CA Inter Cost & Mgmt — Question Paper — November 2011

PART (a): Book Profit and Partner Salary under Section 40(b) of the Income-tax Act, 1961 — AY 2011-12

Step 1 — Computation of Book Profit:

Net profit as given (before deduction of the three items) = ₹7,00,000.

For computing book profit under Section 40(b), partner salary is not deducted; allowable depreciation under Section 32 and allowable interest (capped at 12% p.a.) are deducted.

Allowable interest: The deed provides 15% p.a. on ₹5,00,000 = ₹75,000, but Section 40(b) restricts interest to 12% p.a. Hence allowable interest = 12% × ₹5,00,000 = ₹60,000 (excess ₹15,000 is disallowed).

| Particulars | ₹ |
|---|---|
| Net profit before items | 7,00,000 |
| Less: Depreciation u/s 32 | (1,50,000) |
| Less: Allowable interest (12% on ₹5,00,000) | (60,000) |
| Book Profit | 4,90,000 |

Step 2 — Allowable Working Partner Salary:

As per the amended Section 40(b)(v) applicable from AY 2010-11 onwards:
- On first ₹3,00,000 of book profit: 90% or ₹1,50,000, whichever is higher
- On the balance of book profit: 60%

On first ₹3,00,000: 90% × ₹3,00,000 = ₹2,70,000 (exceeds ₹1,50,000)
On balance ₹1,90,000: 60% × ₹1,90,000 = ₹1,14,000
Maximum allowable salary = ₹3,84,000

Actual salary claimed = ₹20,000 × 2 × 12 = ₹4,80,000. Since this exceeds the limit, allowable deduction is ₹3,84,000 and ₹96,000 is disallowed.

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PART (b): Clubbing of Income — Section 64(1)(vi) of the Income-tax Act, 1961 — AY 2011-12

Shri Madan gifted the building to his son's wife Smt. Hema. Under Section 64(1)(vi), income from assets transferred without adequate consideration to the son's wife is clubbed in the hands of the transferor. Accordingly, house property income arising after 01-10-2010 is clubbed with Madan; income prior to transfer is directly Madan's.

Computation of House Property Income:

*Pre-gift period (01-04-2010 to 30-09-2010 — 6 months, directly Madan's):*
Rent = ₹60,000; Municipal tax paid (June 2010) = ₹5,000; NAV = ₹55,000; Standard deduction 30% = ₹16,500; HP income = ₹38,500

*Post-gift period (01-10-2010 to 31-03-2011 — 6 months, clubbed in Madan's hands):*
Rent = ₹60,000; Municipal tax not paid till 30-09-2011 — not deductible; NAV = ₹60,000; Standard deduction 30% = ₹18,000; HP income (clubbed) = ₹42,000

Total HP income clubbed with Madan = ₹38,500 + ₹42,000 = ₹80,500. Hema gets NIL house property income.

Total Income — Shri Madan (Age 67, Senior Citizen):

| Head | ₹ |
|---|---|
| Income from House Property | 80,500 |
| Business Income | 1,00,000 |
| Long-term Capital Gains (LTCG) | 50,000 |
| Income from Other Sources | 1,50,000 |
| Total Income | 3,80,500 |

Income-Tax Liability — Shri Madan (Senior Citizen, exemption limit ₹2,40,000):
Normal income (excluding LTCG) = ₹3,30,500. Since this exceeds ₹2,40,000, full LTCG is taxable.
Tax on normal income: NIL on ₹2,40,000 + 10% on ₹90,500 = ₹9,050
Tax on LTCG u/s 112: 20% × ₹50,000 = ₹10,000
Total tax before cess = ₹19,050; Education Cess @ 3% = ₹572
Total Tax Liability = ₹19,622 (approx.)

Total Income — Smt. Hema:

| Head | ₹ |
|---|---|
| Business Loss | (75,000) |
| STCG (non-equity, normal rate) | 2,00,000 |
| Less: Business loss set off u/s 71 | (75,000) |
| Net STCG | 1,25,000 |
| Income from Other Sources | 50,000 |
| Total Income | 1,75,000 |

Basic exemption for women (AY 2011-12) = ₹1,90,000. Since ₹1,75,000 < ₹1,90,000, Hema's tax liability = NIL.

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PART (c): Value of Taxable Service — Commercial Training and Coaching — Finance Act, 1994

Under Section 65(27) of the Finance Act, 1994, a "commercial training or coaching centre" excludes: (1) pre-school centres, (2) sports coaching, and (3) any institute that itself issues certificates/degrees/diplomas recognised by law. Vikas Coaching Centre does not issue any recognised qualification, so it is a commercial training or coaching centre.

| Item | Amount (₹) | Treatment |
|---|---|---|
| (i) Civil Service exam coaching | 3,59,000 | Taxable — competitive exam coaching, no recognised qualification issued |
| (ii) Postal coaching for University exams | 2,40,000 | Taxable — Vikas Centre does not issue recognised qualifications; coaching for external exams does not change character |
| (iii) Sports coaching | 1,10,000 | Not taxable — Sports expressly excluded from the definition |
| (iv) Foreign university diploma not recognised in India | 4,40,000 | Taxable — not recognised by any law in force in India |
| (v) Coaching at residence of service receiver | 6,40,000 | Taxable — commercial coaching service; location of delivery irrelevant |

Value of Taxable Service = ₹3,59,000 + ₹2,40,000 + ₹4,40,000 + ₹6,40,000 = ₹16,79,000

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PART (d): VAT Payable — February 2011

Input Tax Credit (ITC):
No ITC is available on inter-state CST purchases or imports (customs duty is not VAT). ITC is available only on within-state VAT-paid purchases.

| Input | Amount (₹) | VAT Rate | ITC (₹) |
|---|---|---|---|
| Inter-state RM (CST @2%) | 10,00,000 | — | NIL |
| RM X — within state | 15,00,000 | 1% | 15,000 |
| Import from Singapore (customs) | 11,00,000 | — | NIL |
| RM Z — within state | 6,00,000 | 12.5% | 75,000 |
| Total ITC | | | 90,000 |

Output VAT:

| Sale | Amount (₹) | VAT Rate | Output VAT (₹) |
|---|---|---|---|
| Goods from RM X | 27,00,000 | 4% | 1,08,000 |
| Goods from inter-state/imported RM | 32,00,000 | 1% | 32,000 |
| Goods from RM Z | 8,00,000 | 12.5% | 1,00,000 |
| Total Output VAT | | | 2,40,000 |

VAT Payable = Output VAT – ITC = ₹2,40,000 – ₹90,000 = ₹1,50,000

Part (a): Computation of Salary Income of Mr. Balaji for AY 2011-12

Particulars | ₹

Basic Salary:
April 2010 – October 2010 (7 months × ₹50,000) = ₹3,50,000
November 2010 – March 2011 (5 months × ₹60,000) = ₹3,00,000
Total Basic Salary = ₹6,50,000

Dearness Allowance @ 40% of basic salary:
April–October (40% × ₹3,50,000) = ₹1,40,000
November–March (40% × ₹3,00,000) = ₹1,20,000
Total DA = ₹2,60,000

Bonus (1 month salary paid in October 2010 on Basic + DA):
Basic October = ₹50,000; DA October = ₹20,000 → Bonus = ₹70,000

Employer's Contribution to Recognised Provident Fund (RPF):
Contribution = 16% × ₹6,50,000 = ₹1,04,000
Exempt u/s 10(12) = 12% × ₹6,50,000 = ₹78,000
Taxable excess (16% − 12%) = ₹26,000

Profession Tax paid by Employer (perquisite u/s 17(2)): ₹2,000

Laptop and Computer: As per the proviso to Section 17(2)(iii)(b), use of laptop or computer (even for personal use) provided by employer is not a taxable perquisite. Value = NIL

Motor Car Perquisite (CC > 1.6 litres, self-driven, official + personal use, 01-11-2010 to 31-03-2011 = 5 months):
As per Rule 3(2)(A)(ii) of the Income Tax Rules 1962, prescribed value = ₹1,800 per month
5 × ₹1,800 = ₹9,000
(Actual running expenses of ₹45,000 borne by employer are ignored; prescribed rate applies)

Leave Travel Concession (LTC):
Under Section 10(5) of the Income Tax Act 1961, LTC is exempt for employee, spouse, and up to 2 children (born on/after 01-10-1998).
Daughter aged 7 = 1st child; Twin sons aged 3 = count as 1 child (single delivery). Total = 2 qualifying births — within the permissible limit.
Adults (employee + wife): ₹30,000 — fully exempt
Children (daughter + twin sons): ₹45,000 — fully exempt
Taxable LTC = NIL

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Gross Salary:
Basic Salary: ₹6,50,000
DA: ₹2,60,000
Bonus: ₹70,000
Excess RPF Contribution: ₹26,000
Profession Tax (employer paid): ₹2,000
Motor Car Perquisite: ₹9,000
Gross Salary = ₹10,17,000

Less: Deduction u/s 16(iii) — Profession Tax paid (entire ₹3,000, including employer-paid portion, is deductible): ₹3,000

Net Salary Income Chargeable to Tax = ₹10,14,000

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Part (b): E-Payment of Service Tax

(i) When is e-payment mandatory?
E-payment of service tax becomes mandatory for every assessee who has paid service tax of ₹10 lakh or more (including amount paid by utilisation of CENVAT credit) in the preceding financial year. This is governed by Rule 6(2) of the Service Tax Rules, 1994.

(ii) Due Dates for E-Payment of Service Tax:

Individuals, Proprietary Firms & Partnership Firms: Service tax is payable quarterly — by the 6th of the month immediately following the quarter (i.e., 6th July, 6th October, 6th January, and 31st March for the quarter ending March).

Companies: Service tax is payable monthly — by the 6th of the month immediately following the month of collection (e.g., 6th May for April). For the month of March, the due date is 31st March itself.

(Note: The general due date without e-payment is the 5th; e-payment gets one additional day, making it the 6th, except for March which remains 31st March for all categories.)

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Part (c): Role of Chartered Accountants in VAT Compliance (Any 4 Points)

1. VAT Audit: CAs are appointed to conduct VAT audits for dealers whose turnover exceeds the threshold prescribed under respective State VAT Acts. They certify the correctness of turnover, tax paid, and input tax credits claimed.

2. Preparation and Filing of Returns: CAs assist dealers in preparation and timely filing of VAT returns (monthly/quarterly/annual), ensuring accurate computation of output tax, eligible input tax credit (ITC), and net tax payable.

3. Advisory on Input Tax Credit: CAs advise clients on eligibility and proper claim of ITC, including identification of goods/services eligible for credit, blocked credits, and conditions for reversal, thereby preventing incorrect claims and penalties.

4. Classification of Goods and Rate Determination: CAs advise on the correct classification of goods under the VAT schedules and applicable tax rates (exempt, lower rate, standard rate), preventing mis-classification which can lead to tax evasion or excess payment.

5. Representation before VAT Authorities: CAs represent clients during assessments, appeals, and hearings before VAT/Commercial Tax authorities, preparing replies to notices, submissions of objections, and drafting appeals.

6. Reconciliation and Record Maintenance: CAs ensure reconciliation of VAT accounts with the financial statements, maintain statutory registers, and advise on record-keeping obligations under the relevant State VAT Act, ensuring the dealer is audit-ready at all times.