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 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 2013-14, 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 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 1,35,000
2,30,000 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. The
use of the car was 3/4th for business and 1/4th 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 2012 @ ` 5,000 p.m., paid
in cash on 1.11.2012.
(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. 2013-14 (in the case of Income-tax), which is
the 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 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 2012-13 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 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 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 28th 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, 2013 5,00,000
Other receipts 12,00,000
Rate of service tax is12%, Education cess is 1%, Secondary & Higher Education cess is
1%. (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
2,80,000
Add: VAT@ 4% 11,200 2,91,200
Raw materials purchased from neighbouring State (includes
51,000
CST @ 2%)
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. VAT
rate on sale of such goods is 4%. There is no opening or closing stock. (5 Marks)
Answer
(a) Computation of total income of Mr. Aditya for the A.Y. 2013-14
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 1,90,000
2. 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.

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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)
Drivers salary (th being for personal use, 4,500
disallowed)
Repair of car (th 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 1,44,250
3. Computation of income under the head Income from other sources
Particulars ` `
Cash gift from friend received on 15.9.2012 (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. Adityas 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 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. Adityas
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.

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 70 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

4. 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 Amount
(`)
Services performed before such service became taxable (Note 1) 4,44,998
[(5,00,000 100)/112.36]
Services by way of renting of residential dwelling for use as residence Nil
(Note 2)
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 21,44,998
Less: 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 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.

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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 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 of
directors represents the value of such services.
(c) Computation of Net VAT liability of Sachin
Particulars ` `
Raw materials purchased from foreign market (including duty 1,20,000
paid on imports @ 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
CST @ 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: 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 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

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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. The
particulars 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 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)

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Answer
(a) Computation of Income from house property of Mr. Krishna for A.Y. 2013-14
Particulars ` `
(A) Rented unit (50% of total area)
Step I - Computation of Annual letting 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 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

(B) 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.
(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 service
tax 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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 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 (`1,00,000 12.5%) 12,500
Capital goods procured during the month (`1,00,000 12.5%) [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 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 forms
part 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 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:

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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 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) 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)
Answer
(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 3,02,500
Dearness 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 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

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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 ` 12,000
Total ` 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 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

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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 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
1st 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 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 year
2013-14 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 assessment
year 2013-14 :

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 78 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

Nature of receipt Amount (`)

Interest on enhanced compensation received on 12-3-2013 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)
(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 to
whether any service will be rendered. No services were rendered to Mr. Dinesh Raina
and 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 the
quarter 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)
Answer
(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 22,00,000
of land

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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 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.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 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 (12.04.2012).
(ii) Rule 6(3) of the Service Tax Rules, 1994, inter alia, provides that where an assessee

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 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 31.03.2013.
(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 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. 9
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 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 the
following 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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 PAPER 4 : TAXATION 81

Selling time slots for T.V. advertisements 32

Selling time slots (to be read as space) for advertisements in
24
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 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)
Answer
(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
(a) The money has been received under an agreement or arrangement which is
either 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 Depreciation
Depreciation@15% 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]
Depreciation@7.5% on ` 10,00,000, being new machinery
put to use for less than 180 days 75,000
8,40,000

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 82 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

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

Additional Depreciation (Refer Note below)

Additional Depreciation@10% of ` 10,00,000 [being actual 1,00,000
cost of new machinery purchased on 12-10-2012]
Additional Depreciation@20% 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
depreciation@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, 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 31.03.2013
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) 58,00,000
12.36 6,38,021
Service tax payable (rounded off) = 58,00,000
112.36

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 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 2011-12
exceeds `10 lakh, he is not eligible for small service providers exemption in the
financial 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 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 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 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

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 84 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2013

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 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
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)
Answer
(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) 4,00,000
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.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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 PAPER 4 : TAXATION 85

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 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, 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 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.

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 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, 1961. (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 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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 PAPER 4 : TAXATION 87

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, 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, 1961.
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.
(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 [See Working Note below] 12.0
6.0
Less: Set-off of brought forward business loss as per section 72 3.2
2.8

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 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]
Export turnover of unit A 120
Profit of Unit A x = 13 =
Total turnover of Unit A 130 12

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.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 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.

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 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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