Worked Solution
✓ VerifiedPART (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
Write it like this
1The skeleton
- Label every part clearly (Part a, b, c, d) and open each with the governing section — examiners allocate 5 marks per part and scan for the legal hook in line 1; missing it costs you even if the numbers are right.
- In Part (a), show book profit as a mini-table BEFORE computing salary — the salary slab % applies to book profit, so if book profit is wrong or unstated, you lose the salary marks too; always make it a visible checkpoint.
- In Part (b), split house property into pre-gift and post-gift periods explicitly — write the dates (01-04-2010 to 30-09-2010 and 01-10-2010 to 31-03-2011) in your working; examiners need to see you applied clubbing only from the date of gift, not the full year.
- In Part (c), handle each item in a table with a one-line reason column — the marks here are for classification logic, not arithmetic; write 'sports expressly excluded' or 'foreign diploma not recognised by law in India' as a reason or you get zero for that row even if the taxable value totals correctly.
- In Part (d), state the ITC exclusion rule upfront before the table — one line like 'ITC not available on inter-state CST purchases or imports' before the numbers shows examiner you know the principle, not just the answer; without it, correct numbers still look like guesswork.
- End Parts (b) with a two-line tax computation showing cess separately — senior citizen exemption + separate LTCG @ 20% + 3% education cess is a three-step sequence; collapsing it loses the stepwise marks even if the final figure is right.
2Examiner-rewarded phrases
3Common trap
Heads up — in Part (b) most students club Hema's FULL year house property with Madan, ignoring that clubbing kicks in only from the date of gift (01-10-2010); that one mistake cascades into wrong NAV, wrong deduction, wrong tax — you bleed 4-5 marks. Also in Part (a), don't use the pre-AY2010-11 salary slabs (75%/60%); the question says AY 2011-12 so the 90%/60% amended slabs apply — using old slabs is a guaranteed wrong answer even with perfect arithmetic.