Question 1

The following is the Profit and Loss Account of Mr. Aditya, aged 55 years, a resident, for the year ended 31.03.2013:

| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| Rent | 60,000 | Gross Profit | 1,85,000 |
| Repair of car | 3,000 | Gift of cash from a friend (received on 15.09.2012) | 25,000 |
| Wealth tax | 5,000 | Sale of car | 17,000 |
| Medical expenses | 4,500 | Interest on income-tax refund | 3,000 |
| Salary | 18,000 | | |
| Depreciation on car | 3,600 | | |
| Advance bonus | 1,500 | | |
| Net Profit | 1,33,000 | | |
| **Total** | **2,30,000** | **Total** | **2,30,000** |

Other information:
(1) Aditya bought a car during the year for ₹ 20,000. He charged depreciation @ 15% on the value of the car. The use of the car was 3/8 for business and 1/8 for personal use.
(2) Medical expen…

Accepted Answer

**Computation of Total Income of Mr. Aditya for AY 2013-14**

**I. Income from Business/Profession**

Net Profit as per P&L Account: ₹1,33,000

**Add: Inadmissible Expenses:**
- **Rent under Section 40A(3) of the Income Tax Act, 1961:** Arrears of 7 months (April to October 2012) × ₹5,000 = ₹35,000 paid in cash on 1.11.2012. Since this exceeds the cash payment limit of ₹20,000 in a single day, the entire ₹35,000 is disallowed: ₹35,000
- **Repair of car (non-business use):** Car used 3/8 for business; remaining 5/8 disallowed — 5/8 × ₹3,000 = ₹1,875
- **Wealth tax under Section 40(a)(iia):** Not deductible as it is a personal tax — ₹5,000
- **Medical expenses for wife (personal in nature):** ₹4,500
- **Driver's salary (non-business portion):** 5/8 × ₹18,000 = ₹11,250
- **Book depreciation (to be replaced by IT Act depreciation):** ₹3,600

**Less: Non-Business Credits in P&L:**
- **Gift from friend ₹25,000:** Since aggregate amount received does not exceed ₹50,000, it is exempt under Section 56(2)(vii) — removed from business income and not taxed anywhere: ₹25,000
- **Sale of car:** Dealt through block of assets under Section 50; sale proceeds reduce WDV — not business income: ₹17,000
- **Interest on Income-tax refund:** Taxable under 'Other Sources': ₹3,000

**Less: Depreciation under Income Tax Act (Section 32):**
Block WDV: Cost ₹20,000 − Sale Proceeds ₹17,000 = ₹3,000; IT Dep @ 15% = ₹450; Business portion (3/8) = **₹169**

**Income from Business/Profession = ₹1,49,056**

*…

Question 2

Mr. Krishna owns a residential house in Delhi. The house is having two identical sets. First unit of the house is self-occupied by Mr. Krishna and another unit is rented for ₹ 12,000 p.m. The rented unit was vacant for three months during the year. The particulars of the house for the previous year 2013-14 are: Standard Rent: ₹ 2,50,000 p.a.; Municipal Valuation: ₹ 2,44,000 p.a.; Fair Rent: ₹ 2,35,000 p.a.; Municipal tax paid by Mr. Krishna: 12% of the Municipal Valuation; Light and water charges: ₹ 800 p.m.; Interest on borrowed capital: ₹ 2,000 p.m.; Insurance charges: ₹ 3,500 p.a.; Painting expenses: ₹ 15,000 p.a. Compute income from house property of Mr. Krishna for the assessment year 2013-14.

Accepted Answer

**Computation of Income from House Property of Mr. Krishna for A.Y. 2013-14**

The house has two identical units. All given figures are apportioned equally (50:50) between the **Self-Occupied Unit (Unit 1)** and the **Let-Out Unit (Unit 2)**.

**Note on inadmissible expenses:** Light & water charges (₹800 p.m.), insurance (₹3,500 p.a.), and painting expenses (₹15,000 p.a.) are **not deductible** under Section 24 of the Income Tax Act, 1961. Only standard deduction @ 30% of NAV and interest on borrowed capital are allowable deductions.

---

**UNIT 2 — Let-Out Property:**

**Step 1: Gross Annual Value (GAV)** under Section 23(1)

All values apportioned to let-out unit (50%):
- Municipal Valuation = ₹1,22,000; Fair Rent = ₹1,17,500; Standard Rent = ₹1,25,000
- **Expected Rent** = Higher of Municipal Valuation (₹1,22,000) and Fair Rent (₹1,17,500), restricted to Standard Rent = ₹1,22,000
- **Actual Rent Received** = ₹12,000 × 9 months (rented for 9 months, vacant for 3) = ₹1,08,000
- Since Actual Rent (₹1,08,000) < Expected Rent (₹1,22,000) **due to vacancy**, GAV = Actual Rent = **₹1,08,000** [Section 23(1)(c)]

**Step 2: Net Annual Value (NAV)**
- GAV = ₹1,08,000
- Less: Municipal Taxes paid (50% share) = 12% × ₹1,22,000 = ₹14,640
- **NAV = ₹93,360**

**Step 3: Deductions under Section 24**
- Standard Deduction @ 30% of NAV = ₹28,008
- Interest on borrowed capital (50% share) = ₹2,000 × 12 × 50% = ₹12,000

**Income from Let-Out Unit = ₹93,360 − ₹28,008 − ₹12,000 = ₹53,352**

-…

Question 3

What will be the obligation of service provider in respect of excess service tax collected from the recipient under the service tax law?

Accepted Answer

When a service provider collects excess service tax (now GST on services under the current regime) from the recipient, the service provider has specific obligations:

**Issuance of Credit Note**: The service provider must issue a **credit note** to the recipient as per Regulation 16 of the CGST Rules 2017, clearly indicating the excess amount of tax collected and the reason for issuance. This should be done before filing the return for that period.

**Reversal in Tax Returns**: The service provider must reverse the excess tax in their subsequent periodic return (GSTR-1 for outward supplies). The excess output tax must be reported as nil or reversed in the return filing, ensuring only the correct tax liability is reported to the government.

**Refund or Adjustment to Recipient**: The service provider should promptly refund the excess amount to the recipient through one of the following methods: (a) direct refund to the recipient's bank account, (b) adjustment of the excess amount against future invoices raised to that recipient, or (c) via the credit note mechanism allowing the recipient to adjust it against their liability.

**Reversal of Input Tax Credit (ITC)**: If the service provider had claimed Input Tax Credit on goods or services used in providing the taxable supply, and excess tax is now being reversed, the corresponding ITC must also be reversed proportionately as per Section 49 of the CGST Act 2017. This ensures proper matching of input and output tax.

**Refund Cla…

Question 4

Can a multiple service provider use a single challan for payment of service tax for various services rendered by it?

Accepted Answer

**Yes, a Multiple Service Provider (MSP) can use a single challan for payment of service tax for various services rendered by it.**

**Meaning of Multiple Service Provider:**
An MSP is a person who provides two or more taxable services. Prior to the GST regime (July 1, 2017), Service Tax was levied on taxable services, and a person providing multiple such services was classified as an MSP.

**Single Registration for MSP:**
Under the Service Tax framework, an MSP was granted a single Service Tax registration number. This single registration covered all taxable services provided by the MSP, rather than requiring separate registrations for each service.

**Consolidated Challan Payment:**
The Service Tax rules permitted an MSP to consolidate the payment of service tax liability across all the different taxable services under a single challan. This meant the MSP could combine the tax payable on multiple services and make a consolidated payment through one challan without needing separate challans for each service. This was an administrative convenience and a practical measure to simplify the payment process.

**Mechanism:**
The challan form allowed the MSP to mention different services and the corresponding tax amounts, and the consolidated amount could be paid together. The tax details for each service would still be reflected in the Service Tax return (ST-3), but the actual payment could be consolidated.

**Important Note (Post-GST):**
Following the implementation of the Goods a…

Question 5

From the following details, find out the salary chargeable to cost of Mr. Anand for the assessment year 2013-14:

Mr. Anand is a regular employee of Malgoal Ltd. in Mumbai. He was appointed on 01-03-2012 in the scale of ₹ 5,000-2,500-35,000. He is paid dearness allowance (which forms part of salary for retirement benefits) @ 15% of basic salary and basic equivalent to one and a half times the scale at the end of the year. He contributes 18% of his salary (basic pay plus dearness allowance) towards recognised provident fund and the Company contributes the same amount.

Accepted Answer

To determine the salary chargeable for Mr. Anand in AY 2013-14 (FY 2012-13), we calculate his total salary components.

**Basic Salary Calculation:** Mr. Anand was appointed on 01-03-2012 on a scale of ₹5,000-2,500-35,000, representing a starting salary of ₹5,000 with an annual increment of ₹2,500. During FY 2012-13 (01-04-2012 to 31-03-2013), he earned his first increment on 01-03-2013 (after completing one year of service). Therefore, his basic salary was ₹5,000 per month for 11 months and ₹7,500 per month for 1 month, totaling ₹55,000 + ₹7,500 = **₹62,500**.

**Dearness Allowance:** At 15% of basic salary, the DA is calculated as: 15% of ₹55,000 = ₹8,250 (for 11 months) and 15% of ₹7,500 = ₹1,125 (for 1 month), totaling **₹9,375**. Since DA forms part of salary for retirement benefits, it is included in all salary-based calculations.

**Total Salary Income:** Basic (₹62,500) + DA (₹9,375) = **₹71,875**. This is the salary chargeable to income tax for AY 2013-14.

**Provident Fund Treatment:** The employee's contribution to the recognized provident fund is 18% × ₹71,875 = ₹12,937.50. Under **Section 80C of the Income Tax Act, 1961**, this contribution is allowed as a deduction from gross income. Although the employee's contribution is deducted from salary in practice, it does not reduce the salary income itself for tax computation purposes—the salary income remains ₹71,875. The employer's contribution of ₹12,937.50 is a deductible business expense and is not added to the em…

Question 6

Professionals Ltd. is engaged in providing services which became taxable with effect from 1st July 01, 2012. Compute the service tax payable by Professionals Ltd. on the following amounts (exclusive of service tax) received for the month of March, 2013: Services performed before such service became taxable (Invoice issued on 28th June, 2012): ₹ 5,00,000; Services by way of renting of residential dwelling for use as residence: ₹ 1,50,000; The services rendered to the friends of directors: ₹ 20,000; Advance received for services to be rendered in July, 2013: ₹ 5,00,000; Other receipts: ₹ 12,00,000. Rate of service tax is 12%; Education cess is 1%; Secondary & Higher Education cess is 1%.

Accepted Answer

**Computation of Service Tax Payable by Professionals Ltd. for March 2013**

**1. Services performed before taxability — Invoice dated 28th June, 2012 (₹5,00,000): TAXABLE**

Under **Rule 5 of the Point of Taxation Rules, 2011**, where a service is taxed for the first time, no service tax is payable only if BOTH the invoice has been issued AND payment received before such service became taxable. The proviso further clarifies that the exemption shall not apply if payment is received beyond 14 days from the date the service becomes taxable. Here, although the invoice was issued on 28th June 2012 (before 1st July 2012), the payment was received in March 2013 — well beyond 14 days of 1st July 2012. Since both conditions are not simultaneously satisfied, **service tax is payable** on ₹5,00,000.

**2. Renting of residential dwelling for use as residence (₹1,50,000): EXEMPT**

Services by way of renting of a residential dwelling for use as residence are specifically exempt under **Sl. No. 5 of the Mega Exemption Notification No. 25/2012-ST dated 20th June, 2012**. No service tax is payable.

**3. Services to friends of directors (₹20,000): TAXABLE**

There is no exemption under the Finance Act, 1994 or the Mega Exemption Notification for services rendered to friends or relatives of directors. The transaction is an ordinary taxable service. Service tax is payable on ₹20,000.

**4. Advance received for services to be rendered in July 2013 (₹5,00,000): TAXABLE**

Under **Rule 3 of the …

Question 7

List out the documents to be submitted along with the first service tax return.

Accepted Answer

**Documents to be submitted/maintained with first service tax return:**

1. **Certificate of Registration** – Original or certified copy demonstrating valid service tax registration number.

2. **Bank Account Details** – Proof of bank account linked to business operations, including bank statements for the return period.

3. **Invoices Issued** – Complete records of all service invoices issued during the return period, showing service particulars, rates, and service tax charged (where applicable).

4. **Service Agreements/Contracts** – Copies of agreements with clients defining scope of services, payment terms, and any special conditions.

5. **Records of Receipts and Payments** – Bank deposit slips, cheques received, payment vouchers, and records substantiating service receipts during the period.

6. **List of Clients** – Details of all service recipients including names, addresses, and nature of services provided to each.

7. **PAN Certificate** – Copy of Permanent Account Number certificate of proprietor/partners/company, establishing tax identification.

8. **Proof of Business Address** – Supporting documentation (utility bills, rental agreement, property documents) confirming registered business premises.

9. **Amendments to Registration** – If any changes made to registration details (address, constitution, authorized signatory) during the period, supporting amendment proofs.

10. **Books of Accounts** – Ledger extracts, cash book entries, or accounting software records…

Question 8

Compute net VAT liability of Sachin from the following information: Raw materials from foreign market (includes duty paid on imports @ 20%): ₹ 1,20,000; Cost of raw material: ₹ 2,50,000; Add: Excise duty @ 12%: ₹ 30,000; Add: VAT @ 4%: ₹ 11,200; Raw materials purchased from neighbouring State (includes CST @ 2%): ₹ [amount]; Sorting and transportation cost: ₹ 9,000; Manufacturing expenses: ₹ 30,000. Sachin sold goods to Mohan and earned profit @ 12% on the cost of production. VAT rate on sale of goods is 4%. There is no opening or closing stock.

Accepted Answer

**Computation of Net VAT Liability of Sachin**

Under the VAT framework, **input tax credit (ITC)** is available only on **VAT paid on purchases made within the same State**. Import duty paid on foreign purchases and **CST paid on inter-state purchases are NOT eligible** for input tax credit.

**Step 1 – Cost of Production**

All costs incurred (including taxes that are embedded in purchase price) are included in the cost of production:

| Particulars | ₹ |
|---|---|
| Raw materials from foreign market (incl. import duty @ 20%) | 1,20,000 |
| Cost of local raw material | 2,50,000 |
| Add: Excise duty @ 12% | 30,000 |
| Add: VAT @ 4% | 11,200 |
| Raw materials from neighbouring State (incl. CST @ 2%) | **Amount not given in question** |
| Sorting and transportation cost | 9,000 |
| Manufacturing expenses | 30,000 |
| **Total Cost of Production** (excl. neighbouring State RM) | **4,50,200** |

*Note: The amount for raw materials purchased from the neighbouring State appears to have been omitted from the question as furnished. The solution below proceeds without that figure; if the amount were provided (say ₹ X), it would be added to the cost base — but the CST component embedded in it would still not generate any ITC.*

**Step 2 – Selling Price (Profit @ 12% on Cost)**

Selling Price = ₹ 4,50,200 × 112% = **₹ 5,04,224**

**Step 3 – Output VAT**

Output VAT @ 4% on ₹ 5,04,224 = **₹ 20,169** (rounded)

**Step 4 – Input Tax Credit (ITC)**

Only VAT paid on purchases made within th…

Question 9

What happens to VAT claim when a seller opts for composition scheme? What are the eligibilities for the composition scheme under the VAT regime?

Accepted Answer

**What Happens to VAT Claim Under Composition Scheme**

When a seller opts for the composition scheme under VAT, the most significant consequence is that **input tax credit (ITC) is completely forfeited and NOT allowed**. The dealer cannot claim credit for VAT paid on purchases of goods or services during the period of opting for the composition scheme. Instead of the normal VAT mechanism where tax is levied on value added (with ITC on inputs), the composition scheme operates on a **simplified fixed-percentage-of-turnover basis**. The tax liability becomes a fixed percentage (typically 1-3%, varying by state and commodity) of the dealer's turnover, and this becomes the final tax payable without any adjustment or credit for input taxes. This is a deliberate trade-off that simplifies compliance in exchange for losing the ITC benefit.

**Eligibility Criteria for VAT Composition Scheme**

(i) **Turnover Threshold:** The dealer's annual turnover must not exceed a specified limit. This threshold was state-specific, generally ranging from ₹50 lakhs to ₹1 crore, depending on the jurisdiction. Dealers exceeding the notified turnover limit became ineligible for the scheme.

(ii) **Type of Business:** The scheme was available only for dealers engaged in trade activities (retail or wholesale). Manufacturers and dealers in excluded goods typically could not opt for the scheme.

(iii) **Specified Goods:** The scheme was restricted to trade in certain specified goods or categories as notifi…

Question 10

Mr. Vaibhav sold a house, held as a capital asset, to his friend Mr. Dhanesh on 1st December, 2012 for a consideration of ₹ 25,00,000. The Sub-Registrar refused to register the document for the said value, as according to him, stamp duty valuation based on State Government guidelines was ₹ 45,00,000. Mr. Vaibhav preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house at ₹ 35,00,000 (₹ 22,00,000 for building portion). The differential stamp duty was paid, accepting the said value. Mr. Vaibhav had purchased the land on 1st June, 2006 for ₹ 5,19,000 and completed the construction of the house on 1st October, 2010 for ₹ 14,00,000.

Accepted Answer

**Applicable Provision — Section 50C of the Income Tax Act, 1961:**

Where the actual consideration received is less than the stamp duty value (value adopted by State Government for stamp duty purposes), the stamp duty value is deemed to be the **full value of consideration** for computing capital gains. Where the assessee disputes such value and an appeal or reference is made to a competent authority, the value determined by such authority is taken as full value of consideration.

Here, Mr. Vaibhav received ₹25,00,000, but the **Revenue Divisional Officer (RDO)** — the competent authority — fixed the value at **₹35,00,000** (₹22,00,000 for building + ₹13,00,000 for land) and differential stamp duty was paid. Hence, full value of consideration = **₹35,00,000**.

**Nature of Capital Asset and Period of Holding:**

The house consists of two components: (a) **Land** — purchased 1st June 2006, held for over 36 months until 1st December 2012 → **Long-Term Capital Asset (LTCA)**. (b) **Building** — construction completed 1st October 2010, held for ~26 months → **Short-Term Capital Asset (STCA)**.

**Computation of Capital Gains (Assessment Year 2013-14):**

*Long-Term Capital Gain — Land:*
Full value of consideration (land portion as apportioned by RDO): ₹13,00,000
Less: Indexed Cost of Acquisition [₹5,19,000 × CII 2012-13 (852) / CII 2006-07 (519)]: ₹8,52,000
**LTCG = ₹4,48,000**

*Short-Term Capital Gain — Building:*
Full value of consideration (building as fixed by RDO): ₹22,00,…

Question 11

Mayak, a dealer, furnished the following details for the month of January, 2013:

Imports purchased within the State: ₹ 1,00,000
Finished goods sold within the State: ₹ 2,00,000
Goods sold in the course of inter-State trade: ₹ 1,00,000
Capital goods procured during the month: ₹ 1,00,000
VAT paid on capital goods: 12.5%
Input VAT rate: 12.5%
Output VAT rate: 4%
Central Sales Tax rate: 2%

Compute the total tax liability under the State VAT law.

Note: The capital goods are not goods included in the negative list. Input tax credit on capital goods is available in full in the year of purchase.

Accepted Answer

**Computation of Total Tax Liability under State VAT Law for January 2013**

**Step 1 – Input Tax Credit (ITC) Available**

ITC on purchases within the State (₹1,00,000 × 12.5%) = **₹12,500**
ITC on capital goods (₹1,00,000 × 12.5%) = **₹12,500** *(allowed in full in the year of purchase as capital goods are not in the negative list)*
**Total ITC = ₹25,000**

**Step 2 – Output Tax Liability**

VAT on intra-State sales (₹2,00,000 × 4%) = **₹8,000**
CST on inter-State sales (₹1,00,000 × 2%) = **₹2,000** *(CST is payable separately and cannot be offset against VAT ITC)*

**Step 3 – Net VAT Payable**

Output VAT = ₹8,000
Less: Total ITC = ₹25,000
Net VAT = **Nil** (Excess ITC of ₹17,000 to be carried forward)

**Step 4 – Total Tax Liability**

VAT payable = **Nil**
CST payable = **₹2,000**
**Total Tax Liability = ₹2,000**

Note: The excess ITC of ₹17,000 (₹25,000 − ₹8,000) will be carried forward to the subsequent month and cannot be utilised to discharge CST liability, as CST is governed by the Central Sales Tax Act, 1956, not the State VAT law.

Question 12

Compute the total income of Mr. Krishna for the assessment year 2013-14 from the following particulars:
Income from business before adjusting the following items: ₹ 1,75,000
(a) Business loss brought forward from assessment year 2011-12: ₹ 70,000
(b) Current depreciation: ₹ 40,000
(c) Unabsorbed depreciation of earlier year: ₹ 1,55,000
Income from house property (Gross annual value): ₹ 4,32,000
Municipal taxes paid: ₹ 32,000
Mr. Krishna sold a plot of land in Noida on 12th Sep. 2012 for a consideration of ₹ 6,00,000, which had been purchased by him on 20th Dec. 2009 at a cost of ₹ 4,10,000.
Long-term capital loss on sale of shares sold through recognized stock exchange (STT paid): ₹ 75,000
Long-term capital gain on sale of debentures: ₹ 60,000
Dividend on shares held as stock in trade: ₹ 2…

Accepted Answer

**Computation of Total Income of Mr. Krishna for Assessment Year 2013-14**

**Income from House Property:**
Gross Annual Value is ₹4,32,000. Municipal taxes paid of ₹32,000 are deducted to arrive at Net Annual Value (NAV) of ₹4,00,000. A standard deduction of 30% of NAV (₹1,20,000) is allowed under **Section 24(a) of the Income Tax Act, 1961**. Income from House Property = ₹2,80,000.

**Profits and Gains from Business or Profession:**
Business income before adjustments is ₹1,75,000. Current year depreciation of ₹40,000 is deducted, giving ₹1,35,000. Business loss brought forward from AY 2011-12 (₹70,000) is set off against current business income under **Section 72**, leaving ₹65,000. Unabsorbed depreciation of ₹1,55,000 from earlier years is then set off under **Section 32(2)** — only ₹65,000 can be absorbed here, reducing business income to **Nil**. Remaining unabsorbed depreciation = ₹90,000.

Under Section 32(2), the unabsorbed depreciation of ₹90,000 can be set off against income from any other head. It is set off against Income from House Property: ₹2,80,000 − ₹90,000 = **₹1,90,000** (adjusted HP income).

**Capital Gains:**
The plot of land was purchased on 20th December 2009 and sold on 12th September 2012. The holding period is approximately 33 months, which is less than 36 months. Hence, the land is a **short-term capital asset**. STCG = ₹6,00,000 − ₹4,10,000 = **₹1,90,000** (no indexation applies to STCG).

Long-term capital gain on sale of debentures = **₹60,000**…

Question 13

Define the term 'assessee' as per the Income Tax Act, 1961.

Accepted Answer

The term **'assessee'** is defined in **Section 2(7) of the Income Tax Act, 1961**. According to this section, assessee means: (1) any person in whose hands the income is assessable under the Act; (2) any person who is deemed to be an assessee under the Act; and (3) in the case of any person not assessable under the Act, any other person in or in respect of whom any act, operation or thing is required to be done for the purposes of the Act.

In simple terms, an **assessee is any person whose income is liable to be assessed under the Income Tax Act**. The definition is comprehensive and covers all types of persons whether natural or juridical.

**Who can be an assessee:**

The definition of assessee includes: (a) **Individuals** – both resident and non-resident persons; (b) **HUF (Hindu Undivided Family)** – treated as a separate taxable entity; (c) **Companies** – both domestic and foreign; (d) **Partnerships/Firms** – assessed on the basis of individual partners' shares; (e) **Associations of Persons (AOP)** and **Body of Individuals (BOI)**; (f) **Trusts** – assessed on the basis of beneficiaries' income; (g) **Local Authorities** – such as municipal corporations, panchayats; and (h) **Any other juridical person**.

**Key features of the definition:**

The definition is **exhaustive** as it includes "any other person", making it wide enough to cover all possible persons who may be assessed. The definition is **non-resident inclusive**, meaning even non-resident individuals…

Question 14

Mr. Premy is running two industrial undertakings, one in a SEZ (Unit A) and another in a DTA (Unit B). The brief details for the year ended 31.03.2013 are as under:

| Particulars | Unit A (₹ in lacs) | Unit B (₹ in lacs) |
|---|---|---|
| Domestic turnover | 10 | 100 |
| Export turnover | 120 | Nil |
| Gross Profit | 20 | 10 |
| Less: Expenses and depreciation | 07 | 06 |
| Profits derived from the units | 13 | 5 |

The brought forward business loss belonging to assessment year 2010-11 for Unit B is 3.2 lakhs. Briefly compute the business income of the assessees.

Accepted Answer

**Computation of Business Income of Mr. Premy for A.Y. 2013-14**

**Relevant Provision — Section 10AA of the Income Tax Act, 1961:** Unit A is situated in a Special Economic Zone (SEZ). The deduction under Section 10AA is computed as: **(Export Turnover ÷ Total Turnover) × Profit of the Unit.** Assuming Unit A is in the first five-year block, the deduction is **100%** of the export profit so derived.

**Step 1 — Compute Profits of Both Units:**

Unit A (SEZ): Profits derived = ₹13 lacs. Unit B (DTA): Profits derived = ₹5 lacs.

**Step 2 — Set off of Brought Forward Business Loss (Section 72):**

The brought forward business loss of Unit B pertaining to A.Y. 2010-11 is ₹3.2 lacs. Under **Section 72 of the Income Tax Act, 1961**, unabsorbed business loss can be carried forward and set off against business income of subsequent years (up to 8 assessment years). Since A.Y. 2013-14 is within the permissible limit, the loss of ₹3.2 lacs is set off against current year business income.

Combined business income before deduction = ₹13 + ₹5 = ₹18 lacs. After set off of brought forward loss: ₹18 − ₹3.2 = **₹14.8 lacs**.

**Step 3 — Deduction under Section 10AA for Unit A:**

Export Profit = (Export Turnover ÷ Total Turnover) × Profit of Unit A
= (₹120 ÷ ₹130) × ₹13 lacs = **₹12 lacs**.

Assuming Unit A is within its first 5-year block of operation, 100% of export profit is deductible = ₹12 lacs.

**Step 4 — Taxable Business Income:**

Net Business Income after Section 10AA deduction = ₹…

Question 15

Fill up the blanks for the following items in the context of VAT:
(i) The most commonly used method for computing VAT is the _____ method.
(ii) The most widely used variant among the various ones is the _____ variant.
(iii) When a dealer opts for Composition Scheme, the VAT chain _____ (continues/gets broken)
(iv) Among the following is not an applicable VAT rate: 0, 5, 8, 12

Accepted Answer

**Answer:**

(i) The most commonly used method for computing VAT is the **Invoice method** (also called the **Credit method** or **Credit-Invoice method**).

This method allows dealers to determine their VAT liability by crediting the input VAT paid on purchases against the output VAT collected on sales. It is the most prevalent method globally and in India because it prevents tax cascading and maintains the VAT chain effectively.

(ii) The most widely used variant among the various ones is the **Multi-stage variant**.

Multi-stage VAT is applied at multiple points in the supply chain (manufacturing, wholesale, retail, etc.), making it the most comprehensive and widely adopted model. It operates at various stages of production and distribution, which is why it is preferred over single-stage VAT in most countries including India's earlier VAT system.

(iii) When a dealer opts for Composition Scheme, the VAT chain **gets broken**.

Under the Composition Scheme, a dealer pays VAT on a fixed percentage of turnover without charging VAT separately to customers and without claiming input VAT credit. Since the dealer does not charge or collect VAT and is not part of the normal VAT registration chain, the VAT chain is broken at that point in the supply chain.

(iv) Among the following, **8** is not an applicable VAT rate.

The standard VAT rates applicable in India include 0% (zero-rated), 5% (reduced rate), 12% (standard rate), and higher slabs. The rate of 8% does not form part of t…

Question 16

In the context of charitable services, what are the implications of the term 'provided or supplied'?

Accepted Answer

In the context of charitable services under GST law, the term **'provided or supplied'** carries significant implications for determining the taxability and exemption status of charitable organizations' activities.

**Scope and Definition**: The phrase 'provided or supplied' in Section 12 of the CGST Act 2017 (which grants exemption for activities of charitable organizations) encompasses both gratuitous provision of goods or services and those supplied for consideration. This dual terminology ensures that the exemption covers all modes of making goods or services available, whether or not payment is received.

**Distinction Between 'Provided' and 'Supplied'**: 'Provided' refers to making something available without necessarily involving monetary or non-monetary consideration, while 'supplied' under GST has the technical meaning of goods or services transferred for consideration in the course of business (as per Section 7 of CGST Act 2017). The combined use of both terms broadens the scope to cover transactions that might otherwise fall outside the strict definition of supply.

**Implications for Exemption**: By using the inclusive term 'provided or supplied,' Section 12(3)(f) ensures that charitable organizations' activities qualify for exemption regardless of whether they are rendered for a fee or free of charge. This means a hospital providing medical services to poor patients (without fee) and providing vaccination services for consideration both fall within the exemption …

Question 17

List the purchases which are not eligible for input tax credit under VAT legislation.

Accepted Answer

Under the GST legislation (CGST Act, 2017), the following purchases are **NOT eligible for input tax credit**:

**1. Goods and Services for Personal Consumption:** Goods or services used for personal consumption of the recipient or any member of the recipient's household are not eligible for ITC. This includes personal purchases made by employees or proprietors.

**2. Exempt Supply Inputs:** Goods or services acquired for making supplies that are completely exempt from GST cannot claim input tax credit. The tax paid on such inputs cannot be recovered.

**3. Motor Vehicles and Fuel (Personal Use):** Motor vehicles acquired for personal use and fuel used for personal vehicles are not eligible for ITC. However, motor vehicles used for transportation of goods or as part of supply of services may qualify for ITC under certain conditions.

**4. Food and Beverages:** Food and beverages are not eligible for ITC except when they are used as inputs in the supply of food and beverages. For example, raw materials used in restaurants can claim ITC, but staff canteen meals cannot.

**5. Services Related to Employees:** Goods or services used for making supplies of services in relation to a member (including medical insurance, recreational facilities, accommodation) are not eligible for ITC as they relate to employee benefits.

**6. Construction Services:** Services used for construction of complexes, buildings, and civil structures where the output supply is not a supply of construction se…

Question 18

What are the conditions to be fulfilled by a charitable trust under section 12A for applicability of exemption provisions contained in section 11 and 12 of the Income-tax Act, 1961?

Accepted Answer

Section 12A of the Income Tax Act, 1961 prescribes the conditions for registration of a charitable trust to claim exemption under sections 11 and 12. The following conditions must be fulfilled:

**1. Constitution and Governing Body**
The trust must be constituted by a deed or by operation of law. The governing body must consist wholly of individuals or institutions that the Income-tax Officer is satisfied are "fit and proper persons" or institutions, or a combination thereof with government bodies. This ensures proper oversight and management.

**2. Exclusive Application of Income for Charitable Purposes**
The entire income of the trust must be applied wholly and exclusively for charitable purposes in India. "Wholly and exclusively" means that no part of the income can be diverted for any non-charitable purpose. If charitable purposes are to be pursued outside India, they must be in conformity with Indian policies and interests.

**3. Prohibition on Remuneration and Personal Benefits**
No part of the income should be applied directly or indirectly for the benefit of any individual. Specifically:
- No remuneration or commission can be paid except for essential administrative and office staff, and such remuneration must be reasonable and necessary
- No benefit, whether direct or indirect, can be given to any person connected with the management or governance of the trust
- No surplus income can be distributed among members or founders

**4. Maintenance of Books of Accounts and …

Question 19

Describe briefly the manner of determination of value for service tax purposes, when consideration is not wholly/partly consisting of money.

Accepted Answer

When consideration for a taxable service is not wholly consisting of money or includes non-monetary components, the value is determined through the following methodology:

**Identification of Components** – First, segregate the consideration into monetary (cash, cheque) and non-monetary components (goods, services, barter, or other benefits).

**Valuation of Non-Monetary Components** – The fair market value (FMV) of non-monetary components is determined at the point of supply. The FMV is the price at which similar goods or services are ordinarily available in the open market under comparable conditions. Where FMV cannot be determined, the cost incurred by the service provider to obtain or produce those goods/services serves as the basis.

**Aggregation of Value** – The taxable value is computed as: Monetary consideration + FMV of non-monetary consideration. This aggregated amount forms the taxable value for service tax purposes.

**Treatment of Specific Items** – Gifts or items of negligible value are excluded from consideration as they do not represent true consideration for the service. In barter transactions where one service is exchanged for another, the valuation is based on the FMV of the service provided by the service provider, not the consideration received.

**Arm's Length Principle** – All valuations must comply with the arm's length principle to ensure that mixed consideration arrangements do not result in undervaluation of the service. Documentation of the basis …

Question 20

What are the deficiencies of VAT system?

Accepted Answer

The VAT (Value Added Tax) system, though conceptually superior to sales tax, had several significant deficiencies that necessitated its replacement by GST:

**Cascading of Tax (Partial)** - Although VAT aimed to eliminate tax cascading, input tax credit could be blocked on certain goods and services, particularly those considered personal consumption or outside the scope. This resulted in partial cascading of tax burden throughout the supply chain, defeating the core objective of VAT.

**Classification Disputes and Litigation** - The boundary between goods and services remained unclear under VAT, leading to frequent disputes over classification. Multiple tax rates for different goods created further complications, resulting in lengthy litigation and uncertainty for businesses about their tax obligations.

**Interstate Trade Complications** - VAT applied only on intrastate transactions while interstate transactions fell under Central Sales Tax, creating a dual tax structure. This led to differential tax treatment, supply chain disruptions, and administrative complexity across state borders.

**Threshold Exemptions and Inverted Duty Structure** - Small traders below the registration threshold were exempted from VAT collection. However, their inputs still attracted tax, creating an inverted duty structure where tax on inputs exceeded tax on outputs. This disadvantaged small businesses and created competitive distortions.

**Input Tax Credit Blocking** - Credit was systematically…

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