MOCK TEST I INTERMEDIATE (IPC) GROUP I PAPER 4: TAXATION SUGGESTED ANSWERS/HINTS Test Series: September, 2014 1. (a) Computation of taxable income and tax liability of Smt. Sudha Sharma for A.Y. 2014-15 Rs. Rs. Income from salary Basic salary (Rs.45,000 х 12) 5,40,000 Dearness Allowance (Rs.12000 х 12) 1,44,000 House Rent allowance (fully taxable) 72,000 Employer s contribution to recognized provident fund in excess of 12% is taxable as salary income 12% of salary is Rs.73,440. Employer s contribution is 15% of salary, which is Rs.91,800 Excess contribution is (Rs.91,800 Rs.73,440) 18,360 Perquisite in respect of interest free loan (Rs.1,50,000 x 8% x ½) 6,000 Net Salary 7,80,360 Income from house property (See Note below) 30,000 Long term Capital Gain: Sale consideration of GOI capital indexed bonds 1,50,000 Less: Indexed cost of acquisition (Rs.80,000 x 1,76,338 939/426) Long-term capital loss (to be carried forward) 26,338 Gross Total Income 8,10,360 Deduction under section 80C in respect of 91,800 recognized provident fund contribution Deduction under section 80D Mediclaim 15,000 1,06,800 Total Income 7,03,560 Tax Payable on Rs.7,03,560 65,712 Add : Education cess and Secondary and higher education cess @ 3% 1,971 Total tax payable 67,683 Total tax payable (rounded off) 67,680 Note: As per section 27, any property transferred to the minor child without adequate consideration would be deemed to be the property of the assessee.
Therefore, the income from house property of Rs.30,000 (computed) is to be assessed in the hands of Smt. Sudha Sharma. (b) Computation of service tax payable by Star Professionals Ltd.:- Services performed in July, 2013 i.e., before such service became taxable (Note-1) Services by way of renting of residential dwelling for use as residence (Note-2) Value of free services rendered to the friends (Note-3) Amount (Rs. ) 5,00,000 Services rendered to its associated enterprise in UK (Note-4) 5,00,000 Other receipts 7,00,000 Total 17,00,000 Less: Exemption available to small service providers (Note-5) 10,00,000 Value of taxable services 7,00,000 12.36 Service tax payable = 7,00,000 112.36 Notes:- Nil Nil 77,002 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 leviable to service tax. 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. Services rendered to associated enterprises are taxable even if an invoice has not been issued. Point of taxation is the date of making the payment [Rule 7 of the Point of Taxation Rules]. 5. Since, services provided by Star Professional Ltd. became taxable on August 01, 2013, aggregate value of taxable services rendered in preceding financial year 2012-13 is Nil. Hence, Star Professional Ltd. is eligible for small service provider s exemption.
2. (a) Computation of taxable capital gains of Mr. Suresh for the A.Y. 2014-15 Rs. Sale consideration 12,00,000 Less: Indexed cost of acquisition (Note 1) 4,69,500 7,30,500 Less: Indexed cost of improvement (Note 2) 11,35,930 Long term capital loss (4,05,430) Note 1 Indexed cost of acquisition is determined as under: Cost to the previous owner i.e. Mr. Mahesh is Rs.1,05,000 Fair Market Value on 1 st April, 1981 is Rs.1,50,000 Cost to the previous owner or FMV on 1 st April, 1981, whichever is more, is to be taken as cost of acquisition of Mr. Suresh Rs.1,50,000 Less: Advance money forfeited by Mr. Suresh (as per section 51) Rs.80,000 (Note : Advance forfeited by Mr. Mahesh, the previous owner, should, however, not be deducted) Cost of acquisition Rs. 70,000 Indexed cost of acquisition (Rs.70,000 939/140) Rs. 4,69,500 140 is the CII for F.Y. 1986-87, being the first year in which property is held by Mr. Suresh and 939 is the CII for F.Y. 2013-14, being the year in which the property is sold. Alternative view: In the case of CIT v. Manjula J. Shah 16 Taxmann 42 (Bom.), the Bombay High Court held that the indexed cost of acquisition in case of gifted asset can be computed with reference to the year in which the previous owner first held the asset. As per this view, the indexation cost of acquisition of house would be Rs. 6,57,300, taking CII of 100 for the F.Y. 1980-81 since F.M.V. as on 1 st April, 1981 is taken as cost of acquisition of Mr. Suresh. Note 2 Indexed cost of Improvement is determined as under: Expenditure incurred before 1 st April, 1981 should not be NIL considered Expenditure incurred on or after 1 st April, 1981 - During 1983-84: Indexed cost of Improvement Rs.4,04,741 [Rs.50,000 939/116] - During 1993-94: Indexed cost of Improvement Rs.7,31,189 [Rs.1,90,000 939/244]
Total indexed cost of improvement (b) Computation of Net VAT liability Rs.11,35,930 Purchase price of goods acquired from local market excluding VAT (input tax credit does not form part of cost of production) Rs. 100 50,00,000 52,00,000 104 Transportation, insurance etc. 30,000 Cost of production 50,30,000 Profit @ 15% on cost of production 7,54,500 Total Sales 57,84,500 Output VAT payable @ 12.5% 7,23,062.50 Less: Input tax credit [VAT paid on goods acquired from local market is eligible for input tax credit] 2,00,000 Net VAT payable 5,23,062.50 (c) Where an assessee has paid to the credit of Central Government any amount in excess of the amount required to be paid towards service tax liability for a month/quarter, the assessee may adjust such excess amount paid by him against his service tax liability for the succeeding month/quarter. Such adjustment is subject to the condition that the excess amount paid is on account of reasons not involving interpretation of law, taxability, valuation or applicability of any exemption notification. Since Mr. Sumit Arora has paid the excess amount on account of a clerical error, he can adjust the excess payment of Rs. 3,15,000 against his service tax liability for the succeeding quarter. 3. (a) Where an assessee is engaged in the composite business of growing and curing of coffee, the income will be segregated between agricultural income and business income, as per Rule 7B of the Income-tax Rules, 1962. As per the above Rule, income derived from sale of coffee grown and cured by the seller in India shall be computed as if it were income derived from business, and 25% of such income shall be deemed to be income liable to tax. The balance 75% will be treated as agricultural income. Rs. Rs. Rs. Sale value of cured coffee 29,00,000 Less: Expenses for growing coffee 4,20,000 Car expenses (75% of Rs. 60,000) 45,000 Depreciation on car (75% of 15% of Rs. 4,50,000) 50,625 Rs.
Total costs of agricultural operations 5,15,625 Expenditure for coffee curing 3,10,000 operations Add: Depreciation on machinery (15% of 17,50,000) (See Computation 2,62,500 below) Total cost of the curing operations 5,72,500 Total cost of composite operations 10,88,125 Total profits from composite activities 18,11,875 Amount regarded as business income (25% of above) 4,52,969 Amount treated as agricultural income (75% of above) 13,58,906 Computation of written down value of depreciable assets as on 31.3.2014 Rs. Rs. Rs. Car: Opening value as on 1.4.2013 4,50,000 Depreciation thereon @ 15% 67,500 Less: Disallowance @ 25% for personal use 16,875 Depreciation actually allowed 50,625 Closing value as on 31.3.2014 3,99,375 Machinery: Opening value as on 1.4.2013 17,50,000 Less: Depreciation @ 15% 2,62,500 Closing value as on 31.3.2014 14,87,500 Explanation 7 to section 43(6) provides that in cases of composite income, for the purpose of computing written down value of assets acquired before the previous year, the total amount of depreciation shall be computed as if the entire composite income of the assessee (and not just 25%) is chargeable under the head Profits and gains of business or profession. The depreciation so computed shall be deemed to have been actually allowed to the assessee. (b) Computation of service tax liability of Mr. X for the quarter October- December, 2013 Rs. Basic fare in case of domestic bookings 1,00,900 Service tax @ 0.6% [A] Refer Note 1 605.40 Basic fare in case of international bookings 3,16,880
Service tax @ 1.2% [B] Refer Note 1 3,802.56 Total service tax payable [A] + [B] (rounded off) 4,408 Add: Education cess @ 2% 88.16 Add: Secondary and higher education cess 44.08 Total service tax payable inclusive of education cesses 4,540 (rounded off) Notes: 1. Rule 6(7) of Service Tax Rules, 1994 provides an option to an air travel agent to pay service tax at special rates of 0.6% and 1.2% of basic fare in case of domestic and international bookings for air travel respectively. 2. Since the given basic fare is in terms of rule 6(7) of service Tax rules, 1994, service tax has been computed as a percentage of such basic fare and other charges, fee and taxes have been ignored. The option once exercised, applies uniformly in respect of all the bookings for air travel made by the air travel agent and cannot be changed during a financial year under any circumstances. Therefore, Mr. X cannot pay service tax @ 12% for the quarter January March, 2014 and will have to discharge his service tax liability for the said quarter by paying service tax at the special rates mentioned above. However, he can change the option and pay service tax @ 12% from financial year 2014-15. 4. (a) Any payment by a company, other than a company in which the public are substantially interested, of any sum by way of advance or loan to an equity shareholder, being a person who is the beneficial owner of shares holding not less than 10% of the voting power, is deemed as dividend under section 2(22)(e), to the extent the company possesses accumulated profits. (i) The provisions of section 2(22)(e), however, will not apply where the loan is given by a company in which public are substantially interested. In such a case, the loan would not be taxable as deemed dividend in the hands of Gayatri. (ii) However, if the loan is taken from a private company (i.e. a company in which the public are not substantially interested), which is a manufacturing company and not a company where lending of money is a substantial part of the business of the company, then, the provisions of section 2(22)(e) would be attracted, since Gayatri holds more than 10% of the equity shares in the company. The amount chargeable as deemed dividend cannot, however, exceed the accumulated profits held by the company on the date of giving the loan. Therefore, the amount taxable as deemed dividend in the hands of Gayatri
would be limited to the accumulated profit i.e., Rs.4,50,000 and not the amount of loan which is Rs.6,00,000. (b) Computation of depreciation in the case of transfer of business: Depreciation is to be calculated as if there is no succession (Rs.) WDV as on 1 st April 5,00,000 Add : Additions made before succession 1,50,000 6,50,000 Less : Sale consideration of the asset sold Nil 6,50,000 Depreciation @ 15% 97,500 Allocation of depreciation between sole proprietary concern and the successor company: The depreciation of Rs. 97,500 is to be allocated in the ratio of number of days the assets were used by the sole proprietary concern and the company. Ex sole proprietary concern 1 st April to 20 th August = 142 days Rs. 97,500 x 142 / 365 = Rs. 37,932 Successor company Rs. 97,500 - Rs. 37,932 = Rs. 59,568 (i.e. Rs. 97,500 x 223 /365) The depreciation of Rs. 13,500 [50% of 15% on Rs. 1,80,000] in respect of asset purchased by the successor company on 1 st January is fully allowable in the hands of the successor company. Note: Since it has not been specified that the company is a manufacturing company or a company engaged in the generation or generation and distribution of power, additional depreciation has not been provided for. (c) Computation of export duty Amount (Rs.) Assessable value of the export goods 60,00,000 Export duty @ 8% [Refer Note below] 4,80,000 Note: In case of goods entered for export, the rate of duty shall be the rate in force on the date on which the proper officer makes an order permitting clearance and loading of the goods for exportation. (d) Computation of CENVAT credit available with Shri Brijmohan Services Ltd.: Amount [Rs.]
Accounting and auditing services [Note 1] 12,00,000 Legal services [Note 1] 4,00,000 Security services [Note 1] 40,000 Hiring of motor vehicles [Note 2] Nil Total CENVAT credit available 16,40,000 Notes: 1. As per the definition of the input services under, there is a specific inclusion with regard to the following services:- (a) Accounting and auditing services (b) Legal services (c) Security services Hence, the CENVAT credit of the service tax paid on the aforesaid services is available. 2. The definition of input services specifically excludes the services of hiring of the motor vehicles, which are not eligible as capital goods. 5. (a) Computation of Total Income of Mr. Dhruv and Mrs. Diya for the A.Y. 2014-15 Mr. Dhruv (Rs.) Mrs. Diya (Rs.) Salaries 4,60,000 Profits and gains of business or 7,50,000 profession Income from other sources: Income by way of interest from 30,000 company deposit earned by minor married daughter A [See Note (d)] Less : Exemption under section 10(32) 1,500 28,500 Total Income 7,78,500 4,60,000 Notes: (a) The income of a minor child suffering from any disability of the nature specified in section 80U shall not be included in the hands of the parents. Hence, Rs.1,08,000, being the income of minor son B who suffers from disability specified under section 80U, shall not be included in the hands of either of his parents. (b) The income derived by the minor from manual work or from any activity involving exercise of his skill, talent or specialised knowledge or experience will not be included in the income of his parent. Hence, in the given case,
Rs.86,000 being the income of the minor daughter C shall not be clubbed in the hands of the parents. (c) Under section 56(2)(vii), cash gifts received from any person/persons exceeding Rs. 50,000 during the year in aggregate is taxable. Since the cash gift in this case does not exceed Rs. 50,000, the same is not taxable. (d) The clubbing provisions are attracted even in respect of income of minor married daughter. The income of the minor will be included in the income of that parent whose total income is greater. Hence, income of minor married daughter A from company deposit shall be clubbed in the hands of the Mr. Dhruv and exemption under section 10(32) of Rs. 1,500 per child shall be allowed in respect of such income. (b) Section 10(37) exempts the capital gains arising to an individual or a Hindu Undivided Family from transfer of agricultural land by way of compulsory acquisition, or a transfer, the consideration for which is determined or approved by the RBI or the Central Government. Such exemption is available where the compensation or the enhanced compensation or consideration, as the case may be, is received on or after 1 st April, 2004 and the land has been used for agricultural purposes during the preceding two years by such individual or a parent of his or by such Hindu undivided family. Since all the above conditions are fulfilled in this case, Cheeku is entitled to exemption under section 10(37) of the entire capital gains arising on sale of agricultural land. (c) As per rule 5 of the Point of Taxation Rules, where a service is taxed for the first time, no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued:- (a) within 14 days of the date when the service is taxed for the first time or (b) before such service became taxable. In the given case, since the payment has been received before service became taxable and Rahman Services Ltd. has issued the invoice on 13.11.2013 i.e. within 14 days of the service becoming taxable, no service tax is payable on the said transaction. However, if the invoice is raised on 16.11.2013, i.e. after 14 days of the service becoming taxable, service tax will be payable on the said transaction. (d) Since the manufacturer charged only Rs. 22,060 and he is not able to recover any extra amount from customer, this amount is required to be treated as price cum duty. Hence, differential duty payable by him will be computed as under:
Price-cum-duty 22,060 Excise duty @ 12.36% [Rs. 22,060 x 12.36/112.36) 2,426.68 Excise duty (rounded off) 2,427 Differential excise duty to be paid [Rs. 2,427 Rs. 2,060 (duty already paid)] 6. (a) Computation of total income of Mr. Ram Bharose for the A.Y.2014-15 RsRs. RsRsRs. Profits and gains of business or profession Income from wholesale business Net profit as per books 7,20,000 Add: - Depreciation as per books 45,000 - Disallowance of municipal taxes paid for the second half-year under section 43B, since the same was paid after the due date of filing of return (Rs.8,500/2) 4,250 - Disallowance under section 40A(3) in respect of salary paid in cash since the same 32,000 exceeds Rs.20,000-20% of car expenses for personal use 11,000 92,250 8,12,250 Less: Depreciation allowable (Note 1) 1,71,600 6,40,650 Income from firm Interest on capital from partnership firm (Note 2) 1,20,000 7,60,650 Income from other sources Interest on bank fixed deposit (Gross) 25,000 Interest on income-tax refund 2,450 27,450 Gross total income 7,88,100 Less: Deduction under Chapter VIA (Note 3) 1,55,000 Total Income 6,33,100 Notes: (1) Depreciation allowable under the Income-tax Rules, 1962 Rs. 367 Opening Rate Depreciation Closing
WDV WDV Block 1 Computers 2,10,000 60% 1,26,000 84,000 Block 2 Motor Car 3,80,000 15% 57,000 Less: 20% disallowance for personal use 11,400 45,600 3,34,400 1,71,600 (2) Only to the extent the interest is allowed as deduction in the hands of the firm, the same is includible as business income in the hands of the partner. Maximum interest allowable as deduction in the hands of the firm is 12% p.a. It is assumed that the partnership deed provides for the same and hence is allowable to this extent in the hands of the firm. Therefore, interest @12% p.a. amounting to Rs.1,20,000 would be treated as the business income of Mr. Ram Bharose. (3) Deduction under Chapter VI-A Rs. Rs. Under section 80C LIP for major son 75,000 PPF paid in wife s name 85,000 1,60,000 Deduction under 80CCE, restricted to 1,00,000 Add: Deduction under section 80E 55,000 Total deduction 1,55,000 (b) (i) For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency at that time, multiplied by the total units of currency. Hence, in the given case, value of taxable service would be as follows:- (RBI reference rate for $ Selling rate for $) Total units of US $ =Rs. (63-62) 8,000 =Rs. 8,000 (ii) If the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money. Hence, in the given case, value of taxable service would be as follows:- 1% of Rs. (62 8,000) =Rs. 4,960
In case neither of the currencies exchanged is Indian Rupee: The value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI. Hence, in the given case, value of taxable service would be 1% of the lower of the following:- (a) US dollar converted into Indian rupees = $ 8,000 Rs. 64 = Rs. 5,12,000 (b) UK pound converted into Indian rupees = 4,000 Rs. 102 = Rs. 4,08,000 Value of taxable service = 1% of Rs. 4,08,000 = Rs. 4,080 7. (a) (i) Since investment or deposit in a public sector company is one of the permitted modes of investment mentioned in section 11(5), the exemption granted to a charitable trust under section 11 will not be forfeited if it holds shares in a public sector company. (ii) As per section 11(4), property held under trust includes a business undertaking so held. If the object of the trust is relief of the poor, education, medical relief etc. (other than advancement of any other object of general public utility) and the trust has a business undertaking, then, the income from such business would also be exempt from tax provided the following conditions, as mentioned in section 11(4A) are satisfied : (a) such business is incidental to the attainment of the objects of the trust; and (b) separate books of accounts are maintained by such trust in respect of such business. Even if the main object of the charitable trust is advancement of any other object of general public utility, tax exemption will not be denied in this case since the aggregate receipts from business have not exceeded Rs.25 lakhs in the year. (b) A non-resident is chargeable to tax in respect of income received outside India only if such income accrues or arises or is deemed to accrue or arise to him in India. The income deemed to accrue or arise in India under section 9 comprises, inter alia, income by way of fees for technical services, which includes any consideration for rendering of any managerial, technical or consultancy services. Therefore, payment to a management consultant relating to project financing is covered within the scope of fees for technical services. The Explanation below section 9(2) clarifies that income by way of, inter alia, fees for technical services, from services utilized in India would be deemed to accrue or arise in India in case of a non-resident and be included in his total income, whether
or not such services were rendered in India or whether or not the non-resident has a residence or place of business or business connection in India. In the instant case, since the services were utilized in India, the payment received by Mr. Shekhar, a non-resident, in Macau is chargeable to tax in his hands in India, as it is deemed to accrue or arise in India. (c) (i) Since in the given case, sale is effected by transfer of documents of title to the goods after the goods have crossed the customs frontiers of India, it is not an inter-state sale, but a sale in the course of export. (ii) Since in this case, the sale has occasioned the import of the goods into the territory of India, it is not an inter-state sale, but a sale in the course of import. (d) In terms of Rule 4A of Service Tax Rules, 1994, Y has to issue an invoice or a bill, or a challan signed by him or a person authorized by him in respect of taxable service provided by him. The invoice, bill or challan should contain the following details and be serially numbered: (i) Name, address and the registration number of Y; (ii) Name and address of Z (person receiving taxable service); (iii) Description of taxable service provided or agreed to be provided; (iv) Value of taxable service provided or agreed to be provided and (v) Service tax payable thereon. Such an invoice has to be issued within 30 days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier. Since X will receive the payment for the services only after three months, he should issue the invoice latest by June 15, 2013 i.e., within 30 days from May 15, 2013 (date of completion of such taxable service).