Question 1

Ms. Purvi is a Chartered Accountant in practice. She maintains her accounts on cash basis. Her Income and Expenditure account for the year ended March 31, 2012 reads as follows:

Expenditure:
Salary to staff: ₹5,50,000
Stipend to articled assistants: ₹37,000
Incentive to articled assistants: ₹3,000
Office rent: ₹24,000
Printing and stationery: ₹22,000
Meeting, seminar and conference: ₹31,600
Purchase of car: ₹80,000
Repair, maintenance and petrol of car: ₹4,000
Travelling expenses: ₹35,000
Municipal tax paid in respect of house property: ₹3,000
Net Profit: ₹9,28,224
Total: ₹17,17,824

Income:
Fees earned — Audit: ₹7,88,000; Taxation services: ₹5,40,300; Consultancy: ₹2,70,000; Total: ₹15,98,300
Dividend on shares of Indian companies (Gross): ₹10,524
Income from Unit Trust of India: ₹7,600
…

Accepted Answer

**Computation of Total Income of Ms. Purvi for Assessment Year 2012-13**

**Income from Profession:**

Ms. Purvi maintains accounts on **cash basis**. Professional receipts include fees (Audit ₹7,88,000 + Taxation ₹5,40,300 + Consultancy ₹2,70,000 = ₹15,98,300), **honorarium for valuation of answer papers** ₹15,800 (professional income, not other sources), and **value of benefits received from clients** ₹10,500 (taxable u/s 28(iv) of the Income Tax Act, 1961). Total receipts: **₹16,24,600**.

Allowable deductions: Salary ₹5,20,000 (₹30,000 paid in cash to computer specialist **disallowed u/s 40A(3)** as it exceeds ₹20,000 limit); Stipend to articled assistants ₹37,000; **Incentive to articled assistants: NIL** — amount paid for passing IPCC is a personal reward, not wholly and exclusively for the purpose of profession and hence not deductible u/s 37(1); Office rent ₹24,000; Printing ₹22,000; Seminar/conference ₹31,600; **Depreciation on car** ₹12,000 (15% × ₹80,000; car purchase is capital expenditure — not deductible directly); **Repairs of car** ₹3,000 (out of total ₹4,000, ₹1,000 is **prepaid** attributable to period 1-4-2012 to 30-9-2012, hence disallowed); Travelling expenses ₹35,000 (foreign tour ₹32,000 within RBI norms — fully allowable u/s 37(1)); **Municipal taxes: NIL** — not a professional expense, deductible under house property. Total expenses: **₹6,84,600**. **Income from Profession: ₹9,40,000.**

**Income from House Property:**

The residential flat is let out…

Question 2

Infotech software systems is an information technology software company. The receipts during financial year 2011-12 are as under:
(i) Receipts for the analysis of information technology software: ₹1,50,000
(ii) Receipts for providing advice, consultancy and assistance on matter related to specifications to secure a database: ₹4,10,000
(iii) Receipts for providing the right to use the canned software on which the amount of excise duty has been paid and the benefit under Notification (No. 31/2010 Cus Dated 27-02-2010) has not been availed: ₹5,10,000
(iv) Receipts for the upgradation of the information technology software: ₹2,65,000
(v) Infotech software systems in the financial year 2010-11 has provided the taxable services valuing ₹15,00,000.
Determine the value of taxable service and the a…

Accepted Answer

**Determination of Value of Taxable Service and Service Tax payable by Infotech Software Systems for FY 2011-12**

**Applicability of Small Service Provider (SSP) Exemption:**
Under **Notification No. 6/2005-ST**, a service provider is exempt from service tax up to ₹10 lakhs in the current year only if the aggregate value of taxable services in the **preceding year did not exceed ₹10 lakhs**. Since Infotech's taxable services in FY 2010-11 were ₹15,00,000 (exceeding ₹10 lakhs), **no SSP exemption is available** for FY 2011-12. Service tax is payable from the first rupee.

**Treatment of each receipt:**

**(i) Analysis of IT software – ₹1,50,000:** This falls squarely within the definition of **information technology software service** under Section 65(105)(zzzze) of the Finance Act 1994. **Fully taxable.**

**(ii) Advice, consultancy and assistance on specifications to secure a database – ₹4,10,000:** Providing advice, consultancy or assistance on matters relating to IT software (including database security specifications) is a taxable IT software service. **Fully taxable.**

**(iii) Right to use canned software on which excise duty has been paid and benefit of Notification No. 31/2010-Cus dated 27-02-2010 has NOT been availed – ₹5,10,000:** Where **central excise duty has already been paid** on packaged/canned software and the benefit of the said Customs Notification has **not** been availed, service tax is **not leviable** on such supply to prevent double taxation of the sa…

Question 3

R. Ltd of Mumbai made a total purchases of input and capital goods of ₹60,00,000 during the month of February, 2012. The following further information is available:
(i) Goods worth ₹15,00,000 were purchased from Assam on which C.S.T. 2% was paid.
(ii) The purchases made in February, 2012 include goods purchased from unregistered dealers amounting to ₹18,50,000.
(iii) It purchased capital goods (not eligible for input credit) worth ₹6,50,000 and those eligible for input credit for ₹9,00,000.
(iv) Sales made in Mumbai during the month of February, 2012, is ₹10,00,000 on which VAT at 12.5% is payable.
Assuming that all purchases given are exclusive of tax and VAT 4% is paid on them, calculate:
(a) the amount of purchases eligible for input credit.
(b) the amount of input credit available for …

Accepted Answer

**Solution:**

**(a) Purchases Eligible for Input Credit**

Under the VAT framework applicable in February 2012, input credit is **not available** on: (i) inter-state purchases on which CST is paid, (ii) purchases from unregistered dealers, and (iii) capital goods specifically excluded from credit eligibility.

Deductions from total purchases of ₹60,00,000:
- Inter-state purchases from Assam (CST paid) = ₹15,00,000 — **not eligible** (CST-paid goods do not qualify for VAT input credit)
- Purchases from unregistered dealers = ₹18,50,000 — **not eligible**
- Capital goods not eligible for input credit = ₹6,50,000 — **not eligible**

**Eligible purchases = ₹60,00,000 − ₹15,00,000 − ₹18,50,000 − ₹6,50,000 = ₹20,00,000**

This ₹20,00,000 comprises: regular eligible goods = ₹11,00,000 and eligible capital goods = ₹9,00,000.

**(b) Input Credit Available for February 2012**

VAT @ 4% on eligible regular goods (₹11,00,000) = ₹44,000 — fully available in the current month.

VAT @ 4% on eligible capital goods (₹9,00,000) = ₹36,000 — available in **36 equal monthly instalments** of ₹1,000 per month.

Input credit for February 2012 = ₹44,000 + ₹1,000 = **₹45,000**

**(c) VAT Payable for February 2012**

Output VAT on Mumbai sales of ₹10,00,000 @ 12.5% = ₹1,25,000

Less: Input credit available = ₹45,000

**VAT payable = ₹1,25,000 − ₹45,000 = ₹80,000**

Question 4

Answer any two sub-parts out of the following three sub-parts.

Accepted Answer

**Note:** Any **two** sub-parts are to be answered. All three are solved below for reference.

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**Sub-part (i): Return Filing Obligation of Paras — F.Y. 2011-12 (A.Y. 2012-13)**

Paras is a **resident** of India. The tax treatment of his income is as follows:

**Interest on NRE Account (₹1,88,000):** Under **Section 10(4)(ii) of the Income Tax Act, 1961**, interest credited to a Non-Resident (External) account is exempt only when the account holder is a **person resident outside India** as defined under FEMA. Since Paras is a **resident of India**, this exemption is NOT available. The entire ₹1,88,000 is therefore **taxable** as Income from Other Sources.

**Interest on Fixed Deposit with SBI (₹30,000):** Fully taxable under Income from Other Sources.

**Interest on Savings Bank Account (₹3,000):** Fully taxable under Income from Other Sources.

Total income = ₹1,88,000 + ₹30,000 + ₹3,000 = **₹2,21,000**.

The basic exemption limit for A.Y. 2012-13 for an individual (below 60 years) is **₹1,80,000**. Since ₹2,21,000 exceeds ₹1,80,000, Paras is **required to file his return of income** under **Section 139(1) of the Income Tax Act, 1961**.

**If Paras also owns one shop in Kerala (150 sq. ft.):** Ownership of a shop does not, by itself, alter the filing obligation. If the shop is used for his own business, its annual value is not separately taxable under House Property. If the shop is let out or lying vacant and deemed let out, the annual rent/fair rent would be added to hi…

Question 5

A Partnership Firm gives the following particulars relating to the services provided to various clients by them for the half-year ended on 30-09-2011:
(i) Total Bills raised for ₹8,75,000 out of which bill for ₹75,000 was raised on an approved International Organization and payments of bills for ₹1,00,000 were not received till 30-09-11.
(ii) Amount of ₹50,000 was received as an advance from XYZ Ltd. on 25-09-2011 to whom the services were to be provided in October, 2011.
You are required to find out the:
(a) Taxable value of services.
(b) Amount of service tax and education cess and secondary and higher education cess payable.

Accepted Answer

**Relevant Law:** Service Tax under the Finance Act, 1994. For the half-year ended 30-09-2011, service tax was chargeable at **10%** (effective from 24.02.2009 vide Budget 2009, increased back to 12% only from 01.04.2012). Education Cess is levied at **2%** and Secondary & Higher Education Cess (SHEC) at **1%** on the service tax amount.

**Point of Taxation:** For professionals and partnership firms providing specified professional services, tax liability arose on **receipt of payment** under the applicable provisions in force for this period. Accordingly, bills raised but not yet received are excluded, while advance received for future services is included (as money is already received in this half-year).

**Treatment of specific items:**
- Bill of ₹75,000 raised on an **approved International Organization** — exempt from service tax (services to approved international organisations were exempt under relevant notification).
- Bills of ₹1,00,000 **not received** till 30-09-2011 — excluded from taxable value (receipt basis).
- Advance of ₹50,000 **received** on 25-09-2011 from XYZ Ltd. — included in taxable value since money is received during the half-year, even though services will be provided in October 2011.

**(a) Taxable Value of Services = ₹7,50,000**

**(b) Service Tax and Cesses payable:**
Service Tax = ₹7,50,000 × 10% = **₹75,000**
Education Cess = ₹75,000 × 2% = **₹1,500**
Secondary & Higher Education Cess = ₹75,000 × 1% = **₹750**
**Total amount payable = ₹77,250*…

Question 6

Explain the consumption variant of VAT. Mention the reasons for the preference of this variant of VAT.

Accepted Answer

The **Consumption Variant of VAT** is a system where VAT is levied at each stage of production and distribution, but input tax credits are allowed in full. Under this variant, the entire tax burden ultimately rests with the final consumer, while businesses in intermediate stages pass the tax forward and claim full credit for VAT paid on purchases.

**Mechanism and Key Features**: VAT is applied at each stage of the supply chain (production, wholesale, retail). At each stage, a business calculates VAT as (Tax on Output) minus (Tax on Input). Input tax credit is available for all VAT paid on purchases of goods and services used in taxable supplies. Capital goods also receive full input credit, distinguishing this from other variants. The business acts as a tax collector, bearing no net tax burden. Exports are typically zero-rated (0%), meaning no VAT is charged but input credit is still allowed. This ensures the final consumer bears all tax incurred through the value chain.

**Reasons for Preference of Consumption Variant**:

**1. International Acceptability and WTO Compliance**: The consumption variant is the variant adopted by over 150 countries and aligns with GATT and WTO principles. It is the global standard for indirect taxation, recognized as the most efficient and non-discriminatory approach.

**2. Neutrality to International Trade**: By zero-rating exports while allowing full input credit, this variant ensures exports face no tax burden, enhancing their global competit…

Question 7

Anshu transfers land and building on 02-01-2012 and furnishes the following information:
(i) Net consideration received: ₹14,00,000
(ii) Value adopted by Stamp Valuation Authority: ₹16,00,000
(iii) Value ascertained by Valuation Officer on reference by the Assessing Officer: ₹17,00,000
(iv) This land was acquired by Anshu on 1-04-1981. Fair Market value of the land as on 01-04-1981 was ₹1,10,000.
(v) A Residential building was constructed on land by Anshu at cost of ₹3,20,000 (construction completed on 01-12-2002 during financial year 2003-04).
Short term capital loss incurred on sale of shares during Financial Year 2007-08 brought forward: ₹1,50,000.
Anshu seeks your advice on the amount to be invested in NHAI bonds so as to be exempt from capital gain tax under Income Tax Act.
Cost infla…

Accepted Answer

**Computation of Long-Term Capital Gain and Investment Required in NHAI Bonds under Section 54EC of the Income Tax Act, 1961**

**Step 1 — Full Value of Consideration under Section 50C**

The land and building were transferred on 02-01-2012. Since the actual sale consideration (₹14,00,000) is less than the value adopted by the Stamp Valuation Authority (SVA) (₹16,00,000), Section 50C deems the SVA value as the full value of consideration. When the Assessing Officer referred the matter to a **Valuation Officer (VO)**, the VO ascertained ₹17,00,000. Since the VO value (₹17,00,000) exceeds the SVA value (₹16,00,000), the SVA value of **₹16,00,000** is adopted as the full value of consideration (VO value cannot exceed SVA value for this purpose).

**Step 2 — Nature of Capital Assets**

Both assets are **long-term capital assets** since they are held for more than 36 months before transfer:
- Land: acquired 01-04-1981, transferred 02-01-2012 (≈30 years)
- Building: construction completed 01-12-2002, transferred 02-01-2012 (≈9 years)

**Step 3 — Indexed Cost of Acquisition**

For the **land**: The cost of acquisition is taken as FMV on 01-04-1981 = ₹1,10,000 (per Section 55(2)(b), since the asset was acquired on/before 01-04-1981 and only FMV is available). CII for 1981-82 = 100; CII for 2011-12 = 785.

Indexed Cost of Land = ₹1,10,000 × (785 ÷ 100) = **₹8,63,500**

For the **building**: Construction completed in FY 2002-03 (01-12-2002); CII for 2002-03 = 447; CII for 2011-12 = 785…

Question 8

Test the veracity of the following assertions with reference to the statutory provisions relating to value added tax. Do not assign any reason for them.
(a) Input credit under VAT is available in respect of Central Sales Tax paid on purchases.
(b) VAT is leviable at the first stage of sale.
(c) Input credit is available in respect of customs duty paid on goods imported from a country outside India.
(d) Input credit is available only if the purchaser has obtained proper tax invoice.
(e) No registration is required under any VAT regime.
(f) A trader can take credit of the inputs purchased by him only if he has obtained proper tax invoice from the valuer.
(g) VAT is inflationary in nature.
(h) White paper on State level VAT provides a framework for drafting various State VAT legislations.

Accepted Answer

**Veracity of VAT Statements:**

(a) **FALSE** — Input credit under VAT is available only for VAT paid on purchases, not for Central Sales Tax (CST), which is a separate tax regime.

(b) **FALSE** — VAT is leviable at every stage of sale, not merely the first stage. It is a multi-stage tax where input credit is available at each stage for taxes paid in preceding stages.

(c) **FALSE** — Input credit is not available for customs duty paid on imported goods. Customs duty is an import-related levy and falls outside the VAT input credit mechanism. Input credit under VAT applies only to VAT paid on purchases within the territory.

(d) **FALSE** — Same as (c). Customs duty does not qualify for input credit under VAT as it is not a VAT on the goods within the supply chain covered by VAT legislation.

(e) **FALSE** — Registration is mandatory under VAT once the turnover threshold is exceeded. Most State VAT legislations require compulsory registration for dealers whose annual turnover exceeds the prescribed limit (typically ₹10 lakhs or ₹20 lakhs depending on the state).

(f) **FALSE** — Input credit is available upon obtaining a proper tax invoice from the **vendor/supplier**, not from a "valuer." The term "valuer" is incorrect; the invoice must be from the person from whom the goods are purchased.

(g) **FALSE** — VAT is not inflationary in nature. It is designed as a neutral tax because the tax at each stage is offset by the input credit mechanism, ensuring the tax burden rests ul…

Question 9

Mr. Y carries on his own business. An analysis of his trading and profit & loss for the year ended 31-3-2012 revealed the following information:
(1) The net profit was ₹11,20,000.
(2) The following incomes were credited in the profit and loss account: (a) Dividend from UTI ₹22,000. (b) Interest on debentures ₹17,500. (c) Winnings from races ₹15,000.
(3) It was found that some stocks were omitted to be included in both the opening and closing stocks, the value of which were: Opening stock ₹8,000. Closing stock ₹12,000.
(4) ₹1,00,000 was debited in the profit and loss account being contribution to a University approved and notified under section 35(1)(ii).
(5) Salary includes ₹20,000 paid to his brother which is unreasonable to the extent of ₹2,500.
(6) Advertisement expenses include 15 gift…

Accepted Answer

**Computation of Total Income of Mr. Y for Assessment Year 2012-13** (Previous Year ended 31-03-2012)

**I. Profits and Gains from Business or Profession**

Net Profit as per Profit & Loss Account: ₹11,20,000

**Add: Items to be added back**

**Stock omission correction (net):** Since both opening and closing stocks were understated, the understated opening stock (₹8,000) overstated profit (less COGS), while understated closing stock (₹12,000) understated profit (more COGS). Net upward correction = ₹12,000 − ₹8,000 = **₹4,000**.

**Contribution to University u/s 35(1)(ii) of the Income Tax Act, 1961:** The ₹1,00,000 debited is added back; weighted deduction of 125% (i.e., ₹1,25,000) is separately allowed below. Addition = **₹1,00,000**.

**Unreasonable salary to brother u/s 40A(2):** Only the unreasonable portion is disallowed. Addition = **₹2,500**.

**Personal use of car:** Total car expenses ₹78,000; ¼ attributable to personal use = **₹19,500** (disallowed).

**Cash payment to goods transport operator u/s 40A(3):** Payment of ₹30,000 in cash to A & Co. exceeds the ₹20,000 threshold. The earlier exception for goods transport operators under Rule 6DD was removed w.e.f. AY 2009-10 by Finance Act 2008. Hence fully disallowed = **₹30,000**.

**Excess book depreciation over IT depreciation:** ₹55,000 − ₹50,000 = **₹5,000**.

**Less: Items to be deducted**

**Dividend from UTI:** Exempt under Section 10(34); credited in P&L but not taxable under business income = **₹22,000**.

**…

Question 10

Punjabi Banquets is engaged in providing 'mandap keeper services'. For the month of January, 2012, it provided the following information:
(1) Banquet hall let out for marriage function: The gross amount charged for banquet hall including catering charges (catering charges have been separately indicated in the invoice): ₹6,00,000
(2) Amount received for rooms let out for stay of guests attending the marriage: ₹40,000
(3) Amount collected for letting out the hall for All India Dance Competition. No food was supplied along with it: ₹5,00,000
(4) Mandap for shooting of marriage sequence of a Daily Soap Opera: ₹2,40,000
Compute the amount of service tax, education cess and secondary and higher education cess payable by Punjabi Banquets for the month of January, 2012.
Additional Information:
(1)…

Accepted Answer

**Computation of Service Tax Payable by Punjabi Banquets for January 2012**

The applicable rate of service tax is **10%**, Education Cess (EC) is **2%** on service tax, and Secondary & Higher Education Cess (SHEC) is **1%** on service tax, giving an effective rate of **10.3%**.

**Item 1 — Banquet Hall for Marriage (with Catering, Separately Indicated): ₹6,00,000**
This is a **mandap keeper service** under Section 65(105)(m) of the Finance Act, 1994. When a mandap keeper provides catering services in conjunction with the mandap, the gross amount includes food charges. As catering charges are separately indicated in the invoice, an **abatement of 30%** is available under Notification No. 1/2006-ST (as applicable in January 2012) on the ground that food/goods are not a 'service'. Taxable value = **70% × ₹6,00,000 = ₹4,20,000**.

**Item 2 — Rooms Let Out for Guest Accommodation: ₹40,000**
Letting out of rooms for the stay of guests does not fall within mandap keeper services (which cover temporary occupation of a mandap). It constitutes **renting of immovable property** for commercial/event-related purposes, which is a taxable service under Section 65(105)(zzzz) of the Finance Act, 1994. The full value of ₹40,000 is the **taxable value**.

**Item 3 — Hall for All India Dance Competition (No Food): ₹5,00,000**
This is squarely within **mandap keeper service** (entertainment/sportsmanship function). Since no catering is provided, no abatement is available. **Taxable value = ₹5,00…

Question 11

Determine the liability of VAT of X for the month of December 2011 using invoice method of computation from the following data:
Purchase price of goods acquired from local market (including VAT): ₹52 lakhs
VAT rate on input: 4%
Transportation, insurance, warehousing and handling cost incurred by X: ₹20,000
Goods sold at a profit margin: 14%
VAT rate on sales: 12.50%

Accepted Answer

**Computation of VAT Liability of X for December 2011 — Invoice Method**

Under the **Invoice Method**, VAT liability is computed as: **Output Tax (VAT on Sales) − Input Tax Credit (VAT paid on purchases)**.

**Step 1 — Input Tax Credit (ITC)**
The purchase price of ₹52 lakhs is inclusive of VAT @ 4%. Hence, the VAT embedded in the purchase price is:
VAT paid on inputs = 52,00,000 × 4/104 = **₹2,00,000**
Purchase price excluding VAT = 52,00,000 − 2,00,000 = **₹50,00,000**

**Step 2 — Total Cost to X**
Purchase price (ex-VAT): ₹50,00,000
Add: Transportation, insurance, warehousing & handling: ₹20,000
Total cost = **₹50,20,000**

**Step 3 — Selling Price (excluding VAT)**
X sells goods at a **profit margin of 14% on cost**:
Selling price (ex-VAT) = 50,20,000 × 1.14 = **₹57,22,800**

**Step 4 — Output VAT**
VAT on sales @ 12.50% = 57,22,800 × 12.50% = **₹7,15,350**

**Step 5 — Net VAT Liability**
Output VAT: ₹7,15,350
Less: Input Tax Credit: ₹2,00,000
**Net VAT Liability = ₹5,15,350**

Question 12

During the previous year 2011-12 the following transactions occurred in respect of Mr. A:
(a) Mr. A had a fixed deposit of ₹5,00,000 in Bank of India. He instructed the bank to credit the interest on the deposit @ 9% from 1-4-2011 to 31-3-2012 to the savings bank account of Mr. B, son of his brother, to help him in his education.
(b) Mr. A holds 75% share in a partnership firm. Mrs. A received a commission of ₹25,000 from the firm for promoting the sales of the firm. Mrs. A possesses no technical or professional qualification.
(c) Mr. A gifted a flat to Mrs. A on April 1, 2011. During the previous year the flat generated a net income of ₹52,000 to Mrs. A.
(d) Mr. A gifted ₹2,00,000 to his minor son who invested the same in a business and he got a share income of ₹20,000 from the investment…

Accepted Answer

**Assessment Year: 2012-13 | Previous Year: 2011-12**

**Transaction (a) — Interest on FD credited to Mr. B (nephew)**

Mr. A owns a Fixed Deposit of ₹5,00,000 @ 9% p.a. Interest = ₹45,000. Mr. A instructs the bank to credit this interest to Mr. B (son of his brother). Here, **the asset (FD) is not transferred; only the income is diverted**. This is squarely covered by **Section 60 of the Income Tax Act, 1961** — transfer of income without transfer of the underlying asset. The income shall be deemed to be income of Mr. A (the transferor) and NOT of Mr. B. Therefore, ₹45,000 is **taxable in Mr. A's hands** under the head 'Income from Other Sources.'

**Transaction (b) — Commission of ₹25,000 received by Mrs. A from the firm**

Mr. A holds **75% share** in the partnership firm, which constitutes **substantial interest** (threshold: 20% or more). Mrs. A received ₹25,000 as commission for promoting sales. Mrs. A **possesses no technical or professional qualification**. Under **Section 64(1)(ii) of the Income Tax Act, 1961**, remuneration received by the spouse from a concern in which the individual has substantial interest, where the spouse lacks professional/technical qualification, is clubbed with the income of the individual. Hence, ₹25,000 is **clubbed with Mr. A's income**. It will NOT be included in Mrs. A's total income.

**Transaction (c) — Flat gifted to Mrs. A, net income ₹52,000**

Mr. A gifted a flat to Mrs. A without adequate consideration. Under **Section 64(1)(iv) …

Question 13

What are the documents to be attached by a service provider along with an application for registration under service tax?

Accepted Answer

**Note:** Service tax as a separate tax has been subsumed under the Goods and Services Tax (GST) with effect from 1 July 2017. GST registration is now the applicable requirement for providing taxable services.

**Documents Required for GST Registration:**

**1. Proof of Authorized Signatory:** Board Resolution (for companies), Partnership Deed with authorization (for partnerships), or e-stamped Power of Attorney authorizing the signatory to apply for registration.

**2. Proof of Principal Place of Business:** Ownership deed, registered lease deed, sub-lease agreement, or notarized rental agreement establishing the applicant's right to occupy the business premises.

**3. Proof of Additional Places of Business:** Similar proof as above for each additional location where business is conducted.

**4. Constitutional Documents:** Memorandum and Articles of Association for companies, Partnership Deed for partnerships, LLP Agreement for Limited Liability Partnerships, or Deed of Association for trusts/societies.

**5. Bank Account Details:** Cancelled cheque bearing the name of the applicant, bank statement, or bank certificate confirming the account details.

**6. Identity Proof:** PAN certificate or reference, Passport, Driver's License, Aadhar Card, or Voter ID of proprietor/partners/directors.

**7. Signature Specimen:** Declaration signed by proprietor/partners/directors on letterhead, confirming the particulars furnished in the application.

**8. Authorization Certificate:** Wh…

Question 14

MNP Ltd. commenced operations of the business of a new four-star hotel in Chennai on 1-4-2011. The company incurred capital expenditure of ₹40 lakh during the period January, 2011 to March, 2011 exclusively for the above business, and capitalized the same in its books of account as on 1st April, 2011. Further, during the Previous Year 2011-12, it incurred capital expenditure of ₹2.5 crore (out of which ₹1 crore was for acquisition of land) exclusively for the above business. Compute the income under the heading 'profits and gains of business or profession' for the assessment year 2012-13, assuming that MNP Ltd. has fulfilled all the conditions specified for claim of deduction under section 35AD and has not claimed any deduction under Chapter VI-A under the heading 'C. — Deductions in respe…

Accepted Answer

**Computation of Income under 'Profits and Gains of Business or Profession' for MNP Ltd. — A.Y. 2012-13**

**Deduction under Section 35AD of the Income Tax Act, 1961 (Chennai Hotel — Specified Business):**

Section 35AD provides a 100% deduction on **capital expenditure incurred wholly and exclusively** for any specified business. Building and operating a new hotel of two-star or above category is a **specified business** under Section 35AD(8)(c).

**Pre-commencement capital expenditure:** As per the proviso to Section 35AD(1), capital expenditure incurred prior to commencement of a specified business and **capitalised in books of account on the date of commencement** is eligible. The ₹40 lakh incurred during January 2011 to March 2011, capitalised on 1st April 2011, therefore qualifies.

**Capital expenditure during P.Y. 2011-12:** Of the ₹2.5 crore incurred, ₹1 crore was for **acquisition of land**. As per Section 35AD(8)(e), the definition of 'capital expenditure' for this section **excludes expenditure on acquisition of land, goodwill, or financial instruments**. Hence, ₹1 crore is not eligible. Only ₹1.5 crore (₹2.5 crore − ₹1 crore) qualifies.

**Total Section 35AD deduction** = ₹40 lakh + ₹150 lakh = **₹190 lakh**

**Profit/Loss from Chennai Hotel (Specified Business):**
Profits before Section 35AD deduction = ₹80 lakh. After deducting ₹190 lakh, the result is a **loss of ₹110 lakh** from the specified business.

**Treatment of loss — Section 73A and Section 35AD(6):**…

Question 15

Avinash is a qualified Chartered Accountant. He acquired the certificate of practice from the ICAI in May, 2010. For the financial year 2011-12 his receipts (including service tax) are as follows:
Services rendered in tax planning: ₹50,000
Representation of client before CESTAT: ₹40,000
Preparation of financial statements of XYZ Ltd.: ₹4,00,000
Certification of documents under Export and Import policy of Government of India: ₹1,50,000
Receipts for the legal advice given to clients in the month of December, 2011: ₹50,000
In the financial year 2010-11 he has provided the value of taxable service of ₹11,00,000.
Using the above information, calculate the value of taxable services for the financial year 2011-2012.

Accepted Answer

**Relevant Law:** Chapter V of the Finance Act, 1994 (Service Tax provisions applicable for FY 2011-12).

**Step 1 — Small Service Provider (SSP) Exemption Check:**
Under Notification No. 6/2005-ST, the SSP exemption of ₹10,00,000 is NOT available if the aggregate value of taxable services in the **preceding financial year** exceeded ₹10,00,000. Since Avinash's taxable services in FY 2010-11 were ₹11,00,000 (exceeding the ₹10,00,000 threshold), the SSP exemption is **not available** in FY 2011-12. He is liable to pay service tax on ALL taxable services from the first rupee.

**Step 2 — Classification of Services:**

(i) **Services rendered in tax planning — TAXABLE.** This is squarely covered under 'Chartered Accountant Service' as defined under Section 65(25a) read with Section 65(105)(s) of the Finance Act, 1994.

(ii) **Representation before CESTAT — TAXABLE.** Representation before a quasi-judicial authority by a CA falls under 'Chartered Accountant Service' [Section 65(105)(s)], and is taxable.

(iii) **Preparation of financial statements of XYZ Ltd. — TAXABLE.** This is a core service rendered by a practicing CA in a professional capacity and is taxable under Section 65(105)(s).

(iv) **Certification of documents under EXIM Policy of Government of India — EXEMPT.** Certification of documents required under the Export and Import Policy (Foreign Trade Policy issued under the Foreign Trade (Development and Regulation) Act, 1992) is specifically exempt from service tax unde…

Question 16

Ms. Pragya, a dealer submits the following information. Compute the net VAT liability from the following information:
Import of raw material (including 10% import duty): ₹1,10,000
Raw material purchased from Kerala (including excise duty @ 12%): ₹2,24,000
VAT @ 4% on the above purchase (from Kerala)
Raw material purchased from Karnataka: ₹85,000
Transportation and manufacturing expenses: ₹47,000
Pragya sold entire stock to Nishu at a profit of 10% on the cost of production. VAT rate on such sale is 4%.

Accepted Answer

**Computation of Net VAT Liability of Ms. Pragya**

Under the **VAT mechanism**, a dealer can claim **Input Tax Credit (ITC)** for VAT paid on eligible purchases, which is set off against the Output VAT on sales. The net VAT payable = Output VAT − Input Tax Credit.

**Step 1 — Cost of Production**

The cost of production is built up from all input costs. Since VAT paid on the Kerala purchase is eligible for ITC, it does not form part of the cost of production (it is a recoverable credit). Import duty and excise duty are not VATable inputs; hence no ITC is available on them, and they remain part of cost.

| Particulars | ₹ |
|---|---|
| Import of raw material (including 10% import duty) | 1,10,000 |
| Raw material from Kerala (including excise duty @ 12%) | 2,24,000 |
| Raw material from Karnataka | 85,000 |
| Transportation and manufacturing expenses | 47,000 |
| **Total Cost of Production** | **4,66,000** |

Note: VAT paid on Kerala purchase (₹8,960) is excluded from cost as it is recoverable via ITC.

**Step 2 — Selling Price to Nishu**

Profit = 10% on cost = 10% × ₹4,66,000 = ₹46,600

Selling Price = ₹4,66,000 + ₹46,600 = **₹5,12,600**

**Step 3 — Output VAT**

Output VAT @ 4% on ₹5,12,600 = **₹20,504**

**Step 4 — Input Tax Credit**

ITC is available only on **VAT paid on purchases**. Import duty and excise duty do not qualify for VAT credit.

ITC on Kerala purchase = 4% × ₹2,24,000 = **₹8,960**

(No ITC on Karnataka purchase as no VAT is mentioned; no ITC on import duty…

Question 17

Mr. Mohit is employed with XY Ltd. on a basic salary of ₹10,000 p.m. He is also entitled to Dearness allowance @ 100% of basic salary, 50% of which is included in salary as per terms of employment. The company gives him house rent allowance of ₹6,000 p.m. which was increased to ₹7,000 p.m. with effect from 1-1-2012. He also got an increment of ₹1,000 p.m. in his basic salary with effect from 1-02-2012. Rent paid by him during the previous year 2011-2012 is as under:
April and May, 2011: Nil, as he stayed with his parents.
June to October, 2011: ₹6,000 p.m. for an accommodation in Ghaziabad.
November, 2011 to March, 2012: ₹8,000 p.m. for an accommodation in Delhi.
Compute his gross salary for assessment year 2012-13.

Accepted Answer

**Computation of Gross Salary of Mr. Mohit for A.Y. 2012-13 (P.Y. 2011-12)**

Under Section 17(1) of the Income Tax Act, 1961, gross salary includes basic salary, dearness allowance, and house rent allowance to the extent not exempt under Section 10(13A).

**Basic Salary:**
April 2011 to January 2012 (10 months) @ ₹10,000 p.m. = ₹1,00,000; February–March 2012 (2 months) @ ₹11,000 p.m. = ₹22,000. **Total Basic = ₹1,22,000.**

**Dearness Allowance (DA):**
DA @ 100% of basic salary. April–January (10 months) × ₹10,000 = ₹1,00,000; February–March (2 months) × ₹11,000 = ₹22,000. **Total DA = ₹1,22,000.** (50% of DA, i.e., ₹61,000, forms part of salary only for HRA exemption computation purposes.)

**HRA Received:**
April 2011–December 2011 (9 months) @ ₹6,000 = ₹54,000; January–March 2012 (3 months) @ ₹7,000 = ₹21,000. **Total HRA received = ₹75,000.**

**HRA Exemption under Section 10(13A) read with Rule 2A:**
Exemption is the **least** of: (i) actual HRA received, (ii) 50% of salary if metro / 40% if non-metro, (iii) rent paid minus 10% of salary. Salary for HRA = Basic + DA forming part of salary. Ghaziabad is a **non-metro** city; Delhi is a **metro** city.

The year is split into five sub-periods due to changes in city, HRA amount, and basic salary:

— **April–May 2011 (2 months):** No rent paid → Exemption = **NIL**.

— **June–October 2011 (5 months) – Ghaziabad (non-metro):** Salary = ₹10,000 + ₹5,000 = ₹15,000 p.m. Least of: ₹6,000 / ₹6,000 (40% × 15,000) / ₹4,500 (₹6,000 …

Question 18

Mention the due dates for filing of service tax returns. Can an assessee submit a revised return?

Accepted Answer

**Due Dates for Filing of Service Tax Returns:** Service tax has been subsumed under the Goods and Services Tax (GST) regime effective July 1, 2017. Currently, service tax returns are filed as part of GST returns under the CGST Act, 2017. The due dates for GST returns are: (1) **GSTR-1** (return of outward supplies) is due by the **10th of the following month**; (2) **GSTR-3B** (monthly return and tax payment) is due by the **20th of the following month**; (3) **GSTR-4** (quarterly return for composition scheme dealers) is due by the **18th of the month following the end of quarter**; and (4) **GSTR-9** (annual return) is due by **31st December of the year following the end of the financial year**.

**Revised Return Provisions:** Yes, an assessee can file a **revised return** under the GST regime. As per Section 34 of the CGST Act, 2017, a registered person can furnish a **revised return** to correct or add information in the original return. The revised return for outward supplies is filed using **GSTR-1R** (revised outward supplies return). The revised return can be filed within **prescribed periods** as specified in the rules. However, revised returns cannot be filed after the due date of filing GSTR-9 (annual return) for that financial year. The revised return mechanism allows assesses to correct errors, omissions, or additional transactions that were missed in the original return, ensuring accurate tax compliance and reducing the risk of penalties for unintentional error…

Question 19

Briefly explain the system of cross checking under VAT Act.

Accepted Answer

The **cross-checking system under VAT** is a compliance verification mechanism designed to prevent tax evasion and ensure accurate tax collection by matching tax records of buyers with suppliers. This system operates on the principle that every purchase by one taxpayer must correspond to a sale by another, creating an unbroken chain of documentation.

**Objectives of the Cross-Checking System:** The primary aim is to prevent fraudulent claim of Input Tax Credit (ITC) by verifying that claimed purchases are actually backed by valid invoices from genuine suppliers. It also helps detect under-reporting of sales and identification of suppressed transactions.

**Mechanism of Operation:** The cross-checking process involves matching the sales invoices issued by a supplier against the corresponding purchase invoices submitted by buyers claiming ITC. Tax authorities reconcile the VAT return filed by a seller showing sales with the purchases declared by buyers, ensuring consistency and detecting discrepancies. Where a buyer claims ITC for purchases from a supplier, the system verifies whether that supplier has declared corresponding sales in their VAT return.

**Key Components:**

1. **Invoice Matching:** Tax authorities compare invoices presented by purchasers with those recorded by suppliers to identify mismatches or forged documents.

2. **Input Tax Credit Verification:** Before allowing ITC, authorities verify that the supplier is a registered VAT taxpayer and that the transaction…

CA Inter Cost & Mgmt

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