THIS FILE CONTAINS (1) TEST PAPER (2) SOLUTION TO TEST PAPER (3) ADDITIONAL AMENDMENTS IN INCOME TAX

AND SERVICE TAX APART FROM THE ONE ALREADY GIVEN. TEST PAPER This is 68 Marks Question Paper designed to give an idea to the Students about the Paper Pattern TAXATION Answer all questions Question 1(a): Mr. Chatterbox has commenced a new business of manufacturing chemicals and introduced the following assets in his business on 1/4/2010: Date of Purchase Historical Cost Market Value on 1/4/2010 Personal Car 10/6/2006 2,00,000 3,00,000 Personal Building 10/8/2008 4,00,000 5,00,000 Besides above, he had purchased a Plant and Machinery on 1/7/2010 for ` 6,00,000. Compute depreciation Claim for P.Y. 2010-11. [5 Marks ] Question 1(b): Mr. B draws a basic salary of Rs. 5,00,000 p.a. from his employer. His employer gives him an option either to take House Rent allowance of Rs. 10,000 p.m.[ Rent paid 12,000 p.m.] or a Rent free Accommodation. Discuss. [5 Marks] Question 1(c): Compute Service tax under Cargo Handling Services in respect to Following transaction Amount (`) (a) Cargo Handling activity undertaken in port or other port or airport 10,00,000 (b) Unaccompanied baggage 5,00,000 (c) Charges recovered from Customs House Agent (CHA) 2,00,000 (d) Auction of abandoned cargo 10,00,000 (e) Handling of empty containers 25,00,000 (f) Marketing or canvassing for cargo for airlines 35,00,000 (g) Rake handling charges 10,00,000 (h) Loading/unloading of cargo on individual capacity 20,00,000 i) Loading/unloading of cargo by sole proprietorship firm. 5,00,000 (j)Export after transshipment services 10,00,000 k) Transportation of cargo 5,00,000 l) charges for handling of agricultural produce 10,00,000 [5 Marks] Question 1(d): The particulars regarding sale, purchase etc. for the last quarter of the year 2010-11 are as under: Amount ( `) (1) Purchases of Raw material within the state (i) taxable @1% 40,00,000 (ii) taxable @ 4% 60,00,000 (iii) taxable @ 12.5% 10,00,000 (2) Sale of goods manufactured from raw material purchased @ 4% tax rate (i) Taxable Intra state sale ( tax rate 4%) 20,00,000 (ii) Exempted Intra State Sale 10,00,000 (iii) Sale in the course of Inter-state trade or Commerce (tax rate 4%) 10,00,000 (3) Sale of raw material purchased @ 1% tax rate 44,00,000 (4) Goods manufactured from the raw material purchased @ 12.5% tax rate were given on lease. The deemed sale price of such goods is ` 12,00,000, taxable @12.5%. You may assume that input credit of tax on raw material used in manufacture of leased goods is available immediately. Compute the amount of Value Added Tax (VAT) payable. There was no opening or closing inventory How can he utilise the balance of input tax credit available, if any? [5 marks] Question 2(a): Dr. Shuba is medical practitioner. Her age is 64 as on 1 Jan 2011. The Receipts and payments account of 2010-11 of her is as under:

To Balance B/f : Receipts from sale of Medicine Consultation fee Visiting fee Lecturers Family pension Saving bank interest Loan from bank Share from HUF Agriculture income Income from lottery (net after deduction of TDS @ 30%)

10,000 2,50,000 50,000 2,00,000 5,000 2,80,000 1,000 3,00,000 50,000 1,00,000 35,000

By Purchase of commercial vehicle (Before 30 Sep. 2010) Drawing Deposit in bank for 5 years Surgical instrument purchased Before 30 Sep. 2010 Instalment of loan paid (including interest ` 22,333) Medical insurance premium Instalment of housing loan (Principal component ` 48,000) Advance tax paid Purchase of medicine Payment for medical journal Vehicle expenses Balance C/f :

4,00,000 2,50,000 1,50,000 50,000 1,21,000 32,000 1,08,000 20,000 47,000 5,000 50,000 48,000 Total 12,81,000

Total 12,81,000

Other relevant information is as under : (i) She resides in her own house which was constructed in 1998 with a loan from LIC Housing of 10,00,000 out of which 6,00,000 was still due. She got it refinanced from SBI on 01.04.10 at the rate of10%. One fourth portion of the house is used for clinic purposes. (WDV as on 1.4.2010 ` 2,82,430) (ii) She invested in term deposit 1,50,000 in Bank of Baroda on 01.07.10 for a period of 5 years in the name of her minor daughter at 9% interest p.a. (iii) She purchased a commercial vehicle on 1 July 2010 at 4,00,000. A loan of 3,00,000 was taken to buy the van at 8% interest. One fourth use of vehicle is estimated to be personal. (iv) She paid medical insurance premium for herself of 16,000 and for her mother 16,000. Her mother is dependent on her. (v) She got her share from HUFs income of 50,000. Compute Total Income. [8 Marks] Question 2(b): Documents to be attached at the time of filling of First return under Service tax [4 marks]

Question 2(c): ABC Ltd. deducted tax at source of ` 10,000 from a chartered Accountant (Resident) u/s. 194J on 15th March, 2011 and deposited the same with Government on 15th September, 2011. Discuss the consequences with respect to the provisions of TDS and provisions of Profit and Gains from business or profession. [4 marks] Question 3(a): Mrs. Maheshwari, engaged in business. Her Profit & Loss Account for the year ended 31/3/2011 reads as follows: Expenses Amount Income Amount Salaries to Paid Staff 4,25,000 Gross profit 18,37,600 Donation to Electoral Trust 24,000 Interest on loan 56,000 Advance Tax 1,00,000 Postage and telegram 1,89,000 29,500 Depreciation Travelling Expenses 55,000 Net Profits 9,59,100 18,37,600 18,37,600 Other information: 1. The Advance tax shown above was paid on 15/3/2011. The following items were not credited/debited to Income and Expenditure Account 2. During the year Maheshwari has also earned ` 2,00,000 from business in USA which was received there.

3. On 1/10/2010 she sold her personal furniture for ` 1,00,000 purchased in 2008-09 for ` 80,000. She received a LCD TV set worth `90,000 as gift from her Mother- in -Law on 1/1/2011. 4. Amount received on maturity of Life Insurance Policies ` 6,00,000 (including bonus ` 50,000). 5. Maheshwari contributed ` 80,000 to pension fund of New Pension Trust 6. Amount withdrawn from PPF ` 6,00,000 including interest ` 1,00,000 From the following information you are required to (i)Compute tax liability of Mrs. Maheshwari who is resident but not ordinarily resident (ii) State whether any advance tax is payable and if yes, what is the amount payable. Compute amount payable or refundable after taking into account interest U/s 234A, 234B and 234C assuming return was filed on 10/7/2010 and all taxes were paid on that date. [5+3 = 8 Marks] Question 3(b): VAT is regressive. Comment [4 Marks]

Question 3(c):Discuss the correctness of the following statements: (i) The exemption in respect of Service Tax applies only to basic rate of 10% and not to Education Cess and Secondary and Higher Education Cess. (ii) Sub Contractors are liable to Service Tax. [4 Marks] Question 4(a): Ms. V purchased 10,000 equity shares of R Pvt. Ltd. on 28-2-2006 for `1, 20, 000. The company was

wound up on 31-7-2011. The following is the summarized financial position of the company as on 31-7-2011: Liabilities ` Assets ` 60, 000 Equity Shares 6, 00, 000 Agricultural land 42, 00, 000 General reserve 40, 00, 000 Cash at bank 6, 50, 000 Provision for taxation 2, 50, 000 __________ 48, 50, 000 48, 50, 000 The tax liability (towards dividend distribution tax) was ascertained at `3, 00, 000, after considering refund due to the company. The remaining assets were distributed to the shareholders in the proportion of their shareholding. The market value of 6 acres of agricultural land (in an urban area) as on 31-7-2011 is `10,00,000 per acre. The agricultural land received above was sold by Ms. V on 29-2-2012 for `15, 00, 000. Discuss the tax consequences in the hands of the company and Ms. V for the AY 2012-13. [8]
Question 4(b): Discuss the EASIEST scheme in Service Tax. [4]

Question 4(c): Filing of Returns, Penal Provisions and Documents and records to be maintained under VAT [4]

ANSWER TO TEST PAPER

Answer to Q. 1(a):

Sirs Note:- This question is from special cases of depreciation and is from page 107 Q 23 & Q 24. Computation of depreciation of Mr. chatter box for P.Y. 2010-11 (A.Y. 2011-12) Particulars Block 1: Plant & Machinery ( rate 15%) Opening WDV Add: (1) Car introduced in business from personal purpose at Historical cost [ 01/04/2010] (2) P&M purchased on [01/07/2010] Closing WDV (before depreciation) Depreciation Normal depreciation 15% on Rs 800000 Additional depreciation (since engaged in manufacturing business) 20% on ` 600000/Total depreciation Block -2: Building [10% Rate] NIL 324000 324000 32400 Amount(`) Amount(`) NIL 200000 600000 800000 800000

120000 120000 240000

Opening WDV Add: Personal Bldg introduced to Business [ Refer W. N. 1] Closing WDV before depreciation: Depreciation @ 10% Total Depreciation (Block 1 + Block 2) = ` 2,72,400 Working Note 1 On 10/08/08 original cost Less: depreciation 10% On 01/04/09 WDV Less: depreciation 10 % 01/04/2010 WDV

=>

400000 40000 360000 36000 324000

[ Even though the building was residential building the depreciation of earlier years is provided considering the rate which is applicable when asset is introduced to business]
Answer to Q. 1(b):

Sirs Note : This is a very advanced question. Whether the assessee shall opt for HRA or RFA will be decided by cash inflows and a cash flow statement will be prepared for it

(1) Computation of Tax liability Option 1 HRA ----------500000 120000 Option 2 RFA ----------500000

(1) Basic Salary (2) HRA received Exemption u/s.10(13A): Least of the followingsa) Amount Received 120000 b) Rent paid (-) 10 % of salary 94000 94000

c) 40% of 5,00,000 200000

26000 526000 ----34000 5200 39200 1176 40376 40380

75000 575000 -----34000 15000 49000 1470 50470 50470

Perquisite value of RFA (15% of 5,00,000) Salaries / Gross Total Income/ Total income Tax on Total Income Up to 160000 Next 340000 @ 10 % Balance @ 20% EC/ SHEC @ 3% Rounding Off (2)Cash Flow Statement

Option (1) Option (2) ( HRA) ( RFA) Basic Salary 500000 500000 HRA Recd 120000 ----Rent Paid (144000) -----Tax Paid (40380) ( 50470) -----------------------------------------------------Net Cash inflow: 435620 449530 -----------------------------------------------------Since Net cash inflow is higher in option 2, therefore option 2 is better. The assessee shall opt for RFA.
Answer to Q. 1(c): Whether taxable under this service (a) Cargo Handling activity undertaken in port or other port or airport- No covered separately in port services (b) Unaccompanied baggage - refer pg 283 baggage exempted No (c) Charges recovered from Customs House Agent (CHA) Yes (d) Auction of abandoned cargo handling of cargo is taxable and not NO its auction or sale (e) Handling of empty containers not goods (refer class discussion) No Amount(`) 2,00,000 -

(f) Marketing or canvassing for cargo for airlines handling of cargo is covered and not its marketing (g) Rake handling charges loading and unloading is taxable (h) Loading/unloading of cargo on individual capacity - refer class discussion where it had been discussed that no service tax on individuals like coolie i) Loading/unloading of cargo by sole proprietorship firm. (j)Export after transshipment services exempted since for export k) Transportation of cargo mere transportation of cargo not taxable. l) charges for handling of agricultural produce Taxable Value Service tax @ 10.3% Answer to Q. 1(d):

No Yes NO Yes NO No NO

10,00,000 5,00,000 17,00,000 1,75,100

Computation of VAT /CST payable VAT Output VAT/CST: Sale of goods manufactured from raw material purchased @ 4% tax rate (i) Intra state sale @ 4% of ` 20,00,000 (ii) Exempted Intra State Sale (iii) Inter-state trade or Commerce @ 4% of ` 10,00,000 Sale of raw material purchased @ 1% of 44,00,000 Goods sold on lease lease is a deemed sales, hence liable to VAT @ 12.5% on 12,00,000 Less: Input tax credit (refer Note 1) VAT/CST payable Note 1: Input Tax credit Purchases of Raw material within the state (i) taxable @ 1% of ` 40,00,000 = (ii) taxable @ 4% of 60,00,000 = 2,40,000 x 10,00,000 40,00,000 Being proportionate credit not allowed for exempted goods (iii) taxable @ 12.5% of ` 10,00,000 Less: Set off against output VAT and CST Balance ` 40,000 1,80,000 80,000 NIL NA 44,000 1,50,000 2,74,000 2,74,000` NIL CST NA NA 40,000 NA 40,000 40,000 NIL

1,25,000 3,45,000 3,14,000 31,000

The balance input credit can be claimed as refund during 2010-11. Otherwise the assessee may carried forward it for set off in 2 or 3 subsequent years. Answer to Q. 2(a): Refer page No. 294 of study mat. Answer to 2(b): Refer Study Mat Answer to 2(c): Has already come in May 2011. Answer to Q. 3(a): Note: There is a misprint in the original question. Instead of Gross receipts Rs. 50,00,000 in the credit side of P/L it should be read as Gross Profit - `18,37,600

Computation of Total income of Mrs. Maheswari for the P.Y 2010-11(A.Y 2011-12) Amount (`) Amount (`) (I)Income under the head Business/profession a) Business carried on in India Net profit as per P/L Account Add: Item not allowed or treated separately but debited to P/L Donation to electoral trust 24,000 Advance Tax not allowed as it is Income tax 1,00,000 Income from business in India b) Income from business carried on in USA- Since she is a resident and not ordinarily resident of India, therefore business Income of USA is not taxable . income under the head Business/profession (II) Capital gains Since personal furniture is a personal movable effects therefore not a capital asset for the purpose of Capital gains. Hence, No Capital gain arises on transfer of such assets. (III) Other sources Gift in kind received from relative is not taxable u/s. 56(2)(vii). Further, LCD TV is also not a Property as defined under the said section. Hence, nothing taxable under the head other sources. Gross Total income (I+II+III) Less: Deduction under Chapter VIA U/s. 80CCD- amount contributed or 10% of GTI-lower U/s. 80GGC- Donation to electoral trust 100% of amount donated Total Income Tax on Total Income Up to190000 Next 310000 @ 10 % Next 300000 @20% Balance 159000 @ 30% EC/ SHEC @ 3% Rounding Off Less: Advance tax paid Balance tax payable Add: Interest u/s. 234B @ 1% p.m for 4months on ` 42,860 NIL 31000 60000 47700 1,38,700 4,161 1,42,861 1,42,860 1,00,000 42,860 17,144 9,59,100

1,24,000 10,83,100 NIL ________ 10,83,100 NIL

NIL ________________ 10,83,100 80,000 24,000 9,59,000

Interest u/s. 234C (Note 4) 4,283 Tax payable including Interest 64,287 Rounded off 64,290 Note: (1) Assuming depreciation as per books is also depreciation as per IT rules it has not been added back as in the question depreciation as per Income Tax Act is not given. (2) Amount withdrawn from PPF account is not taxable also interest on PPF is exempted. (3) Amount received on maturity of LIC is not taxable.

(4) Computation of interest u/s. 234C for short fall Due dates 15th September 30% 15th December 60% 15th March 100% Interest u/s. 234C Amount Reqd. to pay 42,800 85,700 1,42,800 Actual payment Nil Nil 1,00,000 shortfall 42,800 85,700 42,800 interest charged 42,800@ 3%= 1284 85,700@ 3% = 2571 42,800 @1% = 428 4283

(5) Since return is files within the due date i.e, before 31/7/2011. Therefore, Interest u/s. 234A shall not be chargeable. Answer to Question 3(b) : Refer ICAI Study Material Answer to 3(c): (i) False. [Refer Amendment Sheet] (ii) Refer ICAI Material Answer to Question 4(a): Sirs Note: This is a final level question. You may ask me that why I have set the question in your paper. Every term there are some final level advanced questions being asked in your paper. I consider it as relevant for your term. Solution: Tax treatment in the hands of Company [Refer chapter of Taxation of dividend] The company has accumulated profits of ` 40,00,000. But since the provision for taxation is to be increased from ` 2,50,000 to ` 3,00,000 accumulated profit will decline by ` 50,000 and will be revised at ` 39,50,000. The company is distributing all its assets to shareholders and distribution to the extent of profits is deemed dividend. Hence the company will be liable to pay Corporate dividend Tax @ 16.60875% on dividend of ` 39,50,000. Tax treatment for shareholders Since the company goes into liquidation the ownership of shares will be extinguished. There will be capital gain in the hands of shareholder for transfer of shares. The shareholder holds 10,000 equity shares of the total 60,000 shares and therefore his voting right is 1/6 th. The total distribution to the shareholder is agricultural Land ` 60,00,000. Bank balance will be utilised for payment of taxes of ` 3,00,000 first. The remaining bank balance will remain ` 3,50,000. The total distribution to the shareholders will be Agricultural Land ` 60,00,000 and bank balance ` 3,50,000 i.e. ` 63,50,000. Hence Ms. V will get 1/6th of ` 63,50,000 = ` 10,58,333. Total amount received by shareholder Less: Dividend Exempted U/s 10(34) 1/6th of Rs. 39,50,000 Amount received for transfer of Shares Less: Indexed Cost of Acquisition [1,20,000 x 711/480] Taxable Long term capital Gain Answer to 4(b) & 4(c): Refer Study material. ` 10,58,333 ` 6,58,333 ` 4,00,000 ` 1,77,750 ` 2,22,250

ADDITIONAL AMENDMENT SHEETS SERVICE TAX (1) The followings are not taxable under service tax. (a) Services provided by State Government under Centrally Sponsored Schemes (CSS) are not liable to Service tax. CSS- These are special grants provided by Central Government to State Government for planning and implementation of various programmes that help to attain national goals and objective. E.g., eradicating polio and tuberculosis, making primary education universal for every female and male child etc. (b) Underwriting commission received by the primary dealers for the auction of Govt. securities not liable to service tax. (c) Donation and grant-in-aid received by a charitable foundation imparting free livelihood training to the youth not liable to service tax. (d) Janata Personal Accident Policy (JPAP) provided by insurance company as specified by state Govts. is exempt from service tax. (e) Service provided by a visa facilitator in the form of assistance to individual directly to obtain a visa does not liable to service tax. However, service tax would be leviable on any service provided other than direct assistance to individuals for obtaining visa. For instance where the visa facilitators also act as agents of recruitment or of the foreign employer, then service tax would be leviable. (f) Outdoor catering service provided for mid-day meal scheme is exempt from service tax. (g) General Insurance service provided under Rashtriya Swasthya Bima Yojana is exempt from service tax. (2) Whether service tax exemption applies to EC and SHEC? Since EC and SHEC are levied and collected as percentage of service tax therefore service tax exemptions are also applies to EC and SHEC as well. Hence, when and wherever service tax is NIL by virtue of exemption, EC and SHEC would also be NIL. -------------------------------------------------------------------------------------------------------------------------------------------------------AMENDMENTS IN INCOME TAX (1) Interest credited to the RPF A/C. is exempted to the extent of 9.5% for the entire previous year 2010-11. [Notification No. 24/2011]. Note: The earlier rate of 8.5% has now been deleted. For example- If interest @ 9.5% is credited in the RPF A/c. of the employee for the P.Y 2010-11, then the entire interest is exempted as it does not exceed the limit of 9.5%. (2) Now employees of companies and persons, whose accounts are required to be audited u/s. 44AB or any other law for the time being force, are eligible to act as Tax Return preparers. [Notification No. 84/2010, dated 22.11.2010] Note: the earlier disqualification in this regard has now been removed. (3) The CBDT has notified the new income-tax return forms for the A.Y 2011-12- Rule 12 of the Income tax rules, 1962 has been amended in respect of the followingForm Applicable to whom Form Saral-II (ITR-1) has been Individuals, whose total income includes income chargeable under the headsubstituted by the new FORM SAHAJ a) Salaries or income in the nature of family pension u/s. 57(iia); or (ITR-1) b) Income from house property, where the assessee does not own more than one house property and does not have any brought forward loss under the head; or c) Income from other sources, except winning from lottery or income from race horse. FORM SUGAM (ITR-4S)- newly Where the business income of a Individual and HUF is computed on introduced presumptive basis u/s. 44AD and u/s. 44AE. Features: SAHAJ and SUGAM Form is simplest, technology enabled and taxpayer friendly return forms. These have been designed to facilitate error free and faster digitization. This is expected to curtail processing cycle and expedite issue of refund. [Notification No. 18/2011 dated 5.4.2011]