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CA SACHIN GUPTA 1 IPCC TAX MAY 12 SOLUTION

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Dear Students ,

It gives me immense pleasure to say that the May 2012 IPCC TAX paper was ALSO 100% covered from the course covered by me in the batch.

This gives me motivation even to work harder so that students excel in their exams. Success or failure depends on hard work of the teacher as well as of the student. We as a teacher always try to give our best so that everything becomes simple for the student. Now the onus is on you to get good marks so that your parents are proud of you. For your reference I have developed the solutions of the above paper so that you can check your answers. If you have any doubts or queries feel free to contact me. Remember one thing “Dreams do come true provided you believe in them”. SACHIN GUPTA 9810511753 [email protected]



Solution 1(a) : Computation of Total Income of Ms Purvi for A/Y 12/13

Income under head House property (WN2) 57,820

Income under head Business & Profession (WN1) 9,20,200

Income under head Other sources 15,800

GTI 9,93,820

Less : Deduction u/s 80C Investment in NSC

10,000

TI 9,83,820

Computation of Tax payable of Ms Purvi for A/Y 12/13

Tax on 9,83,820 at slab rates applicable for woman resident & less than 60 yrs

1,50,530

Working note 1: Income under head PGBP:

Net profit as per P&L a/c Add : Benefits from clients Add : Municipal taxes of let out property Add : Purchase of car Add : Salary in excess of 20,000 Less: Car Depreciation (80,000 x 15%) Less : Dividend Less : Income from UTI Less : Rent of let out property Less : Honorarium

9,28,224 10,500 3,000

80,000 30,000 12,000 10,524 7,600

85,600 15,800

9,20,200

Working note 2: Income under head house property

Rent received GAV Less: Municipal Taxes NAV Less: Deduction @ 30%

85,600 85,600 3,000

82,600 24,780 57,820

Solution 1(b) : Computation of Value & service tax along with Cess for F/Y 11/12

Analysis of software Advice for database Right to use canned software Upgradation of software Value of taxable services Service Tax @ 10% Education cess @ 2% SHEC @ 1% Total ST Tax payable

1,80,000 4,10,000

Exempt 2,65,000 8,55,000

85,500 1,710 855 88,065



Solution 1(c) : Total purchases eligible for tax credit

Purchase made in February, 2012 Less: (i) Inter-state purchases (Input credit not available as Interstate) (ii) Purchase from unregistered dealer (input credit not available) (iii) Capital goods (not eligible for input credit)

60,00,000 15,00,000 18,50,000 6,50,000 20,00,000

Input tax credit available for the month of February, 2012

VAT credit on input @ 4% of 11,00,000 ( 60,00,000 – 15,00,000 – 18,50,000 – 15,50,000 ) VAT credit on eligible capital goods (4% of 9,00,000) / 36

44,000

1,000 45,000

VAT payable for the month of February, 2012

VAT on sales @ 12.5% of 10,00,000 Less: Input tax credit Net VAT payable

1,25,000 45,000 80,000

Solution 2(a) : i) Gross Total Income : 1,88,000 + 30,000 + 3,000 = Rs. 2,14,000 Mr. Paras is required to file his return of income u/s 139(1) as his Gross Total Income is more than Rs.1,80,000 (assuming he is less than 60 yrs. of age) Even if he owns one shop, even than he is required to furnish return of income. Working note : Exemption u/s 10(14) of Interest on NRE a/c is not available as he is a resident ii) Clubbing to be done u/s 64(1A) in hands of Mr.Sharma

Daughter 1 Daughter 2 Son 1 Son 2 Less : Exemption u/s 10(32) 1500 X 3 Total

9,000 No clubbing

6,200 4,300

19,500

4,500 15,000

iii) Unrealised rent : Unrealised rent is rent which is receivable & which is proved to be lost & irrecoverable.It is excluded form Actual rent provided the below conditions are fulfilled Tenancy is bonafide. Defaulting tenant has vacated or steps taken to compel him to vacate property. Defaulting tenant not occupying assessee‟s other property. Assessee taken reasonable steps to institute legal proceedings for recovery of unpaid rent or satisfies AO

that proceedings will be useless



Recovery of unrealised rent (Section 25A): Recovery of unrealised rent claimed as deduction upto A/Y 2001-2002 Where Deduction has been claimed for Unrealised Rent upto A/Y 2001- 2002 & subsequent recovery takes place of any amount in respect of above in any previous year then such recovered amount shall be taxable under head house property in the previous year in

which such amount is received Whether or not assessee is the owner of such property in the previous year of receipt SECTION 25AA - RECOVERY OF UNREALISED RENT OF A/Y 2002-2003 ONWARDS

Where Unrealised rent is reduced from actual rent received/receivable

& subsequent recovery takes place of any amount in respect of above

then such recovered amount shall be taxable under head house property in previous year in which such amount is received

whether or not assessee is the owner of such property in the previous year of receipt Solution 2(b) : Taxable value of services for Half yr ended 30/9/11 Assuming Point of taxation rules,2011 Applies : Liability on Due basis

Total Bills Less : International Organisation : Exempt Add : Advance Taxable Value

8,75,000 75,000 8,00,000 50,000 8,50,000

Service tax liability

Service Tax @ 10% Education cess @ 2% SHEC @ 1% Total ST Tax payable

85,000 1,700

850 87,550

Assuming Point of taxation rules do not apply : Liability on Receipt basis

Total Bills Less : International Organisation : Exempt Less : Amount not received Add : Advance Taxable Value

8,75,000 75,000 1,00,000 7,00,000 50,000 7,50,000

Service tax liability

Service Tax @ 10% Education cess @ 2% SHEC @ 1% Total ST Tax payable

75,000 1,500

750 77,250

Assumption : It is assumed service tax was received separately in both above cases



Solution 2(c) : Consumption Variant

Under this variant deduction is allowed for all taxes on purchase of raw material together with taxes of capital goods.

Deduction of taxes on capital goods is allowed irrespective of % of depreciation No distinction is made within capital & revenue expenditure.

This is easy to operate and does not discriminate between labour intensive industries and

capital intensive industries. No cascading effect is present in Consumption variant

Consumption method is the most popular method all over world. Solution 3(a) : Computation of Capital Gains in hands of Anshu for A/Y 12/13

Full Value of Consideration lac (14 lac or 16 lac, Higher) Less: ICOA (1,10,000 x 785 / 100) Less: ICOI (3,20,000 x 785 / 447) Less: STCL set off Taxable Capital Gain Amount to be invested in NHAI bond for exemption u/s 54EC

16,00,000

8,63,500 5,61,969 1,74,531 1,50,000 24,531

24,531

Solution 3(b) : (Q specifies that Reason not to be given in exams but Reasons are given only for your Knowledge)

(a) (b) (c) (d) (e) (f) (g) (h)

Incorrect : (It is included in their service) Incorrect : (As it is exempt) Incorrect : (Engineering orgn is covered in Engineering services ) Incorrect : ( It is exempt) Incorrect : (Within 30 days from 25/1/12) Correct : (Sec 69(2) Incorrect : (Can be before ,during or after) Incorrect : (Upto 31

st march )

Solution 3(c) : (Q specifies that Reason not to be given in exams but Reasons are given only for your Knowledge)

(a) (b) (c) (d) (e) (f) (g) (h)

Incorrect : Not allowed as paid to different state Incorrect : Levied at every stage Incorrect : As paid to Central Govt Correct : Without invoice credit not available Incorrect : Required Incorrect : No valuer required Incorrect : Infact reduces prices Correct : (For this purpose committee on state level vat published white paper)



Solution 4(a) :

Computation of Total Income of Mr.Y for A/Y 12/13

Income under head Business & Profession (WN1) 10,46,500

Income under head Other sources Dividend from UTI : exempt u/s 10(35) Interest on debentures : 17,500 Winning from Horse races : 15,000

32,500

GTI 10,79,000

Less : Deduction u/s 80C Investment in NSC

15,000

TI 10,64,000

Working Note 1 : Income under Head PGBP

Net Profit as per P&L A/c Less: Dividend from UTI Less: Interest on Debentures Less: Winnings from races Less: Opening Stock Add: Closing Stock Less: Weighted deduction of 75% Add: Salary disallowed u/s 40A(3) Add: Car expenses 78,000 X 1/4 Add: Depreciation not allowed Add: Drawings (assuming debited to P&L A/c) Add: NSC (assuming debited to P&L A/c)

11,20,000 22,000 17,500 15,000 8,000 12,000 75,000 2,500 19,500 5,000

10,000 15,000

10,46,500

Solution 4(b) : Computation of Service tax & Cess for Punjabi Banquets for month of jan,2012

Banquet hall for marriage Less: Abatement @ 40% Rooms for marriage Dance competition Shooting Service tax @ 10 % Education cess @ 2% SHEC @ 1%

6,00,000 2,40,000

3,60,000 40,000

5,00,000 Not covererd

9,00,000

90,000 1,800

900 92,700

Assuming bill of rooms is separately issued & hence abatement of 40% not available on it. Solution 4(c) : VAT liability for month of Dec,2011

Local Purchases Excl VAT 52 lacs X 100/104 Transportation & other expenses Total Cost Profit margin @ 14% Sales price without VAT

50,00,000

20,000 50,20,000 7,02,800

57,22,800



VAT @ 12.5% Sale price incl VAT Output VAT Less: Input tax credit Tax payable

7,15,350 64,38,150

7,15,350 2,00,000

5,15,350

Solution 5(a) : Computation of Total income of Mr.A for A/Y 12/13

Income under House property (As per sec 27 Mr A deemed owner of HP gifted to spouse) Income under head Business Clubbing of minor income u/s 64(1A) as Mr.A TI is greater than Mrs A less Exemption u/s 10(32) 20,000 – 1,500 Income under other sources Interest @ 9% of 5 lacs ( As per sec 60 if income is transferred without transfer of asset ,it is clubbed in income of transferor) : 45,000 Commission : 25,000 (Clubbing under sec 64(i)(ii)) Pension : 1,20,000 TI

52,000

18,500

1,90,000

2,60,500

Computation of Total income of Mrs.A for A/Y 12/13 Income under Salary : 2,40,000 Total income : 2,40,000 Computation of Total income of Minor for A/Y 12/13 Income under Business & Profession : 20,000 Total income : 20,000 Solution 5(b) : Documents to be attached with ST-1

1. Proof of address 2. Copy of PAN 3. Copy of constitution ( eg partnership deed for firms. AOA,MOA for companies etc) 4. Professional like CA etc, copy of Certificate of practice 5. Board resolution authorizing company to sign, deal and comply with service tax

provisions



Solution 5(c) :

(i) : VARIANTS OF VAT

1. Gross Product Variant

Under this variant, deduction is allowed for all taxes on purchase of raw materials but no deduction is allowed for taxes on capital goods. In this way tax on capital goods such as plant and machinery are neither deductible in the year of purchase nor deductible in subsequent years. This discourages investments in capital goods. This also raises disputes about distinction between „inputs‟ and „capital goods‟.

2. Income Variant

Under this variant, deduction is allowed for taxes on purchase of raw material , together with taxes of capital goods. However deduction for taxes on capital goods is allowed proportionately on the basis of % of depreciation. In this method difficulty arises regarding calculation of method of such depreciation.

3. Consumption Variant

Consumption method is the most popular method all over world. Under this variant deduction is allowed for all taxes on purchase of raw material together with taxes of capital goods. Deduction of taxes on capital goods is allowed irrespective of % of depreciation No distinction is made within capital & revenue expenditure.

This is easy to operate and does not discriminate between labour intensive industries and

capital intensive industries. (ii) : The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value added (i.e. sale minus

purchase) which is equivalent to wages plus interest, other costs and profits. In an economy, apart from the manufacturers and final consumers, there would be wholesalers and retailers also. The wholesaler might supply to retailer and each one of them could supply to the manufacturer and end consumer. VAT will be collected at each stage, and wherever applicable, the manufacturer or retailer will claim input credit. Thus, VAT is collected at each stage of production and distribution process, and in principle, its entire burden falls on the final consumer, who does not get any tax credit. Thus, VAT is a broad based tax covering the value added to each commodity by parties during the various stages of production and distribution. Solution 6(a) : Computation of income under head PGBP

Profit before35AD Less: deduction u/s 35AD Pre commencement Post commencement (land not allowed ) Loss Income of other hotel PGBP

80,00,000 40,00,000 1,50,00,000 1,10,00,000 1,30,00,000 20,00,000



Solution 6(b) : Value of taxable services for A/Y 12/13

Tax planning Representation before CESTAT (assuming after 1/5/2011) Preparation of financial statement Certification Legal advice VALUE = 6,90,000 X 100/110.3

50,000 40,000

4,00,000 1,50,000

50,000 6,90,000 6,25,567

Solution 6(c) : VAT liability of Pragya

Import of RM incl duty Raw material from Kerala Excl excise as it will be claimed as Cenvat credit) Raw material Transportation & expenses Cost of production Add: profit @ 10% Sales price without VAT VAT @ 4% Sale with VAT Output VAT Less: Input tax credit (2,24,000 X 4%) VAT liability

1,10,000 2,00,000

85,000 47,000 4,42,000 44,200 4,86,200 19,448 5,05,648

19,448 8,960

10,488

Solution 7(a) : Gross Salary of Mr.Mohit for A/Y 12/13

Basic salary (10,000 x 10 + 11,000 x 2) Dearness Allowance (fully taxable) @ 100% HRA received : 75,000 Less: Exempt U/S 10(13A) : 53,700 (WN1)

1,22,000

1,22,000

21,300 2,65,300

Working note 1

April -May

June – Oct Nov – Dec Jan Feb – Mar

HRA Received Rent paid – 10% of salary 40%/50%of Salary

12,000

NIL

30,000

30,000 –10% of 75,000 = 22,500

40% of 75,000 =

12,000

16,000 – 10%of 30,000 = 13,000

50% of 30,000= 15,000

7,000

8,000 -10% of 15,000 = 6,500 50% of 15,000 =

14,000

16,000 – 10% of 33,000 = 12,700

50% 0f 33,000 = 16,500



Exempt

No exempion

as rent not paid

30,000

22,500

12,000

7,500 6,500

12,700

TOTAL 22,500 + 12,000 + 6,500 + 12,700 = 53,700

Solution 7(b) : Due date of return : Rule 7 of service tax rules,1994

Interval Due date of Return

1st April to 30

th September Upto 25

th October

1st October to 31

st March Upto 25

th April

Notification No. 43/2011 dated 1

st day of October, 2011 : Every assessee shall submit the half-yearly return

electronically.CBEC has extended the date of submission of half yearly return for the period April 2011 to September 2011 from 25

th October 2011 to 26

th December 2011 & also extended thereafter

Revised Return (RULE 7B) : Assessee may submit a revised return In form ST-3 in triplicate to rectify a mistake or omission Within 90 days of date of filing the original return under rule 7 Solution 7(c) :

SYSTEM OF CROSS CHECKING In the VAT system more emphasis has been laid on self-assessment. Hence, a system of cross-checking is essential. Dealers may be asked to submit the list of sales or purchases above a certain monetary value or to give the dealer-wise list from whom or to whom the goods have been purchased/sold for values exceeding a prescribed monetary ceiling. A cross-checking computerized system is being worked out on the basis of coordination between the tax authorities of the State Governments and the authorities of Central Excise and Income-tax to compare constantly the tax returns and set-off documents of VAT system of the States and those of Central Excise and Income-tax. This comprehensive cross-checking system will help reduce tax evasion and also lead to significant growth of tax revenue. At the same time, by protecting the interests of tax-complying dealers against the unfair practices of thx-evaders, the system will also bring in more equal competition in the sphere of trade and industry.