CA. AJAY JAIN www.caajayjain.com 1 (RTP – Nov 2010 – IPCC) Hello, dear friends,In continuation of our efforts for your success, Revisionary test paper has been prepared. This contains complete paper along with solutions.

An Answered Prayer

I asked for prosperity, And God gave me brain,

And brawn* to work! *Physical strength

I asked for love,And God gave me,

Troubled people to help!

I asked for favours,And God gave me,

Opportunities to grab!

I asked for strength,And God gave me diffi-

-culties to make me strong!

I asked for wisdom,And God gave me,

Problems to solve!

I asked for courage, And God gave me,

dangers to overcome!

I received nothing I wantedI got everything I needed

Friends you must be feeling very tense. This tension is created by the institute to develop more capabilities in you, so that you are prepared for the future challenges.

It is said that the maximum development of the world took place during two world wars. Because it is only during challenges that our mind becomes creative and our capabilities increase.

Therefore take this tension as a challenge and just think that God has given you this opportunity to grow.

Before the examination day

1. Don’t waste any time on checking the paper of Cost & FM . Just think what next.

CA. AJAY JAIN www.caajayjain.com 2 (RTP – Nov 2010 – IPCC)

2. Keep in mind that the person who starts early always stays ahead. So don’t get relaxed. Don’t think you have two days and you will work slowly. Don’t unduly stick to one topic.

3. Allocate time for each and every topic before starting the revision and don’t at all exceed those limits. Following should be a tentative time plan for revision:- Service Tax & VAT 2 hour 30 minutesAssessment Procedure 1 hourStatus 30 minutesSalary 2 hourHouse Property 1 hourCapital Gain 2 hourPGBP 2 hour 30 minutesOther Sources 30 minutesClubbing & C/f 30 minutesDeductions 1 hour 30 minutesTrust and Agricultural 30 minutesMiscellaneous 30 minutesTotal 15 hours

4. Don’t try to recall the things; just try to read the topic. Just keep on reading, don’t think whether you will be able to recall or not in the examination hall.

You will be definitely able to recall the topics provided you have gone through that topic before examination day.

5. Don’t at all compromise on your sleep. If you are fresh then you will solve even the most difficult questions and vice-versa.

And as per Dr. Bruta before sleeping take bath, it will give you good sleep.

So, please, take proper sleep and not only in this paper but in all the papers.

In the examination hall:-1. Don’t rush to attempt the question paper. First go through the entire question

paper and select your best and shortest possible question.

2. Even in the most difficult papers, there are always few questions which are very easy. If you once start doing easy questions, your confidence boosts up and you are able to do even the difficult ones. Therefore, instead getting demoralized from difficult questions, try to search for the easier ones.

3. Allocate time for each question and don’t exceed the limits.

4. Don’t leave numerical questions for the end, try to attempt them somewhere in the middle.

And finally friends, it is said that great battles are always won at the end. You still have lots of time. If you work with regularity and discipline then your success is definite. Relax and work hard.For successful people there is only one second of tension and all, all the remaining seconds of work

With Best Wishes Ajay Jain

CA. AJAY JAIN www.caajayjain.com 3 (RTP – Nov 2010 – IPCC)

Time Allowed – 3 Hours Maximum Marks - 100

Answers to questions are to be given only in English except in cases of candidates who have opted for Hindi medium. If a candidate who has not opted for Hindi medium, answers

in Hindi, his answer in Hindi will not be valued.

All questions are compulsory.

Part – AQ. 1

Mr. Meganathan is the Karta of HUF of which Ravi, Ram, Srihari are members. They share the net income equally. They were the residents of Chennai and live as HUF for the past 40 years. They furnish the following particulars of HUF for the purpose of computing total income and tax liability of HUF and its members for the Assessment year 2010-11.

S. No. Particulars Rs.a. HUF Business Income

350,000b. Capital Gains on sale of Shares purchased out of HUF Funds on 10.04.09

and sold on 01.01.2010. S.T.T. was paid on the same 1,20,000

c. An old house owned by HUF, acquired by it in 1950 was sold on 01.10.2010. The cost of purchase was Rs. 5,000 and the sale price was Rs. 20,00,000.Cost inflation

index factor for FY 2009-10 was 632 and the fair market as on 01.04.1981 was Rs.1,00,000

d. Dividends received by Meganathan (investment made out of HUF Funds) 20,000

e. Share of profits received from M/s Suri & Co. by Meganathan as Partner on behalf of HUF

1,20,000f. Meganathan also received remuneration from M/s Suri & Co.

on behalf of HUF 3,00,000g. Srihari is Managing Director of a company in which HUF holds

6,50,00025% of its shares. However Srihari is a chemical Engineer by virtue of which he was offered the post of M.D. Salary and perquisites received by Srihari per annum was

h. Ram was running a business by investing his private funds. 3,00,000

The profits earned during the year wasi. Ravi was looking after all HUF activities. He was reimbursed

25,000all expenses incurred on behalf of HUF which amounts to

(15 marks)Q. 2 Answer any two of the following:(a) Mr. Manoj owns two houses. The details of which are as follows:-

Particulars House I House II

CA. AJAY JAIN www.caajayjain.com 4 (RTP – Nov 2010 – IPCC) Amount Amount

(Rs.) (Rs.)

Municipal valuation 50,00080,000Fair rent 60,00090,000Standard Rent 55,00084,000Municipal taxes paid 10,00014,000Repairs (Actual) 12,00020,000Insurance premium paid 1,000 1,500Interest on loan Loan taken on 01.04.1998 80,000 ----Loan taken on 01.04.2005 ----1,40,000

You are required to advise Mr. Manoj which of the two houses can be treated as self occupied and the other deemed to be let out.

(8 marks)

(b) (i) Alpha Ltd. commenced operation of the business of laying and operating a cross-country natural gas pipeline network of distribution on 1st April, 2009. The Company incurred capital expenditure of Rs. 40 lakh during the period January to March, 2009 exclusively for the above business, and capitalized the same in its books of account as on 1st April, 2009. Further, during the financial the same in its books of account as expenditure of Rs. 150 lakh (out of which Rs. 50 lakh was for acquisition of land) exclusively for the above business.

(ii)Ram, an assessee gives the following information for the Assessment year 2010-11: Sr. Particulars

Rs.a. Loss from profession 1,05,000b. Capital loss on the sale of property-short term

55,000c. Capital gains on Sales of Shares-long term

2,05,000d. Loss in respect of self occupied property

15,000e. Loss in respect of let out property 30,000f. Share of loss from firm 1,60,000Compute the net income/ loss of Ram. (2 x 4

= 8 marks)

(c) Explain the method of determining the amount of expenditure in relation to income not includible in the total income. (8 marks)

Q. 3 State with reasons whether the following statements are true or false:-

CA. AJAY JAIN www.caajayjain.com 5 (RTP – Nov 2010 – IPCC) (a) Mr. Raju, a non-resident, received consultancy income in India of Rs. 15,00,000 and

rental income outside India in respect of his house at London of Rs. 7,00,000, during the financial year 2009-10.The total income chargeable to the Income –tax is Rs. 22,00,000.

(b) Ramesh gifted a house property to Miss Renu on 15.3.2009. Miss Renu married to Ramesh’s son Shyam on 1-2-2010. The income from the gifted property was Rs. 50,000, which was added by the assessing officer in the hands of Ramesh under the provisions of Section 64(1)(iv)

(c) Under Section 208 of the Income-tax Act, 1961, obligation to pay advance tax arises in every case where the advance tax payable is Rs. 5,000 or more.

(d) The regime of the surcharge on Income-tax deduction has been abolished by the Finance Act, 2009 except in the case when the recipient is the Foreign Company when surcharge would be still levied if the income or aggregate of income paid or likely to be paid and subject to deduction exceeds the specified amount.

(e) A businessman makes a cash payment of Rs. 33,000 on 03.10.2009 as lorry hire charges to a transporter. It does not attract disallowance under Section 40A (3) of the Income-tax Act, 1961.

(2 x 5 = 10 marks)

Q.4 Answer any three of the followings:- (3x3 = 9 marks)

(a) Explain the provision for taxation and exemption of anonymous donations under section 115BBC of the Income Tax Act, 1961.

(b) Discuss the tax implications of income arising from revocable transfer of assets. When will the clubbing provisions not apply at present, even where is a revocable transfer of assets?

(c) Examine the obligation of the person responsible for paying the income to deduct tax at source and indicate the due date for payment of such tax wherever applicable in respect of the following item:M/s. Nidhi Textiles Ltd. credited Rs.19,000 towards fees for professional services and Rs. 15,000 toward fees for technical services to the amount of Mr. Suresh in its books of account on 6.10.2009. The total sum of Rs. 34,000 was paid by cheque to Mr. Suresh on 18.12.2009.

(c) Discuss the provisions of income-tax Act, 1961, about interest chargeable under section 234B and 234C for non-payment / short payment / deferment of advance tax.

Q. 5 Answer the following:

(a) Explain the special provision for payment of service tax in case of an air travel agent.

(b) With reference to commercial training or coaching services, state whether service tax is applicable in the following cases:(i) Pinnacle Institute offering courses on personality development and grooming.(ii) BTL Engineering College offering B.Tech to students. However, the college has

been derecognized by the All India Council for Technical Education

CA. AJAY JAIN www.caajayjain.com 6 (RTP – Nov 2010 – IPCC)

(c) How will a taxable service be valued when the consideration thereof is not in wholly or partly in terms of money?

(d) Does service tax law provides any exemption to services provided to a developer

or units of special economic zone? If yes, discuss the same. (2 x 4 = 8 Marks)

Q. 6 Shaurya is a Cost Accountant. He has furnished the following information for the month of July , 2010:-a) A bill for annual professional service was raised to Lifeline Ltd. for Rs. 6,10,000 on

22nd June, 2010. However, he received Rs.6,00,000 in full and final settlement of the above bill on 23rd July, 2010.

b) Advance of Rs. 2,00,000 was received from Aarogya Ltd. for the services to be provided in the months of August and September.

c) Services were provided to a friend gratuitously for which Shaurya normally charges Rs. 1,00,000 from other clients.

Compute the service tax liability of Shaurya provided he furnishes the following additional information:-

1. In all the aforesaid cases, he has not charged the service tax separately.2. He is not eligible for the exemption available to the small service provider.

(8 marks)

Q. 7 Answer any three of the following:(a) Ashiana Associates private Limited provided architect services of the value of Rs.

100 lakh in the financial year 2009-10 and of Rs. 50 lakh in financial year 2008-09. For the month of April, 2010, their value of taxable services is Rs. 2,00,000.. What is the due date for payment of service tax?

(b) Tarana Ltd. in engaged in providing consultancy in software engineering. It provided the taxable services of the value of Rs. 100 lakh in the financial year 2009-10 and of Rs. 50 lakh in financial year 2008-09. Tarana Ltd. is of the opinion that e-filing of return is optional for the assessees and it does not wish to file its return electronically. You are required to advice Tarana Ltd. whether it should file the return electronically or otherwise for the financial year 2010-11.

(c) Some taxable services are provided by an oil and Natural Gas Company (GONC) established in the Continental Shelf of India, constructed for the purposes of prospecting or extraction or production mineral oil and natural gas. The Department raised the demand for service tax on the said service.

(d) Prahlaad has paid the amount of service tax for the quarter ending June 30, 2009 by cheque. The date of presentation of cheque to the designated bank is July 5, 2009 and it is realised by the bank on July 7, 2009? What is the date of payment of service tax in this case? Whether any interest and penalty is attracted in this case? (3 x 3 = 9 marks)

Q. 8 Answer the following:

CA. AJAY JAIN www.caajayjain.com 7 (RTP – Nov 2010 – IPCC) (a)Briefly explain the three variants of VAT. Which of these methods is most widely

used and why?(b) Explain briefly, how a VAT system discourages the tax evasion.(c) Enumerate the tax rates under VAT. (d) Do VAT laws allow input tax credit on capital goods? Explain the policy as

envisaged in the White Paper. (2 x 4 = 8 Marks)

Q. 9 Compute the VAT payable at each stage using ‘invoice method’ from the particulars given below:-

Stage

Particulars Profit (as % of cost price)

I Sambhav Medicaids Ltd. sold the manufactactured by it to the distributors of medicines-Rishabh Pharmacy-at Rs. 4,000.

-----

II Rishabh Pharmacy sold the medicines to the wholesalers- Suhani Medicos.

56.25%

III Suhani Medicos sold the medicines to the retailers-Galaxy Medicines.

25%

Iv Galaxy Medicines sold the medicines to the ultimate consumers

25%

Assume that the VAT rate is 4% and that there was no value addition at various stages of sale except profit margin.

(8 marks)

Q. 10 Answer any three of the following:(a) Briefly explain the ‘addition method’ of computation of VAT. What is the drawback

of the addition method?(b) Explain the role of a Chartered Accountant in proper implementation of VAT.(c) List six purchases which are not eligible for input tax credit. (d) Discuss filing of return under VAT. (3 x 3 = 9

marks)

ANSWERSAns. 1 Computation of total income of HUF and its members for A/Y 2010-2011

Income from business (a) Out of own business 3,50,000(b) As a partner of M/s sunil and co. Remuneration 25,000 x 123,00,000Share of profits received from M/s Sunil & co. is exempt Nil

6,50,000

Capital Gains(a)STCG on sale of shares

1,20,000(b)LTCG on sale of house

CA. AJAY JAIN www.caajayjain.com 8 (RTP – Nov 2010 – IPCC) Sale price 20,00,000COA as on 1.4.1981 1,00,000ICOA 1,00,000 x 632/100 6,32,000 13,68,000

14,88,000Income from other source Dividend received Rs. 20,000 exempt u/s 10(34) NilGTA (6,50,000 + 14,88,000)21,38,000

Income tax on the above STCG on Rs. 1,20,000 @ 15%

18,000LTCG on Rs. 13,68,000@20% 2,73,600On the balance Rs. 6,50,000

99,0003,90,600

Add education cess @ 2% 7,812SHEC @ 1% 3,906Tax payable4,02,318

SrihariSalary received as MD 6,50,000Total Income 6,50,000Income tax 99,000Add education cess @ 2% 1,980SHEC @ 1% 990Tax payable

1,01,970RamIncome from business3,00,000Total income 3,00,000Income Tax 14,000Add: education cess @ 2%

280 SHEC @ 1% 140

Tax payable 14,420

Since Meghanathan and ravi has no separate income, there is no liability.

Ans. 2(a) Computation of income from house propertyParticulars option I option II

House I House II House I House II

Self occupied Deemed Let deemed let self occupied

Out outMunicipal valuation 50,000 80,000 50,00080,000Fair Rent 60,000 90,000 60,00090,000Standard Rent 55,000 84,000 55,00084,000

CA. AJAY JAIN www.caajayjain.com 9 (RTP – Nov 2010 – IPCC) Gross annual value nil 84,000 55,000 nil

Less: Municipal taxes paid 0 14,000 10,000 0 Net annual value nil 70,000 45,000 nil

Less: deduction u/s 24Standard ded.@30% 0 21,000 13,500 0Interest on loan 30,000 1,40,000 80,000 1,40,000 Income from HP (30,000) (91,000) (48,500)

(1,40,000)

Since loss under option II is more, option II can be availed by Mr. Manoj which would be more beneficial i.e. it is better to treat house II as self occupied property and house I as deemed to be let out property.

(b)(i) (a) section 35AD has been introduced with effect from A/Y 2010 -2011 as investment linked for specified business.With the specific objective of creating rural infrastructure and environmental friendly alternate means for transportation of the bulk goods, investme3nt linked tax incentives have been introduced for the specific business which also includes laying and operating a cross – country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network.

(b) 100% of the capital expenditure incurred during the p/y wholly and exclusively for the above business would be allowed as deduction from the business income. However, expenditure incurred on acquisition of land, goodwill of financial investment would not be eligible for deduction.

(c) further, the expenditure incurred wholly and exclusively, for the purpose of specified business prior to the commencement operation would be allowed as deduction during the p/y in which the assessee commences operation of his specified business. A condition has been inserted that such amount incurred prior to the commencement should be capitalized in the books of account of the assessee on the date of commencement of its operation.Accordingly Alpha Ltd. Will be entitled for the deduction under 35AD for A/Y 2010-2011 as under.

Capital expenditure incurred during the p/y 2009- 2010 100 lakhs(excluding land)Capital expenditure incurred prior to 1.4.2009 and capitalized 40 lakhsTotal deduction u/s35AD 140 lakhs

(ii) Computation of Total Income of Ram for the A/Y 2010-2011Amount(Rs.) Amount(Rs.)

Income from House property Loss from self occupied (15,000)Loss from let out property (30,000)

(45,000)

CA. AJAY JAIN www.caajayjain.com 10 (RTP – Nov 2010 – IPCC) Less: Set off against LTCG 45,000 Nil

Profits and Gains of Business or profession Loss under the head business and profession (1,05,000)

Less: Set off against LTCG 1,05,000 Nil

Capital GainsLong term capital gain on sale of shares 2,05,000Set off STCL on sale of shares (55,000)Taxable LTCG 1,50,000Less: Amount utilized to set off business loss (1,05,000)Less: Amount utilized to set off loss from HP (45,000) NilTotal Income Nil

Notes:-It has been assumed that in respect of LTCG on sale of shares, the shares are not listed in stock exchange and STT was not paid. Hence, LTCG is not exempt under section 10(38).

Ans.2(c) If the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with –

(1) the correctness of the claim of expenditure by the assessee; or(2) the claim made by the assessee that no expenditure has been incurred in relation

to exempt income for such previous year,he shall determine the amount of expenditure in relation to such income in the manner provided hereunder -

The expenditure in relation to income not forming part of total income shall be the aggregate of the following:

(i) the amount of expenditure directly relating to income which does not form part of total income;

(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the prescribed formulae.

(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.

Ans. 3 (a) False The status of Mr. Raju is a non – resident Indian. Hence, income earned in india only would be subject to tax. Accordingly, total income chargeable to income – tax would be Rs. 15,00,000 only. Therefore, the statement is incorrect

(b) False As per section 64(1)(iv), the income arising directly or indirectly to the son’s wife from the assets transferred to her by such individuals otherwise than for adequate consideration is taxable in the hands of the individual. As per this provision on the date of transfer of the property, Renu should have been the wife

CA. AJAY JAIN www.caajayjain.com 11 (RTP – Nov 2010 – IPCC) of Ramesh’s son. Since she was not the daughter- in –law on the date of the transfer, the income from the transferred property cannot be taxed in the hands of Ramesh. Hence, the statement is incorrect.

(c) FalseThe finance Act 2009 has revised the limit from Rs. 5,000 to Rs. 10,000 to provide inflation adjustment. Accordingly, from F/Y 2009 -2010 onwards, advance tax would be payable only if advance tax liability is Rs. 10,000 or more. Hence, the statement is incorrect.

(d) TrueThe Finance Act 2009 has abolished surcharge on tax deduction at source with effect from a/Y 2010 – 2011 except if the recipient is a foreign company. If the recipient is a foreign company, surcharge @2% would be levied on such income tax if the income or aggregate of income paid or likely to be paid exceeds Rs. 1 crore.

(e) True As per section 40(A)(3), where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque or account payee bank draft exceeds Rs. 20,000 no deduction shall be allowed in respect of such expe4nditure. However, as per amendment made by finance act 2009 w.e.f. 1.10.2009 in the case of payment made for plying, hiring or leasing goods carriages, the limit has been increased to Rs. 35,000. Therefore the payment of Rs. 33,000 is within the the maximum limit of exemption, hence does not attract disallowance under section 40A(3) of the income tax act 1961.

Ans. 4 (a) Exemption limit for taxation of anonymous donation u/s 115 BBCI) Anonymous donation received by wholly charitable trust and institutions are

subject to tax at a flat rate of 30% u/s 115BBC. Further anonymous donation received by partly charitable and partly religious trusts and institutions would be taxed @ 30%, only such anonymous donation is made with a specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by such trust or institution.

II) In order to provide relief to these trusts and institutions and to reduce their compliance burden an exemption limit has been introduced, and only the anonymous donation in excess of this limit would subject to 30% u/s 115BBC.

III) The exemption is the higher of the following a. 5% of the total donations received by the assessee.b. Rs. 1 lakhs

IV) The total tax payable by the assessee would be:-a. Tax @30% of the anonymous donation exceeding the exemption limit as

calculated above.b. The tax on the balance i.e. total income as reduced by the aggregate of

anonymous donation received.

(b) Income arising from revocable transfer of assets I) All incomes arising to any person by virtue of a revocable transfer of assets is

to be included in the total income of the transferor.II) As per section 63, the transfer is deemed to be revocable if-

CA. AJAY JAIN www.caajayjain.com 12 (RTP – Nov 2010 – IPCC) a. It contains any person for the re- transfer, directly or indirectly, of the

whole or any part of the income or assets to the transferor, ofb. It gives, in any way to the transferor, a right to re – assume power,

directly or indirectly, over the whole or any part of the income or the assets.

Transfer not revocable during the lifetime of the beneficiary or the transferee:If there is a transfer of asset which is not revocable during the lifetime of the beneficiary or transferee, the income from the transferred asset is not includible in the total income of the transferor provided the transferor derives no direct or indirect benefit from such income.If the transferor receives direct or indirect benefit from such income, such income Is to be included in his total income even though the transfer may not be revocable during the lifetime of the transferee.

(c) The requirement to deduct tax at source in respect of fees or professional or technical services are covered under section 194J in case the amount exceeds Rs. 20,000 in financial year. Further, the tax shall be deducted at source either on credit or payment, which ever is earlier. The proviso to section 194J contemplates independent limit of Rs. 20,000 each towards

(a) fees for professional services(b) fees for technical services.

In the given case M/s Nidhi textiles has credited Rs. 19,000 towards fees for professional services and Rs. 150,000 towards the fees for technical services to the account of Mr. suresh in its books of accounts. As the fees for professional services independently does not exceed Rs. 20,000 during the financial year, the liability to deduct tax u/s 194J does not arise.

(d)(i) Interest for non payment or short payment of advance tax (sec 234B)

(a) Interest under section 234 B is attracted for non-payment of advance tax or payment of advance tax of an amount less than 90% of the assessed tax.

(b) The interest liability would be 1% per month or part of the month from 1st April following the financial year up to the date of determination of income under section 143(1).

(c) Such interest is calculated on the amount of difference between the assessed tax and advance tax paid.

(d) Assessed tax is tax calculated on the total income less tax deducted at source.

(ii)(a) Interest under section 234C is attracted for deferment of advance tax beyond

due date.(b) The interest liability would be @1% per month, for a period of 3 months, for

every deferment. (c) However, for the last installment of 15th March the interest liability under this

section would be 1% for 1 month.(d) The interest is to be calculated on the difference between the amount arrived at

by applying the specified %age of tax on the returned income and the actual amount paid by the assessee sue date.

Ans. 5 (a) Special provision for payment of service tax in case of air travel agent:

CA. AJAY JAIN www.caajayjain.com 13 (RTP – Nov 2010 – IPCC) Rule 6(7) of the Service Tax Rules, 1994 provides that the person liable for paying the service tax in relation to the services provided by an air travel agent, shall have the option: (i) to pay an amount calculated at the rate of 0.6% of the basic fare in the case of

domestic bookings, and (ii) at the rate of 1.2% of the basic fare in the case of international bookings, of

passage for travel by air, during any calendar month or quarter, as the case may be.

(b) Section 65(105) provides that the scope of taxable service shall include any service provided or to be provided to any person, by a commercial training or coaching centre in relation to commercial training or coaching.

(i) Institutes offering general course on improving communication skills, how to be effective in group discussions or personal interviews, personality development, general grooming and finishing etc. are not covered under the definition of vocational training institute Thus, Pinnacle Institute is not entitled to exemption under the above notification and is liable to service tax.

(ii) A B.Tech degree is recognised by law and thus institutes offering such degrees are excluded from the scope of the said taxable service. An institution or establishment which is derecognized by the professional councils are taxable under the category of commercial coaching and training services.

Thus, BTL Engineering College being derecognized by All India Council for Technical Education shall be liable to service tax.

(c) If the consideration for a taxable service is not wholly or partly in terms of money, then the value of such service shall be such amount in money, with the addition of service tax charged, is equivalent to the consideration.In other words, where the service rendered is for a consideration not wholly or partly consisting of money, the value of the taxable service is equivalent to the total value of the consideration. However, the total of such money and non-money value of the consideration has to be treated as inclusive the service tax payable thereon.

(d) Exemption to services provided to a developer or units of special economic zone Taxable service provided to a developer of special economic zone or a unit (including a unit under construction) of special economic zone by any service provider, for consumption of the services within such special economic zone, are exempt from the whole of service tax leviable thereon u/s 66 of the Act. However, exemption is subject to the following conditions, namely:-

a. the developer has been approved by the Board of Approvals to develop, oprate and maintain the special economic zone;

b. the unit of the special economic zone has been approved by the Development Commissioner or Board of Approvals, As the case may be, to establish the units in the special economic zone

c. the developer or unit of a special economic zone shall maintain proper account of receipt and utilization of the said taxable services.

Ans. 6 Computation of service tax payable by shaurya for the month of July 2010

CA. AJAY JAIN www.caajayjain.com 14 (RTP – Nov 2010 – IPCC) Particulars Amount (Rs)

Service Tax on services provided to lifeline ltd 56,029,.016,00,000 x 10.30 (Note 1 & 2)

110.30

Service Tax on advance received 2,00,000 x 10.30 (Note 2) 18,676.34 110.30Total service tax payable(rounded off) 74,705

Notes:-1. Service tax is payable on the amount actually received i.e. Rs. 6,00,000 and not Rs.

6,10,000.2. Where the gross amount charged by a service provider, for the service provided or

to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

3. If the value of taxable service is zero, tax will be also zero even though the service may be taxable. Therefore, service tax is not payable on service provided to a friend gratuitously.

Ans. 7(a) Service tax paid by Ashiana Associates pvt ltd in the financial year 2009-2010 is Rs.

10,30,000(10.30% of Rs. 1,00,000). Proviso to rule 6(2) of the service tax rule 1994 has been amended to provide that an assessee shall deposit the service tax electronically through internet banking if he has paid the total service tax of Rs. 10lakh or more (including the maount of service tax paid by the utilization of Cenvat credit) in the preceding financial year. Therefore, Ashiana Associates private limited is required to make e-payment of service tax in the financial year 2010-2011.

The due date for payment of service tax by a company is the 6th day of the month, if the duty is deposited electronically through internet banking immediately following the calendar month in which the payment is received, towards the value of taxable services. Hence, in the given case, Ashiana Associates Pvt ltd is required to make e-payment of the service tax by 6th May 2010.

(b) The facility of e-filling of returns was earlier optional for the assessee. Proviso inserted to rule 7(2) of the service tax rules, 1994 has now made the electronic filing of returns mandatory for the assessee who has paid total service tax of Rs. 10 lakh or more including the amount of service tax paid by the utilization of Cenvat credit in the preceding financial year. Service tax paid by the Tarna ltd in the financial year 2009-2010 is Rs. 10,30,000 (10.30% of Rs. 1,00,000). Therefore, it is mandatory for Tarna ltd to file the return electronically for the financial year 2010-2011.

(c) The demand raised by revenue is valid in law. The provision of chapter V has been extended to any service provided or to be provided by or to the installations, structures and vessels within the continental shelf and the exclusive economic zone of India, constructed for the purpose of prospecting or extraction of production of mineral oil and natural gas. Therefore, GONC is liable to pay service tax in the given case.

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(d) Rule 6(1) of the Service Tax Rules, 1994, inter alia, provides that service tax on the value of taxable services received by an individual during any quarter is payable by the 5th day of the month immediately following the said quarter. Therefore, in the given case, the due date for payment of service tax is July 5, 2009. Further, in case the amount of service tax is paid by cheque, the date of presentation of cheque to the designated bank, subject to realization is the date of payment. Thus, in this case, the date of payment will be 5th July, 2009 as the cheque has been realized on 7th July, 2009.Since, the service tax has been paid on the due date, no interest and penalty is chargeable as there is no delay in payment of service tax.

Ans. 8(a) Different variants of VAT

1. Gross product variant: Tax is levied on all sales and deduction for tax paid on inputs excluding capital inputs is allowed.

2. Income variant: Tax is levied on all sales with set-off for tax paid on inputs and only depreciation on capital goods.

3. Consumption variant: Tax is levied on all sales with deduction for tax paid on all business inputs (including capital goods).

Among the three variants of VAT, the consumption variant is most widely used.

Reasons for preference of consumption variant:(1) It does not affect decisions regarding investment because the tax on capital goods

is also set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital-intensive). The consumption variant is convenient from the point of administrative expediency as it simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand.

(b) Under VAT, credit of duty paid is allowed against the liability on the final product manufactured or sold. Therefore, unless proper records are kept in respect of various inputs, it is not possible to claim credit. Hence, suppression of purchases or production will be difficult because it will lead to loss of revenue. A perfect system of VAT will be a perfect chain where tax evasion is difficult.

(c) Tax rates under VAT: 1. Exempted category :- There are about 50 commodities which are legally barred

from taxation and items which have social implications. 2. 4% VAT category :- Under 4% VAT rate category, there are largest number of

goods comprising of items of basic necessities, all agricultural and industrial inputs, capital goods and declared goods.

3. 12.5% category :-The remaining commodities, common for all the States, fall under the general VAT rate of 12.5%.

4. 1% Category :-The special rate of 1% is meant for precious stones, bullion, gold and silver ornaments etc.

5. Non-VAT goods :- Petrol, diesel, ATF, other motor spirit, liquor and lottery tickets are kept outside VAT. The States may or may not bring these commodities under VAT laws.

(d) The policy in the White Paper lays down that in relation to capital goods set off will be available to traders and manufacturers. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments. The States may at their option reduce this number of instalments. The State of Maharashtra has decided to give full input tax credit in the month of purchases only. However, if the capital asset is sold

CA. AJAY JAIN www.caajayjain.com 16 (RTP – Nov 2010 – IPCC) within the period of 36 months proportionate input tax credit will be withdrawn. There will be a negative list for capital goods not eligible for input tax credit.

Ans. 9 Computation of Vat payable

Stage Particulars Vat liability Less vat credit Tax to Govt

I medicines sold by Sambhav Medicaids 4,000 x 4% ------- 160Ltd to Rishabh Pharmacy = 160 at Rs. 4,000

II medicines sold by 160 100Rishabh pharmacy 6,500 x 4%Ltd to Suhani medicos = 260 at Rs. 4,000

III medicines sold by 260 70Suhani 8,250 x 4% to Galaxy medicines = 330 at Rs. (6,500 + 100) x 125%

IV Medicines sold by Galaxy Medicines to ultimate 10,400 x 4% 330 86Consumers = 416 at Rs. (8,250 + 70) x 125%

Ans. 10 (a) Addition method aggregate all the factors payment including profits to arrive at the

total value addition on which the rate is applied to calculate the tax. This type of calculation is mainly used with income variant of vat. Addition method does not easily accommodate exemptions of intermediate dealers.A drawback of this method is that it does not facilitate matching of invoices for detecting evasion.

(b) Chartered Accountants have the following key role to play in proper implementation of VAT:

(i) Record keeping :

VAT requires proper record keeping and accounting. Systematic records of input credit and its proper utilisation is necessary for the success of VAT. Chartered Accountants are well equipped to perform such tasks.

(ii) Tax planning :

In order to establish an efficient plan for purchases and sales, a careful study of VAT is required. A Chartered Accountant is competent to analyze the impact of various alternatives and choose the most optimum method of purchases and sales in order to minimize the tax impact.

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(iii) Negotiations with suppliers to reduce price :

VAT credit alters cost structure of goods supplied as inputs. A Chartered Accountant will ensure that the benefit of such cost reduction is passed on by the suppliers to his company. However, if the buyers of his company make the similar demand, he must be ready with full data to resist the claims.

(iv) Handling the audit by departmental officers :

There will be audit wing in department and certain percentage of dealers will be taken up for audit every year on scientific basis. Chartered Accountant can ensure proper record keeping so as to satisfy the departmental auditors. The professional expertise of a Chartered Accountant will help him in effectively replying audit queries and sorting out audit objections.

(v) External audit of VAT records :

Under VAT system, trust has been reposed on tax payers as there will be no regular assessment of all VAT returns but only few returns will be scrutinized. In other cases, return filed by dealer will be accepted. Thus, a check on compliance becomes necessary. Chartered Accountants can play a very vital role in ensuring tax compliance by audit of VAT accounts.

(c) The following purchases are not eligible for input tax credit:

(a) purchases from unregistered dealers;

(b) purchases from registered dealers who opt for composition scheme under the provisions of the Act;

(c) purchase of goods as may be notified by the State Government;

(d) purchase of goods where the purchase invoice is not available with the claimant or there is evidence that the same has not been issued by the registered selling dealer from whom the goods are purported to have been purchased;

(e) purchase of goods where invoice does not show the amount of tax separately;

(f) purchase of goods which are being utilized in the manufacture of exempted goods;

(g) purchase of goods used for personal use or consumption or provided free of charge as gifts;

(h) goods imported from other States;

(i) goods imported from outside the territory of India;

(j) goods in stock which have suffered tax under an earlier Act but under VAT Act they are covered under exempted items.

Out of the above, any six purchases may be mentioned in the answer.

(d) VAT returns are to be filed monthly/quarterly/annually along with tax paid challans according to the provisions of the State Acts. They should contain details of output tax liability, value of input tax credit and payment of VAT and should be filed within the prescribed time schedule. In case of any mistakes, revised returns may be filed. The returns will be checked and any deficiency in payment of tax may have to be made good.Filing of returns are designed with a view:

CA. AJAY JAIN www.caajayjain.com 18 (RTP – Nov 2010 – IPCC) (i) to reduce cost of compliance(ii) to encourage businesses to comply with their obligations; and(iii) to ensure efficient processing of data.