Question 1

Farm Heroes is engaged in providing services for the last five years. The value of taxable services provided by Farm Heroes during the financial year was ₹ 45 lakhs. It has received the following sums (Exclusive of service tax) in the month of January 2014. Calculate the value of taxable services and tax payable thereon for the month of January 2014.

(1) Supply of farm labour ₹ 55,000
(2) Trapping of soil of farm land ₹ 1,65,000
(3) Value of Services provided free ₹ 50,500
(4) Processing of raw material to make it fit for production and this process is not liable to Excise Duty ₹ 6,35,000
(5) Advance Received for such services (As mentioned in para 4) ₹ 2,13,000

Accepted Answer

**Calculation of Value of Taxable Services and Service Tax Payable for January 2014**

Farm Heroes has been providing taxable services with annual turnover of ₹45 lakhs, which exceeds the small service provider threshold of ₹10 lakhs under Notification No. 33/2012-ST. Hence, the exemption is not available and service tax is payable.

The applicable **service tax rate for January 2014** is **12.36%** (Basic: 12% + Education Cess: 2% on ST + Secondary and Higher Education Cess: 1% on ST) under Section 66B of the Finance Act, 1994.

**Item-wise Analysis:**

**(1) Supply of farm labour – ₹55,000:** This is covered under the **Negative List under Section 66D(d)(ii)** of the Finance Act, 1994, which specifically includes "supply of farm labour" as an agricultural service. **Not taxable.**

**(2) Trapping (tilling/testing) of soil of farm land – ₹1,65,000:** This constitutes an agricultural operation directly related to production of agricultural produce and falls under **Section 66D(d)(i)** of the Finance Act, 1994. **Not taxable.**

**(3) Value of services provided free – ₹50,500:** Service tax is levied on **consideration received**. Since no consideration is received for services provided free of charge, there is no taxable value. **Not taxable.**

**(4) Processing of raw material to make it fit for production (not liable to Excise Duty) – ₹6,35,000:** This does not fall under the Negative List under Section 66D, nor is it covered under any exemption notification. It is a **taxa…

Question 2

Mr. Vijay a registered dealer from Gujarat, submits the following information pertaining to the month of January 2014.

(1) Purchase of Raw material A for ₹ 2,50,000 which was exempt from levy of VAT and utilized for production of X.
(2) Purchase of Raw material B for ₹ 7,60,000 on which VAT is paid @ 1% and utilized for the production of product Y.
(3) Purchase of Raw material C for ₹ 10,00,000 on which VAT is paid @ 12.5% and utilized 50% each for production of product Z and product E.

Accepted Answer

**Computation of Input Tax Credit (ITC) Available to Mr. Vijay for January 2014**

**Note:** The question provides only purchase details. The solution computes admissible ITC under the Gujarat VAT Act. It is assumed that Product E is **exempt from VAT** (a standard exam assumption that tests ITC restriction rules), while Products X, Y, and Z are taxable.

**Treatment of each input:**

**(1) Raw Material A — Exempt from VAT, used for Product X:**
Since no VAT was paid on the purchase of RM A, **no ITC is available**. The concept of input tax credit arises only when tax has actually been paid on inputs. ITC = ₹Nil.

**(2) Raw Material B — VAT @ 1%, used for Product Y (taxable):**
VAT paid on RM B = ₹7,60,000 × 1% = **₹7,600**. Since Product Y is taxable, the entire VAT paid on RM B is available as ITC = ₹7,600.

**(3) Raw Material C — VAT @ 12.5%, used 50% for Product Z (taxable) and 50% for Product E (exempt):**
Total VAT paid on RM C = ₹10,00,000 × 12.5% = ₹1,25,000.
Under VAT law, **no ITC is allowed on inputs used for production of exempt goods**. Therefore, ITC is restricted proportionately:
- ITC for Product Z (50% taxable use) = ₹1,25,000 × 50% = **₹62,500** — Admissible.
- ITC for Product E (50% exempt use) = ₹1,25,000 × 50% = ₹62,500 — **Not admissible.**

**Total Admissible ITC = ₹7,600 + ₹62,500 = ₹70,100**

Question 3

From the following details compute the total income of Kamal, A resident individual aged 54 years for the year ended 31-3-2014. Tax payable need not be calculated.

1. Salary including Dearness Allowance: ₹ 5,70,000
2. Bonus: ₹ 15,000
3. Salary to servant provided by Employer: ₹ 12,000
4. Bill paid by Employer for Gas, Electricity and water provided free of cost in his flat: ₹ 14,500
5. Cost of Laptop provided by the employer (Used both for official and personal purposes): ₹ 40,000

Additional Information:
(1) Kamal purchased a flat in a Cooperative Housing Society in Delhi for ₹ 10,75,000 in April, 2010 by taking loan from State Bank of India amounting to ₹ 5,00,000 @ 15% p.a annum interest, ₹ 65,000 from his own savings and a deposit from a Nationalized Bank in whom this flat was given o…

Accepted Answer

**Computation of Total Income of Kamal (Resident Individual, Age 54) for A.Y. 2014-15**

**I. Income from Salary**

Basic Salary including DA is ₹5,70,000 and Bonus is ₹15,000 — both fully taxable. Salary paid to servant by employer (₹12,000) and bills for gas, electricity and water (₹14,500) are **taxable perquisites** under Section 17(2) of the Income Tax Act 1961 read with Rule 3. The **cost of laptop** (₹40,000) provided for official and personal use is **exempt** under Rule 3(7)(vii) of the Income Tax Rules — use of laptop/computer is specifically excluded from perquisite valuation.

Income from Salary = ₹6,11,500

**II. Income from House Property**

The flat is let out on lease to a Nationalized Bank at ₹5,500 per month. Gross Annual Value = ₹66,000. Municipal taxes paid by the owner (₹4,500) are deducted to arrive at NAV = ₹61,500. Under Section 24 of the Income Tax Act 1961: (a) Standard deduction @ 30% of NAV = ₹18,450; (b) Interest on SBI loan — computed on outstanding balance of ₹1,60,000 @ 15% = ₹24,000. **Insurance on flat (₹1,275) is not deductible** under Section 24 as only standard deduction and interest are allowable.

Income from House Property = ₹19,050

**III. Profits and Gains from Speculation Business**

Share speculation profit (₹15,000) is set off against cotton speculation loss (₹20,200). Both are **speculative transactions** under Section 43(5). Net speculation loss of ₹5,200 cannot be set off against any other head and shall be **carried forward for…

Question 4

JK Ltd., a manufacturing company purchased the following Plant and Machinery:

| Date of Acquisition and Installation | Actual Cost (in ₹ Crores) |
|---|---|
| 25-05-2013 | 90.00 |
| 31-08-2013 | 20.00 |
| 15-04-2014 | 120.00 |

From the above information compute the amount of depreciation available u/s 32(1), additional depreciation, if any and deduction u/s 32 AC for the Assessment Years 2014-15 and 2015-16.

What will be the consequences of asset acquired on 31-08-2013 is sold on 01-09-2016?

Accepted Answer

**Part (a): Depreciation u/s 32(1), Additional Depreciation, and Deduction u/s 32AC**

**Relevant Provisions:**
- **Section 32(1) of the Income Tax Act, 1961** allows depreciation on a block of assets at prescribed rates (15% for general Plant & Machinery).
- **Section 32(1)(iia)** allows **additional depreciation @ 20%** on new P&M acquired and installed by a manufacturing company (full 20% if used > 180 days; 50% thereof i.e., 10% if ≤ 180 days).
- **Section 32AC(1)** allows an **investment allowance @ 15%** of actual cost of new P&M, over and above normal deductions, if: (i) the assessee is a company engaged in manufacturing, (ii) new P&M is acquired and installed during any PY beginning on/after 01-04-2013 but before 01-04-2015, and (iii) aggregate cost of such P&M in the PY exceeds ₹100 crores.

**Assessment Year 2014-15 (Previous Year 2013-14):**

Assets acquired:
- 25-05-2013: ₹90.00 crores — used from May 25 to March 31 (~310 days) > 180 days → **full depreciation**.
- 31-08-2013: ₹20.00 crores — used from Aug 31 to March 31 (~213 days) > 180 days → **full depreciation**.

Total additions = ₹110 crores. Since ₹110 crores > ₹100 crores, Section 32AC is triggered.

| Deduction | Computation | Amount (₹ Crores) |
|---|---|---|
| Normal Depreciation u/s 32(1) | 15% × ₹110 cr | **16.50** |
| Additional Depreciation u/s 32(1)(iia) | 20% × ₹110 cr | **22.00** |
| Investment Allowance u/s 32AC | 15% × ₹110 cr | **16.50** |

Closing WDV at end of PY 2013-14 = 110 – 16.50 – 22.…

Question 5

(A) Mr. Vineet submits his return of income on 12-09-2014 for AY 2014-15 consisting of income under the head house property and other sources. On 21-01-2015, he realized that he had not claimed deduction under section 80 TTA in respect of his interest earned on the Savings Bank Account. He wants to revise his return of income, since one year has not elapsed from the end of the relevant Assessment Year. Discuss.

Accepted Answer

Mr. Vineet **can revise his return of income** under **Section 139(5)** of the Income Tax Act, 1961.

**Section 139(5) Provision:** This section permits an assessee to revise his return of income at any time before the expiry of **one year from the end of the relevant assessment year**. The revision is specifically allowed to claim deductions, reliefs, or to correct errors that were inadvertently omitted in the original return.

**Time Limit Verification for AY 2014-15:**
- Relevant Assessment Year: 2014-15
- End of Assessment Year: 31-03-2015
- Last date for revision under Section 139(5): 31-03-2016 (one year from the end of AY)
- Date of realization of omission: 21-01-2015
- Conclusion: Since 21-01-2015 falls significantly before 31-03-2016, Mr. Vineet is well within the prescribed time limit. The condition that "one year has not elapsed from the end of the relevant Assessment Year" is clearly satisfied.

**Nature of Omission - Section 80TTA:** Section 80TTA provides a deduction to individuals for interest earned on savings bank accounts. This deduction is available under Chapter VI-A of the Income Tax Act. The omission of claiming this deduction in the original return constitutes a valid and recognized ground for revision under Section 139(5). Such omission of deductions falls squarely within the scope of matters that can be corrected through a revised return.

**Key Points:**
- The omission relates to a deduction, not the income itself (the interest income appears to have…

Question 6

(B) Where the Karta of an Hindu undivided family absent from India, the return of income can be signed by only male member of the family. (?) Give reasoning for the statement to be true or false.

Accepted Answer

**Answer: FALSE**

The statement is **false**. The Income Tax Act, 1961 does not restrict the signing of a return of income by only male members of an HUF when the Karta is absent from India.

**Reasoning:**

When the Karta of an HUF is absent from India or unable to sign the return, the return can be signed by any **authorized representative** appointed by the HUF. Section 140(2) of the Income Tax Act, 1961 provides that where the assessee is incapacitated or cannot sign due to absence or any other reason, an authorized representative can sign the return on behalf of the assessee.

The term **'representative'** as defined in Section 2(58) of the Income Tax Act includes any person duly authorized to act on behalf of the assessee. The Act imposes **no gender-based restriction** on who can be appointed as an authorized representative. Therefore, the HUF can authorize any competent person—whether male or female—to sign the return of income.

Further, the power to execute documents and sign returns is based on authority granted by the HUF through a Power of Attorney or authorization letter, not on the gender of the representative. Any member of the family (or even an outsider like a Chartered Accountant or lawyer) can be appointed as an authorized representative to sign the return if properly authorized.

Constitutionally and legally, gender-based restrictions on signing authority are not permissible under the IT Act. The Act recognizes the right of any person to be authorized as…

Question 7

Who is liable to pay Advance Tax? What is the procedure to compute the Advance Tax payable?

Accepted Answer

**PART (a): WHO IS LIABLE TO PAY ADVANCE TAX**

Under **Section 207 of the Income Tax Act, 1961**, Advance Tax is payable by any person whose estimated tax liability for the financial year is likely to exceed **₹10,000**. The term 'person' encompasses:
- Individuals
- Hindu Undivided Families (HUFs)
- Companies
- Partnership firms
- Association of persons
- Bodies of individuals
- Local authorities

**Exceptions from Advance Tax payment:**
1. **Individual earning only salary income** – Not required to pay Advance Tax if income is solely from salary (Section 207(3))
2. **Individual earning salary + specified income** – May be exempt if income falls within defined thresholds and sources
3. **HUFs with similar characteristics** – Similarly exempted under specified conditions

These exemptions recognize that certain taxpayers can adjust tax liability through annual assessment without quarterly installments.

**PART (b): PROCEDURE TO COMPUTE ADVANCE TAX PAYABLE**

The computation procedure under **Section 208 of the Income Tax Act, 1961** follows these steps:

**Step 1 – Estimate Total Income:** Compute the estimated Gross Total Income for the financial year from all sources (salary, business, capital gains, other income).

**Step 2 – Apply Permissible Deductions:** Deduct amounts under Chapter VI-A (Sections 80C to 80U) such as contributions to provident funds, life insurance premiums, education fees, donations, medical insurance, etc.

**Step 3 – Calculate Taxable Income:** Taxa…

Question 8

Mr. Rakh is an employee in a private company. He receives the following medical benefits from the company during the previous year 2013-14: (A) On treatment of his self employed daughter in a private clinic ₹ 4,000 (B) On treatment of himself by Family doctor ₹ 8,000 (C) On treatment of her Mother-in-law she dependent on her, in a Nursing Home ₹ 5,000. Discuss about the taxability of above benefits and allowances in the hands of Rakh.

Accepted Answer

**Taxability of Medical Benefits in the Hands of Mr. Rakh — Previous Year 2013-14 (AY 2014-15)**

Under **Section 17(2) of the Income Tax Act, 1961**, the value of any medical benefit or reimbursement provided by an employer is treated as a **perquisite** and included in the employee's salary income. However, an exemption is available under the proviso to Section 17(2) for medical reimbursements not exceeding **₹15,000 per annum** in respect of the employee himself and specified **family members**.

For the purpose of this exemption, **'family'** means:
- The **spouse and dependent children** of the employee, and
- The **parents, brothers and sisters** of the employee who are **wholly or mainly dependent** on him.

Notably, **parents-in-law** are **not included** in this definition.

**Analysis of each benefit:**

**(A) Treatment of Self-Employed Daughter in Private Clinic — ₹4,000:**
Since Mr. Rakh's daughter is **self-employed**, she earns her own income and is **not dependent** on Mr. Rakh. A non-dependent daughter does not qualify as a covered family member under Section 17(2). Accordingly, the entire **₹4,000 is taxable** as a perquisite in Mr. Rakh's hands.

**(B) Treatment of Himself by Family Doctor — ₹8,000:**
Medical reimbursement for the **employee himself** is covered. The amount of ₹8,000 is within the annual exemption ceiling of ₹15,000. Accordingly, the entire **₹8,000 is exempt** and not included in taxable income.

**(C) Treatment of Mother-in-Law in Nursing …

Question 9

Particulars of Sales are:
(A) Sold X for ₹ 5,00,000 in Gujarat on which VAT is levable at 4%.
(B) Sold Y for ₹ 6,00,000 in Gujarat on which VAT is levable at 0%.
(C) Sold Z for ₹ 4,00,000 in Delhi @ CST 2%.
(D) Sold E for ₹ 12,00,000 which is exempt from levy of VAT.

Assuming there is no opening and closing inventory, calculate the amount of VAT payable for the relevant month.

Accepted Answer

**VAT Payable Calculation for the Month**

Under the VAT framework, **Value Added Tax (VAT)** is levied only on **intra-state sales** within the same state, while **Central Sales Tax (CST)** applies to **inter-state sales**. Exempt transactions attract no tax. Since there is no opening or closing inventory, all goods purchased are fully sold in the same period.

**Transaction (A) — Sale of X in Gujarat:** This is an intra-state sale within Gujarat. VAT @ 4% is applicable. VAT = ₹5,00,000 × 4% = **₹20,000**.

**Transaction (B) — Sale of Y in Gujarat:** This is an intra-state sale within Gujarat. However, VAT is levable @ 0%, meaning it is a zero-rated transaction. VAT = ₹6,00,000 × 0% = **Nil**.

**Transaction (C) — Sale of Z in Delhi @ CST 2%:** This is an **inter-state sale** (Gujarat to Delhi). CST is applicable, not VAT. CST = ₹4,00,000 × 2% = **₹8,000**. This amount is **CST payable**, not VAT payable.

**Transaction (D) — Sale of E (Exempt):** This sale is **exempt from levy of VAT**. Tax payable = **Nil**.

**Summary:**
- VAT Payable = ₹20,000
- CST Payable = ₹8,000
- **Total Tax Payable for the month = ₹28,000**

**VAT payable for the relevant month is ₹20,000**, and CST payable (separate liability) is ₹8,000.

Question 10

Ajit who entered into a roll over contract, approached ABC Bank Ltd for selling US $2.6000 at the rate of ₹60 per US dollar. RBI Reference rate at that time was ₹60.50 per US Dollar. However the rate of exchange declared by CBEC for the day is ₹61.50 per US dollar. Calculate the value of taxable service with reference to rule 28 of the service tax (Determination of value) Rules, 2006 and Service Tax payable thereon.

Accepted Answer

**Applicable Provision:** Rule 2B of the Service Tax (Determination of Value) Rules, 2006 governs the valuation of taxable services provided by a money changer (foreign exchange dealer). The question refers to this rule as 'Rule 2B' (sometimes typeset as '2B' or '28' in certain study materials).

**Nature of Transaction:** Ajit is **selling US $2,60,000** to ABC Bank Ltd. From the bank's perspective, it is **buying** foreign currency. The bank is providing a 'money changing service' to Ajit, which is a taxable service.

**Valuation Method under Rule 2B:** When the **RBI Reference Rate** is available, the value of taxable service shall be determined as follows:

For **purchase** of foreign currency (bank buying from customer):
**Value = (RBI Reference Rate − Rate at which currency is purchased) × Total units of currency purchased**

**Role of CBEC Rate:** The rate of exchange declared by CBEC (₹61.50 per US$) is relevant only when the RBI Reference Rate is **not** available for that currency. Since the RBI Reference Rate of ₹60.50 is available here, the CBEC rate of ₹61.50 is **not applicable** for valuation purposes.

**Computation:**
Value of Taxable Service = (₹60.50 − ₹60.00) × 2,60,000 = **₹1,30,000**

Service Tax payable @15% (14% basic + 0.5% Swachh Bharat Cess + 0.5% Krishi Kalyan Cess) = 15% × ₹1,30,000 = **₹19,500**

**Conclusion:** The value of taxable service is **₹1,30,000** and Service Tax payable thereon is **₹19,500**.

Question 11

State with reasons whether the following statements are true or false with reference to the credit of VAT:

Accepted Answer

**1. FALSE** – It is not always mandatory to issue a tax invoice under VAT. Exemptions exist for: (a) retail traders with turnover below the prescribed threshold (typically ₹5 lakhs in many states), (b) supplies of goods exempt under VAT law, and (c) job work or certain specified transactions. Input VAT credit is available only on tax invoices, but their issuance is conditional on the nature and value of supply, making the statement universally incorrect.

**2. FALSE** – This statement is incorrect on two counts. First, VAT as a **value-added tax** is collected on the value added at each stage, not on the "first sales price." Second, VAT does not inherently increase the final price to the consumer in theory because input VAT is credited against output VAT throughout the supply chain. However, in practice, the credit mechanism may be imperfect or delayed, resulting in some price impact. The characterization of VAT being "payable on the first sales price" is fundamentally flawed.

**3. FALSE** – Under VAT regimes across most Indian states, lottery tickets were typically taxed at **5%**, not 4%. Lottery is a declared good subject to higher tax rates to discourage consumption and generate revenue. While rate variations exist across states and time periods, 4% is not the standard rate for lottery tickets under VAT. The correct rate is 5% in the majority of jurisdictions.

**4. TRUE** – It is permitted to issue a tax invoice that is **inclusive of VAT**, provided that the VAT amoun…

Question 12

Raj Associates is a consultancy firm. During the financial year 2013-14, it received ₹ 18 lakh as professional fee on which tax has been deducted u/s 194 J. You are required to compute the value of taxable service and service tax liability of Raj Associates for the year 2013-14 assuming that the receipt is inclusive of Service Tax.

Accepted Answer

**Computation of Value of Taxable Service and Service Tax Liability of Raj Associates for FY 2013-14**

The receipt of ₹18,00,000 is **inclusive of Service Tax**. Therefore, the value of taxable service must be extracted by back-calculation.

Applicable Service Tax rate for FY 2013-14: **12% + Education Cess @ 2% on ST + Secondary & Higher Education Cess @ 1% on ST = 12.36%** (effective rate).

Under the Finance Act, 1994, professional/consultancy services rendered by Raj Associates are chargeable to service tax. Since the amount received is inclusive of service tax, the taxable value is computed as:

**Value of Taxable Service** = Total Receipt × 100 / 112.36
= ₹18,00,000 × 100 / 112.36
= **₹16,01,994 (approx.)**

**Service Tax Liability** = ₹18,00,000 – ₹16,01,994
= **₹1,98,006 (approx.)**

*Note:* The basic exemption under Notification No. 33/2012-ST is available only if aggregate value of taxable services in the preceding financial year did not exceed ₹10 lakh. Since no data is given for the preceding year and the question requires computation of liability, the full amount is treated as taxable. The TDS deduction u/s 194J of the Income Tax Act, 1961 does not affect the service tax computation — service tax liability is on the gross value of service.

Question 13

Mr. Javed, a resident of Delhi for a calendar year, sold goods in a retailer Mr. Mohan for ₹ 5,500. The wholesaler sells goods to a retailer Mr. Mohan for ₹ 6,000 who inturn sells it to end user for ₹ 7,000. Compute the VAT liability, input credit availed and tax payable by the manufacturer, wholesaler and retailer under invoice method assuming: (i) VAT Rate is 12.5% (ii) Input on excluding VAT component.

Accepted Answer

**VAT Computation under Invoice Method (Tax Credit Method)**

Under the **Invoice Method** (also called the Tax Credit Method), VAT is levied on the full sale price at each stage, but the dealer is entitled to deduct the **Input Tax Credit (ITC)** of VAT already paid on purchases. The net VAT payable is: Output Tax – Input Tax Credit.

The given prices (₹5,500 / ₹6,000 / ₹7,000) are **exclusive of VAT**, so VAT is computed on these figures directly.

**Manufacturer (Mr. Javed):**
Mr. Javed is the first stage producer; he has no prior taxable purchase, so no ITC is available. His output VAT on ₹5,500 @ 12.5% = ₹687.50. **Tax payable = ₹687.50**.

**Wholesaler:**
The wholesaler purchases from Mr. Javed at ₹5,500 and pays VAT of ₹687.50, which is available as ITC. He sells to Mr. Mohan at ₹6,000, collecting output VAT of ₹750. **Tax payable = ₹750 – ₹687.50 = ₹62.50**.

**Retailer (Mr. Mohan):**
Mr. Mohan purchases at ₹6,000 and pays VAT of ₹750, which is his ITC. He sells to the end user at ₹7,000, collecting output VAT of ₹875. **Tax payable = ₹875 – ₹750 = ₹125**.

**Verification:** Total VAT remitted to government = ₹687.50 + ₹62.50 + ₹125 = **₹875**, which equals ₹7,000 × 12.5% — confirming VAT is ultimately borne by the end consumer on the final sale price.

Question 14

Mr. Garg, a resident individual, furnishes the following particulars of his income and other details for the previous year 2012-13: Income from Salary: ₹15,000; Income from Business (before providing expectation): ₹60,000; Long-term capital gain on sale of Land: ₹10,800; Loss on maintenance of Race Horses: ₹15,000; Loss from Gambling: ₹9,100. The other details of unabsorbed depreciation and brought forward losses pertaining to Assessment Year 2013 are as follows: Unabsorbed depreciation: ₹11,000; Loss from Speculative business: ₹22,000; Short term capital loss: ₹9,800. Compute the Gross total income of Mr. Garg for the Assessment Year 2014-15 and the amount of loss, if any, that can be carried forward, or not.

Accepted Answer

**Computation of Gross Total Income of Mr. Garg for A.Y. 2014-15 (P.Y. 2013-14)**

**Treatment of Current Year Losses:**

**Loss from Gambling (₹9,100):** As per Section 58(4) of the Income Tax Act, 1961, losses from gambling or betting are **not allowed to be set off** against any income, nor can they be **carried forward**. Hence, this loss is permanently disallowed.

**Loss from Race Horses (₹15,000):** Under Section 74A, loss from owning and maintaining race horses can **only** be set off against income from the same source. Since there is no income from race horses in the current year, this loss cannot be set off and must be **carried forward for 4 years**.

**Treatment of Brought Forward Losses:**

**Unabsorbed Depreciation (₹11,000):** Under Section 32(2), unabsorbed depreciation can be set off against income from **any head of income**. It is set off against business income: ₹60,000 − ₹11,000 = ₹49,000.

**B/F Short-Term Capital Loss (₹9,800):** Under Section 74, short-term capital loss can be set off against **both short-term and long-term capital gains**. Set off against LTCG: ₹10,800 − ₹9,800 = ₹1,000 LTCG remaining.

**B/F Speculative Business Loss (₹22,000):** Under Section 73, speculative business loss can only be set off against **speculative business income**. Since there is no speculative income in the current year, this loss **cannot be set off** and is **carried forward for up to 8 years**.

**Gross Total Income = ₹15,000 + ₹49,000 + ₹1,000 = ₹65,000**

**L…

Question 15

Ris, Horna and Raj, three new retail investors, have made the following investments in equity-oriented fund of Rajiv Gandhi equity savings scheme for the previous year 2013-14: [Investment in listed Equity Shares: Ris ₹50,000, Horna ₹23,000; Investment in equity oriented Mutual Funds: Ris ₹10,000, Horna ₹12,000, Raj ₹55,000; Cross total income: Ris ₹10,80,000, Horna ₹11,50,000, Raj ₹12,60,000]. Calculate the amount of deduction allowable under section 80 CCG in all the three cases for the Assessment Year 2014-15. What would be the Tax-treatment in the hands of Raj, if he sells his investment in the Financial Year 2014-15?

Accepted Answer

**Section 80CCG — Rajiv Gandhi Equity Savings Scheme (RGESS): Deduction for AY 2014-15**

**Key Conditions under Section 80CCG of the Income Tax Act, 1961:**
(i) The assessee must be a **new retail investor** as notified under RGESS.
(ii) **Gross Total Income (GTI) must not exceed ₹12,00,000** for AY 2014-15.
(iii) Eligible investments include listed equity shares and units of equity-oriented mutual funds under RGESS.
(iv) Deduction = **50% of eligible investment**, subject to a maximum investment of ₹50,000 (i.e., maximum deduction = ₹25,000).
(v) A **lock-in period of 3 years** applies (1 year fixed + 2 years flexible).

**(1) Computation of Deduction under Section 80CCG for AY 2014-15:**

**Ris:** GTI = ₹10,80,000 (does not exceed ₹12,00,000 — eligible). Total investment = ₹50,000 (equity shares) + ₹10,000 (equity MF) = ₹60,000. However, the maximum eligible investment is capped at ₹50,000. Deduction = 50% × ₹50,000 = **₹25,000**.

**Horna:** GTI = ₹11,50,000 (does not exceed ₹12,00,000 — eligible). Total investment = ₹23,000 (equity shares) + ₹12,000 (equity MF) = ₹35,000 (below the ₹50,000 cap). Deduction = 50% × ₹35,000 = **₹17,500**.

**Raj:** GTI = ₹12,60,000 — **exceeds ₹12,00,000 threshold**. Raj is **not eligible** for deduction under Section 80CCG. Deduction = **Nil**, irrespective of the amount invested (₹55,000 in equity-oriented MF).

**(2) Tax Treatment in Raj's Hands on Sale in FY 2014-15:**

Since Raj's GTI exceeded ₹12,00,000, he was **not entitled to any d…

Question 16

Mr. X provides some taxable services to Mr. Y. In the course of providing such services, Mr. X incurs some expenditure such as travelling, Telephone, etc. and includes these amounts in the value of taxable services. Discuss whether Service Tax has to be charged on these items of expenditures. Will your answer be different if Mr. X indicates these items separately in the invoice?

Accepted Answer

**Service Tax on Expenditure Items**

When Mr. X includes travelling, telephone, and other expenditure items in the value of taxable services, Service Tax must be charged on the entire amount, including these expenses. Under Section 66 of the Finance Act, 1994, the value of taxable service includes all amounts charged by the service provider to the service recipient. These expenditure items form part of the consideration for the taxable service and are therefore subject to Service Tax.

**Legal Principle**: Service Tax is levied on the total value of consideration received or receivable for providing the taxable service. When a service provider charges for services plus reimbursable expenses (travelling, telephone, etc.), the entire amount constitutes the value of taxable service unless specifically exempted.

**Impact of Separate Indication**: The answer does not change if Mr. X indicates these items separately in the invoice. The method of presentation—whether combined with the service fee or itemized separately—is irrelevant to taxability. As long as these amounts are charged to the service recipient as part of the service engagement, they remain part of the value of taxable services and attract Service Tax.

**Possible Exception**: A different treatment might apply only if these are genuine out-of-pocket reimbursements (like courier charges) incurred specifically for the client without any service component. However, in normal circumstances, expenses such as travelling an…

Question 17

Invoices are crucial documents for Administering VAT. Discuss.

Accepted Answer

**Invoices as the Foundation of VAT Administration** Invoices are fundamental documents that form the cornerstone of VAT administration. They serve as the primary evidence of supply and establish the complete chain of custody throughout the supply chain, enabling tax authorities to effectively track goods and services from production through to final consumption. **Role in Input Tax Credit Mechanism** The fundamental principle of VAT is that tax is collected only on the value added at each stage of production and distribution. Invoices are the only documents through which recipients can substantiate and claim input tax credit (ITC) on taxes paid on inputs. Without proper invoices, ITC cannot be claimed, making invoices essential for the functioning of VAT. Invoices must clearly specify the tax amount charged to enable correct ITC calculation and prevent unjustified claims. **Statutory Compliance and Information Requirements** VAT laws require invoices to contain specific mandatory information: invoice number and date, names and addresses of supplier and recipient, description and quantity of goods, rate of tax, taxable value, and tax amount. Sequential numbering and timely issuance create accountability. Non-compliance with invoice requirements attracts penalties and may result in denial of input tax credit, ensuring strict adherence to requirements. **Cross-Verification and Control Mechanism** Invoices create an effective audit trail enabling cross-verification between the s…

Question 18

Explain the provisions regarding adjustment of Excess amount of Service Tax paid in case of renting of Immovable Property Service, owing to Property Tax Payment.

Accepted Answer

**Renting of Immovable Property (RIP) Service – Adjustment of Excess Service Tax due to Property Tax Payment**

**Taxable Nature of RIP Service**: Renting of immovable property is a taxable service under the GST regime, classified under SAC 9963. Service tax is levied on the rental value received by the service provider (lessor/landlord) from the service recipient (lessee/tenant).

**Service Value and Property Tax Consideration**: When computing the service tax liability on RIP services, the taxable value includes the entire rental amount. However, property tax (levied by municipal or local authorities) is often paid out of the rental amount or separately by either party. The law recognizes that property tax should not form part of the taxable service value to avoid double taxation—once as property tax and again as service tax on the same property.

**Adjustment Mechanism**: Under the relevant GST notifications (particularly the notification covering RIP services), if service tax has been paid on an amount that should have been reduced by property tax paid, the service provider can claim adjustment of the excess service tax. The adjustment is allowed because the property tax is considered an obligatory levy on the immovable property itself and should not be part of the taxable service value.

**Process for Adjustment**:
1. Identify the gross rental received or charged
2. Deduct the property tax actually paid on the property during the relevant period
3. The net amount (rental…

Question 19

State the circumstances under which VAT registration can be cancelled.

Accepted Answer

VAT registration can be cancelled under the following circumstances:

**1. Voluntary Cancellation by Registered Person:** A registered person may apply for cancellation of VAT registration in the following cases:
- When the person ceases to carry on business activities
- When the annual turnover falls below the prescribed threshold for registration
- When the registered person wishes to discontinue business voluntarily
- In case of retirement of a proprietor or closure of the business unit

**2. Automatic Cancellation:** VAT registration stands automatically cancelled in the following events:
- Upon death of an individual proprietor
- Upon dissolution of a partnership firm
- Upon winding up or liquidation of a company
- Upon closure or transfer of the business
- When the person migrates out of the state permanently

**3. Cancellation by Tax Authority:** The tax authority may cancel VAT registration compulsorily in the following circumstances:
- When false information or declaration is made in the application for registration
- For serious or persistent violation of provisions of the VAT Act
- For non-payment of VAT dues and penalties without reasonable cause
- For failure to file returns despite notice or repeated defaults
- For failure to maintain prescribed records and books of accounts
- When the registered person conducts business contrary to law
- For committing fraud or tax evasion

**4. Cancellation Due to Non-Active Status:** When a registered person remains inactive …

Question 20

Answer any two of the following three sub-divisions. (a) What are the provisions relating to tax deduction at source with respect of: ABC and Co. Ltd. paid ₹19,000 to one of its Directors as sitting fees on 01-01-2014. (b) Mr. X sold sub House to Mr. Y on 01-02-2014 for ₹60 lacs ?

Accepted Answer

Answering parts (a) and (b) as requested.

**Part (a) – Tax Deduction at Source on Sitting Fees**

Sitting fees paid by ABC and Co. Ltd. to its Director are subject to TDS provisions under the Income Tax Act, 1961. The applicable provisions depend on the classification of the payment:

**Applicable Section:** Sitting fees paid for attending board/committee meetings typically fall under **Section 194J** (TDS on professional fees and technical services). Alternatively, if treated as remuneration, Section 192 or Section 194 (general TDS on other income) may apply depending on the facts.

**TDS Rate and Threshold:** Under Section 194J, TDS is deductible at **10% of the amount paid**, but only if the aggregate payment to the recipient during the financial year **exceeds ₹30,000**.

**Application to the Case:** The sitting fees of ₹19,000 paid on 01-01-2014 falls **below the threshold of ₹30,000** prescribed under Section 194J. Unless there are other payments to the same director that collectively exceed ₹30,000 in FY 2013-14, **no TDS is required to be deducted** on this sitting fees payment. The company can claim the ₹19,000 as a deductible expense without deducting TDS.

**Part (b) – Tax Deduction at Source on Sale of Immovable Property**

When Mr. X sold his house to Mr. Y for ₹60 lacs on 01-02-2014, **Section 194LA** of the Income Tax Act becomes applicable. This section governs TDS on transfer of immovable property (other than agricultural land).

**Applicable Section:** **Se…

Question 21

(C) Mr. X furnishes the following particulars for the month of December 2013. Compute the VAT payable and input tax carried forward to Next period, if any. Inputs purchased during the month (from within state) (inclusive of VAT 12.5%): ₹2,25,000; Raw Material purchased intra state (including CST 2%): ₹51,000; Transportation charges: ₹35,000; Balance of VAT Credit as on 1-12-2013: ₹6,700. 90% of the stock was sold during the month at the profit of 20% on cost. Assume there was no opening stock of goods. The VAT Rate on sale is 4%.

Accepted Answer

**Computation of VAT Payable for Mr. X for December 2013**

**Step 1: Computation of Input Tax Credit (ITC) Available**

For inputs purchased intra-state (inclusive of VAT @ 12.5%): The VAT embedded = ₹2,25,000 × 12.5/112.5 = ₹25,000. This VAT is eligible as ITC.

For raw material purchased intra-state (including CST @ 2%): CST paid on inter-state purchases is **not eligible for Input Tax Credit** under the VAT mechanism. Hence, ITC = **NIL**.

Transportation charges of ₹35,000 are a service; no VAT is levied, so no ITC is available.

**Step 2: Computation of Total Cost of Stock Purchased**

The cost base (exclusive of taxes not creditable) is used to determine the selling price:
- Inputs (net of VAT): ₹2,25,000 − ₹25,000 = ₹2,00,000
- Raw materials (net of CST): ₹51,000 − ₹1,000 = ₹50,000
- Transportation charges: ₹35,000
- **Total cost of stock = ₹2,85,000**

**Step 3: Computation of Sales Value**

90% of stock is sold at a profit of 20% on cost:
- Cost of goods sold = 90% × ₹2,85,000 = ₹2,56,500
- Selling price = ₹2,56,500 × 120% = **₹3,07,800**

**Step 4: Output VAT**

Output VAT = 4% × ₹3,07,800 = **₹12,312**

**Step 5: Net VAT Computation**

Total ITC available = Opening VAT credit (₹6,700) + ITC on intra-state inputs (₹25,000) = ₹31,700

Since Total ITC (₹31,700) **exceeds** Output VAT (₹12,312):
- **VAT Payable = NIL**
- **Input Tax Credit carried forward to next period = ₹31,700 − ₹12,312 = ₹19,388**

CA Inter Cost & Mgmt

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