Question 1

Mr. Hari provides the following information for the year ending 31-03-2012:
(i) Rent from vacant site let on lease: Rs.1,12,000
(ii) Rent from house property at Delhi: Rs.20,000 per month
(iii) Turnover from retail trade in grains (No books of account maintained): Rs.24,37,500
(iv) Arrears of salary received from ex-employer: Rs.40,000
(v) Purchase of 10,000 shares of X Co. Ltd., on 01-01-2008: Rs.1,00,000. He received a 1:1 bonus on 01-01-2009. Sale of 5,000 bonus shares in September, 2011: Rs.2,20,000
(vi) Received Rs.1,50,000 on 12-02-2012 being amount due from Mr. A relating to goods supplied by Hari's father, which was written off as bad debt by his father in Assessment Year 2010-11 and allowed as deduction. Hari's father died in July 2010.
(vii) Brought forward business loss relating…

Accepted Answer

**Assessment Year:** 2012-13 (Previous Year: 2011-12)

**Head 1 — Income from Salaries**
Arrears of salary received from ex-employer are taxable under Section 15 of the Income Tax Act, 1961. No deduction under Section 16 is available (no government employment, no professional tax stated). **Taxable Salary: Rs. 40,000**

**Head 2 — Income from House Property (Delhi)**
The Delhi property is let out at Rs. 20,000 per month. Annual value = Rs. 2,40,000. Standard deduction under Section 24(a) @ 30% = Rs. 72,000. No interest on housing loan mentioned. **Income from House Property: Rs. 1,68,000**

**Head 3 — Profits and Gains from Business or Profession**
Since no books of account are maintained and turnover is Rs. 24,37,500 (below Rs. 60 lakhs), **Section 44AD** (presumptive taxation for eligible business from AY 2011-12 onwards; Section 44AF was omitted) applies at 8% of turnover = Rs. 1,95,000.

The recovery of Rs. 1,50,000 from Mr. A (bad debt written off by Hari's father in AY 2010-11 and allowed as deduction) is taxable in Hari's hands as successor under **Section 41(4)** of the Income Tax Act, 1961, in the year of recovery. Total business income before set-off = Rs. 3,45,000.

**Set-off of brought forward losses:** The business loss of Rs. 1,97,500 (AY 2010-11) from the discontinued textile business is set off under **Section 72** against current business profits (permissible since it is within 8 years and loss is from a business, not speculation). Balance business income = R…

Question 2

Mr. Ghosh is a practising Chartered Accountant. He has furnished the following information for the month of January 2012:
(i) A bill for annual professional service was raised on Amco Ltd., for Rs.7,20,000 on 22nd December 2011. However he received Rs.7,00,000 in full and final settlement of the above bill on 23rd January 2012.
(ii) An advance of Rs.3,00,000 was received from Atul Ltd., for services to be provided in the month of April and May.
(iii) Services were provided to a friend free of cost in January 2012 for which Ghosh normally charges Rs.1,20,000 from other clients.
(iv) Rs.1,00,000 was received on 20th January 2012 from client 'C' whom Ghosh represented in the Income-tax Appellate Tribunal which sent a notice to Mr. C.
(v) Rs.1,00,000 was received on 18th January 2012 for servi…

Accepted Answer

**Computation of Service Tax payable by Mr. Ghosh for January 2012**

**Item (i) — Bill of Rs.7,20,000 raised on Amco Ltd. (22 Dec 2011); Rs.7,00,000 received on 23 Jan 2012 as full and final settlement:**
Since Mr. Ghosh is an individual, under the transitional provision of Rule 7 of the **Point of Taxation Rules, 2011**, individuals and partnership firms were permitted to continue on the **receipt basis** up to 31 March 2012. Accordingly, the point of taxation is the date of receipt (January 2012). The actual consideration received (Rs.7,00,000) forms the taxable amount; the balance Rs.20,000 waived is not taxable. **Taxable: Rs.7,00,000.**

**Item (ii) — Advance of Rs.3,00,000 received from Atul Ltd. for services in April–May:**
Under Rule 3(b) of the Point of Taxation Rules, 2011, where payment is received before provision of service, the point of taxation is the **date of receipt of advance**. The advance received in January 2012 is taxable in that month itself. **Taxable: Rs.3,00,000.**

**Item (iii) — Free services to a friend (normal charge Rs.1,20,000):**
Service tax is levied on the **consideration received** for services. Where services are provided without any monetary or non-monetary consideration, there is no taxable value. Free services are **not liable to service tax**. **Taxable: Nil.**

**Item (iv) — Rs.1,00,000 received for representing client C before ITAT:**
Representation of a client before the Income Tax Appellate Tribunal by a Chartered Accountant fall…

Question 3

The following are details of purchases, sales, etc. effected by Varadan & Co., a registered dealer, for the year ended 31-03-2012:
- Purchase of raw materials within State (500 units, inclusive of VAT levy at 12.5%): Rs.11,25,000
- Inter-State purchases of raw materials, inclusive of CST at 4%: Rs.4,08,000
- Import of packing material, inclusive of customs duty of Rs.10,000: Rs.2,10,000
- Capital goods purchased on 01-04-2011 at VAT levy at 10% (input credit to be spread over 2 financial years): Rs.5,50,000
- Sales of taxable goods within State, inclusive of VAT levy at 4%: Rs.40,24,000
- Sales of goods within State, exempt from levy of VAT (goods were manufactured from the Inter-State purchase of raw materials): Rs.1,20,000
Compute the VAT liability of the dealer for the year ended 31-03-…

Accepted Answer

**VAT Liability of Varadan & Co. for the year ended 31-03-2012**

**Output VAT (Tax Collected on Sales):**
Only sales of taxable goods within the State are liable to output VAT. Sales of exempt goods (Rs.1,20,000) carry no output VAT.

Output VAT on taxable sales (inclusive of VAT @ 4%) = Rs.40,24,000 × 4/104 = **Rs.1,54,769**

**Input Tax Credit (ITC) Available:**

**(1) Within-State purchase of raw materials:** VAT @ 12.5% is embedded in Rs.11,25,000 (inclusive). ITC = 11,25,000 × 12.5/112.5 = **Rs.1,25,000**

**(2) Inter-State purchases of raw materials:** CST (Central Sales Tax) paid on inter-state purchases is **not eligible** for set-off as Input Tax Credit under State VAT laws. ITC = **Nil**

**(3) Import of packing material:** Customs duty paid on imports is **not eligible** for ITC under State VAT. ITC = **Nil**

**(4) Capital goods purchased (01-04-2011):** VAT @ 10% embedded in Rs.5,50,000 (inclusive). Total VAT = 5,50,000 × 10/110 = Rs.50,000. As input credit is to be spread equally over **2 financial years**, credit for 2011-12 = 50,000 / 2 = **Rs.25,000**

**Note on exempt goods:** The exempt goods (Rs.1,20,000) were manufactured exclusively from inter-state purchased raw materials, on which no ITC was availed. Hence, no reversal of ITC is required.

**Total ITC available = Rs.1,25,000 + Rs.25,000 = Rs.1,50,000**

**Net VAT Payable = Output VAT − Input Tax Credit = Rs.1,54,769 − Rs.1,50,000 = Rs.4,769**

**The VAT liability of Varadan & Co. for the year ended 31…

Question 4

Mr. B is the Kartha of a HUF, whose members derive income as given below:
(i) Income from B's profession: Rs.45,000
(ii) Mrs. B's salary as fashion designer: Rs.76,000
(iii) Minor son D — interest on fixed deposits with a bank which were gifted to him by his uncle: Rs.10,000
(iv) Minor daughter P's earnings from sports: Rs.95,000
(v) D's winnings from lottery (gross): Rs.1,95,000
Discuss the tax implications in the hands of Mr. and Mrs. B.

Accepted Answer

**Tax Implications in the Hands of Mr. B and Mrs. B**

**Preliminary Note — Identifying the Higher-Income Parent for Section 64(1A)**

Before examining each item, we must identify which parent has the higher income (before clubbing minor's income), since under **Section 64(1A) of the Income Tax Act, 1961**, the income of a minor child is clubbed with the parent whose total income (excluding minor's income) is greater. Mr. B's professional income is **Rs.45,000** and Mrs. B's salary income is **Rs.76,000**. Therefore, **Mrs. B is the higher-income parent**, and eligible minor income will be clubbed with her.

---

**(i) Income from B's Profession — Rs.45,000**

This is Mr. B's own income chargeable under the head **"Profits and Gains from Business or Profession"**. It is taxable in **Mr. B's hands** without any clubbing implications.

---

**(ii) Mrs. B's Salary as Fashion Designer — Rs.76,000**

Under **Section 64(1)(ii)**, remuneration received by a spouse from a concern in which the other spouse has substantial interest is clubbed. However, the **proviso to Section 64(1)(ii)** carves out an exception: where the spouse possesses technical or professional qualifications and the income is solely attributable to such qualifications, clubbing does not apply. Fashion designing constitutes a technical/professional qualification. Moreover, the question does not indicate that Mr. B holds a substantial interest in the concern employing Mrs. B. Accordingly, Mrs. B's salary of **Rs.76,…

Question 5

D & Co. has been providing taxable services for the past few years. Its gross value of taxable services provided during the financial year 2009-10 and 2010-11 is Rs.12 lakhs and Rs.8.75 lakhs respectively. During the financial year 2011-12 it provided service for Rs.13 lakhs. Calculate the service tax liability of D & Co. for the financial year 2011-12. Rate of Service Tax 10%, Education cess 2% and Higher Education cess @ 1%.

Accepted Answer

**Small Service Provider (SSP) Exemption under Notification No. 6/2005-ST (as amended) under the Finance Act, 1994**

Under the SSP exemption, a service provider whose **aggregate value of taxable services in the preceding financial year does not exceed Rs. 10 lakhs** is eligible for exemption up to Rs. 10 lakhs in the current financial year.

**Step 1 — Check eligibility for FY 2011-12:**
The relevant preceding year is FY 2010-11. D & Co.'s gross value of taxable services in FY 2010-11 = **Rs. 8.75 lakhs**, which is **less than Rs. 10 lakhs**. Therefore, D & Co. is **eligible for SSP exemption** in FY 2011-12.

**Step 2 — Apply exemption:**
In FY 2011-12, total services provided = Rs. 13 lakhs. Exemption is available for the **first Rs. 10 lakhs**. Taxable value = Rs. 13 lakhs − Rs. 10 lakhs = **Rs. 3 lakhs**.

**Note on FY 2009-10:** D & Co.'s turnover in FY 2009-10 was Rs. 12 lakhs (> Rs. 10 lakhs), so no SSP exemption was available in FY 2010-11 — the entire Rs. 8.75 lakhs was taxable in that year. However, since FY 2010-11 turnover fell back below Rs. 10 lakhs, the SSP exemption revives for FY 2011-12.

**Service Tax Liability for FY 2011-12:**

| Component | Rate | Amount (Rs.) |
|---|---|---|
| Service Tax on Rs. 3,00,000 | 10% | 30,000 |
| Education Cess on Rs. 30,000 | 2% | 600 |
| Higher Education Cess on Rs. 30,000 | 1% | 300 |
| **Total Service Tax Liability** | | **30,900** |

**Total Service Tax Liability of D & Co. for FY 2011-12 = Rs. 30,900.**

Question 6

How is VAT computed under the subtraction method?

Accepted Answer

**VAT Computation under the Subtraction Method** is the process of determining the net tax liability by deducting input tax from output tax. This method is the most widely used globally and forms the basis of India's GST system.

**Formula:** VAT Payable = Output Tax – Input Tax Credit

**Computation Process:**

**Step 1: Compute Output Tax.** Output tax is calculated by applying the applicable VAT rate to the value of all taxable supplies made during the tax period. This includes goods/services supplied to customers, whether domestic or export.

**Step 2: Identify Eligible Input Tax.** Input tax refers to tax paid on purchases of goods and services used in the course of business. This includes raw materials, packing materials, plant and machinery, and services used in production or distribution.

**Step 3: Claim Input Tax Credit.** The registered taxpayer is entitled to claim credit of input tax against output tax liability, subject to conditions: (a) the supplier must be a registered dealer, (b) the purchase must be for use in business, (c) the supply must be taxable, (d) a valid tax invoice must be obtained, (e) input goods/services must not be specifically excluded from credit entitlement.

**Step 4: Calculate Net VAT.** The net VAT payable is determined by subtracting total input tax credit from output tax. If output tax exceeds input tax, the difference is payable by the dealer. If input tax exceeds output tax, the excess is refundable or carried forward to the next per…

Question 7

Mr. C inherited from his father 8 plots of land in 1980. His father had purchased the plots in 1960 for Rs.5 lakhs. The fair market value of the plots as on 1-4-1981 was Rs.8 lakhs (Rs.1 lakh for each plot).
On 1st June 2001, C started a business of dealer in plots and converted the 8 plots as stock in trade of his business. He recorded the plots in his books at Rs.45 lakhs being the fair market value on that date. In June 2005, C sold the 8 plots for Rs.50 lakhs.
In the same year he acquired a residential house property for Rs.45 lakhs. He invested an amount of Rs.5 lakhs in construction of one more floor in his house in June 2006. The house was sold by him in June 2011 for Rs.63,50,000.
The valuation adopted by the registration authorities for charge of stamp duty was Rs.85,50,000. As pe…

Accepted Answer

This question involves two Assessment Years: **AY 2006-07** (sale of stock-in-trade plots) and **AY 2012-13** (sale of residential house).

**ASSESSMENT YEAR 2006-07**

**A. Capital Gains on Conversion of Plots to Stock-in-Trade [Section 45(2) of the Income Tax Act, 1961]**

When a capital asset is converted into stock-in-trade, **Section 45(2)** deems the conversion to be a 'transfer'. However, the capital gain is chargeable to tax in the **year in which the stock-in-trade is sold** (i.e., June 2005, AY 2006-07). The **full value of consideration** is the **FMV on the date of conversion** (1st June 2001) = Rs. 45,00,000.

Since the plots were held prior to 1-4-1981, the **cost of acquisition = FMV as on 1-4-1981 = Rs. 8,00,000** (Rs. 1 lakh × 8 plots). The period of holding for LTCA status runs from 1-4-1981 to 1-6-2001 (more than 36 months), making this a **Long-Term Capital Asset**.

**Indexed Cost of Acquisition** = Rs. 8,00,000 × (426/100) = **Rs. 34,08,000**

**Long-Term Capital Gain (LTCG)** = Rs. 45,00,000 − Rs. 34,08,000 = **Rs. 10,92,000**

**Exemption under Section 54F**: The assessee is an individual transferring a long-term capital asset (plots, not residential house). He purchased a residential house for Rs. 45,00,000 in the same year (June 2005), within the stipulated period. Net consideration = Rs. 45,00,000; amount invested = Rs. 45,00,000. Since the **entire net consideration is invested**, the **entire LTCG of Rs. 10,92,000 is exempt under Section 54F**.

*…

Question 8

State whether the following are true or false giving reasons to substantiate your answer:

Accepted Answer

**Sub-part (i): FALSE** — A service provider files a **single consolidated Service Tax return** covering all services provided during the half-yearly or quarterly period, not separate returns for each service. Service Tax liability is reported on an aggregated basis in one return based on the service provider's PAN. Multiple returns are not required merely because multiple services are offered.

**Sub-part (ii): TRUE** — When a foreign service provider (located outside India) provides taxable services to an Indian service recipient, the **reverse charge mechanism** applies. Under Section 69 of the Finance Act, 1994, the liability to pay service tax shifts from the service provider to the service recipient. Therefore, B Ltd. (the Indian service recipient) becomes liable to pay service tax on the services received from the foreign service provider A Ltd., and B Ltd. must file returns and pay tax accordingly.

**Sub-part (iii): TRUE** — Filing of **nil returns is mandatory** even when no service has been provided during the return period and no service tax is payable. The assessee must file the return within the prescribed time limit (typically within 20 days from the end of the half year). Nil returns are a compliance requirement to demonstrate that the assessee was active during the period but had no taxable transaction or turnover below threshold, and failure to file results in penalties under Section 75 of the Finance Act, 1994.

**Sub-part (iv): FALSE** — The assessee **can…

Question 9

Enlist any six purchases eligible for availing input tax credit.

Accepted Answer

**Input Tax Credit (ITC) Eligible Purchases under VAT:**

The following six categories of purchases are eligible for availing input tax credit under the VAT regime:

**1. Raw Materials** – Materials directly used in the manufacture or processing of goods intended for sale qualify for ITC. These form the primary input for conversion into finished products.

**2. Packing Materials** – Materials used for packing and packaging of goods for supply are eligible for input tax credit. This includes all materials used to pack the goods for transportation and sale.

**3. Components and Spare Parts** – Parts and components purchased and incorporated in the manufacturing process or used as spares in manufacturing activities are eligible for ITC.

**4. Semi-finished Goods** – Goods purchased in a semi-finished state for further processing or manufacturing qualify for input tax credit, as they become raw materials for the next stage of production.

**5. Capital Goods** – Machinery, equipment, and other fixed assets purchased for use in the manufacturing or processing activity are eligible for ITC, subject to the condition that they are used in the taxable production activities.

**6. Fuel and Power** – Fuel consumed and electricity/power used in the manufacturing process qualify for input tax credit, as these are essential inputs in the production process.

**Note:** The eligibility for ITC was subject to certain conditions: goods must be purchased for use in business (specifically manufac…

Question 10

Following is the profit and loss account of Mr. Q for the year ended 31-03-2012:

| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| To Repairs on Building | 1,81,000 | By Gross Profit | 6,01,000 |
| To Amount paid to IIT Mumbai for an approved Scientific Research programme | 1,00,000 | By I.T. Refund | 8,100 |
| To Interest | 1,10,000 | By Interest on Company Deposits | 6,400 |
| To Travelling | 1,30,550 | | |
| To Net Profit | 93,950 | | |
| **Total** | **6,15,500** | **Total** | **6,15,500** |

Additional information:

(1) Repairs on building includes Rs.1,00,000 being cost of laying a toilet roof.

(2) Interest payments include Rs.50,000 on which TDS has not been deducted and penalty for contravention of Central Sales Tax Act of Rs.24,000.

Compute the income chargeable under the head 'Pro…

Accepted Answer

**Computation of Income under the head 'Profits and Gains of Business or Profession' of Mr. Q for the year ended 31-03-2012 (AY 2012-13)**

**Starting point:** Net Profit as per Profit & Loss Account is taken and adjusted for non-business income, disallowed expenditure, and additional deductions permissible under the Income Tax Act, 1961.

**Adjustments — Additions (Disallowed/Capital Expenditure):**

(1) **Cost of laying toilet roof ₹1,00,000:** Although booked under 'Repairs on Building', laying a new toilet roof is a **capital expenditure** (creates a new asset/enduring benefit) and is not deductible as revenue expenditure under Section 37(1) of the Income Tax Act, 1961. It is added back to profit. Depreciation is to be ignored as per the question.

(2) **Interest of ₹50,000 — TDS not deducted:** Under **Section 40(a)(ia)**, any interest payment on which tax is deductible at source (TDS) but has not been deducted is entirely disallowed. Since TDS was not deducted on ₹50,000 of interest, the full ₹50,000 is disallowed and added back.

(3) **Penalty for contravention of Central Sales Tax Act ₹24,000:** Penalty for infringement or violation of law is not an expenditure incurred wholly and exclusively for the purpose of business. It is expressly not deductible under Section 37(1). Added back.

**Adjustments — Deductions (Non-business income credited in P&L):**

(4) **Income Tax Refund ₹8,100:** Refund of income tax is not income chargeable under the head 'Profits and Gains of …

Question 11

Pranav Private Ltd., is engaged in providing a taxable service and furnishes the following information:
- December 2011 (includes Rs.2,00,000 for services rendered to the United Nations Organisation): Rs.5,00,000
- January 2012 (includes Rs.1,50,000 for services rendered within the Indian territorial waters): Rs.4,00,000
- February 2012 (includes Rs.1,75,000 for services rendered to the RBI): Rs.5,00,000
- March 2012 — Advance receipt for services to be rendered in April 2012 (includes Rs.1,60,000 for services rendered in the State of Jammu & Kashmir): Rs.5,00,000
Compute the taxable services for the year ended 31-03-2012.

Accepted Answer

**Computation of Taxable Services for Pranav Private Ltd. for the year ended 31-03-2012**

**December 2011:** Total receipts are Rs. 5,00,000. Services rendered to the **United Nations Organisation** are exempt from service tax under the relevant exemption notification (services provided to the UN and specified international organisations are not liable to service tax). Accordingly, Rs. 2,00,000 is excluded. **Taxable value: Rs. 3,00,000.**

**January 2012:** Total receipts are Rs. 4,00,000. Services rendered within the **Indian territorial waters** are taxable because territorial waters (up to 12 nautical miles) form part of India's jurisdiction for service tax purposes. No deduction is available. **Taxable value: Rs. 4,00,000.**

**February 2012:** Total receipts are Rs. 5,00,000. Services rendered to the **Reserve Bank of India** are exempt from service tax under the applicable exemption notification (services provided to RBI were specifically exempt under the erstwhile service tax regime). Accordingly, Rs. 1,75,000 is excluded. **Taxable value: Rs. 3,25,000.**

**March 2012 (Advance receipt):** Total advance received is Rs. 5,00,000. Under the **Point of Taxation Rules, 2011**, where payment is received before the service is provided, the point of taxation is the date of receipt of such advance. Hence, the advance received in March 2012 is taxable in the year 2011-12 itself, even though services will be rendered in April 2012. However, services rendered in the **State of …

Question 12

What are the conditions to be fulfilled by the dealer accepting the composition scheme under the value added tax?

Accepted Answer

The **Value Added Tax (VAT) composition scheme** was an optional simplified scheme available to dealers in states before GST replaced it in 2017. The conditions for a dealer to be eligible for the composition scheme under VAT were:

**Turnover Limit**: The dealer's annual turnover must not exceed the prescribed limit. This limit varied significantly across states but was typically in the range of ₹10 lakh to ₹50 lakh. Dealers exceeding this limit were not eligible for the scheme.

**Nature of Business**: The scheme was generally available to retail dealers, small manufacturers, wholesalers, and traders engaged in purchase and sale of goods. However, dealers dealing exclusively in certain specific goods (such as precious metals in some states) were often excluded.

**No Inter-State Supplies**: The scheme was typically available only to dealers making intra-state supplies. Dealers engaged in inter-state trade were not eligible to avail the composition scheme.

**Voluntary Basis**: The composition scheme was optional and not mandatory. A dealer could choose to opt for the scheme if eligible, and equally could opt out if needed.

**No Input Tax Credit**: A fundamental condition was that dealers under the composition scheme could not claim any input tax credit on their purchases. They paid a fixed percentage of their turnover as tax instead of the normal VAT mechanism.

**Not a Large Dealer**: The dealer should not be classified as a large dealer or serial offender. States maintai…

Question 13

Mr. Rahul, an assessee aged 61 years, gives the following information for the previous year 31-03-2012:
a. Loss from profession: Rs.1,05,000
b. Capital loss on the sale of property — short term: Rs.55,000
c. Capital gains on sale of shares — long term: Rs.2,05,000
d. Loss in respect of self occupied property: Rs.15,000
e. Loss in respect of let out property: Rs.30,000
f. Share of loss from firm: Rs.1,60,000
g. Income from card games: Rs.55,000
h. Winnings from lotteries: Rs.1,00,000
i. Loss from horse races in Mumbai: Rs.40,000
j. Investment in infrastructure bonds: Rs.21,000
k. Medical Insurance premium paid by cheque: Rs.18,000
Compute the total income of Mr. Rahul for the assessment year 2012-13.

Accepted Answer

**Computation of Total Income of Mr. Rahul for Assessment Year 2012-13**
(Previous Year ending 31-03-2012; Age: 61 years — Senior Citizen as per Finance Act 2011)

**Step 1 — Items not allowed / treated separately**

**Share of loss from firm (Rs.1,60,000):** Under **Section 10(2A) of the Income Tax Act, 1961**, a partner's share of profit from a firm is exempt. Consequently, share of loss from a firm is also **not allowable** as a deduction and cannot be set off against any income. This item is ignored.

**Income from card games (Rs.55,000) and Winnings from lottery (Rs.1,00,000):** These are included in Income from Other Sources but taxable at a **flat rate of 30% under Section 115BB**. No deduction or loss set-off is permitted against these incomes.

**Loss from horse races (Rs.40,000):** Under **Section 74A**, loss from owning and maintaining race horses or from horse races can be set off **only** against income from horse races. It cannot be set off against card game income or lottery income. The loss of Rs.40,000 is to be **carried forward for 4 assessment years** and can be set off only against future horse race income.

**Step 2 — Intra-head set-off (Capital Gains)**

Short-term capital loss (STCL) on sale of property (Rs.55,000) is set off against long-term capital gains (LTCG) on sale of shares (Rs.2,05,000) under **Section 70**.
Net Capital Gains = Rs.2,05,000 − Rs.55,000 = **Rs.1,50,000**

**Step 3 — Income from House Property**

Loss from self-occupied property (…

Question 14

What are the consequences of non-payment or delayed payment of service tax?

Accepted Answer

Service tax, now subsumed under GST from 1 July 2017, has prescribed consequences for non-payment or delayed payment governed by the CGST Act, 2017.

**Interest on Delayed Payment (Section 50, CGST Act 2017):**
Interest is charged on any amount of tax not paid by the due date. The rate is **18% per annum** (or as prescribed by Central Government notification), calculated from the due date until actual payment, compounded daily. This ensures the Government compensates for the time value of money.

**Late Fee (Section 47, CGST Act 2017):**
When GST return is filed after the due date, a late fee is imposed equivalent to interest calculated on the tax amount for the delay period.

**Penalty for Non-Payment (Section 122, CGST Act 2017):**
A penalty is levied on any person failing to pay GST within the stipulated time. Penalty amount = **higher of (i) the unpaid tax amount, or (ii) 10% of such tax**, subject to a maximum ceiling of 25% of the tax liability. This escalating penalty structure discourages tax evasion.

**Enhanced Penalty for Fraud (Section 123, CGST Act 2017):**
When non-payment is coupled with fraudulent intent or evasion, an enhanced penalty of **10% to 50% of the tax involved** is imposed. Additionally, criminal liability includes **imprisonment up to 5 years** or fine or both.

**Recovery Mechanisms (Section 129, CGST Act 2017):**
The Government can recover unpaid tax through: (i) **Distress and sale** of movable and immovable property, or (ii) **Recovery as arrea…

Question 15

What is meant by input tax credit in the context of VAT provisions? How does input tax credit help in achieving the essence of VAT?

Accepted Answer

**Input Tax Credit (ITC)** is the credit of tax paid on inputs (purchases of goods and services) that a registered person can claim and set off against the tax liability on outputs (supplies made during the same period). Under Section 16 of the CGST Act, 2017, a registered supplier is entitled to claim ITC on inputs used in the course of business, subject to prescribed conditions.

**Mechanism of ITC**: When a business purchases raw materials or services, it pays GST (or VAT equivalent) as part of the purchase cost. This tax becomes an input tax credit that the business can deduct from the tax it collects on its sales. The formula is: **Tax Payable = Tax on Output Sales - Input Tax Credit Claimed**.

**Elimination of Cascading Effect**: Without ITC, tax would be imposed at every stage of the supply chain, creating a cascading or "tax-on-tax" burden. For example, if raw material costs ₹100 with 18% tax (₹18), and the manufacturer sells for ₹150 with tax (₹27), without ITC the final selling price would include tax on the tax already paid, increasing prices disproportionately. ITC prevents this by allowing the tax paid on inputs to be credited, ensuring tax is levied only on the **value added** at each stage, not on the entire transaction value.

**Achieving the Essence of VAT**: VAT fundamentally aims to tax consumption, not production or distribution. ITC achieves this essence by:

(1) **Single-point taxation**: Tax burden shifts entirely to the final consumer. The manufacture…

Question 16

Discuss whether the following receipts are taxable and also indicate the head of income under which the same is taxable:

Accepted Answer

**(i) Bonus shares received by equity shareholder and preference shareholder**

For an **equity shareholder**, bonus shares received are **not taxable** at the time of receipt. They do not constitute income. However, when subsequently sold, capital gains arise. The **cost of acquisition of bonus shares is taken as Nil** for computing capital gains (Section 55(2)(aa) of the Income Tax Act, 1961).

For a **preference shareholder**, bonus shares are treated as **deemed dividend** under **Section 2(22)(b)** of the Income Tax Act, 1961. They are taxable under the head **"Income from Other Sources"** under Section 56(2)(i).

**(ii) Loan advanced by closely-held company to 15% shareholder**

This loan is treated as **deemed dividend** under **Section 2(22)(e)** of the Income Tax Act, 1961. The conditions are satisfied: (a) the company is one in which public are not substantially interested; and (b) the recipient holds not less than **10% of the beneficial ownership** of shares (here, 15%). The amount of loan is taxable in the hands of the shareholder as **"Income from Other Sources"** under Section 56(2)(i), to the extent of accumulated profits of the company.

**(iii) Medical allowance received by employee (entire amount spent on medical treatment)**

Medical allowance is a **fixed monetary allowance** given to an employee irrespective of actual expenditure. It is **fully taxable** under the head **"Salaries"** under Section 17(1)(iii). The fact that the entire amount has been spen…

Question 17

Briefly explain the provision relating to advance payment of Service Tax.

Accepted Answer

**Advance Payment of Service Tax** is governed under the GST regime by **Rule 87 of the CGST Rules 2017**, which permits registered persons to deposit amounts in advance to meet their tax liabilities.

**Eligibility and Scope**: Any registered person can make advance payment of tax to enhance their payment capacity or for effective liquidity management purposes.

**Mode of Deposit**: Advance deposits can be credited to two electronic ledgers:
- **Electronic Credit Ledger**: For depositing advance tax payments that can be adjusted against tax liability
- **Electronic Cash Ledger**: For maintaining cash deposits to be used for paying tax in cash

**Method of Payment**: Deposits are made through the common online portal using authorized payment channels (such as GePG - Government e-Payment Gateway) notified by the Government.

**Immediate Crediting**: Upon successful online payment, the deposited amount is immediately credited to the respective electronic ledger of the taxpayer, enabling instant utilization without any processing delay.

**Application Against Liability**: The deposited amount can be utilized to offset:
- Output tax liability
- Integrated GST (IGST) liability
- Other GST-related tax obligations under the CGST Act, SGST Act, UTGST Act, or IGST Act

**Adjustment in Returns**: The advance payment is adjusted against the actual tax liability while filing periodic returns (GSTR-3B for monthly/quarterly filers).

**Interest and Refunds**: Advance deposits do not earn i…

Question 18

Discuss the compulsory and voluntary registration under VAT.

Accepted Answer

**Compulsory Registration under VAT:**

A dealer was liable for compulsory registration under the respective **State VAT Act** when the turnover of taxable goods exceeded the state-prescribed threshold during a financial year. The threshold typically ranged from ₹5 lakhs to ₹10 lakhs depending on the state and category of dealer. Once the threshold was crossed, registration became **mandatory** within the specified period (usually 30 days from the end of the month in which the threshold was exceeded). Non-compliance attracted penalties and interest on unpaid tax. The registration authority could not refuse registration if the dealer satisfied the threshold criteria. Compulsory registration made the dealer liable to charge and collect VAT on all taxable supplies.

**Voluntary Registration under VAT:**

Dealers whose turnover remained below the compulsory threshold could apply for **voluntary registration** subject to meeting prescribed conditions, primarily maintaining proper books of accounts. The primary benefit of voluntary registration was eligibility for **input tax credit** on purchases of goods for business purposes, enabling relief from tax cascading. Voluntarily registered dealers had identical obligations to compulsorily registered dealers regarding tax payment, record-keeping, filing returns, and maintaining statutory registers. However, the registration could be cancelled if the dealer's turnover remained below the threshold for a consecutive period (typically 12 m…

Question 19

Bharghav doing textiles business furnishes you the following information:
Total turnover for the financial year — 2010-11: Rs.61,00,000; 2011-12: Rs.59,00,000
State whether the provisions of tax deduction at source are attracted for the following expenses incurred during the financial year 2011-12:
- Interest paid to Indian Bank on Term Loan: Rs.92,800
- Advertisement expenses to R (two individual payments of Rs.24,000 and Rs.34,000): Rs.58,000
- Factory rent paid to C: Rs.1,85,000
- Brokerage paid to B, a sub-broker: Rs.6,000

Accepted Answer

TDS applicability must be assessed for each payment based on the relevant section and applicable threshold limits. For a textiles business with turnover of Rs. 59,00,000 in FY 2011-12, the immediately preceding year's turnover (FY 2010-11) is Rs. 61,00,000, which is **less than Rs. 1 crore**. This determines the thresholds applicable.

**1. Interest paid to Indian Bank on Term Loan (Rs. 92,800):**
TDS **NOT applicable**. Interest paid to banks and financial institutions is **not subject to any TDS provision** as the recipients are registered financial institutions. Banks are exempt from TDS on interest income they receive. This payment is simply deductible as business interest expense under Section 37 of the Income Tax Act, 1961.

**2. Advertisement Expenses to R (Rs. 58,000):**
TDS **NOT applicable**. Advertisement expenses fall under **Section 194N** of the Income Tax Act, 1961. The threshold limit is **Rs. 1,00,000 per financial year** (aggregated). The two payments to R (Rs. 24,000 + Rs. 34,000) total Rs. 58,000, which is **below the threshold of Rs. 1,00,000**. Therefore, TDS is not triggered.

**3. Factory Rent paid to C (Rs. 1,85,000):**
TDS **NOT applicable**. Factory rent falls under **Section 194I** of the Income Tax Act, 1961. For a textiles business with turnover **not exceeding Rs. 1 crore** (Bharghav's turnover is Rs. 61,00,000), the threshold limit is **Rs. 2,40,000 per annum**. The rent paid of Rs. 1,85,000 is **below this threshold**, so TDS is not deductible…

Question 20

Enumerate the circumstances in which an individual assessee is empowered to sign and verify his return of income u/s 139 by himself or otherwise by an authorized signatory.

Accepted Answer

**Circumstances for Signing and Verification of Return u/s 139**

**General Principle:** Section 139 of the Income Tax Act, 1961, read with Rule 12 of the Income-tax Rules, 1962, specifies that an individual assessee has the power to sign and verify his return of income himself or through an authorized signatory under specific circumstances.

**Circumstances Where Individual Can Sign and Verify by Himself:**

1. **Normal Situation**: When the assessee is present in India and is capable of signing the return personally, he must do so. This is the general rule and applies in all ordinary cases.

2. **Resident Individual**: When the assessee is a resident and has no impediment to sign the return himself, personal signature is mandatory.

**Circumstances Where Authorized Signatory Can Sign:**

1. **Absence from India**: When an individual assessee is absent from India during the relevant period, an authorized signatory (Chartered Accountant, Cost Accountant, Company Secretary, or Advocate) can sign and verify the return on his behalf with proper authorization.

2. **Physical Incapacity**: When the assessee is physically incapacitated due to illness or disability and is unable to sign the return, an authorized representative can sign after obtaining due authorization from the assessee.

3. **Minor Assessee**: When the assessee is a minor, the return can be signed and verified by:
   - His parent or legal guardian, or
   - An authorized representative (CA/Advocate) appointed by the…

Question 21

Explain the treatment for excess amount of service tax collected from the Recipient under Service Tax.

Accepted Answer

**Excess Service Tax Collected from Recipient — Treatment**

**Nature and Principle**: When a service provider collects service tax from the recipient (customer/client), they act as an intermediary agent for the Government. The service tax collected is held in trust and does not become the property of the service provider. Therefore, any excess service tax collected from the recipient cannot be retained and must be treated appropriately.

**Treatment of Excess Service Tax Collected**:

**1. Identification of Excess**: Excess service tax arises when:
- Service tax collected exceeds the actual service tax liability of the service provider for that period
- Invoiced amount includes higher tax than applicable
- Tax is wrongly collected due to computational errors or miscalculation of consideration

**2. Refund to Recipient**: The primary treatment is to refund the excess amount to the recipient. The service provider must issue a credit note or debit note (as applicable) documenting the excess tax collected. The refund must be made within a reasonable period, and proper accounting entries should be recorded to reflect the refund.

**3. Adjustment Against Liability**: Alternatively, with the express consent of the recipient, the excess service tax collected can be adjusted against future tax payments. This is permissible when the recipient has ongoing service obligations with the same service provider, enabling seamless adjustment in subsequent invoices without requiring separate r…

Question 22

Since the VAT system emphasizes on self assessment the need for a system of cross-checking has arisen. Elaborate.

Accepted Answer

**Self-Assessment System in VAT:** The VAT system is founded on the principle of self-assessment, where taxpayers are responsible for calculating and declaring their own tax liability based on their records and business transactions. The tax department relies on the taxpayer's return filing and payment without prior verification, reducing administrative burden and promoting tax compliance consciousness.

**Why Cross-Checking Mechanisms Became Necessary:** Although self-assessment promotes efficiency, it creates inherent risks. The tax department faces **information asymmetry** — it lacks complete knowledge of taxpayers' transactions, opening avenues for deliberate underreporting of sales, overreporting of purchases, and fraudulent claims of **input tax credit (ITC)**. Without verification checks, the system becomes vulnerable to evasion. Cross-checking mechanisms serve as a counterbalance to ensure compliance and protect revenue.

**Key Cross-Checking Mechanisms:**

**1. Input-Output Matching:** This is the most fundamental cross-checking tool. The tax department reconciles a taxpayer's outward supplies (sales) with inward supplies (purchases) declared in successive returns. Disproportionate input claims relative to output supplies signal potential fraud.

**2. Invoice-to-Invoice Matching:** The declared sales of one taxpayer are cross-verified against the purchases of counterparties. A mismatch between Seller A's invoice and Buyer B's ITC claim reveals discrepancies requirin…

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