Question 1(a)

On 21.3.2010, Mr. Janak gifted to his wife Mrs. Thilagam 200 listed shares which had been bought by him on 19.4.2009 at Rs.2,000 per share. On 1.6.2010, bonus shares were allotted in the ratio of 1:1. All these shares were sold by Mrs. Thilagam as under:

Briefly state the income-tax consequences in respect of the sale of the shares by Mrs. Thilagam, showing clearly the person in whose hands the same is chargeable, the quantum and the head of income in respect of the above transactions. Detailed computation of total income NOT required.

Net sales value represents the amount credited after all taxes, levies, brokerage, etc., and the same may be adopted for computing the capital gains.

Solution

Sale of 100 shares

Since shares are sold through recognized stock exchange after holding for more than 12 months (including period of holding of previous owner), hence capital gain, if any, arises on such transfer is exempt u/s 10(38)

Sale of bonus shares

Since shares are not sold through recognized stock exchange, hence short term capital gain of Rs.125000 arises on such transfer is taxable in the hands of Mrs.Thilagam. It is to be noted that:

a. Cost of acquisition of bonus shares shall be Nil

b. In case of accretion of assets transferred by the spouse, clubbing provisions are not applicable.

Sale of remaining 100 shares

Computation of capital gain

Question 1(b)

Nathan Aviation Ltd. is running two industrial undertakings, one in a SFZ (Unit S) and another in a normal area (Unit N). The brief summarized details for the year ended 31.3.2011 are as under :                                                                         

(Rs. in lacs)

The brought forward business loss pertaining to Unit N is Rs.2 lacs. Briefly compute the business income of the assessee.

Solution

Computation of business income of Nathan Aviation Ltd. for the A.Y. 2011-12

Question 1(c)

Pareesh & Co., is a partnership firm engaged in the business of recruitment and supply of labourers. The firm, which had rendered taxable services to the tune of Rs.20.2 lacs in the financial year 2009-10, furnishes the following details pertaining to the half year ended on 30.9.2010 :                                                                                                          

(i)      Amounts collected from companies for pre-recruitment Rs.2,50,000 screening.

(ii)     Amounts collected from companies for recruitment of

for conducting campus interviews in college

Wherever applicable, service tax has been charged separately and received from clients. Compute the value of taxable services rendered and the service tax payable by the assessee for the relevant half year.

Solution

Computation of value of taxable services

Question 1(d)

The following are details of purchases, sales, etc. effected by Vasudha & Co. a registered dealer, for the year ended 31.3.2011 :                                                                              

Input credit is allowed only on raw materials used in manufacture of taxable goods, Compute the VAT liability of the dealer for the year ended 31.3.2011.

Solution

Computation of VAT liability

Notes

Input Credit is not available against payment of CST and custom duty.

Question 2(a)(i)

Miss Vivitha paid a sum of 5000 USD to Mr. Kulasekhara, a management consultant practicing in Colombo, specializing in project financing. The payment was made in Colombo. Mr. Kulasekhara is a non-resident. The consultancy related to a project in India with possible Ceylonese collaboration. Is this payment chargeable to tax in India in the hands of Mr. Kulasekhara, since the services were used in India?

Solution

As per sec.9(1)(vii), following income by way of fees for technical service shall be deemed to accrue or arise in India and hence shall liable to tax in India –

In the instant case, the payment has been received from a person resident in India and relates to a project in India, hence such payment is liable to tax in India.

Question 2(a)(ii)

Mr. Praveen Kumar has furnished the following particulars relating to payments made towards scientific research for the year ended 31.3.2011.                

Compute the amount of deduction available under section 35 of the Income-tax Act, 1961 while arriving at the business income of the assessee.

Solution

Computation of deduction u/s 35 to Praveen Kumar for the A.Y.2011-12                                                                     

                      Rs. In lakh

Question 2(b)

During the year ended 31.3.2010, Kohli & Co., running a coaching centre has collected a sum of Rs.10.2 lacs as service tax. Rs.70,000 was met through Cenvat credit and the balance was paid by cheque on various dates. The details pertaining to the quarter ended 30.6.2010 are as under :                                                                                        

Determine the service tax liability for the quarter and indicate the date by which the service tax has to be remitted by the assessee.

Solution

Computation of service tax liability

Due date of the payment of service tax (electronically) is 6th July, 2010.

It is assumed that all receipts do not include service tax.

Question 2(c)

Which variant of VAT is most widely used in the world and why? Are some services also included in the VAT net by such countries?

Solution

Refer page 20.5

Question 3(a)

Mr. Vidyasagar, resident individual aged 64, is a partner in Oscar Musicals & Co., a partnership firm. He also runs a wholesale business in medical products. The following details are made available for the year ended 31.3.2011:                                     

Compute the total income of the assessee for the assessment year 2011-12. The computation should show the proper heads of income. Also compute the WDV of the different blocks of assets as on 31.3.2011.

Solution

Computation of total income of Dr. Shuba for the A.Y. 2011-12

Notes

Computation of depreciation u/s 32

Question 3(b)

 I.    Where any transaction of taxable service is entered into with an associated enterprise, receipt of service tax is not material for levy of service tax. Explain with reasons, whether you agree or disagree with this statement

II.    Briefly discuss about the adjustment of excess amount of service tax paid in case of renting of immovable property service, owing to property tax payment.

Solution

 I.    Refer Page No.19.7

II.    As per Rule 6(4C) of the Service Tax Rules, 1994, where the person liable to pay service tax in respect of services provided or to be provided in relation to renting of immovable property, has paid to the credit of Central Government any amount in excess of the amount required to be paid towards service tax liability for a month or quarter, as the case may be, on account of non-availment of deduction of property tax paid in terms of notification No.24/2007-Service Tax, dated the 22nd May, 2007, from the gross amount charged for renting of the immovable property for the said period at the time of payment of service tax, the assessee may adjust such excess amount paid by him against his service tax liability within one year from the date of payment of such property tax. The details of such adjustment shall be intimated to the Superintendent of Central Excise having jurisdiction over the service provider within a period of fifteen days from the date of such adjustment.

Question 3(c)

M/s. Staruss & Co., a registered dealer under the local VAT law, having stock of goods purchased from outside the State, wishes to opt for the Composition Scheme. Advise him whether the same is possible. Will the VAT chain be broken if the dealer opts for the said scheme?

Solution

Refer Page No.20.24

Question 4(a)

The following are the details relating to Mr. Srivatsan, a resident Indian, aged 57, relating to the year ended 31.3.2011:                                                                                                          

Compute the total-income and show the items eligible for carry forward.

Solution

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

Question 4(b)

State the provisions which enable the Central Government to make rules for administering service tax. For what purposes are such rules made? Name any four such rules issued by the Central Government so far.

Solution

As per sec. 94 of the Finance Act, 1994, the Central Government may, by notification in the Official Gazette, make rules on the following matters for carrying out the provisions of this Chapter:

(a)   collection and recovery of service tax u/s 66 and 68;

(b)   the determination of amount and value of taxable service u/s 67;

(c)    the time and manner and the form in which application for registration shall be made u/s 69;

(d)   the form, manner and frequency of the returns to be furnished u/s 70 and the late fee for delayed furnishing of such return

(e)    the manner of provisional attachment of property u/s 73C;

(f)     publication of name of any person and particulars relating to any proceeding u/s 73D;

(g)   the form in which appeal u/s 85 or u/s 86(6) may be filed and the manner in which they may be verified;

(h)   the manner in which the memorandum of cross-objections u/s 86(4) may be verified;

(i)     the credit of service tax paid on the services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category of taxable service;

(j)      the credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing a taxable service;

(k)    the manner of recovery of any amount due to the Central Government u/s 87;

(l)     provisions for determining export of taxable services;

(m)  grant of exemption to, or rebate of service tax paid on, taxable services which are exported out of India;

(n)   rebate of service tax paid or payable on the taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India;

(o)   the date for determination of rate of service tax and the place of provision of taxable service;

(p)   rebate of service tax paid or payable on the taxable services used as input services in the manufacturing or processing of goods exported out of India u/s 93A;

(q)   any other matter which by this Chapter is to be or may be prescribed.

Further Refer Page No. 19.1

Question 4(c)

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?

Solution

Refer Page No. 20.14

Question 5(a)

Mr. Rakesh purchased a house property on 14^th April, 1979 for Rs.1,05,000. He entered into an agreement with Mr. B for the sale of house on 15^th September, 1982 and received an advance of Rs.25,000. However, since Mr. B did not remit the balance amount, Mr. Rakesh forfeited the advance. Later on, he gifted the house property to his friend Mr. A on 15^th June, 1986.

Following renovations were carried out by Mr. Rakesh and Mr. A to the house property:

The fair market value of the property as on 1-4-1981 is Rs.1,50,000/-

Mr. A entered into an agreement with Mr. C for sale of the house on 1^st June, 1995 and received an advance of Rs.80,000. The said amount was forfeited by Mr. A, since Mr. C could not fulfill the terms of the agreement.

Finally, the house was sold by Mr. A to Mr. Sanjay on 2^nd January, 2011 for a consideration of Rs.12,00,000.

Compute the capital gains chargeable to tax in the hands of Mr. A for the assessment year 2011-12.

Solution

Computation of capital gain in the hands of Mr. A for the A.Y. 2011-12

Question 5(b) & (c)

(b)  Briefly explain the provisions relating to advance payment of service tax.

(c)  What are the major deficiencies of VAT system in India?

Solution

b. Refer page No.19.20

c. Refer Page No.20.4

Harish Jayaraj Pvt. Ltd. is converted into Harish Jayaraj LLP on 1-1-2011.

The following particulars are available to you:                                                      

Though the conversion into LLP took place on 1-1-2011, there was disruption of business and the assets were put into use by the LLP only from 1^st March, 2011 onwards.

The company earned profits of Rs.8 lacs, prior to computation of depreciation.

Assuming that the necessary conditions laid down in section 47 (xiiib) of the Income-tax Act, 1961 have been compiled with, explain the tax treatment of the above in the hands of the LLP.

Solution

Computation of depreciation if no conversion has taken place

Allocation of depreciation between Harish Jayaraj Pvt Ltd. and Harish Jayaraj LLP

The depreciation shall be allocated in the ratio of number of days the assets were used by them:

Calculation of allowable depreciation to Harish Jayaraj Pvt Ltd.

Calculation of allowable depreciation to Harish Jayaraj LLP

Computation of total income of the Harish Jayaraj Pvt Ltd.

Note: Balance brought forward loss of Rs.209995/- is allowed to be adjusted by LLP

Question 6(b)

Nigamanth Cargo Handlers P. Ltd. is a cargo handling agency, in existence since 2003. For the quarter ended 31-3-2011, total collections for handling cargo (excluding service tax) was Rs.32,00,000. The same included the following receipts also:                                   

Ascertain the quantum of taxable cargo handling services for the quarter ended 31-3-2011. Wherever applicable, service tax was charged separately and received in full.

Solution

Computation of service tax liability

Question 6(c)

How can a Chartered Accountant help a client in the handling of VAT audit called for by the Department and in conducting external audit of VAT records?

Solution

Refer Page No.20.25

Specify the persons who are authorized to sign and verify under section 140, the return of income filed under section 139 of the Income-tax Act, 1961 in the case of:

      I.        Political party;

     II.        Local authority;

    III.        Association of persons, and

    IV.        Limited liability Partnership (LLP).

Solution

Refer Page No.17.7

Question 7(a)(2)

The following details have been furnished by Mrs. Hemali, pertaining to the year ended 31-3-2011: 

(i)      Cash gift of Rs.51,000 received from her friend on the occasion of her “Shastiaptha Poorthi”, a wedding function celebrated on her husband completing 60 years of age. This was also her 25^th wedding anniversary.

(ii)     On the above occasion, a diamond necklace worth Rs.2 lacs was presented by her sister living in Dubai.

(iii)    When she celebrated her daughter’s wedding on 21-2-2011, her friend assigned in Mrs. Hemali’s favour, a fixed deposit held by the said friend in a scheduled bank; the value of the fixed deposit and the accrued interest on the said date was Rs.51,000.

Compute the income, if any, assessable as income from other sources.

Solution

Computation of income from other sources of Mrs. Hemali for the A.Y. 2011-12

Note: It may be argued that fixed deposit is not covered u/s 56(2)(vii) as it is neither covered under the purview of money nor under property.

Question 7(a)(3)
During the financial year 2010-11, the following payments/expenditure were made/incurred by Mr. Yuvan Raja, a resident individual (whose turnover during the year ended 31-3-2010 was Rs.39 lacs):

(i)      Interest of Rs.12,000 was paid to Rehman & Co., a resident partnership firm, without deduction of tax at source;

(ii)     Interest of Rs.4,000 was paid as interest to Mr.R. D. Burman, a non-resident, without deduction of tax at source;

(iii)    Rs.3,00,000 was paid as salary to a resident individual without deduction of tax at source;

(iv)    He had sold goods worth Rs.5 lacs to Mr. Deva. He gave Mr. Deva a cash discount of Rs.12,000 later. Commission of Rs.15,000 was paid to Mr. Vidyasagar on 2-7-2010. In none of these transactions, tax was deducted at source.

Briefly discuss whether any disallowance arises under the provisions of section 40(a)(i)/40(a)(ia) of the Income-tax Act, 1961.

Solution

(i)      Mr. Yuvan Raja is not liable to deduct tax at source u/s 194A as his turnover of the preceding financial year does not exceed the limit specified u/s 44AB

(ii)     The assessee is liable to deduct tax at source u/s 195 on payment made to a non-resident, hence, Rs.4000 being interest paid to non-resident shall be disallowed.

(iii)    Salary is not covered u/s 40(a)(ia), hence such payment is allowed.

(iv)    There is no provision for deducting tax at source on discount. Further, Mr. Yuvan Raja is not liable to deduct tax at source u/s 194H as his turnover of the preceding financial year does not exceed the limit specified u/s 44AB

Question 7(b)

State the due dates for filing of service tax returns. Will the delayed filing of service tax return result in payment of any late fee? If so, how much?

Solution

Refer Page No. 19.27

Question 7(c)

Briefly list out the contents of VAT invoices

Solution

Refer Page No.20.20