PAPER 4 : TAXATION › wp-content › uploads › 2019 › 05 › Paper-4-T… · Service Tax Rules, 1994]. Note: In the above solution, a. dvance . of ` 1,14,500 . has been . taken

PAPER – 4 : TAXATION

Question No.1 is compulsory.

Answer any five questions from the remaining six questions.

Wherever necessary, suitable assumptions may be made and stated clearly

by way of a Note, in the answer.

Working notes should form part of the answer.

All questions in income-tax pertain to the assessment year 2016-17, unless stated otherwise

in the questions.

Question 1

(a) Mr. Vinod Kumar, resident, aged 62, furnishes the following information pertaining to the

year ended 31-3-2016:

(`)

(i) Pension received (Net of TDS) 6,27,000

(ii) Short-term capital gains (from sale of listed shares) 65,000

(iii) Long-term capital gains (from sale of listed shares) 1,24,000

(iv) Interest on fixed deposit from bank 1,60,000

(v) Pertaining to consultancy services provided by him:

Gross receipts 12,60,000

Expenses:

Rent for premises 1,44,000

Salary of P.A. 1,20,000

Stenographer's salary 1,00,000

Business Development expenditure 91,000

Conveyance 3,00,000

(vi) Contribution to PPF 1,10,000

(vii) Premium on life insurance policy taken on 10-1-2016 (sum assured ` 5,00,000)

60,000

(viii) Mediclaim Insurance Premium for self (paid otherwise than by cash) 27,000

Preventive health checkup expenses (in cash) 6,000

The Suggested Answers for Paper 4: Taxation are based on the provisions of tax laws as amended by the Finance Act, 2015. The answers to questions on income-tax are based on the provisions of income-tax law applicable for A.Y.2016-17, which is the assessment year relevant for May, 2016 examination.

© The Institute of Chartered Accountants of India

PAPER – 4 : TAXATION 73

(ix) Donation given in cash to a charitable trust registered under Section 12AA (eligible for deduction under section 80G) of the Income-tax Act, 1961

14,000

(x) Interest received from Post Office Savings A/c 18,000

Additional information:

TDS from pension 25,000

1/4th of conveyance expenses is estimated for personal use.

Listed shares were sold in recognized stock exchange.

Compute the total income of the assessee for the assessment year 2016-17, under

proper heads of income. (10 Marks)

(b) Dharmendra Ltd. gives the following particulars relating to the services provided by it to

its various clients for the month of January, 2016:

(i) Total bills raised for ` 17,50,000, out of which bill for ` 1,50,000 was raised on a

SEZ unit for services rendered in the said unit and payment for bills for ` 2,00,000

were not received until 31.01.2016. Service tax is separately charged on the bills

raised, wherever applicable.

(ii) Amount of ` 1,14,500 (including service tax) was received as an advance from

Ramotar Ltd. on 25.01.2016 to whom the services were provided in March, 2016.

Compute:

(i) Value of taxable services

(ii) Amount of service tax payable

(iii) Last date for service tax payment

Assume that service tax is separately charged in the bills as well as for advance

payment, wherever applicable. Assessee is not a small service provider. (6 Marks)

(c) Compute net VAT liability of Rohan from the following information for the month of

February, 2016:

Particulars ` `

Raw material from foreign market (including duty paid on imports @ 20%)

1,50,000

Raw material purchased from local market

Cost of raw material 3,00,000

Add: Excise duty @ 12.5% 37,500

3,37,500

Add: VAT @ 4% 13,500 3,51,000


74 INTERMEDIATE (IPC) EXAMINATION: MAY, 2016

Raw Material purchased from neighboring State (including CST @ 2%)

51,000

Storage and transportation costs 11,000

Manufacturing expenses 25,000

Rohan sold goods to Arya and earned profit @ 12% on the cost of production. VAT rate

on sale of such goods is 4%.

There were no opening and closing stocks. (4 Marks)

Answer

(a) Computation of total income of Mr. Vinod Kumar for the Assessment Year 2016-17

Particulars ` ` `

Income from Salary

Pension received (net of TDS) 6,27,000

Add: Tax deducted at source 25,000 6,52,000

Profits and gains from business or profession

Gross Receipts 12,60,000

Less: Expenses

Rent for premises allowable under section 30(a)

1,44,000

Salary of P.A. 1,20,000

Stenographer’s salary 1,00,000

Business development expenditure1 91,000

Conveyance for official use [3/4th of ` 3,00,000]

2,25,000

6,80,000

5,80,000

Capital Gains

Long-term capital gains on sale of listed shares – exempt under section 10(38), since securities transaction tax would have been paid as the same have been sold in a recognized stock exchange

-

1 Assuming that the same are revenue in nature and incurred wholly and exclusively for the purpose of the profession



Short-term capital gains on sale of listed shares – taxable @15% under section 111A, since securities transaction tax would have been paid as the same have been sold in a recognized stock exchange

65,000

65,000

Income from Other Sources

Interest on fixed deposit from bank 1,60,000

Interest on Post Office Savings Account 18,000

Less: Exempt under section 10(15) 3,500 14,500

1,74,500

Gross Total Income 14,71,500

Less: Deductions under Chapter VI-A

Under section 80C

Contribution to PPF

1,10,000

Life insurance premium paid ` 60,000 (restricted to 10% of sum assured, since the policy was taken after 31.3.2012)

50,000

1,60,000

Restricted to 1,50,000

Under section 80D

Medical insurance premium (paid otherwise than by cash)

27,000

Preventive health check-up (allowed even if paid by cash), `6,000, restricted to

5,000

32,000

Restricted to ` 30,000, since Mr. Vinod Kumar is a resident individual of the age of 62 years (i.e., 60 years or more at any time during the previous year)

30,000

Under section 80G

As per section 80G(5D), cash donation to charitable trust of an amount exceeding ` 10,000 is not allowable as deduction

-



Under section 80TTA

Interest from Post Office Savings Account, ` 14,500, restricted to

10,000

1,90,000

Total Income 12,81,500

(b) Computation of value of taxable service and the service tax payable by

Dharmendra Ltd. for the month of January, 2016

Particulars `

Services rendered in SEZ unit [Note 1] Nil

Taxable services billed to various clients (excluding services billed to SEZ unit) [Note 2]

16,00,000

Advance received = ` 1,14,500 ×114

110 [Note 3]

1,00,439

Value of taxable service 17,00,439

Service tax payable @ 14% (rounded off) 2,38,061

Notes:

1. Where the services received by SEZ unit are used exclusively for the authorized

operations, the person liable to pay service tax has the option not to pay the serv ice

tax ab initio.

Assuming that the services rendered by Dharmendra Ltd. have been exclusively

used for authorized operations by the SEZ unit and the person liable to pay service

tax has availed the option not to pay the service tax ab initio subject to fulfillment of

prescribed conditions; service tax is not payable on said services.

2. As per rule 3 of the Point of Taxation Rules, 2011, point of taxation is issuance of

invoice [when the invoice is issued within 30 days of the completion of service] o r

receipt of payment, whichever is earlier.

In the given case, since services are provided in the month of January, 2016 and

are also billed in the same month, the point of taxation for all such services will fall

in the month of January, 2016 irrespective of whether the payment for the same has

been received or not. Thus, point of taxation for the bills of ` 2,00,000 for which the

payment has not been received till 31.01.2016 will also fall in January, 2016.

3. Since services agreed to be provided are also chargeable to service tax in terms of

section 66B of the Finance Act, 1994, advance received will be liable to service tax.

Further, as per rule 3 of the Point of Taxation Rules, 2011, the point of taxation for



advance received on 25.01.2016 will be the day when it is received, even though

the services for which the advance has been received are provided in March, 2016.

Last date for payment of service tax:

In case of companies, service tax is payable electronically through internet banking on

the monthly basis by 6th day of the following month. Therefore, the due date for payment

of service tax for Dharmendra Ltd., a company, for the month of January, 2016 will be

06.02.2016.

However, the due date will be 05.02.2016 if Dharmendra Ltd. is allowed by the

Assistant/Deputy Commissioner of Central Excise, to make payment of service tax by

any mode other than internet banking, for reasons to be recorded in writing [Rule 6 of the

Service Tax Rules, 1994].

Note: In the above solution, advance of ` 1,14,500 has been taken to be inclusive of

service tax on the basis of information given in point (ii) of the question that advance of

` 1,14,500 includes service tax. However, considering the information given at the end

of question that service tax is charged separately for the advance received, the above

question may also be solved taking advance to be exclusive of service tax.

Further, since Swachh Bharat Cess (SBC) was not applicable for May, 2016 examination,

rate of service tax has been taken as 14% in the above solution. However, the aforesaid

question may also be solved taking rate of service tax as 14.5% (including SBC) since

the question relates to the month of January, 2016 when the levy of SBC had become

effective.

(c) Computation of Net VAT liability

Particulars ` `

Raw materials purchased from foreign market (including duty paid on imports @ 20%)

[Customs duty forms part of cost of production as input tax credit of customs duty paid is not available]

1,50,000

Raw material purchased from local market:-

Cost of raw material 3,00,000

Add: Excise duty @ 12.5%2

[Credit of excise duty is not available]

37,500 3,37,500

Raw material purchased from neighboring State (including CST @ 2%)

[Input tax credit of CST is not available]

51,000

Storage and transportation cost 11,000

2 It has been assumed that excise duty paid is not available as CENVAT credit to the manufacturer.



Manufacturing expenses 25,000

Cost of production 5,74,500

Add: Profit @ 12% on cost of production 68,940

Sale Price 6,43,440

VAT @ 4% on sale price (rounded off) 25,738

Less: Input tax credit [VAT paid on local purchases] 13,500

Net VAT liability 12,238

Question 2

(a) (i) How is the residential status of a company determined for the purposes of Income-tax

Act, 1961, for the assessment year 2016-17? (4 Marks)

(ii) How is the term "Assessee" defined under the provisions of the Income-tax Act,

1961? (4 Marks)

(b) Mandi & Co. is providing taxable information technology software services. The firm

furnishes the following information relating to the services rendered, bills raised, amount

received pertaining to the services, for the quarter ending 31.03.2016 as under:

Particulars

Amount (`)

Amount received being 10% of the assignment fees on 31.03.2016 for the upgradation and enhancement of the software services (including service tax)

7,00,000

Services of designing and programming of IT provided to UNICEF, an international organization, in Delhi

4,00,000

Services provided to A Ltd. for IT services. Service tax was not received from the client due to some dispute

3,00,000

Services provided to B Ltd. for providing software services. However, Mandi & Co. failed to recover the service tax amount from B Ltd. due to insolvency of client. Summary of the bills (all issued in January, 2016) is as under:

Charges for software service 5,00,000

Services tax @ 14.50% 72,500 5,72,500

Amount received from other clients during January to March, 2016 including service tax

70,00,000

Compute the value of total taxable services and service tax payable thereon for the

quarter ending 31.03.2016 by Mandi & Co.



The assessee had rendered taxable services of ` 110 lacs during the year ended

31.03.2015. (4 Marks)

(c) Madhav Enterprises imported some goods from USA. The assessable value of the

imported goods is ` 20,00,000. Compute the custom duty payable from the following

additional information:

Date of Bill of entry 30.09.2015 (Rate of BCD is 10%)

Date of entry inward 25.09.2015 (Rate of BCD is 8%)

C.V.D. is payable @ 12.5%

Special C.V.D. @ 4% (4 Marks)

Answer

(a) (i) Determination of residential status of a company for A.Y.2016-17

As per section 6(3), a company is said to be resident in India in any previous year, if -

(a) it is an Indian company

(b) its place of effective management, in that year, is in India.

Accordingly, all Indian companies are resident in India for A.Y.2016-17. However, a

company other than an Indian company would be resident in India for A.Y.2016 -17,

only if its place of effective management (POEM), in the P.Y.2015-16, is in India.

“Place of effective management” means a place where key management and

commercial decisions that are necessary for the conduct of the business of an entity

as a whole are, in substance, made.

Note – The Finance Act, 2015, passed in May, 2015, had substituted section 6(3)

with effect from A.Y.2016-17 to provide for determination of residential status of a

company, other than an Indian company, on the basis of its place of effective

management (POEM). Accordingly, the above answer is based on the provisions of

section 6(3), as amended by the Finance Act, 2015, passed in May, 2015.

Subsequently, this year, the Finance Act, 2016 has deferred the implementation of

POEM by one year i.e., from A.Y. 2016-17 to A.Y. 2017-18. The Finance Act, 2016

has deleted clause (ii) of section 4 of the Finance Act, 2015 incorporating the

concept of POEM with effect from A.Y.2016-17 and has inserted new section 4 in

the Finance Act, 2016 to substitute section 6(3) of the Income-tax Act, 1961

providing for application of POEM to determine the residential status of companies,

other than Indian companies, with effect from A.Y.2017-18. The deletion of clause

(ii) of section 4 of the Finance Act, 2015 implies that, in effect, there has been no

substitution of section 6(3) by the Finance Act, 2015 incorporating the concept of

POEM for determination of residential status of companies for A.Y.2016-17.



Accordingly, in actual practice, the residential status of a company for A.Y. 2016-17

will be determined in the following manner, applying the provisions of section 6(3)

as actually applicable and relevant for A.Y.2016-17:

A company would be resident in India for the previous year 2015-16, if

(a) it is an Indian company

(b) during that year, the control and management of its affairs is situated wholly in India.

Thus, all Indian companies are resident in India for A.Y.2016-17. However, a

company other than an Indian company would be resident in India for A.Y.2016 -17,

only if the control and management of its affairs is situated wholly in India during the

P.Y.2015-16.

(ii) Definition of “Assessee”

As per section 2(7), “assessee” means a person by whom any tax or any other sum of

money is payable under the Income-tax Act, 1961.

In addition, the term includes –

Every person in respect of whom any proceeding under the Income-tax Act, 1961 has

been taken for the assessment of –

his income; or

the income of any other person in respect of which he is assessable; or

the loss sustained by him or by such other person; or

the amount of refund due to him or to such other person.

Every person who is deemed to be an assessee under any provision of the Income-tax

Act, 1961;

Every person who is deemed to be an assessee-in-default under any provision of the

Income-tax Act, 1961.

(b) Computation of value of taxable service and service tax liability of Mandi & Co. for

the quarter ending on 31.03.2016

Particulars `

Services provided to UNICEF

[Services provided to specified international organizations are exempt vide Mega Exemption Notification]

Nil

Advance received (10% of assignment fees) on 31.03.2016

` 7,00,000114

100

[Since services agreed to be provided are also chargeable to service

6,14,035



tax, advance received will be liable to service tax.]

Services provided to A Ltd.3

` 3,00,000114

100

[Although service tax was not received from A Ltd., the liability thereof does not get extinguished]

2,63,158

Amount received from other clients during January to March, 20164

` 70,00,000114

100

61,40,351

Services provided to B Ltd.

[Service tax to be borne by Mandi & Co. as same is not recoverable on account of insolvency]

5,00,000

Value of taxable service

[SSP exemption is not available as turnover of services in the previous year exceeded ` 10 lakh]

75,17,544

Service tax payable @ 14% [` 75,17,543.86 × 14%] (rounded off) 10,52,456

Note: Since Swachh Bharat Cess (SBC) was not applicable for May, 2016 examination,

in the above solution, rate of service tax has been taken as 14% with regard to all the

transactions including the services provided to B Ltd.

However, considering the specific information provided in the question that in the bills

raised for services provided to B Ltd., service tax has been charged @ 14.5%, the

aforesaid question may also be solved taking service tax @ 14.5% for services provided

to B Ltd. Alternatively, the aforesaid question may also be solved taking rate of service

tax as 14.5% for all transactions since the question relates to quarter ending 31.03.2016

when the levy of SBC had become effective.

(c) Computation of customs duty payable

Particulars `

Assessable value (A) 20,00,000

Basic customs duty @ 10% of (A)

[As per section 15 of the Customs Act, 1962, the relevant rate of

(B) 2,00,000

3 It has been assumed that payment from A Ltd. has been received in the quarter January-March, 2016 and

credit note for the service tax amount not received has been issued to it. 4 It has been assumed that point of taxation of the amount of ` 7,00,000 falls in the quarter January-March, 2016 i.e., neither the invoices for the said services have been issued nor the services have been provided, prior to January, 2016.



duty is the rate prevalent on the date on which bill of entry is presented or the date on which entry inwards is given, whichever is later]

CVD @ 12.5% of (A) + (B) (C) 2,75,000

Education cesses of customs @ 3% on (B) + (C) (D) 14,250

Value for computing special CVD (A) + (B) + (C) + (D) (E) 24,89,250

Special CVD @ 4% on (E)

[Education cesses are not payable on special CVD]

(F) 99,570

Total custom duty payable (B) + (C) + (D) + (F) 5,88,820

Question 3

(a) (i) State the conditions to be fulfilled by a political party for enjoying exemption in relation to

certain incomes, under the Income-tax Act, 1961. (4 Marks)

(ii) Mr. Suresh has set up an undertaking in SEZ (Unit A) and another undertaking in

DTA (Unit B) in the financial year 2010-11. In the previous year 2015-16, total

turnover of the Unit A is ` 180 lacs and total turnover of Unit B is ` 120 lacs. Export

turnover of Unit A for the year is ` 150 lacs and the profit for the Unit A is ` 60 lacs.

Calculate the deduction available, if any, to Mr. Suresh under section 10AA of the

Income-tax Act, 1961, for the Assessment year 2016-17, if Unit A had started

manufacturing in the financial year 2010-11. (4 Marks)

(b) Yahoo Pvt. Ltd., a manufacturer, furnishes the following information:

Bill No. Particulars Date of Bill Excise duty/ service tax paid

(`)

801 Input Goods "A" 15.01.2015 15,000

802 Input Goods "B" 16.05.2015 24,000

810 Input Goods "C" 12.03.2016 30,000

757 Machinery (eligible capital goods under Chapter 82)

11.03.2015 2,00,000

All the input goods and the machinery were received on the dates of Bills. Bill No. 810 is

missing.

Yahoo Pvt. Ltd. is not a SSI unit. Determine the CENVAT credit that can be availed by

Yahoo Pvt. Ltd. during the month of March, 2016. (4 Marks)

(c) Determine the transaction value and the central excise duty payable of M/s. Rajiv

Enterprises from the following particulars:



Particulars `

1. Price of machinery, excluding taxes and duties 6,00,000

2. Installation and erection expenses (Machinery has been fixed to the earth)

35,000

3. Packing charges (Primary and secondary) 12,000

4. Design and engineering charges 4,500


Cash discount @ 2% on price of machinery (not considered in 1. above) was allowed as

per terms of contract, since full payment was received within 15 days of the dispatch of

machinery.

Bought out accessories valued at ` 7,000. The accessories are optional and provide

ease of use of the machinery.

Central excise duty @ 12.5%.

Brief note is to be appended for treatment of each item. (4 Marks)

Answer

(a) (i) Section 13A provides that any income of a political party which is chargeable under the

head “Income from house property” or “Income from other sources” or “Capital gains” or

any income by way of voluntary contributions received by a political party from any

person shall not be included in the total income of the previous year of such political

party, if the following conditions are satisfied:

- Such political party keeps and maintains such books of account and other

documents as would enable the Assessing Officer to properly deduce its

income therefrom.

- Such political party keeps and maintains a record of each such voluntary

contribution in excess of `20,000, including the name and address of the

person who has made such contribution

- The accounts of such political party are audited by an Accountan t as defined in

Explanation below section 288(2)

- The treasurer of such political party or any other person authorized by the

political party has to submit report under section 29C(3) of the Representation

of the People Act, 1951 for such financial year.

(ii) Computation of deduction available under section 10AA to Mr. Suresh for

A.Y.2016-17

As per section 10AA, in computing the total income of an assessee from its unit

located in a Special Economic Zone (SEZ), which begins to manufacture or produce



articles or things or provide any services during the previous year relevant to the

assessment year commencing on or after 01.04.2006, there shall be allowed a

deduction of 100% of the profit and gains derived from export of such articles or

things or from services for a period of five consecutive assessment years beginning

with the assessment year relevant to the previous year in which the Unit begins to

manufacture or produce such articles or things or provide services, as the case may

be, and 50% of such profits for further five assessment years subject to fulfillment of

other conditions specified in section 10AA.

Mr. Suresh has set up an undertaking in SEZ (Unit A) and started manufacturing in

the financial year 2010-11. For A.Y. 2016-17, being the 6th year of operation, he will

be eligible for deduction of 50% of the profit of such unit, assuming all the other

conditions specified in section 10AA are fulfilled.

= Profits of Unit in SEZ x Export turnover of Unit in SEZ

× 50%Total turnover of Unitin SEZ

= 60 lacs x 150 lacs

× 50%180 lacs

= ` 25 lacs

Mr. Suresh is not eligible for deduction under section 10AA in respect of Unit B set

up in DTA.

(b) Computation of CENVAT credit that can be availed during March, 20165

Particulars `

Input goods “A”

[CENVAT credit of inputs cannot be availed beyond one year from the date of issue of invoice - Rule 4(1) of CENVAT Credit Rules, 2004 (CCR)]

Nil

Input goods “B”

[CENVAT credit of inputs is allowed upto one year from the date of issue of invoice - Rule 4(1) of CCR]

24,000

Input “C”

[CENVAT credit cannot be availed without a valid invoice - Rule 9 of CCR]

Nil

Machinery = 50% of ` 2,00,000

[Time limit of one year for availment of CENVAT credit does not apply to capital goods]

1,00,000

Total CENVAT credit that can be availed during March, 2016 1,24,000

5 The solution is based on the most logical assumption that no credit has been taken by the manufacturer till February, 2016.



(c) Computation of transaction value and central excise duty payable

Particulars `

Price of the machinery6 6,00,000

Add: Packing charges [since it is a payment in connection with sale] 12,000

Design and engineering charges [since it is a payment in connection with sale]

4,500

Total 6,16,500

Less: 2% cash discount on price of machinery [` 6,00,000 × 2%]

[since discount has been passed on to the buyer]

12,000

Transaction value 6,04,500

Excise duty @ 12.5% (rounded off) 75,563

Notes:

While computing the transaction value:-

1. value of bought out accessories has not been included as they are optional and do

not provide any value addition.

2. installation and erection expenses have not been included as they result in

immovable property, which is not goods.

Question 4

(a) Discuss the taxability or otherwise in the hands of the recipients, as per the provisions of

the Income-tax Act, 1961:

(i) ABC Private Limited, a closely held company, issued 10,000 shares at ` 130 per

share. (The face value of the share is ` 100 per share and the fair market value of

the share is ` 120 per share).

(ii) Mr. A received an advance of ` 50,000 on 1-09-2015 against the sale of his house.

However, due to non-payment of instalment in time, the contract has cancel led and

the amount of ` 50,000 was forfeited.

(iii) Mr. N, a member of his father's HUF, transferred a house property to the HUF

without consideration. The value of the house is ` 10 lacs as per the Registrar of

stamp duty.

(iv) Mr. Kumar gifted a car to his sister's son (Sunil) for achieving good marks in CA

Final exam. The fair market value of the car is ` 5,00,000. (2 x 4 = 8 Marks)

6 It has been assumed that price of the machinery does not include installation and erection expenses, packing charges and design and engineering charges.



(b) When can an assessee avail the benefit of small service provider’s (SSP) exemption for

the purposes of service tax? Name two situations in which such SSP exemption is not

available. (4 Marks)

(c) State with reason, whether the following transactions are true or false, as per the

provisions of the Central Sales Tax Act, 1956:

(i) CST is not leviable on inter-State sale of electrical energy.

(ii) Cost of freight, though not separately shown in the invoice, will not form part of sale

price. (4 Marks)

Answer

(a)

S. No.

Taxable / Not Taxable

Reason

(i) Taxable Since ABC Private Limited, a closely held company, issued 10,000 shares at a premium (i.e., issue price exceeds the face value of shares), the excess of the issue price of the shares over the fair market value would be taxable under section 56(2)(viib) in its hands under the head “Income from other sources”.

Therefore, ` 1,00,000 [10,000 × ` 10 (` 130 – ` 120)] shall be taxable as income in the hands of ABC Private Limited under the head “Income from other sources”.

(ii) Taxable Any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset would be chargeable to tax under the head “Income from other sources”, if such amount is forfeited and the negotiations do not result in transfer of such capital asset [Section 56(2)(ix)].

Therefore, the amount of ` 50,000 received as advance would be chargeable to tax in the hands of Mr. A under the head “Income from other sources”, since it is forfeited on account of cancellation of contract for transfer of house, being a capital asset, due to non-payment of installment in time.

(iii) Not Taxable As per section 56(2)(vii), immovable property received without consideration by a HUF from its relative is not taxable.

In the present case, since Mr. N is a member of his father’s HUF, he is a relative of the HUF. Hence, ` 10 lakhs, being the stamp duty value of house property received by HUF, without consideration, would not be chargeable to tax in the hands of the HUF.7

7 However, income from such asset would be included in the hands of Mr. N under section 64(2)



(iv) Not Taxable Car is not included in the definition of “property”, for the purpose of taxability under section 56(2)(vii), in the hands of the recipient under the head “Income from other sources”. Further, the same has been received by Sunil from his mother’s brother, who falls within the definition of “relative”.

Hence, ` 5,00,000, being the fair market value of car received without consideration from a relative is not taxable in the hands of Sunil, even though its value exceeds ` 50,000.

(b) An assessee can avail the benefit of small service provider’s (SSP) exemption when the

aggregate value of taxable services rendered by him from one or more premises, does

not exceed ` 10 lakh in the preceding financial year.

If the assessee is so eligible, the taxable services of aggregate value not exceeding

` 10 lakh in the current financial year will be exempted from service tax leviable thereon.

SSP exemption is not available in respect of the following two services: -

(i) Taxable services provided by a person under a brand name or trade name, whether

registered or not, of another person.

(ii) Such value of taxable services in respect of which service tax is payable by such

person and in such manner as specified under section 68(2) of the Finance Act,

1994 i.e., under reverse charge.

(c) (i) The statement is true. CST is not leviable on inter-State sale of electrical energy.

The charging section 6(1) of the Central Sales Tax Act, 1956 provides that every

dealer is liable to pay the central sales tax on inter-State sales of all goods other

than electrical energy. Thus, charging section has expressly excluded electrical

energy from the purview of levy of central sales tax.

(ii) The statement is false. Cost of freight, if not shown separately in the invoice, will

form part of sale price.

In terms of the definition of sale price, cost of freight is excluded from the sale price

only when such cost is separately shown in the invoice, by the dealer.

Question 5

(a) Venus Ltd., engaged in manufacture of pesticides, furnishes the following particulars

relating to its manufacturing unit at Chennai, for the year ending 31-3-2016:

(` in lacs)

Opening WDV of Plant and Machinery 20

New machinery purchased on 1-9-2015 10

New car purchased on 1-12-2015 8

Computer purchased on 3-1-2016 4




All assets were put to use immediately.

Computer has been installed in the office.

During the year ended 31-3-2015, a new machinery had been purchased on 31-10-2014, for ` 10 lacs. Additional depreciation, besides normal depreciation, had been claimed thereon.

Depreciation rate for machinery may be taken as 15%.

Compute the depreciation available to the assessee as per the provisions of the Income-tax Act, 1961 and the WDV of different blocks of assets as on 31-3-2016. (8 Marks)

(b) Briefly explain the concessional/composition rates of service tax applicab le to air travel

agents. (4 Marks)

(c) Discuss whether the following services are chargeable to service tax or not; in

March, 2016:

(i) An Indian tour operator provided the service to Mr. Yuhan, a Japanese national, for

a tour in Sri Lanka.

(ii) Mr. Amit, an organizer, provided services to Mr. Kumar in respect of a business

exhibition held in Patna.

(iii) Mr. Chandra Bhusan provided the services by conducting religious rites at the birth

ceremony of a child.

(iv) Sunita provided consultancy services to Government directly connected with solid

waste management. (4 Marks)

Answer

(a) Computation of written down value of block of assets of Venus Ltd. as on 31.3.2016

Particulars

Plant & Machinery

(` in lacs)

Computer

(` in lacs)

Opening written down value (as on 01.04.2015) 20 Nil

Add: Actual cost of new assets acquired during the year

New machinery purchased on 1.9.2015

10

-

New car purchased on 1.12.2015 8 -

Computer purchased on 3.1.2016 - 4

Less: Assets sold/discarded/destroyed during the year

Closing Written Down Value (as on 31.03.2016)

38

Nil

38

4

Nil

_4



Computation of Depreciation for A.Y. 2016-17

Particulars

Plant & Machinery

(` in lacs)

Computer

(` in lacs)

I. Assets put to use for more than 180 days, eligible for 100% depreciation calculated applying the eligible rate of normal depreciation and additional depreciation

Normal Depreciation

- Opening WDV of plant and machinery (` 20 lacs x 15%)

3.00 -

- New Machinery purchased on 1.9.2015 (`10 lacs x 15%)

1.50

-

(A) 4.50 -

Additional Depreciation

New Machinery purchased on 1.9.2015 (` 10 lacs x 20%)

(B) 2.00 -

II. Assets put to use for less than 180 days, eligible for 50% depreciation calculated applying the eligible rate of normal depreciation and additional depreciation

Normal Depreciation

New car purchased on 1.12.2015 [` 8 lacs x 7.5% (i.e., 50% of 15%)]

0.60 -

Computer purchased on 3.1.2016 [` 4 lacs x 30% (50% of 60%)]

-

1.20

(C) 0.60 1.20

Total Depreciation (A+B+C) 7.10 1.20

Notes:

(1) As per section 32(1)(iia), additional depreciation is allowable in the case of any new

machinery or plant acquired and installed after 31.3.2005, by an assessee engaged,

inter alia, in the business of manufacture or production of any article or thing, at the

rate of 20% of the actual cost of such machinery or plant.

However, additional depreciation shall not be allowed in respect of, inter alia, –

(i) any office appliances or road transport vehicles;

(ii) any machinery or plant installed in, inter alia, office premises.



In view of the above provisions, additional depreciation cannot be claimed in

respect of -

(i) Car purchased on 1.12.2015 and

(ii) Computer purchased on 3.1.2016, installed in office.

(2) The Finance Act, 2015 has inserted third proviso to section 32(1)(ii) with effect from

A.Y.2016-17, to provide that balance 50% of additional depreciation on new plant or

machinery acquired and put to use for less than 180 days in the year of acquisition

which has not been allowed in that year, shall be allowed in the immediately

succeeding previous year.

However, in this case, the balance 50% additional depreciation (i.e., ` 1 lacs, being

10% of ` 10 lacs) is in respect of new machinery which had been purchased during

the previous year 2014-15 and put to use for less than 180 days in that year. The

same cannot be claimed in the previous year 2015-16, which is the immediately

succeeding previous year, since the amendment is effective only from A.Y.2016-17

and would accordingly, apply only in respect of claim of balance additional

depreciation not claimed in the P.Y.2015-16 and onwards.

Note: It may be noted that a beneficial view may also be possible, in the absence of any specific restriction in law, that the balance additional depreciation relating to plant and machinery acquired during the previous year 2014-15 and put to use for less than 180 days during that year can be claimed in the next previous year i.e., P.Y. 2015-16 (A.Y.2016-17), being the year in which this beneficial provision become effective.

Further, the Karnataka High Court has, in CIT v. Rittal India Pvt. Ltd. (2016) 380 ITR 428, upheld that the balance additional depreciation (not claimed in the year of acquisition) is allowable in the immediately succeeding previous year, since additional depreciation is a one-time benefit to encourage industrialisation and the relevant provisions have to be construed reasonably and purposively.

Based on this view, the total depreciation in respect of plant and machinery for A.Y.2016-17 would be ` 8.10 lacs i.e., ` 7.10 lacs plus the balance additional depreciation of ` 1 lac, being 10% of ` 10 lacs [in respect of new machinery purchased on 31.10.2014] allowed as deduction in the previous year 2015-16.

(b) As per rule 6 of the Service Tax Rules, 1994, an air travel agent has the option to pay

following amounts instead of paying service tax at the rate of 14% in relation to services

of booking of tickets for travel by air:

In the case of Option to pay an amount calculated at the rate of

Domestic bookings of passage for travel by air 0.7% of the basic fare

International bookings of passage for travel by air 1.4% of the basic fare



Basic fare means that part of the air fare on which commission is normally paid to the air

travel agent by the airline.

The option, once exercised, shall apply uniformly in respect of all the bookings of

passage for travel by air made by him and shall not be changed during a financial year

under any circumstances.

(c) (i) Services provided by a tour operator to a foreign tourist in relation to a tour wholly

conducted outside India are exempt from service tax vide Mega Exemption

Notification. Therefore, service provided by an Indian tour operator to Mr. Yuhan, a

Japanese national, for a tour in Sri Lanka will be exempt from service tax.

(ii) Services provided by an organizer to any person in respect of a business exhibition

held outside India are exempt from service tax vide Mega Exemption Notification.

Since services provided by organizer-Mr. Amit to Mr. Kumar are in respect of a

business exhibition held in Patna i.e., in India, such services will be liable to service

tax.

(iii) Services provided by a person by way of conduct of any religious ceremony are

exempt from service tax vide Mega Exemption Notification. Thus, services provided

by Mr. Chandra Bhusan by conducting religious rites at the birth ceremony of a child

will be exempt from service tax.

(iv) Services provided to Government by way of solid waste management are exempt

from service tax and not the consultancy services provided in relation to the same

vide Mega Exemption Notification. Thus, consultancy services provided by Sunita

to Government directly connected with solid waste management will be liable to

service tax.

Question 6

(a) Mr. Aditya furnishes the following details for the year ended 31-03-2016 :

Particulars Amount (`)

Loss from speculative business A 25,000

Income from speculative business B 5,000

Loss from specified business covered under section 35AD 20,000

Income from salary 2,50,000

Loss from house property 1,50,000

Income from trading business 45,000

Long-term capital gain from sale of urban land 2,00,000

Long-term capital loss on sale of shares (STT not paid) 75,000

Long-term capital loss on sale of listed shares in recognized stock exchange (STT paid)

82,000



Following are the brought forward losses:

(1) Losses from owning and maintaining of race horses pertaining to A.Y. 2015-16

` 2,000.

(2) Brought forward loss from trading business ` 5,000 relating to A.Y.2012-13.

Compute the total income of Mr. Aditya and show the items eligible for carry forward.

(8 Marks)

(b) Briefly touch upon the provisions relating to interest payable for delayed payment of

service tax. (4 Marks)

(c) What are the due dates for filing of service tax returns? Is there any late fee payable for

any delay in filing of service tax returns? (4 Marks)

Answer

(a) Computation of total income of Mr. Aditya for the A.Y.2016-17

Particulars ` `

Salaries

Income from Salary 2,50,000

Less: Loss from house property set-off against salary income as per section 71(1)

1,50,000

1,00,000

Profits and gains of business or profession

Income from trading business 45,000

Less: Brought forward loss from trading business of A.Y. 2012-13 can be set off against current year income from trading business as per section 72(1), since the eight year time limit as specified under section 72(3), within which set-off is permitted, has not expired.

5,000

40,000

Income from speculative business B 5,000

Less: Loss from speculative business A set-off as per section 73(1)

25,000

Loss from speculative business A to be carried forward to A.Y.2017-18 as per section 73(2)

20,000

Loss from specified business covered under section 35AD to be carried forward for set-off against income from specified business as per section 73A.

20,000

Capital Gains

Long term capital gain on sale of urban land 2,00,000

Less: Long term capital loss on sale of shares (STT not paid) set-off as per section 74(1)]

75,000

1,25,000



Long-term capital loss of ` 82,000 on sale of listed shares on which STT is paid cannot be set-off against long-term capital gain on sale of urban land since loss from an exempt source cannot be set-off against profit from a taxable source.

Total Income 2,65,000

Items eligible for carried forward to A.Y.2017-18

Particulars `

Loss from speculative business A

Loss from speculative business can be set-off only against profits from any other speculation business. As per section 73(2), balance loss not set-off can be carried forward to the next year for set-off against speculative business income of that year. Such loss can be carried forward for a maximum of four assessment years i.e., upto A.Y.2020-21, in this case, as specified under section 73(4).

20,000

Loss from specified business

Loss from specified business under section 35AD can be set-off only against profits of any other specified business. If loss cannot be so set-off, the same has to be carried forward to the subsequent year for set off against income from specified business, if any, in that year. As per section 73A(2), such loss can be carried forward indefinitely for set-off against profits of any specified business .

20,000

Loss from the activity of owning and maintaining race horses

Losses from the activity of owning and maintaining race horses (current year or brought forward) can be set-off only against income from the activity of owning and maintaining race horses. If it cannot be so set-off, it has to be carried forward to the next year for set-off against income from the activity of owning and maintaining race horses, if any, in that year. It can be carried forward for a maximum of four assessment years, i.e., upto A.Y.2019-20, in this case as specified under section 74A(3).

2,000

(b) Failure to pay service tax, including a part thereof, within the prescribed period, attracts

simple interest at the following rates:

Extent of delay Simple interest rate per annum

Up to 6 months 18%

More than 6 months & upto 1 year 18% for first 6 months, and 24% for the period of delay beyond 6 months

More than 1 year 18% for first 6 months, 24% for second 6 months, and 30% for the period of delay beyond 1 year



Interest is payable for the period by which such crediting of the tax or any part thereof is

delayed. In case of a service provider, whose value of taxable service provided in a

financial year does not exceed ` 60 lakh during any of the financial years covered by the

notice or during the preceding financial year, as the case may be, such rate of interest

shall be reduced by 3% per annum [Section 75 of the Finance Act, 1994].

(c) As per rule 7 of the Service Tax Rules, 1994, the due dates for filing service tax returns

are as under:

Half year Due date

1st April to 30th September 25th October

1st October to 31st March 25th April

As per rule 7C of the Service Tax Rules, 1994, the prescribed late fee for furnishing a

delayed return is given in the following table:

S. No.

Delay from the due date of return Late fee

(a) 15 days ` 500

(b) Beyond 15 days but not later than 30 days

` 1,000

(c) Beyond 30 days from the date prescribed for submission of the return

An amount of ` 1,000 plus ` 100 for every day from the 31st day till the date of furnishing the said return.

However, the total late fee for delayed submission of return cannot exceed ` 20,000.

Question 7

(a) Answer any two of the following three sub-divisions (i), (ii) & (iii):

(i) Ashwin a resident individual carrying on business, furnishes you the following

information:

Turnover during financial year `

2014 -15 1,20,00,000

2015 -16 98,00,000

State whether tax deduction at source provisions are attracted for the under -

mentioned expenses incurred during the financial year 2015-16:

Particulars `

Commission paid to Babloo 8,500

Payment to Vijay for repair of office building 23,000

Payment of fees for technical services to Vivek 35,000



All payments are made to residents.

If tax has to be deducted at source, state the amount of tax to be deducted at

source. (4 Marks)

(ii) Briefly discuss the provisions of section 234B of the Income-tax Act, 1961 for short-

payment or non-payment of advance tax. (4 Marks)

(iii) Discuss with reason, whether the following statements are true or false, as per the

provisions of the Income-tax Act, 1961:

(A) Any amount received by an individual or his legal heir as compensation for

natural disaster from the Government, is taxable.

(B) Dividend received (on which no Dividend Distribution Tax has been paid) by a

dealer in shares or one engaged in buying/selling of shares, is chargeable

under the head "Income from other sources". (Discussion must be on the head

of income). (4 Marks)

(b) How is the value of taxable service, whose value is not ascertainable, determined? (4 Marks)

(c) A manufacturer wishing to avail CENVAT credit in respect of certain eligible inputs wants

to store them outside the factory where he carries on manufacture. Briefly state the

relevant provisions for storage of inputs outside the factory. (4 Marks)

Answer

(a) (i) As the turnover of Mr. Ashwin for F.Y.2014-15, i.e., `120 lakh, has exceeded the

monetary limit of `100 lakh prescribed under section 44AB, he has to comply with

the tax deduction provisions during the financial year 2015-16 (even though the

turnover during F.Y.2015-16 has not exceeded `100 lakh), subject to, however, the

exemptions provided for under the relevant sections for applicability of TDS

provisions.

(i) Commission paid to Babloo

As per section 194H, tax has to be deducted @10%, since the amount of commission paid exceeds ` 5,000.

Therefore, tax of ` 850 (10% of ` 8,500) has to be deducted at source

(ii) Payment to Vijay for repair of office building

As per section 194C, tax has to be deducted @1% where the payment is made to an individual for repair of office building; however, tax has to be deducted at source only if the amount of payment exceeds ` 30,000.

In this case, Mr. Ashwin is not required to deduct tax at source, as the amount of payment towards repair of office building does not exceed ` 30,000, assuming that ` 23,000 is the only payment made to Mr. Vijay during the P.Y.2015-16.



(iii) Payment of fees for technical services to Vivek

As per section 194J, tax has to be deducted @10%, since the amount of fees for technical services paid to Vivek exceeds ` 30,000.

Therefore, tax of ` 3,500 (10% of ` 35,000) has to be deducted at source.

(ii) Provisions of section 234B for short-payment or non-payment of advance tax

(1) Interest under section 234B is attracted for non-payment of advance tax or

payment of advance tax of an amount less than 90% of assessed tax.

(2) The interest liability would be 1% per month or part of the month for the period

from 1st April next following the financial year upto the date of determination of

total income under section 143(1) and where a regular assessment is made,

upto the date of such regular assessment.

(3) Such interest is calculated on an amount equal to the assessed tax; in a case

where advance tax is paid in part, such interest is calculated on the amount of

difference between the assessed tax and the advance tax paid.

(iii) (A) The statement is False.

Any amount received or receivable from the Government by an individual or

his legal heir by way of compensation on account of any disaster is exempt

under section 10(10BC) except the amount received or receivable to the extent

such individual or legal heir has been allowed a deduction under the Income -

tax Act, 1961 on account of any loss or damage caused by such disas ter.

(B) The statement is True.

By virtue of section 56(2)(i), dividend received (other than dividend in respect

of which dividend distribution tax is paid by the company and hence, is exempt

in the hands of recipients) is always taxable under the head “Income from

other sources”. Even if such dividend is received by a dealer in shares or one

engaged in buying/selling of shares, the same would be taxable under the

head “Income from other sources”.

(b) As per rule 3 of the Service Tax (Determination of Value) Rules, 2006, where the value of

taxable service is not ascertainable, it shall be determined by the service provider in the

following manner as prescribed under Service Tax (Determination of Value) Rules, 2006: -

(i) The value of taxable service will be equivalent to the gross amount charged by the

service provider to provide similar service to any other person in the ordinary course

of trade and the gross amount charged is the sole consideration.

(ii) Where the value cannot be determined in the aforesaid manner, the service

provider will determine the equivalent money value of such consideration. However,

such value, in no case, can be less than the cost of provision of such taxable

service.



(c) Rule 8 of the CENVAT Credit Rules, 2004 provide for storage of inputs outside the

factory as under:

The Assistant/Deputy Commissioner can permit the inputs in respect of which CENVAT

credit has been taken to be stored outside the factory of the manufacturer concerned.

However, such storage of inputs outside the factory shall be allowed only in the

exceptional circumstances having regard to the nature of the goods and shortage of

storage space at the premises of such manufacturer, and shall be subject to specified

limitations or conditions.

Where such inputs are not used in the manner prescribed in these rules for any reason

whatsoever, it has been stipulated that the manufacturer of the final products shall pay

an amount equal to the credit availed in respect of such inputs.


Documents

PAPER 4 : TAXATION › wp-content › uploads › 2019 › 05 › Paper-4-T… · Service Tax Rules, 1994]. Note: In the above solution, a. dvance . of ` 1,14,500 . has been . taken