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CA IPCC : Sample / Mock Test Paper (with Model Answers) - TAXATION Oct 2014

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Test Series: October, 2014 MOCK TEST PAPER 2 INTERMEDIATE (IPC): GROUP I PAPER 4: TAXATION Time Allowed 3 Hours 1. Maximum Marks 100 (a) Mr. Mahendra (aged 38) owned 6 heavy goods vehicles as on 01.04.2013. He acquired 2 more heavy goods vehicles on 1.7.2013. He is solely engaged in the business of plying goods vehicles on hire since financial year 2008-09. He did not opt for presumptive provision contained in section 44AE for the financial year 2012-13. His books were audited under section 44AB and the return of income was filed on 5.8.2013. He has unabsorbed depreciation of Rs. 70,000 and business loss of Rs. 1,00,000 for the financial year 2012-13. Following further information is provided to you: (i) Deposited Rs. 20,000 in Tax Saver Deposit with UCO Bank in the name of married son. (ii) Paid medical insurance premium of Rs. 23,000 for his parents (both aged above 70) by means of bank demand draft. (iii) Paid premium on life insurance policy of his married daughter Rs. 25,000. The policy was taken on 1.04.2012 and the minimum sum assured is Rs. 2,00,000. (iv) Repaid principal of Rs. 40,000 and interest of Rs. 15,000 to Canara Bank towards education loan of his daughter, who completed B.E. two years ago. She is employed after completion of her studies. Assuming that Mr. Mahendra has opted for presumptive provision contained in section 44AE of the Income-tax Act, 1961, compute the total income of Mr. Mahendra for the assessment year 2014-15. (10 Marks) (b) Amiro Bank Ltd. furnishes the following information relating to services provided and the gross amount received (excluding service tax): Particulars Amount (Rs.) 5,00,000 6,00,000 10,00,000 6,00,000 Interest on overdraft Interest on loans with a collateral security Interest on corporate deposits Administrative charges (over and above interest) on loans, advances and deposits Sale of foreign exchange to general public 15,00,000* Service charges relating to issuance of Certificates of Deposit (CDs) 20,00,000 The Institute of Chartered Accountants of India Compute the value of taxable service and the service tax liability of Euro Bank Ltd. considering the rate of service tax at 12% assuming that it is not eligible for small service providers exemption under Notification No. 33/2012 ST dated 20.06.2012. Service tax has been charged separately, wherever applicable. *It represents the value of taxable service computed as per rule 2B of the Service Tax Valuation Rules. (10 Marks) 2. (a) During the previous year 2013-14, the following transactions occurred in respect of Mr. Arun. (i) Mr. Arun had a fixed deposit of Rs. 5,00,000 in Bank of India. He instructed the bank to credit the interest on the deposit @ 9% from 1-4-2013 to 31-3-2014 to the savings bank account of Mr. Bhola, son of his brother, to help him in his education. (ii) Mr. Arun holds 75% share in a partnership firm. Mrs. Arun received a commission of Rs. 25,000 from the firm for promoting the sales of the firm. Mrs. Arun possesses no technical or professional qualification. (iii) Mr. Arun gifted a flat to Mrs. Arun on April 1, 2013. During the previous year, the flat generated a net income of Rs. 52,000 to Mrs. Arun. (iv) Mr. Arun gifted Rs. 2,00,000 to his minor son who invested the same in a business and he derived income of Rs. 20,000 from the investment. (v) Mr. Arun s minor son derived an income of Rs. 20,000 through a business activity involving application of his skill and talent. During the year, Mr. Arun got a monthly pension of Rs. 10,000. He had no other income. Mrs. Arun received salary of Rs. 20,000 per month from a part time job. Discuss the tax implications of each transaction and compute the total income of Mr. Arun, Mrs. Arun and their minor child. (8 Marks) (b) From the following information provided by M/s AB Ltd., registered under VAT law of Mumbai as dealer in consumer goods, compute the amount of net VAT payable for the month of July 2014 and VAT credit to be transferred, if any: Purchase of raw material (within the State) Item Amount (Rs.) Rate of VAT Goods X 7,50,000 Exempt Goods Y Goods Z 25,00,000 35,00,000 1% 12.5% The Institute of Chartered Accountants of India Sales Particulars of State in which goods are finished goods sold sold Value Rs. VAT/CST Rate % 5,00,000 12.5% VAT 6,00,000 2% CST (ii) Produced from Mumbai goods Y 30,00,000 Exempt (iii) Produced from Mumbai goods Z 40,00,000 4% VAT (i) Produced from Mumbai goods X Inter-state sales to Gujarat Raw materials valued at Rs. 5 lakh of goods Z have been transferred to the branch in Madhya Pradesh during the month. All figures of purchases and sales given above are exclusive of taxes. Make assumptions where required and provide suitable explanations. 3. (8 Marks) (a) Smita, engaged in various types of activities, gives the following particulars of her income for the year ended 31.3.2014: (a) (b) (c) (d) (e) (f) Particulars Profit of business of consumer and house-hold products Loss of business of readymade garments Brought forward loss of catering business which was closed in Asst. Year 2013-14 Short-term loss on sale of securities and shares Profit of speculative transactions entered into during the year Loss of speculative transactions of Asst. Year 2009-10 not set off till Asst. Year 2013-14 Compute the total income of Smita for the A.Y. 2014-15. Rs. 50,000 10,000 15,000 15,000 12,500 15,000 (4 Marks) (b) State the applicability of TDS provisions and TDS amount in the following cases: (i) Rent paid for hire of machinery by Bridgestone Ltd. to Mr. Raghav Rs. 2,10,000. (ii) Fee paid to Dr. K.P Singh by Sharma (HUF) Rs. 35,000 for surgery performed to a member of the family. (4 Marks) The Institute of Chartered Accountants of India (c) Answer the following questions: (i) Mr. X, an architect, rents a cab from Mr. Y, who is engaged in the business of renting of motor vehicles. Value of services provided by Mr. Y is Rs. 2,500. Mr. Y avails CENVAT credit on inputs, capital goods and input services. Who is liable to pay service tax in this case? Will your answer be different if ABC Ltd., a manufacturing company, rents the cab from Mr. Y? Also, compute the amount of service tax payable. Note: Mr. X, Mr. Y and ABC Ltd. are located in Mumbai. (ii) LMN Ltd. a manufacturing company, rents a cab from Mr. M, who is engaged in the business of renting of motor vehicles. Value of services provided by Mr. M is Rs. 2,500 and service tax payable thereon is Rs. 123.60. Who is liable to pay service tax in this case? Note: LMN Ltd and Mr. M are located in New Delhi. 4. (8 Marks) (a) RK & Jain, a partnership firm consisting of two partners, reports a net profit of Rs. 7,00,000 before deduction of the following items: (1) Salary of Rs. 20,000 each per month payable to two working partners of the firm (as authorized by the deed of partnership). (2) Depreciation on plant and machinery under section 32 (computed) Rs. 1,50,000. (3) Interest on capital at 15% per annum (as per the deed of partnership). The amount of capital eligible for interest Rs. 5,00,000. Compute: (i) Book-profit of the firm under section 40(b) of the Income-tax Act, 1961. (ii) Allowable working partner salary for the assessment year 2014-15 as per section 40(b). (4 Marks) (b) The following benefits have been granted by XYZ Ltd. to one of its employees Mr. Sharad: (i) Housing loan @ 6% per annum. Amount outstanding on 1.4.2013 is Rs. 6,00,000. Mr. Sharad pays Rs. 12,000 per month towards principal, on 5th of each month. (ii) Air-conditioners purchased 4 years back for Rs. 2,00,000 have been given to Mr. Sharad for Rs. 90,000. Compute the chargeable perquisite in the hands of Mr. Sharad for the A.Y. 2014-15. The Institute of Chartered Accountants of India The lending rate of State Bank of India as on 1.4.2013 for housing loan may be taken as 10%. (4 Marks) (c) PQR Manufacturers Ltd. imported some goods from Japan through a vessel. After the ship entered Indian port, the goods were unloaded and were lying with the custodian. The said goods were pilfered before the proper officer made an order for clearance for home consumption. Is PQR Manufacturers Ltd. liable to pay duty on such goods? Further, what would be the customs duty implication if such goods are restored to PQR Manufactures Ltd. (4 Marks) (d) A contractor is providing service of construction of bridges. He purchased the following items in May, 2014 Items Dumper Refrigerator fitted in office Diesel for use in dumper Car for use of employees for coming to site and going back Excise duty paid* [Rs.] 1,00,000 10,000 20,000 40,000 *including education cesses You are required to determine the amount of CENVAT credit the contractor can avail. (4 Marks) 5. (a) Check the taxability of the following gifts received by Mrs. Ragini during the previous year 2013-14 and compute the taxable income from gifts for Assessment Year 2014-15: (i) On the occasion of her marriage on 14.8.2013, she has received Rs. 90,000 as gift out of which Rs. 70,000 are from relatives and balance from friends. (ii) On 12.9.2013, she has received gift of Rs. 18,000 from cousin of her mother. (iii) A cell phone worth Rs. 21,000 is gifted by her friend on 15.8.2013. (iv) She gets a cash gift of Rs. 25,000 from the elder brother of her husband's grandfather on 25.10.2013. (v) She has received a cash gift of Rs. 12,000 from her friend on 14.4.2013. (5 Marks) (b) Mr. Rajan, an Indian citizen, left India on 22.09.2013 for the first time to work as an officer of a company in Germany. Determine the residential status of Rajan for the assessment year 2014-15 and explain the conditions to be fulfilled for the same under the Income-tax Act, 1961. (3 Marks) (c) A particular service has been brought into service tax net with effect from 1.7.2014. The Institute of Chartered Accountants of India Mr. Naresh has provided this service on 20.6.2014 and issued the invoice on 2.07.2014, the payment for the same was received on 10.7.2014. Is service tax payable on the same. (5 Marks) (d) A tour operator booked a package tour for a client. He billed the client for his services but did not charge any service tax though he is liable to pay service tax under the relevant provisions. It is the contention of the operator that since he has not collected any service tax from the client, he will not deposit the same with the Government. Do you think the contention of the tour operator is correct in law? Explain. (3 Marks) 6. (a) Mr. Yogesh submits the following information pertaining to the year ended 31 st March, 2014: (i) On 30.11.2013, when he attained the age of 60, his friends in India gave a flat at Surat as a gift, each contributing a sum of Rs. 20,000 in cash. The cost of the flat purchased using the various gifts was Rs. 3.40 lacs. (ii) His close friend abroad sent him a cash gift of Rs. 75,000 through his relative for the above occasion. (iii) Mr. Yogesh sold the above flat on 30.1.2014 for Rs. 3.6 lacs. The Registrar s valuation for stamp duty purposes was Rs. 3.7 lacs. Neither Mr. Yogesh nor the buyer, questioned the value fixed by the Registrar. (iv) He had purchased some equity shares in ABC Pvt. Ltd., on 5.2.2007 for Rs. 3.5 lacs. These shares were sold on 15.3.2014 for Rs. 2.8 lacs. You are requested to calculate the total income of Mr. Yogesh for the assessment year 2014-15. [Cost Inflation Index for F.Y. 2006-07: 519, 2013-14: 939] (8 Marks) (b) MNO Pvt. Ltd. manufactures beauty soap with the brand name Sweet 16 . MNO Pvt. Ltd. has organized a concert to promote its brand. Ms. Namrita Kapoor, its brand ambassador, who is a leading film actress, has given a classical dance performance in the said concert. The proceeds of the concert will be donated to a charitable organization. Explain whether Ms. Namrita Kapoor will be required to pay any service tax. (4 Marks) (c) LMN & Co. is a consultancy firm based in New Delhi. It has two branch offices at Mumbai and Singapore. Services are provided by Mumbai branch to Head Office at New Delhi and by Head Office at New Delhi to Singapore branch. Explain which of the activities will constitute service under service tax law. (4 Marks) 7. (a) All India Aviation Ltd. is running two industrial undertakings one in a SEZ (Unit A) and another in a normal area (Unit B). The brief summarized details for the year ended 31.3.2014 are as follows: The Institute of Chartered Accountants of India Particulars Domestic turnover Export turnover Gross profit Less: Expenses and depreciation Profits derived from the unit Rs. (in lacs) A 10 120 20 7 13 B 100 Nil 10 6 4 The brought forward business loss pertaining to Unit B is Rs. 2 lacs. Briefly compute the business income of the assessee. Assume F.Y. 2013-14 falls within the first 5 year period commencing from the year of manufacture or production of articles or things or provisions of services by the Unit A. (4 Marks) (b) State whether filing of income-tax return is mandatory for the assessment year 2014-15 in respect of the following cases: (i) Research association eligible for exemption under section 10(21) having total income of Rs. 2,10,000 (ii) Registered trade union eligible for exemption under section 10(24) having following incomes: Income from house property (computed) Rs. 60,000 Income from other sources (computed) Rs. 40,000 (iii) A charitable trust registered under section 12AA, having total income of Rs. 2,10,000. (iv) A Limited Liability Partnership (LLP) with business loss of Rs. 1,30,000. (4 Marks) (c) Mr. T of Mumbai purchased declared goods (goods of special importance) from Nagpur by paying sales tax at @ 5%. Subsequently, the commodity is sold to a dealer at Chennai. The dealer T while collecting and remitting tax on the Inter-state sale, wants refund of tax paid on sale within State (i.e. purchase from Nagpur). Is he correct? (4 Marks) (d) Alpha Engineers are manufacturers of specialty articles. Such articles are sold through retail shops. MRP marked on the package Price at which Alpha Engineers sells articles to their wholesalers Price at which wholesalers sell the articles to retail shop owners The Institute of Chartered Accountants of India Rs. 2,000 per piece Rs. 1,300 per piece Rs. 1,500 per piece Price at which articles are sold by retailers to final consumers Excise duty Education cess Secondary and Higher Education Cess Rs. 1,900 (Rs. 100 offered as discount on printed retail sale price 12% 2% 1% Calculate excise duty payable on an article. Such articles are not covered under section 4A of Central Excise Act, 1944. (4 Marks) The Institute of Chartered Accountants of India Test Series: October, 2014 MOCK TEST 2 INTERMEDIATE (IPC) GROUP I PAPER 4: TAXATION SUGGESTED ANSWERS/HINTS 1. (a) Computation of total income of Mr. Mahendra for the A. Y. 2014-15 Particulars Income from business of plying goods vehicle (Refer Note 1) Less: Brought forward business loss of financial year 2012-13 (Refer Note 2 & 3) Gross Total Income Less: Deduction under Chapter VI-A Section 80C:Life insurance premium paid for insurance of married daughter (Refer Note 5) Section 80D:Medical insurance premium paid for insurance of parents (Refer Note 6) Section 80E:Interest paid towards education loan taken for studies of his daughter (Refer Note 7) Total Income Rs. Rs. 4,50,000 1,00,000 3,50,000 20,000 20,000 15,000 55,000 2,95,000 Working Notes: (1) Computation of income from business of plying goods vehicles under section 44AE. Particulars 6 heavy goods vehicle held throughout the year (Rs. 5,000 6 12) 2 heavy goods vehicle held for 9 months (Rs. 5,000 2 9) Income under section 44AE Rs. 3,60,000 90,000 4,50,000 (2) As per section 44AE, any deduction allowable under the provisions of sections 30 to 38 shall be deemed to have been already allowed. Therefore, the unabsorbed depreciation of Rs. 70,000 shall not be allowed as a deduction since it is covered by section 32. The Institute of Chartered Accountants of India (3) Brought forward business loss of Rs. 1,00,000 shall be allowed as deduction, by virtue of section 72, as it is allowed to be carried forward for 8 assessment years following the assessment year to which it relates, since the return for A.Y. 2013-14 was filed before the due date specified under section 139(1). (4) Fixed deposit in the name of married son does not qualify for deduction under section 80C. (5) Premium paid for insurance on the life of any child of the individual, whether married or not, qualifies for deduction under section 80C. In respect of policies issued on or after 1.04.2012, only premium paid to the extent of 10% of minimum capital sum assured qualifies for deduction under section 80C. Therefore, out of the life insurance premium of Rs. 25,000 paid for insurance policy of married daughter, only Rs. 20,000 (being 10% of Rs. 2,00,000) is allowed as deduction under section 80C. (6) Deduction is allowed under section 80D for payment made for medical insurance of parents. Medical insurance premium paid for insuring the health of a person who is a senior citizen i.e. of age 60 years or more, qualifies for deduction under section 80D, subject to a maximum of Rs. 20,000. Hence, deduction of Rs. 20,000 is provided to Mr. Mahendra, as his parents are senior citizens. (7) It is only the payment of interest on education loan which qualifies for deduction under section 80E. Deduction under section 80E is allowed in respect of interest on loan taken for education of children of the individual even if they are not dependent. Principal repayment of the education loan is not eligible for deduction under section 80E. (b) Computation of value of taxable service and service tax liability of Amiro Bank Ltd. Particulars Interest on overdraft (Note-1) Interest on loans with a collateral security (Note-1) Interest on corporate deposits (Note-1) Administrative charges (over and above interest) on loans, advances and deposits (Note-2) Sale of foreign exchange to general public (Note-3) Service charges relating to issuance of CD (Note-4) Value of taxable service Service tax @ 12% [Rs. 41,00,000 12%] Education cess @ 2% [Rs. 4,92,000 2%] The Institute of Chartered Accountants of India Amount (Rs.) Nil Nil Nil 6,00,000 15,00,000 20,00,000 41,00,000 4,92,000 9,840 Secondary and higher education cess @ 1% [Rs. 4,92,000 1%] Service tax liability 4,920 5,06,760 Notes: 1. 2. Following services provided are included in the negative list so far as the consideration is represented by way of interest and hence are not taxable:- Overdraft facility. Loans with a collateral security. Corporate deposits. Administrative charges or amounts collected over and above the interest or discount amounts would not be part of the negative list and thus would represent taxable consideration. 3. 4. 2. Services by way of sale of foreign exchange between banks or by banks to authorized dealers of foreign exchange is included in the negative list. However, services provided by banks by way of sale of foreign exchange to general public is not so covered and hence taxable. Since CDs are in the nature of promissory notes, transactions in CDs shall be considered as transaction in money. However, a related activity, for which a separate consideration is charged would not be treated as a transaction of money and would be taxable. Hence, service charges relating to issuance of CDs shall be chargeable to service tax. (a) Computation of total income of Mr. Arun, Mrs. Arun and their minor son for the A.Y. 2014-15 Particulars Mr. Arun (Rs.) Salary income (of Mrs. Arun) Pension income (of Mr. Arun) (Rs. 10,000 12) Income from House Property [See Note (3) below) Income from other sources Interest on Mr. Arun s fixed deposit with Bank of India 45,000 (Rs. 5,00,000 9%) [See Note (1) below] Commission received by Mrs. Arun from a partnership firm, in which Mr. Arun has substantial interest [See 25,000 Note (2) below] The Institute of Chartered Accountants of India Mrs. Arun Minor Son (Rs.) (Rs.) 2,40,000 1,20,000 52,000 - - - 70,000 - - Income before including income of minor son under section 64(1A) Income of the minor son from the investment made in the business out of the amount gifted by Mr. Arun [See Note (4) below] 2,42,000 2,40,000 - 18,500 - - Income of the minor son through a business activity involving application of his skill and talent [See Note (5) below] Total Income - - 20,000 2,60,500 2,40,000 20,000 Notes: (1) As per section 60, in case there is a transfer of income without transfer of asset from which such income is derived, such income shall be treated as income of the transferor. Therefore, the fixed deposit interest of Rs. 45,000 transferred by Mr. Arun to Mr. Bhola shall be included in the total income of Mr. Arun. (2) As per section 64(1)(ii), in case the spouse of the individual receives any amount by way of income from any concern in which the individual has substantial interest (i.e. holding shares carrying at least 20% voting power or entitled to at least 20% of the profits of the concern), then, such income shall be included in the total income of the individual. The only exception is in a case where the spouse possesses any technical or professional qualifications and the income earned is solely attributable to the application of her technical or professional knowledge and experience, in which case, the clubbing provisions would not apply. In this case, the commission income of Rs. 25,000 received by Mrs. Arun from the partnership firm has to be included in the total income of Mr. Arun, as Mrs. Arun does not possess any technical or professional qualification for earning such commission and Mr. Arun has substantial interest in the partnership firm as he holds 75% share in the firm. (3) According to section 27(i), an individual who transfers any house property to his or her spouse otherwise than for adequate consideration or in connection with an agreement to live apart, shall be deemed to be the owner of the house property so transferred. Hence, Mr. Arun shall be deemed to be the owner of the flat gifted to Mrs. Arun and hence, the income arising from the same shall be computed in the hands of Mr. Arun. The Institute of Chartered Accountants of India Note: (i) It has been assumed that the net income from the flat i.e., Rs. 52,000 given in the question is the net income computed under the head Income from house property . Note: Alternatively, the net income from the flat i.e., Rs. 52,000 given in the question may be taken as the net income before providing for deduction @ 30% under section 24(a) and accordingly, the solution can be worked out on this basis. (ii) The provisions of section 56(2)(vii) would not be attracted in the hands of Mrs. Arun, since she has received immovable property without consideration from a relative i.e., her husband. (4) As per section 64(1A), the income of the minor child is to be included in the total income of the parent whose total income (excluding the income of minor child to be so clubbed) is greater. Further, as per section 10(32), income of a minor child which is includible in the income of the parent shall be exempt to the extent of Rs. 1,500 per child. Therefore, the income of Rs. 20,000 received by minor son from the investment made out of the sum gifted by Mr. Arun shall, after providing for exemption of Rs. 1,500 under section 10(32), be included in the income of Mr. Arun, since Mr. Arun s income of Rs. 2,42,000 (before including the income of the minor child) is greater than Mrs. Arun s income of Rs. 2,40,000. Therefore, Rs. 18,500 (i.e., Rs. 20,000 Rs. 1,500) shall be included in Mr. Arun s income. It is assumed that this is the first year in which clubbing provisions are attracted. Note The provisions of section 56(2)(vii) would not be attracted in the hands of the minor son, since he has received a sum of money exceeding Rs. 50,000 without consideration from a relative i.e., his father. (5) In case the income earned by the minor child is on account of any activity involving application of any skill or talent, then, such income of the minor child shall not be included in the income of the parent, but shall be taxable in the hands of the minor child. Therefore, the income of Rs. 20,000 derived by Mr. Arun s minor son through a business activity involving application of his skill and talent shall not be clubbed in the hands of the parent. Such income shall be taxable in the hands of the minor son. (b) Computation of Net VAT payable by M/s. AB Ltd. for the month of July, 2014 (A) Particulars Output VAT payable (i) On sale of finished goods produced from Goods X The Institute of Chartered Accountants of India Rs. 62,500 within Mumbai (Rs. 5,00,000 12.5%) (ii) On sale of finished goods produced from Goods Z within Mumbai (Rs. 40,00,000 4 %) Total (A) Input tax credit available (i) Goods X (Exempt) (ii) Goods Y (Note-2) (iii) Goods Z transferred to branch (Rs. 5,00,000 10.5%) (Note-3) (iv) Remaining Goods Z after transfer to the branch [Rs. (35,00,000- 5,00,000) 12.5%] Total (B) Net VAT payable = (A)-(B) CST payable (Rs. 6,00,000 2% = Rs. 12,000) on inter-state sale of goods produced from Goods X adjusted (Note-4) Excess input tax credit carried forward to next month (B) 1,60,000 2,22,500 Nil Nil 52,500 3,75,000 4,27,500 (2,05,000) 12,000 1,93,000 Notes: 1. 2. Goods utilized in the manufacture of exempted goods are not eligible for input tax credit. Hence, no input tax credit is available in respect of VAT paid on purchase of Goods Y as they have been used to produce goods which are exempt from VAT. 3. In case of stock transfer, input tax paid in excess of 2% can be claimed as input tax credit. 4. 3. It is assumed that there is no opening and closing inventory. Hence, entire purchases of the raw materials have been used to manufacture the respective finished goods. Input tax credit can be used to set off the central sales tax payable on the inter-state sales. (a) Computation of total income of Smita for the A.Y. 2014-15 Particulars Rs. Profit of business of consumer and house-hold products 50,000 Less: Loss of business of readymade garments for the year adjusted under section 70(1) 10,000 40,000 Less: Brought forward loss of catering business closed in A.Y. 2013- 14 set off against business income for the The Institute of Chartered Accountants of India Rs. current year as per section 72(1) 15,000 25,000 Profit of speculative transaction 12,500 Total Income 37,500 Notes: 1. Loss of speculative transaction of A.Y. 2009-10 is not allowed to be set off against the profit of speculative transaction of the A.Y.2014-15, since, as per the provisions of section 73(4), such loss can be carried forward for set-off for a maximum period of 4 years only i.e. up to A.Y.2013-14. 2. Short term capital loss of Rs. 15,000 on sale of securities and shares has to be carried forward as per section 74 since there is no income under the head Capital Gains for the A.Y.2014-15. The loss is to be carried forward for set off in future years against income chargeable under the head Capital Gains. Such loss can be carried forward for a maximum period of 8 assessment years. (b) (i) Since the rent paid for hire of machinery by Bridgestone. Ltd. to Mr. Raghav exceeds Rs. 1,80,000, the provisions of section 194-I for deduction of tax at source are attracted. The rate applicable for deduction of tax at source under section 194-I on rent paid for hire of plant and machinery is 2% assuming that Mr. Raghav had furnished his permanent account number to Bridgestone Ltd. Therefore, the amount of tax to be deducted at source: = Rs. 2,10,000 x 2% = Rs. 4200. Note: In case Mr. Raghav does not furnish his permanent account number to Bridgestone Ltd., tax shall be deducted @ 20% on Rs. 2,10,000, by virtue of provisions of section 206AA. (ii) As per the provisions of section 194J, a Hindu Undivided Family is required to deduct tax at source on fees paid for professional services only if it is subject to tax audit under section 44AB in the financial year preceding the current financial year. However, if such payment made for professional services is exclusively for the personal purpose of any member of Hindu Undivided Family, then, the liability to deduct tax is not attracted. Therefore, in the given case, even if Sharma (HUF) is liable to tax audit in the immediately preceding financial year, the liability to deduct tax at source is not attracted in this case since, the fees for professional service to Dr. K.P. Singh is paid for a personal purpose i.e. the surgery of a member of the family. (c) (i) In case of renting of motor vehicles, abatement of 60% from gross amount charged is available if CENVAT credit on inputs, capital goods and input The Institute of Chartered Accountants of India services is not availed. Therefore, since in the given case, Mr. Y avails CENVAT credit on inputs, capital goods and input services, it cannot pay service tax on abated value. In case of taxable services provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business by any individual/HUF/partnership firm (whether registered or not) including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory, both service provider and service receiver are liable to pay service tax. 60% of tax is to be paid by service provider and 40% by service receiver. Since in the given case, service by way of renting of motor vehicle is provided by an individual (Mr. Y) to another individual (Mr. X) and not to any body corporate, reverse charge provisions will not apply and entire service tax will be payable by service provider (Mr. Y ). Thus, service tax of Rs. 309 (12.36% of Rs. 2,500) is liable to be paid by Mr. Y. However, when motor vehicle is taken on rent by ABC Ltd. (a company), reverse charge provisions will apply and 60% of tax will be paid by Mr. Y (service provider) and 40% by ABC Ltd. (service receiver). Thus, Mr. Y will pay Rs. 185 and ABC Ltd. will pay Rs. 124. (ii) In case of renting of motor vehicles, abatement of 60% is available from gross amount charged on fulfillment of certain conditions. In other words, effective rate of service tax in case of renting of motor vehicles provided on abated value is 4.944% [12.36% of 40]. Thus, in the given case, service tax is payable on abated value [(Rs. 123.60 / Rs. 2500) x 100 = 4.944%]. In case of taxable services provided by way of renting of a motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business by any individual/HUF/partnership firm (whether registered or not) including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory, entire service tax is liable to be paid by service receiver. Since in the given case, renting of motor vehicle service is provided to a company (LMN Ltd.), reverse charge provisions will apply and entire service tax will be payable by service receiver (LMN Ltd.). Thus, service tax of Rs. 123.60 (4.944% of Rs. 2,500) is liable to be paid by LMN Ltd. 4. (a) (i) As per Explanation 3 to section 40(b), book profit shall mean the net profit as per the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to the partners of the firm if the same has The Institute of Chartered Accountants of India been already deducted while computing the net profit. In the present case, the net profit given is before deduction of depreciation on plant and machinery, interest on capital of partners and salary to the working partners. Therefore, the book profit shall be as follows: Computation of Book Profit of the firm under section 40(b) Particulars Rs. Net Profit (before deduction of depreciation, salary and interest) Less: Depreciation under section 32 1,50,000 Interest @ 12% p.a. [being the maximum allowable as per section 40(b)] (5,00,000 12%) 60,000 Book Profit (ii) Rs. 7,00,000 2,10,000 4,90,000 Salary actually paid to working partners = Rs. 20,000 2 12 = Rs. 4,80,000. As per the provisions of section 40(b)(v), the salary paid to the working partners is allowed subject to the following limits On the first Rs. 3,00,000 of book Rs. 1,50,000 or 90% of book profit, profit or in case of loss whichever is more On the balance of book profit 60% of the balance book profit Therefore, the maximum allowable working partners salary for the A.Y. 2014-15 in this case would be: Particulars On the first Rs. 3,00,000 of book profit [(Rs. 1,50,000 or 90% of Rs. 3,00,000) whichever is more] On the balance of book profit [60% of (Rs. 4,90,000 - Rs. 3,00,000)] Maximum allowable partners salary Rs. 2,70,000 1,14,000 3,84,000 Hence, allowable working partners salary for the A.Y. 2014-15 as per the provisions of section 40(b)(v) is Rs. 3,84,000. (b) Perquisite value for housing loan The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India (SBI) as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it. This rate The Institute of Chartered Accountants of India should be applied on the maximum outstanding monthly balance and the resulting amount should be reduced by the interest, if any, actually paid by him. Maximum outstanding monthly balance means the aggregate outstanding balance for loan as on the last day of each month. The perquisite value for computation is 10% - 6% = 4% Month Maximum outstanding balance as on last date of month (Rs.) Perquisite value at 4% for the month (Rs.) April, 2013 5,88,000 1,960 May, 2013 5,76,000 1,920 June, 2013 5,64,000 1,880 July, 2013 5,52,000 1,840 August, 2013 5,40,000 1,800 September, 2013 5,28,000 1,760 October, 2013 5,16,000 1,720 November, 2013 5,04,000 1,680 December, 2013 4,92,000 1,640 January, 2014 4,80,000 1,600 February, 2014 4,68,000 1,560 March, 2014 4,56,000 1,520 Total value of this perquisite 20,880 Perquisite Value of Air Conditioners Particulars Rs. Original cost 2,00,000 Depreciation on SLM basis for 4 years @10% i.e. Rs. 2,00,000 x10% x 80,000 4 Written down value 1,20,000 Amount recovered from the employee 90,000 Perquisite value 30,000 Chargeable perquisite in the hands of Mr. Sharad for the assessment year 2014-15 Particulars Housing loan The Institute of Chartered Accountants of India Rs. 20,880 Air Conditioner Total 30,000 50,880 (c) No, PQR Manufacturers Ltd. is not liable to pay duty in the given case. If any goods are pilfered after the unloading thereof but before the proper officer has made an order for clearance for home consumption, the importer shall not be liable to pay duty on such goods. However, where such goods are restored to the importer after the pilferage, the importer becomes liable to pay duty. Thus, PQR Manufacturers Ltd. will be liable to pay duty if goods are restored to it. (d) Computation of CENVAT credit available: Particulars Amount (Rs.) Dumper [Note-1] =50% of Rs.1,00,000 50,000 Refrigerator fitted in office [Note-2] Nil Diesel for use in dumper [Note-3] Car for use of employees for coming to site and going back [Note-2] Nil Nil CENVAT credit available to contractor 50,000 Notes: 1. As per the definition of the capital goods read along with rule 4 of the CENVAT Credit Rules, 2004, CENVAT credit of 50% of the duty paid on the dumpers is available in current financial year and balance 50% in the succeeding financial year. 2. The definition of capital goods excludes (i) the motor vehicles designed to carry passengers and (ii) office equipment. Hence, the CENVAT credit of the above goods is not available. 3. 5. The definition of the inputs specifically excludes diesel oil. CENVAT credit of the same is not available. Hence, the (a) Computation of taxable income of Mrs. Ragini from gifts for A.Y.2014-15 Sl. No. 1. Particulars Relatives friends and Taxable Reason for taxability or otherwise of each gift amount (Rs.) Nil Gifts received on the occasion of marriage are not taxable. The Institute of Chartered Accountants of India 2. Cousin of Mrs. Ragini s mother 3. Friend 4. Elder brother of husband s grandfather 5. Friend Aggregate value of gifts 18,000 Cousin of Mrs. Ragini s mother is not a relative. Hence, the cash gift is taxable. Nil Cell phone is not included in the definition of property as per Explanation to section 56(2)(vii). Hence, it is not taxable. 25,000 Brother of husband s grandfather is not a relative. Hence, the cash gift is taxable. 12,000 Cash gift from friend is taxable. 55,000 Since the sum of money received by Mrs. Ragini without consideration during the previous year 2013-14 exceeds Rs. 50,000, the whole of the amount is chargeable to tax under section 56(2)(vii) of the Income-tax Act, 1961. (b) Under section 6(1), an individual is said to be resident in India in any previous year if he satisfies any one of the following conditions (i) He has been in India during the previous year for a total period of 182 days or more, or (ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the previous year. In the case of Indian citizens leaving India for employment, the period of stay during the previous year must be 182 days instead of 60 days given in (ii) above. During the previous year 2013-14, Mr. Rajan, an Indian citizen, was in India for 175 days only (i.e 30+31+30+31+31+22 days). Thereafter, he left India for employment purposes. Since he does not satisfy the minimum criteria of 182 days, he is a nonresident for the A.Y. 2014-15. (c) As per rule 5 of the Point of Taxation Rules, where a service is taxed for the first time, then, (a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable; (b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within 14 days of the date when the service is taxed for the first time. The Institute of Chartered Accountants of India The facts given in the question do not fall under any of the above two clauses. Hence, service tax is payable on the same. (d) Section 68 of Finance Act, 1994 casts the liability to pay service tax upon the service provider. This liability is not contingent upon the service provider realizing or charging service tax at the prevailing rate. Statutory liability does not get extinguished if service provider fails to realize or charge service tax from service receiver. Therefore, action taken by tour operator is not correct in law. He will have to deposit service tax even if he has not collected the same from his client. 6. (a) Computation of total income of Mr. Yogesh for A.Y. 2014-15 Particulars Capital Gains Short term capital gains (on sale of flat) (i) Sale consideration (ii) Stamp duty valuation Consideration for the purpose of capital gains as per section 50C (stamp duty value, since it is higher than sale consideration) Less: Cost of acquisition [As per section 49(4), cost to be taken into consideration for 56(2)(vii) will be the cost of acquisition] Long term capital loss on sale of equity shares of ABC Pvt. Ltd Sale consideration Less: Indexed cost of acquisition(Rs. 3,50,000 939/519) Long term capital loss to be carried forward (See Note 1 below) Income from other sources: Gift from friends by way of immovable property on 30.11.2013 [See Note 3 below]. Gift received from a close friend (unrelated person) [See Note 2 below ] Total income Rs. 3,60,000 3,70,000 Rs. Rs. 3,70,000 3,40,000 30,000 2,80,000 6,33,237 3,53,237 3,40,000 75,000 4,45,000 Notes: 1. In the given problem, shares have been held for more than 12 months and hence, constitute a long term capital asset. The loss arising from sale of such The Institute of Chartered Accountants of India shares is, therefore, a long-term capital loss. As per section 70(3), long term capital loss can be set-off only against long-term capital gains. Therefore, longterm capital loss cannot be set-off against short-term capital gains. However, such long-term capital loss can be carried forward to the next year for set-off against long-term capital gains arising in that year. 2. Any sum received from an unrelated person will be deemed as income and taxed as income from other sources if the aggregate sum received exceeds Rs. 50,000 in a year [Section 56(2)(vii)]. 3. Receipt of immovable property without consideration would attract the provisions of section 56(2)(vii). (b) Services provided by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador are exempt from service tax vide Mega Exemption Notification No. 25/2012 ST dated 20.06.2012. Since Ms. Namrita Kapoor is the brand ambassador of Sweet 16 soap manufactured by MNO Pvt. Ltd., the services rendered by her by way of a classical dance performance in the concert organized by MNO Pvt. Ltd. to promote its brand will not be eligible for the above-mentioned exemption and thus, be liable to service tax. The fact that the proceeds of the concert will be donated to a charitable organization will not have any bearing on the eligibility or otherwise to the abovementioned exemption. (c) As per section 65B(44) of Finance Act, 1994, a service is an activity carried out by one person for another person in lieu of a consideration. Further, Explanation 3 to section 65B(44) provides inter alia that an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons. Also, as per explanation 4 to the said section, a person carrying on a business through a branch in any territory is treated as having an establishment in that territory. Therefore, services provided by Mumbai branch to Head Office at New Delhi will not be service in terms of section 65B(44) since both the establishments namely, Branch office and Head office are located in the taxable territory and are thus, one and the same person. However, when services are provided by Head Office at New Delhi to Singapore branch (located in non-taxable territory), the two establishments are treated as establishments of distinct persons and thus, the services provided in this case will constitute service under service tax law. The Institute of Chartered Accountants of India 7. (a) Computation of business income of All India Aviation Ltd. Particulars Total profit derived from Units A & B (Rs. 13 lacs + Rs. 4 lacs) Less: Exemption under section 10AA [See Working Note below] Less: Brought forward business loss Rs. (in lacs) 17 12 5 2 3 Working Note: Computation of exemption under section 10AA in respect of Unit A located in a SEZ Particulars Domestic turnover of Unit A Export turnover of Unit A Total turnover of Unit A Profit derived from Unit A Exemption under section 10AA Profit of Unit A x (b) Export turnover of unit A 120 = 13 = 130 Total turnover of Unit A Rs. (in lacs) 10 120 130 13 12 (i) As per section 139(4C), a research association referred to in section 10(21) must file its return of income within the due date under section 139(1) if its total income, without giving effect to the provisions of section 10, exceeds the maximum amount which is not chargeable to income-tax. Since the total income of the research association exceeds the basic exemption limit of Rs. 2,00,000, it has to file its return of income for the A.Y.2014-15. (ii) As per section 139(4C), a registered trade union referred to in section 10(24) must file its return of income if the total income exceeds the basic exemption limit without giving effect to the provisions of section 10. Since the total income of the trade union is less than the basic exemption limit of Rs. 2,00,000, it need not file its return of income for the A.Y. 2014-15. (iii) As per section 139(4A), a charitable trust registered under section 12AA must file its return of income, if its total income computed as per the provisions of the Income-tax Act, 1961, without giving effect to the provisions of sections 11 and 12, exceeds the maximum amount which is not chargeable to income-tax. The Institute of Chartered Accountants of India Since the total income of the charitable trust exceeds Rs. 2,00,000, it has to file its return of income for the A.Y. 2014-15. (iv) As per third proviso to section 139(1), every company or firm shall furnish on or before the due date the return in respect of its income or loss in every previous year. Since LLP is included in the definition of firm under the Income-tax Act, 1961, it has to file its return mandatorily, even though it has incurred a loss. (c) If a tax has been levied on sale or purchase of any declared goods inside a State and the same goods are subsequently sold in the course of inter-state trade or commerce and is subjected to tax under the CST Act, sales tax paid has to be reimbursed to the dealer. However, sales tax paid within the state can be reimbursed only when the CST has been paid subsequently and not otherwise. Hence, in this case, Mr. T can claim refund of tax paid within the State after payment of central sales tax in respect of such declared goods. (d) Since the articles are not covered under section 4A of Central Excise Act, 1944 (RSP based valuation provisions), excise duty will be payable on the basis of assessable value under section 4 of Central Excise Act (transaction value). Thus, value for purpose of excise duty will be Rs. 1,300 i.e., the price at which the articles are sold to wholesalers. Particulars Transaction value [price at which Alpha Engineers sells articles to their wholesalers] Rs. 1,300 Excise duty @ 12% [12% of Rs. 1,300] 156 Education cess @ 2% [2% of Rs. 156] 3.12 Secondary and Higher Education Cess @ 1% [1% of Rs. 156] Total excise duty payable (rounded off) 1.56 161 The Institute of Chartered Accountants of India

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