Solutions To May 2014 Taxation - IPC

SUGGESTED ANSWERS / HINTS
Ans. to Q No.1(A)
Computation of total income of KAMAL for the A.Y. 2014-15
Particulars ` `
Salary Income
Salary including dearness allowance 5,00,000
Bonus 15,000
Value of perquisites:
(i)Salary of servant 12,000
(ii) Free gas, electricity and water 14,500 26,500
5,41,500
Income fromhouse property
Gross Annual Value (GAV) (Rent receivable is taken as 66,000
GAV in the absence of other information) (` 5500X12)
Less: Municipal taxes paid 4,500
Net Annual Value (NAV) 61,500
Less: Deductions under section 24
(i)30% of NAV ` 18,450
(ii)Interest on loan from LIC @15% of ` 1,60,000 ` 24,000 42,450 19,050

Income fromP/G/B/P
Income from share speculation business 15,000
Less: Loss from cotton speculation business (20,200)
Net Loss [See Note 1] (5,200)
Income fromOther Sources
(i) Income on account of interest earned from
money gifted to his son 30,000X15% 4,500
(LESS) Exemption u/s 10(32) (1500) 3,000
(ii) Interest income earned from advancing money
gifted to wife has to be clubbed with the income of the
assessee as per section 64(1) 7,500
(iii) Gift received from four friends (taxable under
section 56(2)(vii) as the aggregate amount received
during the year exceeds ` 50,000) 1,00,000 1,10,500
Gross Total Income 6,71,050
Less: Deduction under section 80C
Contribution to Public Provident Fund & ULIP 16,500
Life insurance premium for daughter
(Allowed only 10% of sum assured) 2,00,00x10% 20,000 (36,500)
Total Income 6,34,550

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CA. E V RAMA KRISHNA www.fb.com/rktaxism
TAXATION FACULTY KIRAN'S ICON
Notes:
1. Perquisite of laptop is not taxable
2. Interest on borrowed capital is calculated assuming that the outstanding balance of the loan is ` 1,60,000 as on 1-4-2013.
3 Net loss from speculative business(i.e;` 5,200)has to be carried forward as it cannot be set off against any other head of
income.
4. Interest earned from advancing money gifted to his son during the year 2008- 09 when he was 11 years old is includible in the
hands of Kamal, since Kamals son is minor during the P.Y. 2013-14.

Ans. to Q No.1(B)
Computation of value of taxable services and service tax payable thereon `
Processing of raw material to make it fit for production 6,35,000
Advance received for the services to be provided in May2014 2,13,000
Total value of taxable services 8,48,000
Service tax payable @ 12.36% 1,04,813
Notes:
1. Since taxable services provided by Farm Heroes was more than Rs 10 lacs in the preceding year, they cannot enjoy the
small service providers' exemption in the current year.
2. Supply of farm labour and testing of soil of farm land are covered under the negative list, hence they are not taxable
services.
3. Value of services provided free is not taxable.
Ans. to Q No.1(C)
Calculation of VAT payable for January 2014 for Mr Vijay
Particulars Sales(`) VAT/CST Rate VAT/CST amount(`)
Sale of product X in Gujarat 5,00,000 4% 20,000
Sale of product Y in Gujarat 6,00,000 0% Nil
Sale of product Z in Delhi 4,00,000 2% 8,000
Total Output VAT and Output CST 28,000
Less: Input Tax Credit
Input VAT paid on purchase of raw material B 7,60,000 x 1% 7,600
Input VAT paid on purchase of raw material C 5,00,000 x 12.5% 62,500 (70,100)

Input VAT credit to be carried forward to February 2014 42,100
Hence no VAT is payable by Mr Vijay for January 2014
Notes:
1. No Input VAT credit is available for raw material A since it is exempt from VAT
2. Only 50% Input VAT credit is available for raw material C since only 50% of it is used for manufacture of taxable goods.
3. No output VAT is leviable on product E since it is exempt from levy of VAT.
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Answer to Question 2(A)
Computation of Normal & Additional depreciation and Deduction u/s 32AC available to JK Ltd
For A.Y 2014-15 (P.Y 2013-14)
Date of acquisition &
installation of P&M
Actual cost (`)

Normal Depn (`)
@ 15%
Additional Depn
(`) @ 20%
25/05/2013 90,00,00,000 13,50,00,000 18,00,00,000
31/08/2013 20,00,00,000 3,00,00,000 4,00,00,000
Total 16,50,00,000 22,00,00,000

Deduction u/s 32AC : @ 15% on 1,10,00,000 = ` 16,50,000
Note: Both normal and additional depreciation are available for full year as the P&M was put to use
for more than 180 days.
For A.Y 2015-16 (P.Y 2014-15) `
Opening WDV of P&M as on 1.4.2013 71,50,00,000
Add: New P&M installed on 15-4-2014 1,20,00,00,000
WDV as on 31.03.2014 1,91,50,00,000

Normal depreciation @15% 28,72,50,000
Additional depreciation on new P&M 24,00,00,000
(@20% on1,20,00,000)

Deduction u/s 32AC: `
Total P&M installed in PY 2013-14 and PY 2014-15 230,00,00,000

15% of the above 34,50,00,000
Less: Deduction already allowed in PY 2013-14 (16,50,00,000)

Deduction u/s 32AC allowed in PY 2014-15 18,00,00,000
# If asset acquired on 31-8-2013 is sold on 1-5-2016, the deduction u/s 32AC
allowed in respect of the asset sold shall be chargeable to tax in the P.Y in
which the asset is sold (i.e: 2016-2017)
Hence ` 3 cr (being 15% of 20 cr) will be business income in the PY 2016-17
and also, any STCG u/s 50 may also be taxable in the PY 2016-17.

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Answer to Question 2(B) `
Professional fee received (inclusive of service tax) and net of TDS 18,00,000
Add: TDS u/s 194J @ 10% 2,00,000
Value of taxable services including service tax 20,00,000
Since service tax is included in the above, it has to found out using back calculation.
Service tax amount 20,00,000 x 12.36/112.36 = ` 2,20,007
Value of taxable services 20,00,000 x 100/112.36 = ` 17,79,993

Note: For the purpose of Computing Service Tax , Gross Amount Charged includes the TDS
deducted by the Service Receiver. Hence TDS will also form part of Consideration

Answer to Question 2(C)
Sale price(`) Output VAT(`) Input VAT Credit(`) Net VAT Liability(`)
@12.5% @12.5%

Javed 5,000 625.00 Nil 625.00
Kabir 5,500 687.50 625.00 62.50
Hakim 6,000 750.00 687.50 62.50
Mohan 7,000 875.00 750.00 125.00

Total (` 7,000 x 12.5% ) = ` 875.00

Tax treatment of medical benefits received in the hands of Ms Rakhi for PY 2013-14
Exempt (`) Taxable (`)
1)Reimbursement of medical expenses
On treatment of self employed daughter 4,000
On treatment of herself 8,000
On treatment of her mother in law 5,000
2)Payment of mediclaim policy on her health 7,500
3)Medical Allowance (2000 x 12) 24,000
4)Reimbursement of medical expenses on 5,000
treatment of son in govt hospital.

5)Expenses incurred by company on treatment
of minor son abroad, including cost of travel and 2,00,000 25,000
stay abroad (exempt upto the limit prescribed
by RBI)
Total 2,24,500 54,000
Notes:
1. Mother in law is not included in definition of family member for the purpose of medical benefits.

Answer to Question 3(B)

In case of renting of immovable property service, a deduction of property taxes paid in respect
of the immovable property is allowed from the gross amount charged for renting of the said
immovable property vide Notification No.29/2012 ST dated 20.06.2012.

However, where any amount in excess of the amount required to be paid towards service tax
liability has been paid on account of non-availment of such deduction, such excess amount may
be adjusted against the service tax liability within 1 year from the date of payment of such
property tax. The details of such adjustment shall be intimated to the Superintendent of
Central Excise having jurisdiction over the service provider within a period of 15 days from the
date of such adjustment.

VAT registration may be cancelled in the following circumstances
discontinuance of business, or
disposal of business, or
transfer of business to a new location, or

annual turnover of the assessee falling below the specified amount

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Option - 1:
Taking House 1 as self occupied and House 2 as deemed to be let out
House 1(`) House 2(`)
(S O) (DLO)

Gross Annual Value Nil 1,65,000
(Higher of MV and FR, but Restricted to SR)

Less: Municipal Taxes Paid Nil (9,200)

Net Annual Value (NAV) Nil 1,55,800

Less: Deductions u/s 24:
30% of NAV Nil (46,740)
Interest on borrowed capital Nil (55,000)
Income from house property Nil 54.060

Total Income from house property (Option-1) = 54,060

Option - 2:
Taking House 2 as self occupied and House 1 as deemed to be let out
House 1(`) House 2(`)
(DLO) (SO)

Gross Annual Value 1,00,000 Nil
(Higher of MV and FR, but Restricted to SR)

Less: Municipal Taxes Paid Nil Nil

Net Annual Value (NAV) 1,00,000 Nil

Less: Deductions u/s 24:
30% of NAV (30,000) Nil
Interest on borrowed capital Nil (30,000)
Income from house property 70,000 (30,000)

Total Income from house property (Option-2) = 40,000
Since Option 2 results in lower Income, Nisha should choose House 1 as deemed to be let out and
House 2 as self occupied.
Her Income from House Property is Rs 40,000

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Bundled service refers to combining two or more services by a service provider, each of which may
be taxed at different rates, or one of the services may be taxable while the others are exempt.

For example, Renting of a residential dwelling which is for use partly as a residence and partly for non
residential purpose like an office of a lawyer or the clinic of a doctor would also be a case of bundled
services as renting service is being provided both for residential use and for non residential use.

Taxability of such bundled services has to be determined in terms of the principles laid down in
section 66F of the Finance Act, 1994. The section says that

(a) if various elements of such service are naturally bundled in the ordinary course of business, it
shall be treated as provision of the single service which gives such bundle its essential character;

(b) if various elements of such service are not naturally bundled in the ordinary course of business, it
shall be treated as provision of the single service which results in highest liability of service tax.

For example, a hotel provides a 4 days-3 nights package with the facility of breakfast. This is a natural
bundling of services in the ordinary course of business. The service of hotel accommodation gives the
bundle the essential character and would, therefore, be treated as service of providing hotel
accommodation.

VAT system can be said to be non beneficial as compared to single last point system because while in
the latter, there is just a single tax at the last point in the supply chain, whereas in the former, there
are multiple levels of taxation starting from the first person in the supply chain, mostly the
manufacturer. The tax chain continues with the wholesaler, distributor and retailer too.

Other three deficiencies of VAT system in India are as follows:
1) VAT system requires extensive record keeping in the form of invoices, registers to keep track of
sales, purchases and input credits. Hence there is an increased compliance cost.
2) Since tax is imposed at various stages, it increases the working capital requirements and the
corresponding interest burden.
3) VAT is a regressive tax. Its burden falls disproportionately on the poor since the poor are likely to
spend a greater proportion of their income compared to a rich person.

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--By TAXISM
Answer to Q.No.5(A)
PY 2013-14 Assessee Mr. Roy ( Individual -55 years) AY 2014-15
(Assumed Resident)
POH : 10.10.1986 to 3.11.2013 > 36 M LTCA
Computation of Taxable Long Term Capital Gains
Particulars ` `
Sale Consideration 65,00,000
(SDV u/s. 50 C)
(Less) Transfer Expenses
Brokerage @ 2% on Sale Consideration 53,00,000*2% (1,06,000)
__________
Net consideration 63,94,000

(Less) Indexed cost of Acqusion 6,00,000x
(40,24,286)
__________
Long term Capital Gains 23,69,714

(Less) Exemptionals 54 & 54 EC)
U/s. 54
(i) Residential house acquired at Kolkata 10,00,000
on 10.12.13
(ii) amount deposited in CGAS on 6.7.14
(before the due date For filing of ROI) 4,00,000
for construction of house

--By TAXISM
U/s 54 EC
Amount invested in RECL Bonds on 10.4.14 7,00,000 (21,00,000)
(Within 6 M from DOT) _________ _________

Taxable Long Term Capital Gains 2,69,714
________
Computation of Tax Liability for the AY 2014-15 `

Long Term Capital Gain 2,69,714
Other Income Nill
_________
GTI/TI (rounded off) 2,69,710
Less Basic Exemption (2,00,000)
_________
69,710
_________
Tax on 69,710 @ 20%
69,714 x 20% = ` 13, 942
(Less) Rebate U/s. 87A (2,000)
__________
11,942
(Add) Ed cess @ 3% 358
_________
Tax Liability 12,300
_________

Notes:
1. Capital Asset Transferred is Building, hence u/s 50C SDV should be taken as Sale consideration.
2. Since Cap. Asset is LTCA, Benefit of Indexation is available (second Proviso to Sec. 48)
3. Exemption U/s 54 is available as he invested ` 10,00,000 in a new Residential house & deposited ` 4,00,000
in CGAS before due date for filing of ROI.
4. Since ` 3,00,000 was deposited in CGAS after due date for filing of ROI, exemption is not available to the
extent of ` 3,00,000.
5. Investment of ` 7,00,000 in Bonds of RECL is made on 10.4.14 is eligible for claiming exemption u/s. 54 EC
(i.e; within 6M from DOT 4.11.13)
6. Investment of ` 5,00,000 in Bond of RECL is made on 15.6.14 (i.e. after 6M from DOT 4.11.13) is not
eligible for claiming exemption u/s. 54EC)
7. A Resident Individual having Total income which consists of LTCG & other income can deduct unabsorbed
Basic Exemption Limit form LTCG.
8. LTCG u/s. 112 is taxable @ 20%.
9. In case of Resident Individual having total income up to ` 5,00,000. Rebate U/s. 87A to the extent of `
2,000 is available.

--By TAXISM


(1) The statement is False. If Mr Vikas is a registered service provider, he has to file a NIL return even if he did not provide
any services during the respective half year.

(2) The statement is True. A return filed belatedly is still a return filed under Rule 7 of the Service Tax Rules, 1994. As per
Rule 7B, an assessee can revise a return filed under Rule 7 within 90 days.


(1) True. The entire VAT system is based upon the mechanism of issuing invoice and taking credit based
on it.
(2) False. VAT does not increase price as input credit is available at all subsequent stages.
(3) False. There is no fixed VAT rate throughout the country. Rates may vary from State to State.
(4) True. If the invoice is issued inclusive of VAT amount, then at least the rate of VAT included in the
amount should be mentioned.

Computation of Gross Total Income of Mr Garg for the AY 2014-15
` `
Income from Salary 15,000

Income from business 66,000
Less: Unabsorbed depreciation (11,000) 55,000

Long term capital gain on sale of land 10,800
Less: B/f Short Term Capital Loss (9,800) 1,000
Gross Total Income 71,000
Loss to be carried forward:
1. Loss from speculative business of Rs 22,000 relating to AY 2013-14 shall be carried forward.
2. Loss from maintenance of race horses of Rs 15,000 relating to AY 2014-15 shall be carried forward.
3. Loss from gambling of Rs 9,100 can neither be set off nor carried forward.
*Looks like the question should have mentioned PY 2013-14 instead of PY 2012-13 and
C.Y Depreciation should have been given.

The deduction u/s 80CCG is 50% of investment or Rs 25,000, whichever is lower.

Deduction u/s 80CCG is available only to Ria and Roma, as their GTI does not exceed Rs 12 lacs

Deduction available to Ria ` 25,000
Deduction available to Roma ` 17,500 (50% of ` 35,000)

Raj will have capital gains or capital loss (depending on sale consideration) in case he sells his
investments in FY 2014-15.
Service tax is always to be charged upon the gross amount of taxable services. These would include
costs incurred by the service provider in course of providing the service like telephone, travelling, etc.
It does not make a difference even if the service provider indicates these expenses separately in his
invoice.
The only case where any expenditure is excluded from the value of taxable service is when the service
provider incurs them as "pure agent" of the service receiver.

Answer to Question 6(D)
Invoices are crucial documents for administering VAT. The entire system of VAT is based upon the
invoice.
A purchaser takes input credit based upon the VAT amount indicated in the invoice. Hence it is
important for him to keep safe custody of the invoice.
The State VAT department can do cross-checking based upon the declarations in the invoice, like
registration numbers of the seller (and in some cases the purchaser)
VAT invoice enables every dealer in the supply chain to take credit of VAT paid by him to his vendor.
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(1) (A) TDS @ 10% (i.e Rs 1900) has to be deducted at source u/s 194 J from sitting fees paid to
directors
(1) (B) TDS @ 1% (i.e. Rs 60,000) has to be deducted at source u/s 194 - IA from payment made by Mr Y
to Mr X.
(2) (A) With the available information, it is not possible to determine the due date of filing return of Mr
Vineet. Assuming that the due dateof filing return was 31-7-2014, Mr Vineet has filed a belated
return on 12-9-2014.
As per the SC decision in Kumar Jagadish Chandra Sinha vs CIT (1996), a belated return cannot be
revised. Had Mr. Vineet filed his original return in time, i.e, by 31-7-2014, he would have been able to
file a revised return by 31-3-2016.
(2) (B) The Statemetn is false. U/s 140 of the Income Tax Act, where the Karta of an HUF is absent from
India, any other adult member (not necessarily male) may sign the return of income.

(3) U/s 208, obligation to pay advance tax arises in every case where the advance tax liability is Rs
10,000 or more.
An assessee has to estimate his current income and calculate tax liability as per the rates in force on
that income. If any tax has been deducted at source, the same may be reduced from his tax liability
and only the balance may be paid as advacne tax.

As per Rule 2B of the Service Tax (Determination of Value) Rules, 2006, the value of taxable service shall
be the difference between the buying / selling rate and the RBI reference rate, multiplied by the total
units of the currency.
Hence the value of taxable service in this case is 46000 x (60.50 - 60) = ` 23,000
Service tax payable thereon @ 12.36% on 23,000 = ` 2,843
Computation of VAT payable / Credit Carried Forward of Mr. X for Dec 2013
`
Inputs purchased during the month (2,25,000-25,000) 2,00,000
(Input VAT excluded, as credit for the same is available)
Raw material purchased (inter-state) 51,000
(Input CST included, as credit for the same is not available)
Transportation charges 35,000
Total cost 2,86,000
Sale proceeds of 90% of stock(2,86,000x90%) @ 20% profit on cost 3,08,880
(2,86,000x90% = ` 2,57,400 + 20% = ` 3,08,880)
Output VAT on the above sale value @ 4% ( 3,08,880 x 4%) 12,335
Less: Opening balance of VAT credit as on 1-12-2013 6,700
Credit of inputs purchased during the month 25,000 (31,700)
Balance credit carried forward to January 2014 19,345
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Solutions To May 2014 Taxation - IPC

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