Question 1

Dr. Shashank is a noted child specialist of Mumbai. His Income and Expenditure account for the financial year ended 31-03-2015 is given below:

Expenditure:
- Staff salary: ₹2,78,000
- Administrative expenses: ₹1,64,000
- Medicine consumed: ₹3,95,800
- Consumables: ₹57,500
- Depreciation: ₹1,25,000
- Rent of clinic: ₹1,20,000
- Donation to National Children's Fund: ₹51,000
- Net Profit: ₹6,58,700

Income:
- Fee receipts: ₹16,76,000
- Winning at TV game show (Net of TDS): ₹35,000
- LIC policy matured: ₹1,15,000
- Honorarium for giving lectures at seminars: ₹24,000

Additional information:
(1) Depreciation computed as per Income Tax Rules, 1962 has been ascertained at ₹75,000.
(2) Medicines consumed include cost of medicine for self and family of ₹18,000 and for treating poor patients of ₹24…

Accepted Answer

**Computation of Total Income and Tax Payable — Dr. Shashank (AY 2015-16)**

**A. Income from Profession**

The net profit as per the Income and Expenditure Account is ₹6,58,700. Several adjustments are required before arriving at taxable professional income.

**Disallowable expenditure added back:**
- **Depreciation as per books** (₹1,25,000) is added back and replaced by depreciation as per **Income Tax Rules, 1962** (₹75,000).
- **Donation to National Children's Fund** (₹51,000): This is not a professional expense; it is a personal application of income deductible under Section 80G of the Income Tax Act, 1961 and must be added back.
- **Medicines for self and family** (₹18,000): Personal expenditure, disallowed under Section 37(1).
- **Medicines for treating poor patients free of charge** (₹24,000): Since no professional income was earned from these patients, this expenditure is not incurred wholly and exclusively for the purpose of the profession and is disallowed.
- **Cash payment to computer specialist** (₹30,000): Payment in cash exceeding ₹20,000 to a single person is disallowed under **Section 40A(3)**. The entire ₹30,000 is disallowed.

**Exclusion of non-professional income included in I&E:**
- **TV game show winnings** (net ₹35,000) are assessable as **Income from Other Sources** under Section 115BB, not as professional income. Removed from professional income.
- **LIC policy maturity proceeds** (₹1,15,000) are exempt under **Section 10(10D)** (assuming the mature…

Question 2

MCSS Tech Solutions is providing taxable Information Technology software services and provides the following information related to the services tendered, invoice issued and payment received for these services, for the half year ended on 31st March 2015:

(i) Advance received on 31st March 2015 for upgradation and enhancement of software service to be rendered in the month of April 2015: ₹7,50,000
(ii) Service provided to United Nations in New Delhi for analysis, design and programming of latest information technology software: ₹6,00,000
(iii) Service billed to various clients (including the services provided to United Nations): ₹56,00,000

Service tax, Education cess and Secondary and Higher Education cess have been charged separately in all the bills.

Compute the value of total taxable …

Accepted Answer

**Total Taxable Services: ₹57,50,000**
**Service Tax Payable: ₹7,11,150**

The computation proceeds as follows:

From the services billed (₹56,00,000), the services provided to the **United Nations are exempt** from Service Tax. The UN exemption applies to all analysis, design, and programming services provided to the UN. Accordingly, taxable services from billed amount = ₹56,00,000 − ₹6,00,000 = ₹50,00,000.

The **advance received on 31st March 2015** becomes taxable in the period of receipt itself, as per the point of taxation rules. The date of receipt of advance (31st March 2015) constitutes the point of taxation, irrespective of the fact that the actual services will be rendered in April 2015. Taxable services from advance = ₹7,50,000.

**Total Taxable Services = ₹50,00,000 + ₹7,50,000 = ₹57,50,000**

Service Tax is levied at the rate of **12.36%**, which comprises: Service Tax 12% + Education Cess 2% of Service Tax (= 0.24%) + Secondary and Higher Education Cess 1% of Service Tax (= 0.12%), totaling 12.36%.

**Service Tax Payable = ₹57,50,000 × 12.36% = ₹7,11,150**

Question 3

Mr. Devansh, a dealer of rice plant machinery in the State of Punjab, provides the following information:

Total inter-state sales during the FY 2014-15 is ₹95,00,000 (CST included in this sales). This sales also includes the following:
- Dharmada: ₹7,50,000
- Freight: ₹4,50,000 (₹3,00,000 shown separately in the invoices)
- Cost of packing boxes for machinery: ₹68,500
- Installation and commissioning charges shown separately: ₹65,000

Determine CST payable assuming that all transactions were covered by valid 'C' forms and the VAT rate within the state is 5%.

Accepted Answer

**Computation of CST Payable by Mr. Devansh for FY 2014-15**

Under the **Central Sales Tax Act, 1956**, when inter-state sales are covered by valid **C-forms**, the concessional CST rate of **2%** applies (irrespective of the local VAT rate of 5%).

To arrive at **Taxable Turnover**, the following deductions are allowed from the gross inter-state sales (which is inclusive of CST):

**Dharmada (₹7,50,000):** Deductible, as it is a charitable contribution collected separately and does not form part of the sale price.

**Freight (₹3,00,000 out of ₹4,50,000):** Only the amount **separately shown in invoices** is deductible under CST. The balance ₹1,50,000 (not shown separately) is NOT deductible and remains part of the sale price.

**Cost of packing boxes (₹68,500):** **NOT deductible.** Packing charges for non-returnable containers/boxes are an integral part of the sale price and cannot be excluded from taxable turnover.

**Installation and commissioning charges (₹65,000):** Deductible, as these are **post-sale service charges shown separately** in the invoice and do not form part of the sale consideration.

After deducting the allowable items from the gross turnover (which includes CST), the balance is divided by 102 and multiplied by 2 to extract the CST component.

**CST Payable = ₹1,64,412** (rounded to nearest rupee).

Question 4

Explain with reasons whether the following transactions attract income-tax in India in the hands of recipients:

Accepted Answer

The taxability of each transaction in India depends on the recipient's residential status and the source of income.

**Residential Status Determination:**
Residents are taxed on worldwide income under **Section 5(1)** of the Income Tax Act 1961. Non-residents are taxed only on Indian source income under **Section 9** of the Act. Residential status is determined by the presence test (182 days in previous year, or 60 days current year + 365 days in preceding 4 years).

**(a) Salary to Mr. David — NOT TAXABLE (if non-resident)**

Mr. David, a citizen working in Canada, is likely a **non-resident** given his overseas employment location. Under **Section 9(1)(ii)**, salary is taxable in India only if earned in India (where services are rendered in India). Since services were rendered in Canada, the income of ₹15,00,000 is from a **foreign source** and hence **NOT TAXABLE** in India.

Note: If David were somehow a resident of India (despite working abroad), the entire salary would be taxable under Section 5(1) as worldwide income, but this is unlikely given the facts.

**(b) Legal Charges to Mr. Johnson — TAXABLE**

Mr. Johnson, a lawyer from London, is a **non-resident**. However, he rendered professional services in India (Supreme Court representation). Under **Section 9(1)(ii)**, income earned for services rendered in India constitutes **Indian source income** and is taxable for non-residents. The legal charges of ₹7,50,000 are therefore **TAXABLE IN INDIA** under Section 9(1)(i…

Question 5

Ms. Bindu, a non-resident, residing in New York since 1990, came back to India on 19-02-2013 for permanent settlement in India. Explain her residential status of Ms. Bindu for the Assessment Year 2015-16 in accordance with the various provisions of Indian Income Tax Act.

Accepted Answer

Ms. Bindu's residential status for Assessment Year 2015-16 (corresponding to Financial Year 2014-15: 01-04-2014 to 31-03-2015) is determined under **Section 6 of the Income Tax Act, 1961**.

**Resident Status Analysis:**
Under Section 6(1), a person is a resident for a financial year if present in India for: (i) 182 days or more, OR (ii) 60 days or more during the year AND 365 days or more during the 4 preceding years.

Ms. Bindu returned to India on 19-02-2013. For FY 2014-15, she was present for the entire year (365 days), exceeding 182 days. Therefore, she qualifies as a **resident** under Section 6(1).

**Not Ordinarily Resident (NOR) Status:**
Section 6(6) provides that a resident shall be deemed NOR if BOTH conditions are met: (a) resident for 2 or fewer years in the immediately preceding 10 years, AND (b) not present in India for 730 days or more during the 7 years immediately preceding.

For the period: FY 2005-06 to FY 2014-15 (preceding 10 years), Ms. Bindu was resident for 2 years (FY 2013-14 and FY 2014-15). Condition (a) is satisfied.

For the period: FY 2008-09 to FY 2014-15 (preceding 7 years), she was present for: 41 days (FY 2012-13, from 19-02-2013) + 365 days (FY 2013-14) + 365 days (FY 2014-15) = 771 days. Since 771 days exceeds 730 days, condition (b) is NOT satisfied.

As both conditions are not fulfilled, Ms. Bindu does **NOT** qualify as NOR.

**Conclusion:**
Ms. Bindu's residential status for Assessment Year 2015-16 is **RESIDENT ORDINARY (RO)**. She …

Question 6

Rahul & Co. is a firm engaged in the business of recruitment and supply of Manpower. It furnishes the following details pertaining to the quarter ended 31-03-2015:

(i) Amount collected from clients for recruitment of Permanent Staff: ₹5,00,000
(ii) Amount collected from clients for recruitment of Temporary Staff: ₹3,00,000
(iii) Amounts collected from clients for pre-recruitment screening: ₹2,50,000
(iv) Domestic helps arranged for friends & relatives (Value of similar services is ₹45,000 to other customers)
(v) Amount collected from a warehouse of agricultural produce for labour provided for loading and unloading: ₹1,75,000
(vi) Advances received from prospective employers for conducting campus interviews in colleges to be held in May 2015: ₹2,00,000 (Such campus interviews could not be …

Accepted Answer

**Answer: Taxable Value ₹9,74,231 | Service Tax Payable ₹1,20,364**

Rahul & Co. is engaged in **Manpower Supply Service**, which includes recruitment, placement, and supply of labour. The analysis of each item is as follows:

**Item (i) - Recruitment of Permanent Staff: ₹5,00,000**
This constitutes a manpower supply service and is taxable. Amount is inclusive of Service Tax.

**Item (ii) - Recruitment of Temporary Staff: ₹3,00,000**
Temporary staff recruitment is explicitly covered under Manpower Supply Service and is taxable. Amount is inclusive of Service Tax.

**Item (iii) - Pre-recruitment Screening: ₹2,50,000**
Pre-recruitment screening is an ancillary service to manpower recruitment and falls within Manpower Supply Service. Taxable. Amount is inclusive of Service Tax.

**Item (iv) - Domestic Helps: ₹45,000**
Arranging manpower for domestic help constitutes Manpower Supply Service. Even though arranged for friends & relatives, the fact that similar services are charged at ₹45,000 to other customers indicates this is a commercial service. Taxable. Amount is inclusive of Service Tax.

**Item (v) - Loading and Unloading of Agricultural Produce: ₹1,75,000**
Supply of labour for agricultural operations is exempt from Service Tax. Loading and unloading of agricultural produce qualifies as an agricultural operation under the exemption notification. This amount is **NOT TAXABLE**.

**Item (vi) - Campus Interviews: ₹2,00,000**
No service was rendered as the interviews were cance…

Question 7

Balaji Enterprises, a registered dealer, provides the following details of purchases, sales, etc. for the year ended 31st March 2015:

- Purchase of raw materials within State (1500 units), inclusive of VAT @ 12.5%: ₹4,01,000
- Inter-State purchases of raw materials, inclusive of CST @ 2%: ₹3,06,000
- Import of raw materials, inclusive of custom duty: ₹4,50,000 (custom duty ₹50,000)
- Capital goods purchased on 15-6-2014, inclusive of VAT levy @ 10% (input credit to be spread over 3 years): ₹3,30,000
- Manufacturing expenses: ₹1,75,000
- Sales of taxable goods within state, inclusive of VAT @ 4%: ₹10,92,000
- Sale of exempted goods within state (manufactured from Inter-State purchase of raw materials): ₹2,25,000

Closing Stock of 200 units of raw material purchased within State as on 31st …

Accepted Answer

**Answer: Net VAT Liability = ₹(6,626) – VAT Refund Due**

Balaji Enterprises is entitled to a **refund of ₹6,626** for the year ended 31st March 2015. Alternatively, expressed as a credit: **Negative liability of ₹6,626**.

**Calculation of Output VAT:**
Sales of taxable goods within state (inclusive of 4% VAT): ₹10,92,000
Output VAT = 10,92,000 × (4/104) = **₹42,000**

**Calculation of Input VAT Credit:**

1. **Within-State Purchase (Raw Materials):**
   - Amount inclusive of VAT @ 12.5%: ₹4,01,000
   - VAT component: 4,01,000 × (12.5/112.5) = ₹44,556 (approx.)
   - Closing stock: 200 units out of 1,500 units
   - Raw materials used: 1,300 units
   - Input credit on materials used: 44,556 × (1,300/1,500) = **₹38,626**

2. **Inter-State Purchase (CST) – No Credit Allowed:**
   - The problem specifies that "input tax credit is allowed only on raw materials used in manufacturing of taxable goods."
   - Exempted goods are manufactured from inter-state raw materials (as stated).
   - CST paid on inter-state purchases used for exempted goods: **No credit** (per the stated rule)
   - CST credit: **₹0**

3. **Capital Goods (VAT @ 10%):**
   - Purchase price (inclusive of VAT): ₹3,30,000
   - VAT component: 3,30,000 × (10/110) = ₹30,000
   - Credit to be spread over 3 years: 30,000 ÷ 3 = **₹10,000 per annum**
   - For the year ended 31-3-2015 (first year of use): **₹10,000**

4. **Imported Raw Materials:**
   - No VAT rate specified; no input credit assumed: **₹0**

**Total Input Cr…

Question 8

Rudra Ltd. has one unit at Special Economic Zone (SEZ) and another unit at Domestic Tariff Area (DTA). The company provides the following details for the previous year 2014-15:

| Particulars | SEZ Unit (₹) | DTA Unit (₹) |
|---|---|---|
| Total Sales | 6,00,00,000 | 2,00,00,000 |
| Export Sales | 4,60,00,000 | 1,60,00,000 |
| Net Profit | 80,00,000 | 20,00,000 |

Calculate the eligible deduction under section 10AA of the Income-tax Act, 1961 for the Assessment Year 2015-16 in the following situations:
(i) If both the units were set up and start manufacturing from 24-5-2008.
(ii) If both the units were set up and start from 14-5-2012.

Accepted Answer

**Section 10AA** provides deduction on export profits of undertakings set up in a Special Economic Zone. Only the **SEZ Unit** is eligible for this deduction; the DTA Unit does not qualify as it is not located within a Special Economic Zone.

**Calculation of Export Profit (SEZ Unit):**

Export Profit = (Export Sales ÷ Total Sales) × Net Profit

Export Profit = (₹4,60,00,000 ÷ ₹6,00,00,000) × ₹80,00,000

Export Profit = (23/30) × ₹80,00,000 = **₹61,33,333**

**Eligibility Assessment:**

For units set up **before 1-4-2009**: 100% deduction for 5 consecutive assessment years; 50% deduction for the next 5 assessment years.

For units set up **from 1-4-2009 to 31-3-2015**: Same relief structure applies (100% for 5 years, then 50% for 5 years).

**Situation (i): Both units set up on 24-5-2008**

Unit begins manufacturing during FY 2008-09. First assessment year is AY 2009-10.
- AY 2009-10 to AY 2013-14: Years 1-5 (100% deduction)
- AY 2014-15 onwards: Years 6+ (50% deduction)

For AY 2015-16, this is Year 7 of the relief period, falling in the **50% deduction phase**.

**Deduction = 50% × ₹61,33,333 = ₹30,66,667**

**Situation (ii): Both units set up on 14-5-2012**

Unit begins manufacturing during FY 2012-13. First assessment year is AY 2013-14.
- AY 2013-14 to AY 2017-18: Years 1-5 (100% deduction)

For AY 2015-16, this is Year 3 of the relief period, falling in the **100% deduction phase**.

**Deduction = 100% × ₹61,33,333 = ₹61,33,333**

Question 9

BC Pvt. Ltd., a manufacturer, has furnished the following information:

| S.No. | Particulars | Excise Duty/Service Tax Paid (₹) |
|---|---|---|
| (i) | Input 'A' — Invoice dated 23-09-2014 | 1,56,000 |
| (ii) | Input 'B' — Invoice dated 10-4-2015 | 1,35,000 |
| (iii) | Input 'C' — Invoice missing | 89,460 |
| (iv) | Input Service 'X' — Invoice dated 12-11-2014 | 45,140 |
| (v) | Input Service 'Y' — Invoice dated 20-5-2014 | 68,240 |
| (vi) | Machinery (eligible capital goods under Chapter 82) — Invoice dated 12-9-2014 | 3,54,670 |
| (vii) | GTA service for bringing raw materials to the factory — Invoice dated 10-4-2015 (Payment not made to GTA but service tax paid under reverse charge; Value of Services ₹3,00,000) | 9,270 |

Excise duty/Service tax given above are including education cess…

Accepted Answer

**CENVAT Credit Availed by BC Pvt. Ltd. — April 2015**

The eligibility of each item is determined under the **CENVAT Credit Rules, 2004**.

**(i) Input 'A' — Invoice dated 23-09-2014 (₹1,56,000):** Under **Rule 4(1) of the CENVAT Credit Rules, 2004**, credit on inputs can be taken when inputs are received in the factory. Since no time limit existed (pre-2016 amendment), credit not previously availed can be taken in April 2015. **Credit allowed: ₹1,56,000.**

**(ii) Input 'B' — Invoice dated 10-4-2015 (₹1,35,000):** Invoice falls in April 2015; goods received and credit is immediately available under Rule 4(1). **Credit allowed: ₹1,35,000.**

**(iii) Input 'C' — Invoice missing (₹89,460):** Under **Rule 9(1) and Rule 9(2) of the CENVAT Credit Rules, 2004**, CENVAT credit can only be taken on the basis of a valid specified document (invoice, bill of entry, etc.). Since the invoice is missing, no valid document exists. **Credit NOT allowed: Nil.**

**(iv) Input Service 'X' — Invoice dated 12-11-2014 (₹45,140):** Under **Rule 4(7) of the CENVAT Credit Rules, 2004**, credit on input services is taken on receipt of invoice. If payment is not made within 3 months (i.e., by 12-02-2015), the credit must be reversed and re-availed upon payment. Assuming payment has been made by April 2015, credit is available. **Credit allowed: ₹45,140.**

**(v) Input Service 'Y' — Invoice dated 20-05-2014 (₹68,240):** Same rule applies as above under Rule 4(7). No time limit existed for availing cred…

Question 10

Rajeshwari Industries imported a machinery from Germany in an aircraft. The bill of entry was presented on 12-01-2014 and the aircraft arrived in India on 25-07-2014. The rates of import duty are:

- Bill of entry on 12-01-2014: 12%
- Arrival of aircraft on 25-07-2014: 15%

In the above case, determine the applicable rate of import duty.

Accepted Answer

**Answer: The applicable rate of import duty is 12%.**

**Principle:** Under the **Customs Act, 1962**, the rate of import duty applicable to goods is determined by the rate in force on the date when the **bill of entry is presented/filed**, not the date of arrival of goods in India.

**Section 15 of the Customs Act, 1962** provides that the duty of customs shall be levied at the rate in force at the time when the bill of entry is presented for clearance. The date of actual arrival of goods is immaterial for determining the applicable tariff rate.

**Application to the given case:** Although the aircraft carrying the machinery arrived in India on 25-07-2014 (when the duty rate was 15%), the bill of entry was presented on 12-01-2014 (when the duty rate was 12%). Since the bill of entry was filed on 12-01-2014, the customs duty rate applicable on that date, i.e., **12%**, will be the applicable rate for levying duty on the imported machinery.

**Rationale:** The presentation of the bill of entry is the crucial event that fixes the rate of duty. This principle ensures certainty and prevents importers from facing uncertain duty liability based on delayed clearance. The bill of entry date is when the importer formally declares the goods to the customs authorities, thereby triggering the tariff classification and rate determination process.

Question 11

From the following details furnished by Mr. Dinesh, a marketing manager of XL Corporation Ltd., Delhi, compute the gross total income for the Assessment Year 2015-16:

- Salary including Dearness Allowance of ₹10,800 p.m.: ₹6,50,000
- Conveyance allowance: ₹900 p.m.
- Salary of servant provided by employer: ₹48,000
- Bills paid by the employer for gas, electricity and water provided free of cost at the residence of Mr. Dinesh: ₹52,000

Dinesh purchased a flat in a co-operative housing society in Dwarka, Delhi for self-occupation for ₹35,00,000 in April 2011, financed by a loan from Bank of India of ₹20,00,000 @ 11% interest, his own savings of ₹5,00,000, and a deposit of ₹10,00,000 from Bank of Baroda, to whom he let out his another house in Rohini, Delhi on lease for ten years. The rent p…

Accepted Answer

**Computation of Gross Total Income of Mr. Dinesh for Assessment Year 2015-16**

**A. Income from Salary**

Salary including DA is fully taxable at ₹6,50,000. **Conveyance allowance** of ₹900 p.m. is exempt only up to ₹800 p.m. under Rule 2BB of the Income Tax Rules, 1962; hence ₹100 p.m. (₹1,200 p.a.) is taxable. **Salary of servant** provided by employer is a perquisite under Rule 3(3) valued at actual cost to employer, i.e., ₹48,000 — fully taxable. **Bills for gas, electricity and water** paid by employer is a perquisite under Rule 3(4) valued at actual cost, i.e., ₹52,000 — fully taxable. **Education facility** for minor son in employer-maintained school under Rule 3(5): cost in similar school is ₹2,500 p.m.; exemption is ₹1,000 p.m. per child; taxable perquisite = ₹1,500 × 12 = ₹18,000.

Total Salary Income = ₹6,50,000 + ₹1,200 + ₹48,000 + ₹52,000 + ₹18,000 = **₹7,69,200**

**B. Income from House Property**

**(i) Rohini House — Let-out to Bank of Baroda:** Actual rent = ₹35,000 × 12 = ₹4,20,000 (taken as Gross Annual Value, no unrealised rent or vacancy). Less: **Municipal taxes** paid by owner = ₹12,000 (deductible under Section 23 of the Income Tax Act, 1961). **Net Annual Value (NAV)** = ₹4,08,000. Less: **Standard deduction u/s 24(a)** @ 30% = ₹1,22,400. No interest on borrowed capital is attributable to this property (the ₹10,00,000 deposit from Bank of Baroda is a security deposit from the tenant, not a loan bearing interest). **Income = ₹2,85,600.**

**(ii) Dwar…

Question 12

What will be the point of taxation in case of continuous supply of services?

Accepted Answer

The point of taxation in case of continuous supply of services is determined under **Section 12(2) of the CGST Act, 2017** and the **Point of Taxation Rules, 2017**, Rule 4.

**Definition of Continuous Supply of Services:** Continuous supply of services refers to services that are supplied on a continuous basis for a period of time, where the supplier issues periodic invoices (monthly, quarterly, etc.) and receives corresponding periodic payments. Examples include rental services, maintenance contracts, insurance, support services, and similar recurring service arrangements.

**Point of Taxation Rule:** For continuous supply of services, the point of taxation shall be **the earlier of:**

1. **The date on which payment is received** — Payment can be partial or full. Once payment is received (even partial), the POT event occurs.

2. **The date on which the invoice is issued** — The invoice must be issued within the prescribed time, as per Section 31 (within 30 days of supply or as extended).

The operative word is "whichever is earlier." If an invoice is issued on 10th of the month but payment is received only on 20th, the POT is 10th (invoice date). Conversely, if payment is received on 5th of the month but the invoice is delayed to 15th, the POT is 5th (payment date).

**Practical Application:** In typical monthly invoicing arrangements, invoices are issued on or around the last day of the month for services rendered during that month. Payment usually follows in the next mon…

Question 13

Mohan, a service provider, had received ₹2,50,000 in advance from Rakesh. Mohan had deposited service tax on such amount in the relevant half year. He finally rendered services valuing to ₹2,20,000 only and refunded the balance amount to Rakesh. Mohan wants to adjust service tax on ₹30,000 refunded by him from his current dues of service tax. Advise him.

Accepted Answer

**Answer: Yes, Mohan can adjust the service tax on ₹30,000 against his current dues.**

Mohan received ₹2,50,000 in advance and paid service tax on this full amount in the relevant half year. However, he actually rendered services valuing only ₹2,20,000. This means service tax was levied and paid on an amount exceeding the actual value of services provided.

Service tax is levied on the **value of taxable services provided**, not on advances received. Since Mohan provided services worth only ₹2,20,000 against which tax should have been paid, the service tax paid on the remaining ₹30,000 represents **excess service tax liability**.

Under the provisions of the Finance Act, 1994, when a service provider pays service tax on an amount for which services are not proportionately rendered, the excess tax paid qualifies for refund or adjustment against current service tax dues. Rule 5 of the Service Tax Rules provides for adjustment of service tax against subsequent tax liability.

In this case, the service tax on ₹30,000 (the unexecuted portion of the advance) can be **adjusted against Mohan's current service tax dues** instead of claiming a separate refund, which is operationally more convenient. The refund/adjustment is available because the taxable event (service provision) was incomplete, leaving the excess tax paid to be credited against future liability.

Question 14

A manufacturer of machinery sold his machine on which Excise duty is payable under Section 4 of Central Excise Act, 1944. Details are as follows:

- Sale Invoice Price: ₹7,50,000
- Erection Charges (erection to be done at customer's factory): ₹50,000
- Packing charges: ₹12,000
- Design Charges: ₹20,000
- Insurance Charges (for dispatch to customer's factory): ₹5,000
- Outward freight (from place of removal to customer's factory): ₹17,000
- State VAT: 12.5%
- Cash discount @ 2% was allowed as the customer had made full advance payment.

Excise duty rate is 12% and education and secondary & higher education cesses as applicable. Calculate Assessable Value of the machine and excise duty payable.

Accepted Answer

**Computation of Assessable Value under Section 4 of the Central Excise Act, 1944**

Under **Section 4**, the **transaction value** is the price actually paid or payable for the goods at the time and place of removal, including all amounts charged by the assessee in connection with the sale, but **excluding** post-removal freight, insurance, erection charges at buyer's site, sales tax/VAT, and genuine cash discounts allowed at the time of or prior to removal.

**Treatment of each item:**

- **Invoice Price ₹7,50,000** — Base price, included.
- **Erection Charges ₹50,000** — Activity performed at customer's factory (post-removal). **Excluded** from assessable value.
- **Packing Charges ₹12,000** — Packing is part of the manufacturing process and is **included** in assessable value.
- **Design Charges ₹20,000** — Charges for design related to the goods paid to the manufacturer are **included** per the Valuation Rules.
- **Insurance Charges ₹5,000** — Transit insurance from place of removal to buyer's site is a post-removal cost. **Excluded**.
- **Outward Freight ₹17,000** — Freight from place of removal (factory) to customer's factory is post-removal. **Excluded**.
- **State VAT** — Statutory levy on sale; **excluded** from assessable value under Section 4(3)(b).
- **Cash Discount @ 2%** — Allowed because full advance payment was made (i.e., discount is known and unconditionally given at the time of removal). **Deductible** from invoice price.

**Assessable Value = ₹7,67,000**
…

Question 15

Ms. Mohini transferred a house to her friend Ms. Ragini for ₹35,00,000 on 01-10-2014. The Sub Registrar valued the land at ₹48,00,000. Ms. Mohini contested the valuation and the matter was referred to Divisional Revenue Officer, who valued the house at ₹41,00,000. Accepting the said value, differential stamp duty was also paid and the registration was completed.

The total income of Mohini and Ragini for the assessment year 2015-16, before considering the transfer of said house, are ₹2,80,000 and ₹3,45,000 respectively. Ms. Mohini had purchased the house on 15th May 2010 for ₹25,00,000 and registration expenses were ₹1,50,000.

You are required to explain provisions of Income-tax Act, 1961 applicable to the present case and also determine the total income of both Ms. Mohini and Ms. Ragini …

Accepted Answer

**Applicable Provisions:**

**Section 50C - Full Value of Consideration for Capital Gains:** When immovable property is transferred and the actual sale price is less than the stamp duty valuation, the full value of consideration for computing capital gains shall be taken as the stamp duty value. In case of dispute, the valuation determined by the Divisional Revenue Officer (or appropriate authority) shall apply. Here, the DRO accepted valuation of ₹41,00,000 becomes the full value of consideration for Mohini's capital gains computation, as it exceeds the agreement price of ₹35,00,000.

**Section 56(2)(vii) - Deemed Income from Inadequate Consideration:** Where property is received by a person for inadequate consideration, the difference between the stamp duty value and the consideration actually given is treated as income of the recipient. Exemptions are available only for gifts from relatives (as defined under Section 56(2)(viii)) or gifts not exceeding ₹50,000 in a financial year. Since Ragini is Mohini's friend (not a relative) and the inadequate consideration amount exceeds ₹50,000, no exemption applies.

**Long-term Capital Gains:** The property held for more than 36 months (purchased 15-05-2010, sold 01-10-2014) qualifies as long-term. The holding period exceeds 4 years, clearly meeting the long-term criteria.

**TOTAL INCOME OF MS. MOHINI:**

Long-term capital gain computation:

**Indexed Cost of Acquisition:** Original purchase price ₹25,00,000 plus registration expen…

Question 16

State whether the following services are covered under negative list of services under Section 66D. Need not assign any reason:
(i) Service provided by the Department of Post by way of speed post, express parcel post, Life Insurance and agency services provided to a person other than Government.
(ii) Service provided by way of supply of farm labour relating to agriculture.
(iii) Services by way of renting of residential dwellings for use as residence.
(iv) Services for funeral, burial, crematorium or mortuary and transportation of the deceased.
(v) Services relating to education as a part of an approved vocational education course.
(vi) Service of transportation of passengers with or without accompanied belongings, by Railways in an air conditioned coach.
(vii) Services by way of transport…

Accepted Answer

**Answer:**

(i) **Not entirely covered** — Speed post, express parcel, and life insurance services are covered under the negative list. However, agency services provided to a person other than Government are not covered (only agency services to Government are exempt).

(ii) **Covered** — Services by way of supply of farm labour relating to agriculture are explicitly covered under the negative list of services.

(iii) **Covered** — Services by way of renting of residential dwellings for use as residence are explicitly covered under the negative list.

(iv) **Covered** — Services for funeral, burial, crematorium, mortuary, and transportation of the deceased are explicitly covered under the negative list.

(v) **Covered** — Services relating to education as part of an approved vocational education course are covered under the negative list of services.

(vi) **Covered** — All services by way of transportation of passengers by Railways are covered under the negative list, regardless of the type of coach (including air-conditioned coaches).

(vii) **Covered** — Services by way of transportation of goods by road by a goods transportation agency are covered under the negative list.

(viii) **Not covered** — Selling of space or time slots for advertisement broadcast by FM Radio is not covered under the negative list and is taxable.

Question 17

Define the term 'Transaction value' as per Central Excise Act, 1944.

Accepted Answer

**Transaction value** under the Central Excise Act, 1944 refers to the **price at which goods are sold or delivered under normal trading conditions**. It is the basis for determining the assessable value of goods subject to excise duty.

**Key Characteristics of Transaction Value:**

**1. Price in Money or Money's Worth:** Transaction value includes the actual consideration (payment) for the goods, whether in the form of money or any other valuable consideration. It must represent the genuine price paid or payable between the buyer and seller in an arm's length transaction.

**2. Normal Trading Conditions:** The value must be determined under conditions of free competition and normal commercial dealings, not under forced circumstances or abnormal transactions.

**3. Inclusions in Transaction Value:**
- Packing charges and container charges
- Freight and insurance costs up to the point of removal from the factory
- Commission and brokerage charges (if payable by the manufacturer)
- Any other charges incidental to the sale
- Cost of processing, design, and artwork

**4. Exclusions from Transaction Value:**
- Excise duty itself is strictly excluded
- Any taxes that are separately invoiced and recoverable (e.g., GST in current regime)
- Discounts and rebates allowed at the time of sale
- Interest on delayed payment (not part of price)

**5. Open Market Value:** When actual transaction value is not available or the transaction is not at arm's length, the assessable value is determ…

Question 18

Compute the eligible deduction under Chapter VI-A for the Assessment Year 2015-16 of Ms. Roma, who has a gross total income of ₹15,00,000 and provides the following information about investments/payments during the year 2014-15:

| S.No. | Particulars | Amount (₹) |
|---|---|---|
| 1 | Life Insurance premium paid (Policy taken on 01-01-2012, sum assured ₹1,50,000) | 35,000 |
| 2 | Public Provident Fund Contribution | 90,000 |
| 3 | Repayment of Housing loan to Bhartiya Mahila Bank, Bangalore | 20,000 |
| 4 | Payment to LIC Pension Fund | 25,000 |
| 5 | Mediclaim Policy taken for self, wife and dependent children — Premium paid | 20,000 |
| 6 | Medical Insurance premium paid for parent (Senior Citizen) | 25,000 |

Additionally: Mr. Ramesh gifted a sum of ₹5 lacs to his brother's minor son o…

Accepted Answer

**Computation of Deduction under Chapter VI-A for Ms. Roma — AY 2015-16**

**Section 80C — Life Insurance, PPF, Housing Loan Repayment:**

The LIC policy was taken on 01-01-2012, i.e., *before* 01-04-2012. For such policies, the premium eligible under Section 80C of the Income Tax Act, 1961 is restricted to **20% of the sum assured**. Sum assured = ₹1,50,000; therefore, maximum eligible premium = 20% × ₹1,50,000 = **₹30,000** (actual premium paid ₹35,000 is restricted).

PPF contribution of ₹90,000 is fully eligible. Repayment of housing loan principal to Bhartiya Mahila Bank (a scheduled bank) of ₹20,000 is eligible under Section 80C.

Total eligible under Section 80C = ₹30,000 + ₹90,000 + ₹20,000 = ₹1,40,000. The Section 80C limit is ₹1,50,000; hence deduction = **₹1,40,000**.

**Section 80CCC — LIC Pension Fund:** Payment of ₹25,000 to LIC Pension Fund is eligible under Section 80CCC. However, as per **Section 80CCE**, the aggregate deduction under Sections 80C, 80CCC, and 80CCD(1) cannot exceed **₹1,50,000**. Since ₹1,40,000 is already claimed under 80C, only **₹10,000** more can be claimed under 80CCC.

**Section 80D — Medical Insurance:** For AY 2015-16, the limit under Section 80D for mediclaim premium for self, spouse, and dependent children is **₹15,000** (for non-senior citizens). Premium paid = ₹20,000 → eligible = ₹15,000. For senior citizen parents, the separate limit is **₹20,000**. Premium paid = ₹25,000 → eligible = ₹20,000. Total Section 80D deduction = ₹15,0…

Question 19

Ms. Vasundhara, a service provider who pays service tax regularly, was of the opinion that a particular service rendered by her was not liable to service tax. She therefore did not charge service tax in her bill. She received the payment for the bill amount without service tax. However, it was later confirmed that service tax is payable on the said service. How will service tax liability of Ms. Vasundhara be determined in such a case?

Accepted Answer

When a service is later determined to be liable to service tax, Ms. Vasundhara's service tax liability will be determined on the basis of the amount actually charged to the customer for the service, not on any inflated amount.

**Determination of Taxable Value**: Under **Section 67 of the Finance Act, 1994**, the value of a taxable service includes the amount charged by the service provider for providing that service. In Ms. Vasundhara's case, since she charged ₹X (the bill amount) without service tax, the taxable value is ₹X. Service tax would be calculated on this amount at the applicable rate.

**Service Tax Not Price Cum Duty**: An important principle is that service tax is **not included in the taxable value** (i.e., it is not price cum duty). The taxable value is determined on an exclusive-of-tax basis, representing the actual consideration received for the service. Therefore, the service provider cannot claim that the customer should have paid more; the liability is calculated on what was actually charged.

**Liability Arising on Service Provision**: The service tax liability arises **from the date the service was provided**, not from the date the discrepancy was discovered. This means Ms. Vasundhara is liable to pay service tax on the service rendered, even though she did not collect it from the customer at the time.

**Financial Consequence**: Since Ms. Vasundhara already received the payment without charging service tax separately, she would be required to **pay the…

Question 20

Explain the term 'Price cum Duty' as per Central Excise Act, 1944.

Accepted Answer

**Price cum Duty** refers to the final selling price of excisable goods that includes the amount of excise duty within it. Under the Central Excise Act, 1944, this concept is crucial in determining the assessable value on which excise duty is levied. According to **Section 4 of the Central Excise Act, 1944**, the incidence of duty is on the manufacturer.

The term "Price cum Duty" essentially means that the selling price quoted to the customer encompasses both the cost of the goods and the excise duty amount. When goods are sold at a fixed retail price that is inclusive of all taxes and duties, the concept of "Price cum Duty" becomes applicable. This represents a situation where the manufacturer or seller fixes a single price for the product that absorbs the excise duty obligation.

When the assessable value includes the duty itself, back-calculation becomes necessary to isolate the actual duty component from the total price. This is done using the formula: Duty = (Price cum Duty × Rate) ÷ (100 + Rate). For example, if a product is sold at ₹110 (inclusive of 10% excise duty), the actual duty component is ₹10. This back-calculation method prevents the cascading effect where duty could be levied on duty itself.

The significance of the Price cum Duty concept lies in ensuring that the excise duty is correctly computed on the actual manufactured or transaction value, not on a price inflated by the duty itself. This maintains the integrity and fairness of the excise tax system and…

Question 21

Briefly explain any two of the following three sub-divisions:

Accepted Answer

**ANSWER: Explaining parts (i) and (ii)**

**Part (i): Return of Loss**

A **return of loss** is a return of income filed by an assessee when the computed income for the financial year is negative (a loss). Under Section 139(1) of the Income-tax Act, 1961, every assessee whose gross total income exceeds the basic exemption limit must file a return of income. However, even when income falls below the exemption limit, a return of loss must be filed to preserve the right to carry forward the loss to subsequent years.

**Key provisions**: The return of loss must be filed within the prescribed due date under Section 139(1)—normally by 31st July of the subsequent financial year. Late filing forfeits the carry-forward benefit except where a belated return is permitted under Section 139(4).

**Can losses be carried forward without filing return of loss?** Generally, **losses cannot be carried forward if return of loss is not filed within the prescribed time**. The carry-forward right is conditional upon filing. However, there are **limited exceptions**: (a) If an assessment is completed without a return being filed (best judgment assessment under Section 143), loss can still be carried forward; (b) In rare cases of belated returns under Section 139(4), loss carry-forward is allowed from the next assessment year only.

**Loss carry-forward rules by type**: Loss from business/profession is carried forward for 8 years; loss from house property indefinitely; speculative business loss for…

Question 22

Ashok, a taxable service provider, outsourced a part of work by engaging Suresh, a subcontractor. Service tax is charged and paid by Ashok for the total work. Whether Suresh, the sub-contractor, is liable to charge and pay any service tax?

Accepted Answer

**Yes, Suresh, the subcontractor, is liable to charge and pay service tax on the outsourced services provided to Ashok**, subject to the following conditions:

**Basis of Suresh's Liability:**
Service tax is levied on each **provider of taxable services**. Since Suresh is providing services (the outsourced work) to Ashok, Suresh is a service provider in his own right. If the outsourced work constitutes a taxable service and Suresh's turnover exceeds the applicable threshold limit (currently ₹20 lakhs under GST), he must register and pay service tax on the value of services provided to Ashok.

**Mechanism to Avoid Double Taxation:**
The system does not result in double taxation through the **Input Tax Credit (ITC) mechanism**:

Ashok's position: Ashok charges service tax to the end customer on the full value of the complete service. However, Ashok is entitled to claim ITC on the service tax paid to Suresh. Therefore, Ashok's net tax liability is only on the value added by him, not the total contract value.

Suresh's position: Suresh charges and pays service tax only on the amount received from Ashok for the outsourced portion. Suresh does not service the end customer directly.

Economic incidence: The ultimate tax burden rests with the end customer, and each service provider in the chain pays tax only on their value addition, not the entire transaction value.

**Practical Example:**
If Ashok receives ₹100 from a customer and outsources ₹30 of work to Suresh at a service tax ra…

Question 23

RSL Pvt. Ltd. purchased a pollution control equipment on 20-6-2010 for ₹15,00,000 (including excise duty of ₹1,85,400) and took the CENVAT credit of 50% of the excise duty paid in the financial year 2010-11 and balance credit of 50% in the financial year 2011-12. After using such equipment, sold it as scrap for ₹50,000 excluding excise duty, on 31st December 2014. Examine whether:
(i) RSL Pvt. Ltd. was correct in availing the CENVAT credit on the said equipment in financial years 2010-11 and 2011-12?
(ii) On selling of above equipment in the financial year 2014-15, it needs to pay the amount of excise duty earlier availed as CENVAT Credit?

Accepted Answer

**Part (i): Correctness of CENVAT Credit Availed**

**Pollution control equipment qualifies as 'capital goods'** under Rule 2(a) of the CENVAT Credit Rules, 2004. The Rule specifically includes pollution control equipment within the definition of capital goods eligible for CENVAT credit.

Under **Rule 4(2)(a) of the CENVAT Credit Rules, 2004**, a manufacturer is entitled to take CENVAT credit on capital goods, subject to the condition that:
- Up to **50% of the CENVAT credit** shall be taken in the financial year in which the capital goods are **received**, and
- The **balance 50%** may be taken in any subsequent financial year.

In the present case, RSL Pvt. Ltd. received the pollution control equipment in FY 2010-11 (purchased on 20-6-2010) and availed 50% credit (₹92,700) in FY 2010-11 and the remaining 50% (₹92,700) in FY 2011-12.

**Conclusion:** RSL Pvt. Ltd. was **correct** in availing CENVAT credit of ₹1,85,400 in the manner described. The credits were availed in compliance with Rule 4(2)(a) of the CENVAT Credit Rules, 2004.

---

**Part (ii): Amount Payable on Disposal as Scrap in FY 2014-15**

**Rule 3(5A) of the CENVAT Credit Rules, 2004** specifically deals with the situation where capital goods on which CENVAT credit has been taken are **cleared as waste and scrap**. It states that the manufacturer shall pay an amount equal to the **duty leviable on the transaction value** of such waste and scrap.

Since RSL Pvt. Ltd. sold the equipment as scrap for ₹50,000 (excl…

Income	Tax
Up to ₹2,50,000	Nil
₹2,50,001 to ₹4,27,865 (10%)	₹17,787
Game show winnings ₹50,000 @ 30%	₹15,000
Total tax	₹32,787
Less: Rebate u/s 87A (total income < ₹5 lakh)	(₹2,000)
Tax after rebate	₹30,787
Add: Education Cess @ 2% + SHEC @ 1% (3%)	₹924
Gross Tax Payable	₹31,711
Less: TDS under Section 194B	(₹15,000)
Net Tax Payable	₹16,711

CA Inter Cost & Mgmt

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Worked Solution

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