and other figures in the problem arte exclusive of service tax. On this assumption value of taxable service for the relevant period will be as follows - Service billed during December 2015 [ 5,00,000-2,00,000 (being service provided to UNO which is exempt as given in Mega Exemption Notification)] 3,00,000 Service billed during January 2016 (service rendered in Indian territorial waters is chargeable to tax) 4,00,000 Service billed during February 2016 (service provided by RBI is not 5,00,000 taxable, service provided to RBI is taxable) Advance received ( x 3,40,000) (advance received for service to be provided in a non-taxable territory is not taxable) 2,98,246 Value of taxable service 14,98,246 (5 Marks) Answer 2: fgf Net profit as per profit and loss account 8,50,250 Add: Inadmissible expenses Household expenses 20,000 Income-tax 36,100 Interest on capital 84,000 Reserve for bad debts 3,400 Consultancy fees (30% of 1,00,000), as tax deducted at source is deposited after due date of submission of return of income) 30,000 Excessive depreciation on furniture (i.e., 18,000-17,200) 800 1,74,300 10,24,550 Less: Notional profit on goods withodrawn by X (i.e., 41,250-27,850) 13,400 10,11,150 ADJUSTMENT IN RESPECT OF VALUATION OF STOCK SO AS TO BRING THEM AT COST Add: 1/9 of 2,10,000 23,333 10,34,483 Less: 1/9 of 1,04,000 11,556 Business income 10,22,927 Any other income [gift froma friend is income, see para 114] 96,000 3 P a g e

4 Gross total income 11,18,927 Less: Deductions under section 80C (PPF : 6,000 + NSC : 96,000) 1,02,000 Net income (rounded off) 10,16,930 Tax on net income* 1,30,079 Add: Surcharge (surcharge is 12% of tax if net income exceeds 1 crore) - Tax and surcharge 1,30,079 Add: Education cess 2,602 Add: Secondary and higher education cess 1,301 Tax payable (rounded off) 1,33,980 Notes: 1. Good withdrawn by the owner is not treated as sale. Profit element on this notional sale (i.e., 41,250-27,850) is, therefore, excluded while computing net income. This is because of the fact that one cannot make profit by selling goods to oneself. 2. Stock is valued by X at 10% below cost. Therefore, for computing taxable income, amount of closing and opening stock is worked out at cost (as shown under) and necessary adjustment is made accordingly : Closing stock shown in books 2,10,000 closing stock at cost price (i.e., 2,10,000 x ) 2,33,333 Amount added to book profit 23,333 Opening stock shown in books 1,04,000 Opening stock at cost price (i.e., 1,04,000 x ) 1,15,556 Amount deducted from book profit 11,556 (b) VAT payable by B - Amount VAT Sale of goods (produced from raw material X) 37,00,000 4,62,500 Sale of goods (produced from inter-state purchase and imported raw material) 22,00,000 88,000 Sale of goods (produced from raw material Z) 9,00,000 9,00,000 Total 68,00,000 5,59,500 Less: Input credit Raw material X (4% of 25,00,000) 1,00,000 Raw material Z (4% of 8,00,000) 32,000 Raw material purchased from another State (not eligible) - Custom duty (not eligible) - VAT payable 4,27,500 Answer 3: Personal computer and personal car are not capital assets. Consequently, capital gain is not chargeable to tax however, personal jewellary and personal painting are capital assets and capital assets and capital gain will be calculated as follows - Jewellery Painting Sale consideration 18,00,000 56,00,000 Less: Indexed cost of acquisition [ 80,000 x P a g e

5 480] 6,17,714 54,05,000 Balance 11,82,286 1,95,000 Capital gain 13,77,286 Less: Exemption under section 54EC (NHAI bonds : 6,00,000 + REC bonds : 1,00,000) 7,00,000 Long-term capital gain chargeable to tax 6,77,286 (b) Computation of service tax liability of X - Rent of residential building I (letting out of residential building for residential purposes is not chargeable to service tax) Rent of residential building II (letting out of residential building for residential purposes is not chargeable to service tax) Rent of vacant plot of land III 6,00,000 Rent of vacant plot of land IV (letting out of vacant plant for agricultural purposes is not chargeable to service tax) Rent of residential building V (letting out of residential building for residential purposes is not chargeable to service tax) Rent of commercial building VI (letting out of commercial property is chargeable to tax) 1,50,000 Rent of residential building VII (letting out of residential property for residential purposes is not taxable, if residential property is let out for commercial purposes, it is chargeable to tax) 8,50,000 Value of taxable service 16,00,000 Service 14% 2,24,000 Question 4: 5 P a g e

6 (b) ddf Machine price (excluding taxes and duties) 11,00,000 Adjustments - Add: Installation and erection expenses (nothing is given in the problem whether the expenditure results in emergence of an immovable property, on the assumption that the nature of property created is immovable, it is not subject to excise duty) Add: Packing charges 18,000 Add: Design and engineering charges 6,000 Add: Cost of material supplied free of charge by buyer 9,000 Add: Pre-delivery inspection charges 2,000 Less: Cash discount (-)22,000 Add: Bought out accessories (these are not required for functioning of machine, hence not included) Assessable value 11,13,000 Excise 12.5% 1,39,125 Answer 5: 6 P a g e

7 (b) 7 P a g e

8 Question 6: 8 P a g e

9 (b) Service tax provisions- Point of taxation in the case of continuous service - See para Adjustment of service tax - Z can take the credit of excess service tax paid by him. He can himself adjust the excess service tax paid on 30,000 against the service tax liability of the period in which 30,000 is refunded to the service recipient. For detailed discussion, see para ADJUSTMENT OF SERVICE TAX- Up to March 31,2011, service tax is payable on receipt basis. With effect from April 1, 2011, service tax is payable on invoice basis or receipt basis, whichever is earlier. Consequently, rule 6(e) has been amended with effect from April 1, The amended provisions are applicable if the following conditions are satisfied - a. an assessee (i.e., service provider) has issued an invoice or received any payment; b. the above payment is received against a service to be provided; and 9 P a g e

10 Question 7: c. the service is not actually provided by the assessee, wholly or parthyl, for any reason or the amount of invoice is renegotiated due to deficient provision of service or any terms contained in a contract. If the above conditions are satisfied, the assessee may take the credit of such excess service tax paid by him. However, the credit of such excess service tax is possible only in one (or both) of the following cases - a. he has refunded the payment (or part there of ) so received for the service provided to the person from whom it was received; or b. he has issued a credit note for the value of service not so provided to the person to whom such an invoice had been issued. After such refund of amount or issue of credit note, the assessee can himself adjust the excess service tax paid by him against service tax liability (without any monetary limit). The following points should be noted - 1. With effect from Aril 1, 2011, adjustment is possible even in the case of issue of credit note. Up to March 31, 2011, the provision of credit note was not there. 2. Up to March 31, 2011, adjustment was possible only against service tax liability for the subsequent period. With effect from April 1, 2011, adjustment is possible whether liability of service tax pertains to the current period or the subsequent period. 3. Adjustment is possible if service is not provided wholly or partly. With effect from April 1, 2011, adjustment is also possible if the amount of invoice is renegotiated due to deficient provision of service or any terms contained in a contract (express or implied). When excess amount of service tax is paid for other reasons - Under rule 6(4A) where an assessee had paid excess amount of service tax to the credit of Central Government for a month or of quarter, as the case may be, the assessee is allowed to adjust the excess service tax paid by him for the subsequent period. This self-adjustment facility has now been extended to all assesses subject to the following conditions - 1. Self-adjustment of excess credit is allowed on account of reasons other than interpretation of law, taxability, valuation or applicability of any exemption notification. 2. Adjustment can be made only in the succeeding month or quarter. 3. The details of self-adjustmen should be intimated to the superintendent of Central Excise within a period of 15 days from the date of adjustment. 10 P a g e

11 (b) Pointwise answer 1. The return of loss should be filed in the prescribed form* and within the time allowed under section 139(1)*.The following losses cannot be carried forward if the return of loss is not submitted in time - a. business loss (speculative or otherwise); b. capital loss; and c. loss from the activity of owning and maintaing race horses. However, the delay may be condoned if a few conditions are satisfied- Circular No. 9/2015, dated June 9, (3 Marks) 2. TDS and TCS- TCS is tax collection at source, It is regulated by section 206C. For details discussion, see paras 269 for TDS and 290 for TCS. 11 P a g e

12 (3 Marks) 3. Service tax by sub-contractor- Sub-contractor A will have to charge service tax in the invoices to be issued to Z, the main service provider. Z can take Cenvat credit on service tax paid on input services. (2 Marks) **** 12 P a g e