Question 1

State with reasons whether the following statements are correct or incorrect under the IT Act Provisions:
(1) Mr. P provides the service in March, 2012. He receives the payment by cheque on 30-3-2012 and the cheque is cleared on 15-4-2012. The point of accrual of this service will be 30-3-2012 and the rate of service tax will be 10%.
(2) Postal services for registered post are liable to service tax.
(3) Mrs. SR Brothers having office in Jammu, provide the services to Mr. OR Ltd in Patna. These services are not liable to service tax.
(4) Jaipur Branch of ABC Ltd. provides services in Baroda Branch of ABC Ltd. These services are not liable to service tax.

Accepted Answer

**Statement (1): INCORRECT** — The statement contains two errors. First, the point of accrual of service tax is when the service is **provided or completed**, not when payment is received. Under Section 66E of the Finance Act 1994, since Mr. P provided the service in March 2012, the accrual point is in March 2012, not 30-3-2012 (the date the cheque was received). The clearing of the cheque on 15-4-2012 is irrelevant to determining accrual. Second, the rate of service tax in 2012 was 10% plus 3% education cess, making it 10.3% total, not merely 10%.

**Statement (2): INCORRECT** — Postal services provided by India Post, including registered post services, are **exempt from service tax** under the exemption provisions of Chapter V-A of the Finance Act 1994. These services are not liable to service tax.

**Statement (3): INCORRECT** — The statement is incorrect on two counts. First, the mere fact that the service provider (Mrs. SR Brothers in Jammu) and the recipient (Mr. OR Ltd in Patna) are located in different states does not automatically exempt the service from taxation. Second, service tax is **applicable to services provided between persons within India** regardless of their locations. Since both parties are located within India (Jammu and Patna), the services are **liable to service tax**. The location difference does not create an exemption.

**Statement (4): CORRECT** — The statement is correct. Services provided between different branches or offices of the **same comp…

Question 2

ABC & Co. is a partnership firm engaged in the business of recruitment and supply of labourers. The firm, which had rendered taxable services to the value of ₹ 9.5 lacs in the financial year 2011-12, furnishes the following details pertaining to the half year coded on 30-9-2012:
Announts collected from companies for pre-recruitment screening: ₹ 3,00,000
Amnounts collected from companies for recruitment of permanent staff: ₹ 1,80,000
Amounts collected from companies for recruitment of temporary staff: ₹ 4,80,000
Advances received from prospective employers for conducting campus interviews on colleges: ₹ 80,000
Wherever applicable, service tax has been charged separately and received from clients. Compute the value of taxable service rendered and the service tax payable by the assessee for t…

Accepted Answer

**Classification of Services:** ABC & Co. is engaged in **Manpower Recruitment or Supply Agency Services** as defined under Section 65(105)(k) of the Finance Act 1994. All four types of receipts — pre-recruitment screening, recruitment of permanent staff, recruitment of temporary staff, and advances for campus interviews — fall within the scope of this taxable service category. Since service tax is charged separately by the firm, the amounts given represent the **value of taxable services** (exclusive of tax).

**Small Service Provider Exemption:** Under **Notification No. 6/2005-ST** (as amended), a service provider is exempt from service tax on services up to ₹10,00,000 in the current year, provided the aggregate value of taxable services rendered in the **preceding financial year did not exceed ₹10,00,000**. In FY 2011-12, ABC & Co. rendered services worth ₹9,50,000, which is below the ₹10 lakh threshold. Therefore, the firm is **eligible** for the small service provider exemption in FY 2012-13.

**Total Value of Services in the Half Year Ended 30-9-2012:**
All receipts aggregate to ₹10,40,000. Applying the exemption of ₹10,00,000, the **taxable value of services** = ₹40,000.

**Service Tax Payable:**
Service tax @ 12% on ₹40,000 = ₹4,800; Education Cess @ 2% = ₹96; Secondary & Higher Education Cess @ 1% = ₹48. **Total Service Tax Payable = ₹4,944.**

Question 3

How is the value of the service under service tax provisions determined where such value is not ascertainable ?

Accepted Answer

When the value of a service under GST provisions is not ascertainable, it is determined in accordance with **Section 15 of the CGST Act 2017**, which prescribes alternative valuation methods.

**Methods of Determining Service Value (in order of preference):**

**1. Open Market Value Method**: The value is taken as the open market value of such supply of services. Open market value is the price at which similar services are ordinarily supplied between independent persons in the ordinary course of business at the time of supply.

**2. Cost Plus Method**: Where services are supplied to an associated person and the value cannot be determined through comparable market transactions, the value is computed as the cost of supply plus a reasonable profit margin. This method is commonly applied for inter-company or related-party service supplies.

**3. Residual Method**: In cases where goods and services are bundled together as a composite or mixed supply and the value of services cannot be separately identified, the value of services is determined by deducting the ascertained value of goods from the total consideration paid.

**4. Comparable Uncontrolled Price Method**: Where the supplier has previously supplied identical or similar services to independent parties, the price charged in those comparable independent transactions serves as the basis for valuation.

**5. Cost Plus Percentage**: In specific scenarios, particularly for works contracts, where exact ascertainment is not possib…

Question 4

Mr. Bansilal of Punjab is a manufacturer, registered under VAT. He provides the following particulars for the financial year 2012-13:
1. Purchases from local registered dealer (excluding VAT 4%) - ₹1,15,000
2. Purchases from a dealer having opted composition scheme (includes VAT 4%) - ₹2,20,000
3. Purchases of machinery eligible for input credit on 1-10-2012 (excluding VAT 4%) Depreciation rate 15% p.a. - ₹5,00,000
4. Other direct & indirect expenses - 30% of total purchases (excluding depreciation)
5. Profit margin - 20% of the total cost
6. Unutilized balance of VAT input credit as on 1-4-2012 - ₹7,600
7. 90% of the production is sold during the year
8. VAT rate for sales is 12.5%
Find the taxable turnover, net VAT payable and input credit for the year 2012-13.

Accepted Answer

**Computation of Taxable Turnover, Input Credit, and Net VAT Payable for Mr. Bansilal (Punjab VAT) — F.Y. 2012-13**

**Step 1 – Total Cost of Production**

Purchases from local registered dealer (excl. VAT, as VAT is recoverable as credit) = ₹1,15,000

Purchases from composition scheme dealer (VAT included @ 4%; **no input credit** available on purchases from composition dealers) = ₹2,20,000

Other direct & indirect expenses @ 30% of total raw material purchases (excluding depreciation) = 30% × (1,15,000 + 2,20,000) = 30% × 3,35,000 = ₹1,00,500

Depreciation on machinery: The machinery (₹5,00,000 excl. VAT) was purchased on 1-10-2012, so depreciation is for 6 months. Depreciation = 5,00,000 × 15% × 6/12 = ₹37,500. (Note: VAT on machinery is a **separate input credit item** and is not included in the depreciable cost for VAT-credit-eligible assets; depreciation base = ₹5,00,000.)

Total Cost of Production = 1,15,000 + 2,20,000 + 1,00,500 + 37,500 = **₹4,73,000**

**Step 2 – Total Sales Value (100% production)**

Profit @ 20% on total cost = 20% × 4,73,000 = ₹94,600

Total sales value = 4,73,000 + 94,600 = ₹5,67,600

**Step 3 – Taxable Turnover (90% sold)**

Taxable Turnover = 90% × 5,67,600 = **₹5,10,840**

**Step 4 – Input Credit for the Year**

VAT on purchases from local registered dealer = 4% × 1,15,000 = ₹4,600
VAT on composition scheme purchases = **Nil** (no credit permitted)
VAT on machinery (eligible, full credit in year of purchase) = 4% × 5,00,000 = ₹20,000
Input cr…

Question 5

Discuss the provisions of VAT for 'stock transfer'.

Accepted Answer

**Stock Transfer under VAT** refers to the movement of goods from one place of business (branch, depot, or warehouse) to another place of business of the same dealer within the same state. The following provisions apply:

**1. Definition and Nature**: A stock transfer is the transfer of goods between branches or locations of the same dealer. It is not considered a "sale" under VAT and therefore does not trigger VAT liability. It is merely an inter-branch movement of inventory within the same legal entity.

**2. No VAT Applicability**: Since stock transfers do not constitute a sale, no VAT is payable on such transfers. The goods move in a tax-neutral manner from one location to another, avoiding cascading of tax.

**3. Conditions for Stock Transfer**: (a) Goods must belong to the same dealer; (b) Both source and destination must be within the same state; (c) Transfer must be substantiated by proper documentation; (d) Transfer must be for business purposes (resale, use in production, or exhibition).

**4. Documentation Requirements**: Stock transfers must be supported by challan or transfer invoice containing: description and quantity of goods transferred, source and destination branch details, date of transfer, dealer's name and identity, and declaration that it is a stock transfer (not a sale). These documents must be retained for record purposes.

**5. Distinction from Sale**: A critical distinction exists between stock transfer and sale. If goods are transferred to another …

Question 6

Manufacturer A sold product X to B of Delhi @ ₹ 1,000 per unit. He has charged CST @ 4% on the said product and paid ₹ 60 as freight. B of Delhi sold goods to C of Delhi @ ₹ 1,250 per unit and charged VAT @ 12.5%. C of Delhi sold goods to D, a consumer @ ₹ 1,500 per unit and charged VAT @ 12.5%. Compute VAT Liability of B & C.

Accepted Answer

**VAT Liability of B of Delhi:**

B purchased goods from Manufacturer A (an inter-state purchase) on which **CST @ 4%** was charged. Under the VAT system, **Input Tax Credit (ITC) is not available on CST paid on inter-state purchases**. Only VAT paid on intra-state (within Delhi) purchases qualifies for ITC. Since B paid CST (not VAT) on his purchase from A, he cannot claim any ITC.

B's Output VAT = 12.5% × ₹1,250 = **₹156.25**
Less: ITC available = **NIL** (CST paid is not creditable against VAT)
**Net VAT Payable by B = ₹156.25**

**VAT Liability of C of Delhi:**

C purchased goods from B of Delhi, an intra-state transaction on which VAT @ 12.5% was charged. C is therefore eligible to claim **ITC on the VAT paid to B**.

C's Output VAT = 12.5% × ₹1,500 = **₹187.50**
Less: ITC (VAT paid to B) = 12.5% × ₹1,250 = **₹156.25**
**Net VAT Payable by C = ₹31.25**

Note: The freight of ₹60 paid by A is A's cost and does not affect B or C's VAT liability since selling prices are explicitly given. The core principle applied is that **CST is a cost to B and cannot be set off against VAT**, while VAT paid within the state flows as ITC.

Question 7

What are the procedural requirements under VAT Act for claiming set off of input tax on capital goods ?

Accepted Answer

**Capital goods** are movable property with a cost exceeding the prescribed threshold (typically ₹2,000-₹5,000 depending on state) and having a useful life of more than one year. While most state VAT Acts restricted or disallowed input tax credit on capital goods, the procedural requirements for claiming set-off (where allowed) are as follows:

**1. Documentation Requirements:** The taxpayer must maintain the original **VAT invoice** from a registered dealer containing the seller's VAT registration number, date of supply, detailed description of goods, quantity, cost, rate of VAT, and tax amount. The invoice must be serially numbered and dated. Supporting evidence of receipt and acceptance of goods must be retained.

**2. Purchase from Registered Dealer:** Input tax credit on capital goods is allowable only if purchased from a **registered dealer** under the VAT Act. Purchases from unregistered sources do not entitle credit. The dealer's VAT registration status must be verified.

**3. Time Limit for Claim:** The input tax credit must be claimed in the **VAT return filed for the month in which the capital goods were received and put to use**, or within a prescribed period (typically within one year of acquisition as per some state VAT Acts). Claims cannot be made retroactively beyond the statutory period.

**4. Payment of Tax:** The input tax must have been **actually paid** to the supplier. No credit is allowable on disputed tax or where payment is pending. The payment must b…

Question 8

Devesh and Siddhart are brothers and they earned the following incomes during the previous year 2012-13. Devesh works in America in the year 1985 and Siddhart settled in Mumbai. Devesh visits India for 20 days every year. Both stay in America every year for a month. Compute their total income for the Assessment year 2013-14 from the following information:

Accepted Answer

**Determination of Residential Status for PY 2012-13 (AY 2013-14)** [Section 6 of the Income Tax Act 1961]

**Devesh:** Has been working in America since 1985 and visits India for only **20 days** every year. Since 20 days < 182 days, Section 6(1)(a) is not satisfied. For Section 6(1)(b): he needs 60+ days in the current year AND 365+ days in the 4 preceding years — 20 days < 60 days, so this too is not satisfied. Accordingly, Devesh is a **Non-Resident (NR)** for PY 2012-13. As an NR, only income received in India or income accruing/arising in India is taxable.

**Siddhart:** Settled in Mumbai, stays in India for approximately 335 days (365 minus ~30 days in America). 335 days > 182 days → Section 6(1)(a) satisfied → he is Resident. Since he has been settled in India for many years, he does not satisfy either condition of Section 6(6) for RNOR status. Accordingly, Siddhart is a **Resident and Ordinarily Resident (ROR)** for PY 2012-13. As an ROR, **global income** is taxable.

**Computation of Total Income — Devesh (NR):**

Interest on American Development bonds: only 50% received in India is taxable = ₹23,000. Dividend from Japanese Company received in America: **NIL** (neither received nor accrued in India). Profit on sale of shares of Indian company received in India: **₹45,000** (accrues and received in India). Profit from Mumbai business managed from America: **₹10,000** (business situs is India; income accrues in India under Section 9(1)(i)). Income from Mumbai busines…

Question 9

Rajesh went to Shirapur on a holiday on 15-11-2012 with his wife and two children (son Sam - age 6 years; twin daughters - age 3 years). They were by aeroplane (economy class) and they used personal car. The total cost of tickets by his employer was ₹ 56,000 (₹ 43,000 for adults and ₹ 13,000 for the minor children). Compute the amount of Leave Travel Concession exempt. Will the answer be any different if among his three children, two are sons and one is daughter aged 3 years old? Discuss.

Accepted Answer

**Applicable Law:** Section 10(5) of the Income Tax Act, 1961 read with Rule 2B of the Income Tax Rules, 1962 governs Leave Travel Concession (LTC) exemption.

**Key Provisions:**
(i) LTC exemption covers **economy class air fare** actually incurred on travel on the **shortest route** to the destination.
(ii) Travel by **personal car is not eligible** for LTC exemption — no deduction is available for car travel cost.
(iii) 'Family' for LTC includes spouse and **children**, subject to a restriction: LTC is available for a **maximum of 2 children** born on or after 01-10-1998. Children born before 01-10-1998 are not subject to this restriction.
(iv) **Exception (Multiple Births):** Where a multiple birth (twins, triplets, etc.) occurs after the first surviving child, all children born in such multiple birth are treated as **one child** — i.e., the restriction of 2 children does not exclude them.

**Case 1 — Original Facts (Son Sam age 6 + Twin Daughters age 3):**

All three children were born after 01-10-1998 (Sam born ≈ 2006; twin daughters born ≈ 2009). Sam is the **1st child**. The twin daughters are the **2nd birth** (twins born after the first child). By virtue of the multiple birth exception, both twin daughters are treated as one child. Thus, **all three children are eligible** for LTC.

Eligible family members: Rajesh + Wife + Sam + Twin Daughter 1 + Twin Daughter 2 = 5 members.

Since travel is by economy class air (eligible mode), and personal car cost is **not covere…

Question 10

Mr. Gobind received retrenchment compensation of ₹ 10,00,000 after 30 years 4 months of service. At the time of retrenchment, he was drawing basic salary of ₹ 20,000 p.m. dearness allowance of ₹ 5,000 p.m. Compute his taxable retrenchment compensation.

Accepted Answer

**Computation of Taxable Retrenchment Compensation of Mr. Gobind**

Under **Section 10(10B) of the Income Tax Act, 1961**, retrenchment compensation received by a workman is exempt to the extent of the **least** of the following three amounts:

1. Actual retrenchment compensation received
2. Compensation calculated under the **Industrial Disputes Act, 1947** (i.e., 15 days' average pay for each completed year of service or part thereof exceeding 6 months)
3. Amount notified by the Central Government — **₹5,00,000**

**Step 1: Average Pay**
Average monthly pay = Basic Salary + Dearness Allowance = ₹20,000 + ₹5,000 = **₹25,000 p.m.**

**Step 2: Completed Years of Service**
Total service = 30 years 4 months. Since 4 months is less than 6 months, the fraction is ignored. **Completed years = 30**.

**Step 3: Compensation under Industrial Disputes Act**
15 days' average pay × Completed years = (₹25,000 × 15/26) × 30 = **₹4,32,692** (approx.)

**Step 4: Determine Exempt Amount (Least of three)**

| Particulars | Amount (₹) |
|---|---|
| (i) Actual compensation received | 10,00,000 |
| (ii) Under Industrial Disputes Act | 4,32,692 |
| (iii) Notified limit (Central Govt.) | 5,00,000 |
| **Exempt Amount (Least)** | **4,32,692** |

**Taxable Retrenchment Compensation = ₹10,00,000 − ₹4,32,692 = ₹5,67,308**

Question 11

What is meant by EABIST scheme? Enlist the benefits of EABIST scheme to an assessee under the Service Tax Provisions.

Accepted Answer

**EABIST Scheme** stands for **Exemption for Additional Business Input Service Tax** scheme under Service Tax provisions.

The EABIST scheme provides **exemption from payment of Service Tax** on business auxiliary services when supplied to exporters of goods or services, subject to specified conditions. This scheme was designed to support export-oriented businesses by reducing the tax burden on essential support services.

**Benefits of EABIST Scheme to an Assessee:**

**1. Exemption from Service Tax:** The primary benefit is that services covered under the scheme are **exempt from Service Tax**, provided the conditions are fulfilled. This reduces the cost of acquiring support services.

**2. Reduced Cost of Business Operations:** Since tax is exempted, the assessee avoids paying Service Tax on business auxiliary services, leading to lower operational costs, which can enhance competitiveness in international markets.

**3. No Input Tax Credit Restriction:** Assessee is not required to deny Input Tax Credit on related inputs, as the service itself is exempt.

**4. Applicability to Export-Oriented Units:** The scheme specifically benefits **exporters and units engaged in export activities**, enabling them to optimize their costs and improve profit margins on export contracts.

**5. Availability on Condition Fulfillment:** The exemption is available to assessees who meet the prescribed conditions such as registration with customs authorities, maintaining proper documentation of …

Question 12

Seth Traders, a registered dealer of Bihar having stock of goods worth ₹ 60,000 purchased from West Bengal wishes to opt for composite scheme. Advise the dealer whether it is possible?

Accepted Answer

**Answer: Seth Traders CAN opt for the composite scheme, subject to specific conditions.**

Under Rule 10 of the CGST Rules 2017, a registered supplier is eligible for the composite scheme if they satisfy the prescribed conditions. The purchase of goods from West Bengal (another state) does NOT inherently disqualify Seth Traders from opting for the composite scheme. The source of goods is not a disqualifying factor.

**Key Eligibility Conditions:**

1. **Turnover Limit**: The aggregate turnover in the financial year must not exceed ₹1.5 crore (for goods suppliers). Seth Traders must ensure their total annual turnover falls within this limit. The stock value of ₹60,000 is only inventory value, not turnover, so Seth Traders must verify their aggregate turnover for the year.

2. **Inter-State Supplies**: This is the CRITICAL condition. Rule 10(2) of CGST Rules 2017 explicitly states that a supplier who "has made any inter-State supply of goods" is NOT eligible for composite scheme. Therefore, if Seth Traders intends to make supplies exclusively within Bihar (intra-state supplies only), they are eligible. However, if they supply any portion of these goods to customers in other states, they CANNOT opt for the composite scheme.

3. **Prohibited Goods**: The goods supplied must not fall within the Second Schedule of CGST Rules 2017. Seth Traders must verify that their goods are not from the prohibited list.

4. **Prior Opting**: They must not have previously opted for composition an…

Question 13

From the following information of Mr. Mohit for the financial year 2012-13 you are required to compute his total income for the financial year 2012-13 and ascertain the amount of losses which will be carried forward to next year. (i) He owns two houses: House No. 1 - Income after all statutory deductions ₹ 80,000; House No. 2 - Current year loss ₹ (38,000). (ii) He has three proprietary business concerns: (a) Textile business: (I) Discontinued from 30th September 2012 - Current year's loss ₹ 40,000; (II) Brought forward loss of Asst. year 2009-10 ₹ 55,000; (b) Chemical Business - since discontinued Nil; (c) Bad debts allowed in earlier years recovered during the year ₹ 33,000. (iii) Brought forward business loss of Asst. year 2011-12 ₹ 50,000. (c) Leather Business - Profit for the current …

Accepted Answer

**Computation of Total Income of Mr. Mohit for FY 2012-13 (AY 2013-14)**

**I. Income from House Property**
House No. 1 income: ₹80,000; House No. 2 loss: ₹(38,000). Intra-head set-off permitted under Section 70 of the Income Tax Act, 1961. **Net House Property Income: ₹42,000.**

**II. Profits and Gains from Business or Profession**
Leather Business profit: ₹1,00,000. Textile Business current year loss ₹40,000 is set off intra-head (Section 70). Bad debts recovered ₹33,000 from discontinued Chemical Business are taxable under **Section 41(4)** as deemed business income even after discontinuance. Chemical Business current income: Nil. Net current year business income = 1,00,000 − 40,000 + 33,000 = ₹93,000.

Now set off **brought forward business losses** under Section 72(1): B/F loss of AY 2009-10 (Textile) ₹55,000 is set off first (being older) against ₹93,000, leaving ₹38,000. B/F loss of AY 2011-12 (Chemical Business) ₹50,000: only ₹38,000 can be absorbed; balance ₹12,000 remains unabsorbed. **Net Business Income after B/F set-off: Nil.**

**III. Share of Profit from Firm: Exempt under Section 10(2A).** ₹16,550 is fully exempt.

**IV. Capital Gains**
Short-Term Capital Gain (STCG): ₹60,000. Long-Term Capital Loss (LTCL): ₹35,000. Under **Section 70(3)**, LTCL can only be set off against Long-Term Capital Gain (LTCG); it cannot be set off against STCG. Since there is no LTCG, LTCL of ₹35,000 is **not set off** and must be carried forward under Section 74. **Net Capital Gain…

Question 14

What is 'Negative list of services'? Which services by Government or a local authority are not included in the negative list of services?

Accepted Answer

**Negative List of Services** refers to the list of services enumerated in **Schedule III of the CGST Act 2017** that are exempt from Goods and Services Tax (GST). These services are not subject to GST or are subject to nil rate of tax. The negative list represents services that fall outside the taxable scope and includes services provided by Government, Local Authority, educational institutions, healthcare, agriculture, and certain financial services.

**Services by Government or Local Authority NOT included in the Negative List:**

Pursuant to **Section 66 of the CGST Act 2017**, services provided by Government or Local Authority in their **sovereign capacity** (administration, police, defense) are exempt and form part of the negative list. However, services provided by Government or Local Authority in a manner **similar to non-Government entities** are NOT included in the negative list and are subject to GST. These taxable services include:

(a) **Hotel accommodation and boarding** - When Government/Local Authority provides such services for consideration, they are taxable.

(b) **Transport services** - Services for transport of passengers or goods by air or ship provided by Government entities are taxable (excluding public transport operated by Government for non-commercial purposes).

(c) **Food and beverage supply** - Services of supplying food and beverages through Government-run hotels, canteens, or restaurants are taxable.

(d) **Sports facilities** - Services relati…

Question 15

One of the merits of VAT is 'Neutrality'. Explain.

Accepted Answer

**Neutrality in VAT: Concept and Merits**

**Meaning of Neutrality**: VAT neutrality is the principle that the tax does not affect the economic decisions of taxpayers. The tax burden on any commodity remains constant regardless of the number of stages through which it passes or the distribution channels employed. It ensures that VAT is collected only on the incremental value added at each stage, not on the entire transaction value.

**Mechanism - Input Tax Credit**: The input tax credit (ITC) mechanism is the foundation of VAT neutrality. At each stage, VAT is charged on the taxable value (selling price), but the taxpayer can claim credit for VAT paid on purchases. Thus, the net VAT borne by each party is only on the value they add. For example, if a manufacturer purchases materials with 18% VAT (₹18 on ₹100), manufactures goods, and sells for ₹150 (VAT ₹27), the manufacturer bears only ₹9 VAT (₹27 - ₹18), not the full ₹27. This cascades through all stages with the final consumer bearing the total VAT burden.

**Merits of VAT Neutrality**:

**(a) No Distortion of Business Decisions**: VAT neutrality ensures that business decisions—such as whether to integrate vertically, outsource functions, or adopt specific distribution channels—are driven by operational efficiency, not tax considerations. A manufacturer remains indifferent between selling directly to consumers or through distributors because the total tax incidence is identical.

**(b) Promotes Fair Competition**: Neutrali…

Question 16

Mr. A is an employee of Larsen Limited and has substantial interest in the company. His salary is ₹ 25,000 p.m. Mrs. A also is working in that company at a salary of ₹ 10,000 p.m. without any professional qualification. Mr. A also receives ₹ 30,000 as income from securities. Mrs. A owns a house property which she has let out. Rent received from such house property is not specified. Mr. & Mrs. A have three minor children-two daughters and one son. Income of the two daughters is ₹ 2,600 p.a and that of his son is ₹ 1,200 p.a. Compute the income of Mr and Mrs. A.

Accepted Answer

**Applicable Provisions:** Section 64(1)(ii) of the Income Tax Act 1961 — where an individual has substantial interest in a concern and his/her spouse is employed therein without any technical or professional qualification, the spouse's remuneration is clubbed with the individual's income. Section 64(1A) — income of a minor child is clubbed with the parent whose total income (before such clubbing) is higher. Section 10(32) — exemption of ₹1,500 per minor child whose income is so clubbed.

**Treatment of Mrs. A's Salary:** Mr. A has substantial interest in Larsen Limited and Mrs. A is employed there **without any professional qualification**. Hence, Mrs. A's entire salary of ₹1,20,000 p.a. is clubbed with Mr. A's income u/s 64(1)(ii). Standard deduction u/s 16(ia) of ₹75,000 is available against Mrs. A's salary before clubbing.

**Treatment of House Property Income:** The house property is owned by Mrs. A in her own right (not transferred by Mr. A). Section 64 does not apply to self-acquired assets of the spouse. Accordingly, the rental income remains in Mrs. A's hands. Since rent is not specified, it cannot be quantified.

**Treatment of Minor Children's Income (Section 64(1A)):** Income of all three minor children is clubbed with Mr. A, as his income is higher. Exemption u/s 10(32): ₹1,500 or actual income, whichever is lower, per child.
- Each daughter: ₹2,600 − ₹1,500 = ₹1,100 (clubbed)
- Son: ₹1,200 − ₹1,200 = Nil (entire income exempt as it is below ₹1,500)

**Computatio…

Question 17

Ms. Neelima had purchased 500 equity shares in A Ltd at a cost of ₹ 30 per share (Brokerage 1%) in February 1979. She got 50 bonus shares in September 1980. She again got 500 bonus shares at the time of holding on March, 1985. Fair market value of the shares of A Ltd. on April, 1981 is ₹ 50. In January 2013, she transferred all her shares @ ₹ 240 per share (brokerage 2%). Compute the capital gains taxable in the hands of Ms. Neelima for the financial year 2013-14 assuming:

Accepted Answer

**Preliminary Notes:**

All 1,050 shares (500 original + 50 bonus Sept 1980 + 500 bonus March 1985) are held for more than 36 months before sale in January 2013 — hence all qualify as **Long-Term Capital Assets**.

The original 500 shares and 50 bonus shares (Sept 1980) were acquired/deemed acquired **before 1st April 1981**. Therefore, under the proviso to Section 55(2)(b) of the Income Tax Act, 1961, the assessee may opt for **Fair Market Value (FMV) as on 1st April 1981** as the cost of acquisition, if it exceeds actual cost.

The 500 bonus shares allotted in March 1985 (after 1st April 1981) carry a **Nil cost of acquisition** per Section 55(2)(aa).

Indexation benefit is available on long-term capital assets. The applicable **Cost Inflation Index (CII)** values are: Base year 1981-82 = 100; FY 1984-85 = 125; FY 2012-13 (year of sale, January 2013) = 852.

---

**Part (a): A Ltd. is an unlisted company — STT not applicable**

Since STT is not paid, Section 10(38) exemption does not apply. The gains are taxable as Long-Term Capital Gains under Section 112 of the Income Tax Act, 1961.

**Full Value of Consideration:**
1,050 shares × ₹240 = ₹2,52,000
Less: Brokerage on sale @ 2% = ₹5,040
**Net Sale Consideration = ₹2,46,960**

**Indexed Cost of Acquisition:**

*For 500 original shares (Feb 1979):*
Actual cost = 500 × ₹30 + 1% brokerage = ₹15,150 → Per share = ₹30.30
FMV on 1.4.1981 = ₹50 per share (₹50 > ₹30.30, so take FMV)
Deemed cost = 500 × ₹50 = ₹25,000
Indexed cost = ₹…

Question 18

Mr. Rajesh, a proprietor of Z enterprise provides taxable services. He received the following amount during the financial year 2012-13: (i) ₹ 1,25,000 as advance while signing a contract. (ii) ₹ 6,00,000 by pay order during process of providing service. (iii) ₹ 5,25,000 by credit card after completion of service as 31st Dec., 12. Compute the value of taxable service and amount of service tax payable by him. Assume service tax has been charged separately. Z enterprise is not eligible for small service provider's exemption in the financial year 2012-13. The rate of service tax is 12%, education cess is 2% and higher education cess is 1%.

Accepted Answer

**Computation of Value of Taxable Service and Service Tax Payable by Z Enterprise for F.Y. 2012-13**

Under the **Finance Act, 1994**, service tax is levied on the value of taxable services provided or to be provided. Since service tax has been charged **separately**, the amounts received represent the **taxable value** (exclusive of service tax).

Z Enterprise is **not eligible for small service provider's exemption** (threshold ₹10 lakhs under Notification No. 6/2005-ST), hence service tax is payable on the **entire receipts**.

All three receipts — advance on signing of contract, payment during service provision, and payment after completion — are received in respect of a taxable service. Under the **Point of Taxation Rules, 2011**, for a service provider opting for cash basis (applicable to individuals/proprietary firms with turnover ≤ ₹50 lakhs in the preceding year), tax becomes payable when payment is received. Even under the general rule, all amounts have been received and are liable to service tax.

**Value of Taxable Service:**
(i) Advance received on signing of contract = ₹1,25,000
(ii) Amount received by pay order during service = ₹6,00,000
(iii) Amount received by credit card after completion = ₹5,25,000
**Total Value of Taxable Service = ₹12,50,000**

**Service Tax Payable:**
Service Tax @ 12% on ₹12,50,000 = ₹1,50,000
Education Cess @ 2% on ₹1,50,000 = ₹3,000
Secondary & Higher Education Cess @ 1% on ₹1,50,000 = ₹1,500
**Total Service Tax Payable = ₹1,54,500**
…

Question 19

Distinguish between Gross Variant and Consumption Variant of VAT.

Accepted Answer

**Gross Variant of VAT** is a system where the VAT base includes all additions to the gross national product, including both consumption goods and capital goods (gross investment). In this variant, VAT is levied on the entire value added, irrespective of whether the output is for final consumption or capital formation. The taxable base comprises value added in producing consumer goods as well as capital goods/fixed assets. Consequently, capital goods are subject to VAT tax during their production and sale.

**Consumption Variant of VAT** is a system where the VAT base is restricted to consumption component of value added, excluding capital goods. In this variant, VAT is levied only on goods and services intended for final consumption. Capital goods and fixed assets used in production are either zero-rated or exempted from VAT. This ensures that VAT burden falls solely on consumption and does not tax capital formation.

**Key Distinctions:**

**1. Tax Base:** The gross variant includes all value added (consumption + investment), while the consumption variant includes only consumption-related value added, excluding capital investment.

**2. Treatment of Capital Goods:** Under gross variant, capital goods are taxable when produced and sold. Under consumption variant, capital goods are zero-rated or exempt, eliminating tax burden on capital formation.

**3. Economic Impact on Investment:** Gross variant increases the cost of capital goods, thereby discouraging capital investment …

Question 20

Answer any two of the following three sub-divisions

Accepted Answer

**Sub-part (i): Advance Tax on Capital Gains and Casual Income**

Under **Section 208 of the Income Tax Act, 1961**, advance tax is payable when the estimated tax liability for the year exceeds ₹10,000. However, special relaxation is granted for **capital gains** (Section 45) and **casual income** (e.g., lottery, gambling under Section 56(2)(ib)) owing to their unpredictable nature.

The normal installment schedule for non-corporate assessees is: 15% by 15th June, 45% by 15th September, 75% by 15th December, and 100% by 15th March.

**Special provision under Section 234C:** If capital gains or casual income arises after the due date of any installment, the assessee is not treated as having defaulted for earlier installments. The entire advance tax on such income must be paid by the **immediately succeeding installment due date**. If such income arises in the last quarter (i.e., after 15th December), the full tax thereon must be paid by **15th March**. No interest under Section 234C is charged for the shortfall in earlier installments attributable to such income, provided the entire tax is paid by the next due installment.

In essence, the law recognises that a taxpayer cannot foresee capital gains or windfalls, and therefore does not penalise late payment of advance tax on such income for preceding installments.

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**Sub-part (ii): Taxability of LLP under the Income Tax Act, 1961**

A **Limited Liability Partnership (LLP)** is treated as a **firm** for income tax purposes …

CA Inter Cost & Mgmt

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Worked Solution

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