IPCC May 2010 Tax Paper Solved

Question 1	Question 2
Question 3	Question 4
Question 5	Question 6
Question 7	Question 8

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Question 1

Mr. Dinesh Karthik, a resident individual aged 45, furnishes the following information pertaining to the year ended 31.3.2011 :

• He is a partner in Badrinath & Co. he has received the following amounts from the firm:

• He is engaged in a business in which he manufactures wheat flour from wheat. The Profit and Loss account pertaining to this business (summarized form) is as under:

To	Rs.	By	Rs.
Salaries	120000	Gross profit	1250000
Bonus	48000	Interest on Bank FD	45000
Car expenses	50000	(Net of TDS 5,000)
Machinery repairs	234000	Agricultural income	60000
Advance Tax	70000	Pension from LIC Jeevandhara	24000
Depreciation :
Car	300000
Machinery	125000
Net profit	432000
	1379000		1379000

Opening WDV of assets are as under:

	Rs.
Car	300000
Machinery	650000
(Used during the year for 170 days)
Additions to machinery
New purchased on 23.09.2010	200000
New purchased on 12.11.2010	300000
Old purchased on 12.4.2010	125000
(All assets added during the year were put to use immediately after purchase)

Of the total bonus amount, Rs. 15,000 was paid on 11.10.2010

One-fifth of the car expenses are towards estimated personal use of the assessee.

(iii)  In March, 2009, he had sold a house at Chennai. Arrears of rent relating to this house amounting to Rs.75000 was received in February, 2011.

(iv)  Details of his Savings and Investments are as under:	Rs.
Life Insurance Premium for policy in the name of his major son employed in LMN Ltd. at a salary of Rs.6 lacs p.a. Sum assured Rs.200000	50000
Contribution to Pension Fund of National Housing Bank (this was met partially from out of premature withdrawal of deposit in Post Office Time Deposit made on 12.3.2007 Principal component Rs.55000 and Interest Rs.5000)	70000
Medical Insurance Premium for his father aged 70, who is not dependent on him	22000

You are required to compute the total income of Mr. Dinesh Karthik for the assessment year 2011-12 and the tax payable by him. Also indicate whether interest, if any, under sections 234A and 234B are payable, assuming that the return was filed on 28 th September, 2011 .

Computation of interest, if any, is NOT required. 

Solution

Computation of total income of Dinesh Karthik for A.Y.2011-12

Particulars	Details	Amount	Amount
Income from House Property
Receipt of Arrear Rent		75000
Less : Standard Deduction u/s 24(a) [being 30% of above]		22500	52500
Profit & Gains of Business or Profession
Net profit as per Profit & Loss A/c from Prop. Business		432000
Add : Expenses disallowed but debited to Profit & Loss A/c
Advance Tax	70000
Depreciation as per Profit and Loss A/c [Rs.300000 + Rs.125000]	425000
Unpaid Bonus	33000
Personal Expenses relating to Car	10000	538000
		970000
Less : Expenses allowable under the head but not debited to Profit & Loss A/c
Depreciation as per the Act	283750
Less : Income not taxable under the head but credited to Profit & Loss A/c
Interest on Bank FD	45000
Pension from LIC Jeevandhara	24000
Less : Income not taxable under the head but credited to Profit & Loss A/c
Agricultural Income	60000	412750
Income from Proprietorship Business		557250
Add : Interest on Capital from Badrinath & Co. [Rs.300000/15%*12%] [Note 2]		240000
Add : Salary from Badrinath & Co. [Note 2]		90000	887250
Income from Other Sources
Interest on Bank FD [Rs.45000 + Rs.5000 (TDS)]		50000
Pension from LIC Jeevandhara		24000
Interest on Post Office Time Deposit		5000	79000
Gross Total Income			1018750
Less : Deduction u/s 80C
LIC (Maximum upto 20% of sum assured)	40000
Contribution to Pension Fund of National Housing Bank	70000
	110000
Subject to maximum of		100000
Less : Deduction u/s 80D
Medical Insurance Premium for father, a senior citizen [Maximum Limit]		20000	120000
Total Income (Rounded off u/s 288A)			898750

Note

1. Computation of Depreciation as per Income-tax Act

Particulars	Details	Amount
Block 1: Plant and Machinery @ 15%
W.D.V. as on 1/4/2010	650000
Add : Purchase during the year
- On 12/04/2010	125000
- On 23/09/2010	200000
- On 12/11/2010	300000
	1275000
Less : Sale during the year	-
	1275000
Depreciation @ 15% [Rs.300000 * 15% * ½ + Rs.975000 * 15%]	168750
Additional depreciation @ 20% [Rs.200000 * 20% + Rs.300000 * 10%]	70000	238750
(No additional depreciation is available on second-hand machinery)
Block 2: Car @ 15%
W.D.V. as on 1/4/2010	300000
Add : Purchase during the year	-
	300000
Less : Sale during the year	-
	300000
Depreciation @ 15% [Rs.300000 * 15%]		45000
Depreciation allowed u/s 32		283750

2. Interest and remuneration to partner shall be taxable in the hands of partner, to the extent it is exempted in the hands of firm. Interest @ 12% is exempted in hands of firm. Further, it is assumed that salary to Mr. Karthik is an allowable expenditure in hands of Badrinath & Co.

 

Computation of tax liability of Mr. Dinesh Karthik for A.Y. 2011-12

Particulars	Amount
Tax on Rs.958750 (i.e. agro income Rs.60000 + non-agro income Rs.898750)	141625
Less : Tax on Rs.220000 (i.e. agro income Rs.60000 + maximum exempted limit Rs.160000)	6000
Tax liability	135625
Add : Education cess & SHEC @ 3%	4069
Tax and cess liability	139694
Less : TDS	5000
Advance tax payable	134694
Less : Advance Tax paid	70000
Tax and cess payable (Rounded off)	64690

 

Levy of interest u/s 234A and 234B

Interest u/s 234A : Under this section interest is payable for non filling of income tax return till the due date mentioned u/s 139(1). We assume that Mr. Dinesh is liable to file his income tax return on or before 30/9/2011. Since he filed his return of income on 28/09/2011 i.e. within due date of furnishing return of income, hence, interest u/s 234A is not applicable.

Interest u/s 234B : Under this section interest is payable if at least 90% of the advance tax due has not been paid till 31 st March of the previous year. In this case Mr. Dinesh is liable to pay advance tax of Rs.121225 but he has paid only Rs.70000, which is less than 90% of Rs.134694. Therefore, he is liable to pay interest u/s 234B @ 1% on Rs.64690 for 6 months i.e. April to September, 2011. Assuming tax alongwith interest has been paid on or before furnishing of return of income.

Note : Assessee is also liable to pay interest u/s 234C

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Question 2(a)

Mr. Tenzingh is engaged in composite business of growing and curing (further processing) Coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining to the year ended 31.3.2011 are given below:

	Rs.
WDV of Car as on 1.4.2010	2,00,000
WDV of Machinery as on 31.3.2010 (15% rate)	15,00,000
Expenses incurred for growing Coffee	3,10,000
Expenditure for curing Coffee	3,00,000
Sale value of cured Coffee	22,00,000

Besides being used for agricultural operations, the car is also used for personal use; disallowance for personal use may be taken at 20%. The expenses incurred for car running and maintenance are Rs.50000. The machines were used in coffee curing business operations.

Compute the Income arising from the above activities for the assessment year 2011-12. Show the WDB of the assets as on 31.03.2011.

Solution

Computation of income of Mr. Tenzingh for A.Y. 2011-12
Particulars	Rs.	Rs.
Sale value of cured Coffee		2200000
Less :
Expenses incurred for growing Coffee	310000
Expenditure for curing Coffee	300000
Expenses on running & maintaining car incurred in business [Rs.50000 – Rs.10000]	40000
Depreciation on Car [80% of [Rs.300000 * 15%] [Note 1]	36000
Depreciation on machine [Rs.1500000 * 15%]	225000	911000
		1289000
Less : Agricultural Income [75% of above]		966750
Profit and Gains of Business or Profession		322250

Computation of Written Down Value as on 31.03.2011

Particulars	Car	Machine
W.D.V. as on 1/4/2010	300000	1500000
Add : Purchase	Nil	Nil
	300000	1500000
Less : Sale	Nil	Nil
	300000	1500000
Less : Depreciation for the year ending on 31.03.2011	45000	225000
Opening WDV for the next year	255000	1275000

Notes:

1. Depreciation on car is Rs.45000 but only 80% of this would be considered as a business expense.

2. As per amendment to section 43(6), where the income of the assessee is derived, partly from agriculture and partly from business and asset are used for both of said purposes then amount of depreciation shall be calculated as if entire income is derived from the business of the assessee under the head of Profit and Gains of Business or Profession and depreciation so computed shall be deemed to be the depreciation actually allowed.

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Question 2(b)

Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1 st November, 2010 for a consideration of Rs.2500000. The Sub-Registrar refused to register the document for the said value, as according to him, stamp duty had to be paid of Rs.4500000, which was the Government guideline value. Mr. Raj Kumar preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as Rs.3200000 (Rs.2200000 for land balance for building portion).The differential stamp duty was paid, accepting the said value determined. Assuming that the fair market value is Rs.3200000, what are the tax implications in the hands of Mr. Raj Kumar and Mr. Dhuruv for the assessment year 2011-12? Mr. Raj Kumar had purchased the land on 1 st June, 2007 for Rs.519000 and completed the construction of house on 1 st October, 2008 for Rs.1400000.

Cost inflation indices may be taken as 551 for the financial year 2007-08, 582 for the financial year 2008-09 and 711 for the financial year 2010-11.

Solution

Tax Treatment in hands of Mr. Dhuruv

Acquisition of immovable property below stamp duty value is not considered as income in hand of the purchaser, hence nothing shall be taxable in hands of Mr. Dhuruv.  

Tax Treatment in hands of Mr. Raj Kumar

Computation of Capital Gain for A.Y.2011-12

Particulars	Land	Building
Sale consideration	2200000	1000000
Less : Expenses on transfer	Nil	Nil
Net sale consideration	2200000	1000000
Less : Indexed cost of acquisition
519000 * 711/551	669708
Less : Cost of acquisition		1400000
Less : Indexed cost of improvement	Nil
Less : Cost of improvement		Nil
Long term capital gain	1530292
Short term capital gain		(400000)

Note: It is to be noted that in the given case land is a long term capital asset however building is a short term capital asset.

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Question 3

From the following particulars of Income furnished by Mr. Anirudh pertaining to the year ended 31.3.2011, compute the total income for the assessment year 2011-12, if he is:

(i) Resident and ordinary resident;

(ii) Resident but not ordinarily resident;

(iii) Non-resident:

	Particulars	Amount (Rs.)
(a)	Profit on sale of shares in Indian Company received in Germany	15000
(b)	Dividend from a Japanese Company received in Japan	10000
(c)	Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels	75000
(d)	Dividend from RP Ltd., an Indian Company	6000
(e)	Agricultural income from lands in Gujarat	25000

Solution

Computation of total income of Mr. Anirudh for the A.Y.2011-12

Particulars	Resident & Ordinarily resident	Resident but not ordinarily resident	Non-resident
Profit on sale of shares in Indian Company received in Germany	15000	15000	15000
Dividend from a Japanese Company received in Japan	10000	-	-
Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels	75000	-	-
Dividend from RP Ltd., an Indian Company	-	-	-
Agricultural income from lands in Gujarat	-	-	-
Income liable to tax in India	100000	15000	15000

Note:

1. Dividend from an Indian company is exempt u/s 10(34)

2. Agricultural income from a land situated in India is exempt u/s 10(1).

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Question 4

Answer the following questions with regard to the Provisions of the Income tax Act,1961:

a.	State the concessions granted to transport operators in the context of Cash payments under section 40A(3) and deduction of tax at source under section 194-C.
b.	What are the conditions to be fulfilled by a Charitable Trust under section 12A for applicability of exemption provisions contained in sections 11 and 12?
c.	What are the particulars required to be furnished with the return of income, as per section 139(6)?

Solution

a. Amendment u/s 40A(3)

Any expenditure in respect of which payment has been made in excess of Rs.20000 in a day otherwise than by an account payee cheque or account payee bank draft shall be disallowed. However, w.e.f. 01-10-2009 , i n the case of payment made for plying, hiring or leasing goods carriages (hereinafter referred to as Road Transport), the limit of Rs.20000 has been increased upto Rs.35000.  

Amendment u/s 194C

When following conditions are satisfied then tax cannot be deducted:

1. Amount is paid or payable to a resident contractor during the course of plying, hiring or leasing goods carriage (here-in-after referred to as transport operator).
   
2. Such operator furnishes his Permanent Account Number (PAN) to the payer.
   
3. Payer shall furnish prescribed details in prescribed form and within prescribed time to the prescribed income tax authority.
 

b. Following conditions as specified u/s 12A are required to be satisfied for claiming exemption u/s 11 and 12:

(i) Trust should be registered with the Commissioner of Income tax; 

(ii) Trust should submit an application for registration in the Form 10A to the Commissioner of Income Tax; 

(iii) Such application shall be submitted before the expiry of 1 year from the date of creation of trust.; 

(iv) Commissioner can condone the delay if he is satisfied that there were sufficient reasons for not filling application within the time period of 1 year.

c.  The assessee is required to furnish the following particulars in the return of income:

i. Income exempt from tax, 

ii. Assets of the prescribed nature

iii.  Value and belonging to him, 

iv. His bank account and Credit card held by him 

v. Expenditure exceeding the prescribed limits incurred by him under prescribed heads and such other outgoings as may be prescribed. 

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Question 5

Provide brief answer to the following questions on Service tax:

a.  Is Service tax payable in respect of services provided in the Indian territorial waters?

b.  Is Service tax leviable on fee collected by Public authorities while performing statutory functions under the provisions of law?

c.  Can an assessee file a revised Service tax return?

d.  Explain the term “Commercial training or Coaching centre”.

Solution

a.  The sovereignty of India extends to the territorial waters of India and to the seabed and subsoil underlying, and the airspace over, such waters. The law of service tax is applicable to the territorial waters of India and it has been extended to installations, structures and vessels in the territorial waters

b.  Services provided by public authorities are not covered under definition of taxable services provided u/s 65(105) therefore no service tax will be imposed on the fees collected by them while performing statutory functions under the provision of any law.

c.  As per rule 7B of Service Tax Rules, 1994, a service provider may submit the revised return in Form ST-3 in triplicate to correct a mistake or omission, within a period of 90 days from the date of submission of original return.

d. Commercial training or coaching centre: 

ii.  but does not include -   

- pre-school coaching and training centre or

- any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force

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Question 6(a)

Virat Kholi & Co., a partnership firm, is providing taxable legal consultancy services, for the second consecutive assessment year. The firm furnishes the following information relating to the services rendered, bills raised, amounts received relating to this service, for the year ended 31.3.2011.

		Rs.
(i)	Free services rendered to poor people (value of the services computed on comparative basis)	40000
(ii)	Advances received from clients for which no taxable service has been rendered so far	500000
(iii)	Service billed to clients Gross Amount (Service tax has been charged separately in all the bills; the firm follows mercantile system of accounting)	1200000
(iv)	The firm has received the following amounts during the year: Relating to taxable services rendered in March, 2009 (excluding service tax at applicable rates and TDS under section 194-J of the IT Act,1961 to the tune of Rs.45320)	544680
	Relating to taxable services rendered in current year 2010 (excluding Service tax at applicable rates and TDS under section 194-J or the IT Act,1961 to the tune of Rs.120000) (*includes Rs.50000 for appearance fee before Labour Court received from another firm)	980000*

Service tax has been separately received for applicable items in (iv) above.

You are required to compute the value of taxable services for the year ended 31.3.2011 and Service tax payable, briefly explaining the treatment of each item above.

Solution

Computation of value of taxable service and tax thereon

Particulars	Details	Amount
Free services rendered to poor people		Nil
Advances received from clients		500000
Service billed to clients		Nil
Receipt of value of taxable services provided in March, 2009		Nil
Receipt of value of taxable services provided in current year 2010
Net Receipt	980000
Add : TDS	120000
	1100000
Less : Fee for appearance before Labour Court, an authority	50000	1050000
Value of taxable services		1550000
Service Tax thereon [Rs.1550000 * 10.3%]		159650
- Service tax		155000
- Education Cess		3100
- SHEC		1550

Note:

1. Free service is not taxable.

2. Service tax is payable on receipt of value of taxable service provided or to be provided. Thus, advance received shall be taxable.

3. Legal Consultancy service is covered under the purview of taxable service from 01-09-2009, hence receipt against services provided before such date is not taxable.

4. It is to be noted that service tax is separately charged in the bill and accordingly received.

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Question 6(b)

Answer the following questions on Service tax:

a.  What is the scope of taxable service in respect of membership of Clubs or Associations? State the exception to the same.

b.  Does a service provider have an option to pay Service tax at a rate different from the general rate applicable on gross value of taxable services, in the case of purchase and sale of foreign currency?

c.  What is the late fee payable for delay in furnishing the Service tax return? Can the same be waived?

Solution

a.  Scope of taxable service in respect of membership of clubs or associations

Any service provided or to be provided to its members , by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount. [Sec. 65(105)(zzze)] E.g. services provided by a club in relation to games, sports, swimming pool, etc. is taxable.

Exemption

i.  Resident Welfare Association : Service provided or to be provided by Resident Welfare Association (Housing Co-operatives Societies in Mumbai) to its member is exempt provided

ii.  The monthly contribution of a member does not exceed Rs.3000 per month; and

iii.  Membership is restricted to members of the residential complex or locality. [Notification No. 8/2007 – ST dt. 1-3-2007 ]

iv.  FIEO and Export Promotion Council : Any service provided or to be provided by the prescribed associations, is exempted upto 31-03-2010:

v.  Membership fees paid to the association without any benefit in return is not taxable as there is no service is rendered to the member.

 

b. Option to money changer

Money changer shall have the option to pay an amount calculated @ 0.25% (plus education cess and SHEC) of the gross amount of currency exchanged. However, such option shall not be available in cases where the consideration for the service provided or to be provided is shown separately in the invoice, bill or, as the case may be, challan issued by the service provider. In that case, tax is paid @ 10.30% on the value of consideration.

 

c.  Late Fees for delayed filing of return may be charged as per following schedule (subject to maximum of Rs.2000):

Delay	Penalty
Up to 15 days	Rs.500
16 to 30 days	Rs.1000
31 days onward	Rs.1000 plus Rs.100 per day from 31 day onwards (subject to max of Rs.2000)

Where the gross amount of service tax is nil, the Central Excise Officer may, on being satisfied that there is sufficient reason for not filing the return, reduce or waive the aforesaid penalty.

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Question 7

Answer the following question on VAT:

a.  What are the items aggregated in the Addition method to calculate the VAT payable? When is this method mainly used?

b.  Is any threshold exemption limit fixed for dealers to obtain VAT registration, as per the White Paper? If yes, why is the same provided?

c. Is the Vat chain continued when a purchasing dealer opts for VAT composition scheme? What is the loss to the seller and buyer opting for the composition scheme, and the subsequent buyers?

d. Can it be said that VAT brings about certainty to a great extent in the matter of interpretational issues? If so, how?

Solution

a.  Addition method or Income Approach

This method aggregates all the factor payments such as wages, rent, interest and profits to arrive at the total value addition on which the rate is applied to calculate the tax. Under this method tax is imposed on exempted goods as well. This method is mainly used with income variant of VAT.

b.  In order to provide relief to the small dealers, small dealers with annual turnover not exceeding Rs 10 lakhs (earlier, limit was 5 lakhs) will not be liable to VAT. It is to be noted that States will have the flexibility to fix threshold limit within Rs 10 lakhs.

c.  If a dealer elects to pay tax under composition scheme then the VAT chain is not continued. Selling dealer who has chosen composite scheme will not be allowed to claim any credit for input tax paid on purchases made by him. Further, he will not be entitled to issue tax invoices to the buyer due to which buyer would not be entitled to claim credit of any input tax from his own output tax.

d.  VAT is simple, rational and uniform in its applicability. The mechanism of VAT is based on transactions. The VAT is also broad-based and applicable to all sales leaving very little room for different interpretations. Thus, this system brings certainty to a great extent

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Question 8(a)

Mr. X. a dealer in Mumbai dealing in consumer goods, submits the following information pertaining to the Month of March, 2011:

i.  Exempt goods ‘A' purchased for Rs.200000 and sold for Rs.250000.

ii.  Goods ‘B' purchased for Rs.225000 (including VAT) and sold at a margin of 10% profit on purchases (VAT rate 12.5%);

iii.  Goods ‘C' purchased for Rs.100000 (excluding VAT) and sold for Rs.150000 (VAT rate 4%);

iv.  His unutilized balance in VAT input credit on 1.3.2011 was Rs.1500.

Compute the turnover, Input VAT, Output VAT and Net VAT payable by Mr. X.

Solution

Computation of turnover

Particulars	Working	Turnover
		Exempted	12.5%	4%
Goods A	Exempted	Nil
Goods B	[Rs.225000/112.5% * 100%] * 110%		220000
Goods C				150000
Turnover		Nil	220000	150000
Output tax		Nil	27500	6000

Computation of VAT Payable

Particulars	Amount	Amount
Opening balance of unutilized Input Credit		1500
Add : Input Credit availed during the period
On purchase of Goods A, being exempted	Nil
On purchase of Goods B [Rs.225000/112.5% * 12.5%]	25000
On purchase of Goods C [Rs.100000/104% * 4%]	4000	29000
Input credit available		30500
Less : Output VAT
On sale of Goods B	27500
On sale of Goods C	6000	33500
VAT Payable to the Government		3000

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Question 8(b)

Answer the following questions on VAT:

a.  What are the merits of VAT in the context of tax evasion, neutrality and transparency?

b.  State the importance of VAT invoice/tax invoice in administering VAT.

c.  Discuss the tax consequences of Stock transfer under the VAT scheme

Solution

a.  Merit of VAT

 

b.  The invoice plays a vital role in the mechanism of VAT. In the absence of invoice, VAT paid by the dealer earlier cannot be claimed as set-off. In other words, in the absence of invoice, input tax credit is not available to the dealer. Thus, it is helpful in: 

i. availing and determining the amount of input tax credit 

ii. preventing cascading effect of taxes; 

iii. charging tax on value additions 

iv. Facilitating multi-point tax 

v. performing audit and investigation effectively 

vi. cross-checking

vii.  checking evasion of tax.

 

c.  Inter-State transfer to branch offices is not a sale; hence they are not subjected to tax under VAT. However, the tax paid on:   

will be available as input tax credit after retention of 4% of such tax by the State Governments.  

E.g. If Mr. X of Orissa, transferred goods of Rs.100000 to its Karnataka branch, then input tax credit availed of on purchase of such goods (say Rs.12500/-) is required to be reversed to the extent of Rs.4000 and Mr. X of Orissa will enjoy the credit of Rs.8500/-. This is called ‘Reversal of Input tax Credit'

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