43

EPTL December 2008

TAX LAWS
Time allowed : 3 hours

Maximum marks : 100

NOTE : All references to sections mentioned in Part - A of the Question Paper relate
to the Income-tax Act, 1961 and the relevant Assessment Year 2008-09
unless stated otherwise.
PART A
(Answer Question No. 1 which is
COMPULSORY
and ANY THREE of the rest from this part)
Question 1
(a) Choose the most appropriate answer from the given options in respect of
the following :
(i) Which of the following is not an example of capital receipt
(a) Money received on issue of shares
(b) Money received on sale of land
(c) Money received on sale of
goods (d) None of the above.
(ii) Maximum qualifying limit for deduction under section 80C is
(a) Rs.50,000
(b) Rs.1,00,000
(c)

Rs.1,10,000

(d) Rs.1,50,000.
(iii) In certain cases, income of other person is included in the income of
assessee. It is called
(a)
Clubbing of
income (b) Increase
in income (c) Addition
to income (d) Set-off
of income.
(iv) Remuneration for rendering services on a foreign ship is exempt in the case
of
(a)
A
resident
(b) A non-resident who is not a citizen of
India
(c)
Not
ordinarily
resident
(d)
A citizen of
India.
(v) Which of the following is not an asset under section 2(ea) of the Wealth-tax
Act, 1957
(a) Motor
car

(b)
Boats
aircrafts

and

EPTL December 2008

(c) Guest house

44
44

44

EPTL December 2008

(d) Cash at bank.

(vi) Any rent or revenue derived from land may be treated as agricultural
income if
(a) It is derived from land
(b) The land is situated in India
(c) The land is used for agricultural purpose
(d) All the above conditions are satisfied.
(vii) Which of the following is covered under section 80D of the Income-tax Act,
1961
(a)

Repayment of loan taken for higher

education (b) Medical treatment of handicapped

dependent (c) Medical insurance premium
(d) Reimbursement of medical expenses.
(viii) The incidence of taxation depends on the

(a) Residential status of the

assessee (b) Accommodation of the
assessee (c) Citizenship of the
assessee
(d) Marital status of the assessee.

(1 mark

each) (b) Mrs. Vidya received the following amounts during the financial year
2007-08 :
Rs.
Gross salary
Family pension @ Rs.1,500 p.m.
Income of a minor child
Accumulated balance in provident fund
of her husband after his death

6,00,000
18,000
6,000
1,00,000

Gratuity received after the death of her husband

80,000
Calculate taxable income of Mrs. Vidya for the assessment year 2008-09.
(4 marks)
(c) What is meant by pay-as-you-earn scheme ?
marks)
Answer 1(a)
(i) (c) Money received on sale of
goods. (ii) (b) 1,00,000
(iii) (a) Clubbing of income
(iv) (b) A non-resident who is not a citizen of India
(v) (d) Cash at bank

(3

(vi) (d) All the above conditions are

satisfied. (vii) (c) Medical insurance premium
(viii) (a) Residential status of the assessee.
Answer 1(b)
Computation of Taxable Income of Mrs. Vidya for the Assessment Year 2008-09
Rs.
Gross Salary

6,00,000

Less : Standard deduction

Income from Salary

6,00,000

Income from other sources :

Family Pension

18,000

Income from Minor Child under section 64

6,000

Less : Exemption under section 10(32)

1,500

Gross Total Income

Less : Deduction under Section 57 in
respect of family pension(1/3rd of 18,000)
Taxable Income

4,500
6, 22,500
6,000
6, 16,500

Note : Gratuity received by Mrs. Vidya on the death of her husband is not
taxable in her hands vide Circular No.573 dated August 21, 1990
Answer 1(c)
Pay-as-you-earn Scheme
Sections 207 to 219 of the Income-tax Act lay down the provisions relating to
advance payment of income-tax. The scheme of advance payment of tax is also
known as Pay as you earn. The income on which the assessee is required to pay
advance tax is commonly known as income subject to advance tax and the tax
payable on such income is known as advance tax.
The liability to pay advance tax arises during any financial year, in accordance
with the provisions of Sections 208 to 219 (both inclusive), in respect of the total
income of the assessee which would be chargeable to tax for the assessment year
immediately following that financial year. Such income is, in Section 207, referred to
as current income.
As per Section 208, advance tax shall be payable during a financial year in every
case where the amount of such tax payable by the assessee during that year, as
computed in accordance with the provisions of this Chapter, is five thousand rupees
or more.
Assessee is liable to Pay advance tax, if liability for tax exceeds Rs. 50,000.

Question 2
(a) Re-write the following sentences after filling-up the blank spaces with
appropriate word(s)/figure(s) :
(i) Profit and gains arising from the transfer of a capital asset are taxable as
.
(ii) Income accrued and received outside India is taxable in case of a
.
(iii) If an asset is put to use for less than 180 days in the previous year, the
depreciation is charged at
of normal rate.
(iv) Salary received by a Member of Parliament is taxable under the head
.
(v)

Unabsorbed part of the loss from house property can be carried forward
and set-off within the subsequent
years.

(vi)

Remuneration earned by a member of HUF for the services rendered by

him is
income of the member.

(vii)

One house or part of house belonging to an individual is

under the Wealth-tax Act, 1957.
(1
mark each)

(b) State, with reasons in brief, whether the following statements are correct
or incorrect:
(i) Sandeep, a trader, purchases standing crops and sells it after
harvesting.
His income will be treated as agricultural income.
(ii) Suresh receives Rs.10 lakh from statutory provident fund on his retirement.
This amount is taxable under the head income from salary.
(iii)

Sarita paid Rs.30,000 as interest @ 30% per annum on loan taken for
the construction of a house. No deduction shall be allowed for payment
of interest, as in the opinion of Assessing Officer, the rate of interest is
very high.

(iv)

Ashok Exports Ltd. realised surplus of Rs.1,00,000 consequent to

change in exchange rate of currency. This surplus is a revenue receipt.
(2 marks each)

Answer 2(a)
(i) Capital gains
(ii) Resident and Ordinarily resident
(iii) 50 per cent or
(iv) Income from other sources.
(v) Eight
(vi) Exempt
(vii) Exempt.

Answer 2(b)(i)
Incorrect
Income accruing to Sandeep, a trader, by selling crops after harvesting is not
agricultural income, because he has no interest in land except a mere licence to
enter upon the land and gather upon the produce, since the land is not the direct,
immediate or effective source of income. [CIT v. Maddi Venkata Subbayya (1951) 20
ITR 151 Mad].
Answer 2(b)(ii)
Incorrect
Under Section 10(11) of the Income Tax Act any payment received from statutory
provident fund would be exempted from income tax without any monetary limit.
Answer 2(b)(iii)
Incorrect
Under Section 24(b) of the Income Tax Act the Assessing Officer is not
empowered to question an assessee about the rate of interest on loan. So the
assertion of the Assessing Officer is not tenable.
Answer 2(b)(iv)
Correct
If by virtue of exchange operations profits be made during the course of business
and in connection with business transactions, the excess receipt on account of
conversion of one currency into another would be revenue receipts; otherwise they
would be capital receipts.
Question 3
(a) Attempt the following :
(i)

Income-tax is a tax on income and not a tax on every item of money

received. Explain this statement with reference to capital and revenue
receipts.

(ii)

Expenditure on scientific research is allowed as deduction even if

contribution is made to other institutions for scientific research. Explain
the statement.

(iii) A person receives money from an insurer on account of damage to a

capital asset resulting from accidental fire. Whether such money shall
be taxable as capital gains ? Explain.
(3 marks
each)
(b) Distinguish between any two of the following :
(i) House rent allowance and rent free house.
(ii) Cost of acquisition and cost of improvement.
(iii) Fair rent and annual rent.

(3 marks each)

Answer 3(a)(i)
Income tax as the name implies, is a tax on income and not a tax on every item
of money received. Therefore, unless the receipt in question constitutes income
as

distinguished from capital, it cannot be charged to tax. For this purpose income
should be distinguished from capital which give rise to income. Receipts are of two
types viz., capital receipts and revenue receipts. The distinction between the two is
vital because capital receipts are exempt from tax unless they are expressly taxable
(for e.g., capital gains are taxable under Section 45 even if they are capital receipts.
On the other hand revenue are taxable unless they are expressly exempt from tax.
for example income exempt under section 10. As the Income Tax Act does not
define the term capital receipts and revenue receipts, one has to depend upon the
meaning of the concepts as well as the decided cases.
Answer 3(a)(ii)
According to Section 35(1) of the Income-tax Act, where the assessee does not
himself carry on scientific research but makes contribution to other institutions such
expenditure is allowed while computing income from business and profession.
Accordingly where the assessee does not himself carry on scientific research but
makes contribution to other institutions for this purpose, deduction is allowed if :
(i)

The payment is made to an approved scientific research association which

has as its object undertaking of scientific research related or unrelated to the
business of assessee or to a university college or other institution to be used
for scientific research;

(ii)

The amount of deduction shall be allowed to the extent of 125% of the sum
paid if the payment is made to an approved university college or institution.

(iii)

The approval of the scientific research association, university, college or

institution is required to be obtained from Central Government as provided
by Finance Act, 1999.

Answer 3(a)(iii)
Section 45(1A) of Income Tax Act, provides that where any person receives at
any time during the previous year any money or other asset under an insurance from
an insurer on account of damage to, or destruction of, any capital asset, as a result
of flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or
riot or civil disturbance; or accidental fire or explosion; or by action by enemy or
action by an enemy or action taken in combating an enemy (whether with or without
a declaration of war), then, any profit or gain arising from receipt of such money or
other asset shall be chargeable to tax under the head capital gains. The income
shall be deemed to be the income for the previous year in which such money or other
asset is received. For computing capital gains the value of any money or the fair
market value of asset received on the date of receipt shall be deemed to be the full
value of the consideration received or accruing as a result of the transfer of damaged
asset.
Answer 3(b)(i)
House rent allowance and rent free
house
House Rent Allowance
1. It is dealt under Section 10(13A) and
Rule 2A.

Rent Free House

It is a kind of perquisite. It is dealt
under section 17(2)(i) of the Act.

House Rent Allowance

Rent Free House

2. While calculating salary and basic

pay, dearness allowance and
commission (if terms of employment
provide) is included.

Under calculation of salary, apart

from basic pay, DA and Commission;
Bonus, fees
and other taxable
allowances are also included.

3. Only taxable portion (after deduction)

In this case, it included in the
Gross is added to the Gross Salary of the
Salary of the assessee, as
perquisite. assessee.
Answer 3(b)(ii)
The distinction between Cost of acquisition and Cost of improvement can be
explained in following lines. The above two terms are associated with capital
assets.
Cost of acquisition
Cost of acquisition of an asset is the value for which it was acquired by the
assessee. Expenses of capital nature for completing or acquiring the title to the
property are includible in the cost of acquisition. Cost of acquisition always precedes
cost of improvement.
Cost of improvement
It is the capital expenditure incurred by the assessee in making any additions/
improvement to the capital asset. It also includes any expenditure incurred to protect
or complete the title to the capital assets or cure such title. Any expenditure incurred
to increase the value of the capital asset is treated as cost of improvement. Any cost
of improvement incurred before 1.4.1981 is not taken into consideration for
calculating capital gains chargeable to tax.
Answer 3(b)(iii)
Fair rent and Annual rent
Fair rent means the sum of for which the property might reasonably be expected
to let from year to year. This rent is also known as notional rent. It will be equal to
the rent which a similar property fetchs in the neighborhood.
Whereas annual rent means the actual rent. This happens only where the house
property has been actually let. Again annual rent means (i) if property is let out
throughout the previous year the annual rent received or receivable for that year and
(ii) if the property is let out for a part of the year the amount which bears the same
proportion to actual rent received or receivable for the period of letting as the period
of twelve month bears to the period of letting.
Quesiton 4
(a)

Ram, who is 28 years of age, is a businessman in Delhi. On the basis of the

following profit and loss account for the financial year 2007-08, compute his taxable
income :
Rs.
Rs.
Opening stock
Purchases

20,700
10,00,000

Sales
Closing stock

15,00,000
25,200

Rs.
Household expenses

10,000

Income-tax for the

financial year 200708 on capital
Interest

30,000

Depreciation on furniture

12,000

8,400

Reserve for bad debts

1,200

Salaries and wages

60,000

Rent and rates

25,000

Net profit

Rs.

3,57,900
15,25,200

15,25,200
Other relevant particulars are as follows :

(i) Opening stock and closing stock have consistently been valued at 10%
below cost price.
(ii) Household expenses include a contribution of Rs.1,500 towards public
provident fund.
(iii) Amount of depreciation on furniture as per income-tax provisions is
Rs.10,000.
(6 marks)
(b) Write short notes on any three of the following :
(i) The activities of a co-operative society which are eligible for deduction
under section 80P.
(ii) Essential conditions for claiming exemption under section 11 in the case
of a charitable trust.
(iii) Liability to pay fringe benefit tax.
(iv) Banking cash transaction tax.

(3 marks each)

Answer 4(a)
Computation of Taxable Income of Mr. Ram for the Assessment Year 2008-09
Particulars

Rs.

Rs.

Income from business :

Net Profit as per Profit & Loss A/c
Add :

3,57,900

Inadmissible Expenses :
Household Expenses

10,000

Income Tax

30,000

Interest on Capital

8,400

Excess depreciation (12,000 10,000)

2,000

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Particulars

51
51

51

Reserve for Bad-debt

Add :

EPTL December 2008

Rs.

Rs.

1,200

51,600

Undervaluation of closing stock (1/9 x 25,200)

4,09,500
2,800
4,12,300

Less : Under Valuation of opening stock (1/9 x

20,700)
Income from business

2,300
4,10,000

Income from other sources

Gross Total Income

--4,10,000

Less : Deduction u/s 80C (Contribution to PPF)

Taxable Income

1,500
4,08,500

Answer 4(b)(i)
The activities of a co-operative society which are eligible for deduction under
Section 80P are as follows:
(i) Income from banking business [Section 80P(2)(a)
(i)] (ii) Cottage Industry [Section 80P(2)(a)(ii)]
(iii) Marketing agricultural produce [Section 80P(2)(a)(iii)]
(iv) Purchase of agricultural implements [Section 80P(2)(a)(iv)]
(v) Processing of agricultural produce of its member [Section 80P(2)(a)
(v)] (vi) Collective disposal of Labour [Section 80P(2)(a)(vi)]
(vii) Primary Society engaged in supply of milk, oilseeds, fruits etc. [Section 80P(2)
(b)] (viii) Investment activities
(ix) Letting of Godowns [Section 80P(2)(e)]
Answer 4(b)(ii)
The essential conditions for availing exemption under Section 11 are
: (a) The property should be held under a trust or other legal
obligation.
(b) The property should be held for charitable or religious purposes. Also the
trust should not be created for the benefit of any particular religious
community; no part of the income should vest for benefit of the settler or other
specified person.
(c) The income of the trust should be applied to charitable or religious purposes
or is accumulated within the permitted limits for applying to such purposes.
(d) Income is applied to charitable or religious purposes in India.
(e) The trust should be registered with the Commissioner of Income Tax.
(f)

If the income exceeds the exemption limit, the accounts of the trust should
be audited.

(g) The funds of the trust should be invested or deposited in any of the modes or
forms specified under Section 11(5).

Answer 4(b)(iii)
Liability to pay fringe benefit tax
Fringe benefit tax (FBT) is payable by an employer on the fringe benefits
provided or deemed to have been provided by him to his employees. FBT means
the tax chargeable under Section 115WA. In addition to the income tax charged for
every assessment year commencing on or after 1.4.2006, additional income tax (in
this Act referred to as fringe benefit tax) in respect of fringe benefits provided or
deemed to have been provided by an employer to his employees during the previous
year @ 30% (plus applicable surcharge and education cess of 3% on the aggregate
of additional income tax and surcharge) on the value of such fringe benefits.
Even loss making them concerns will have to pay fringe benefit tax although there
is no income tax payable by him. An employer who is eligible for deductions
under Section 10A, 10AA, 10B, 10BA shall also be liable to pay FBT, even though
he is allowed deduction or exemption under the aforesaid sections.
Answer 4(b)(iv)
Banking Cash Transaction Tax (BCTT)
BCTT is a concept introduced by the Finance Act, 2005, under Chapter VII.
According to Section 94(3) of the Income Tax Act, BCTT means, the tax leviable on
the taxable banking transactions under the provisions of the Chapter. From 1.6.2005,
every taxable banking transaction be charged at 0.1%. The BCTT shall be payable as
per provision of section 94(8) of the Act and there is no surcharge and education
cess on this tax. The value of taxable banking transaction under Section 94(8)(9) is
the amount of cash withdrawn. The value of taxable banking transaction under section
94(8)(b) is the amount of cash received on encashment of term deposit or deposits.
The exemption limit for bank withdrawal is Rs.50,000 for individual or HUF and
Rs.1,00,000 for other persons in respect of cash withdrawal on a day from a Bank.
Question 5
(a) Gulshan submits the following information relevant for the financial year
2007-08 :
Profit
Long-term capital gains on sale of building
16,000

(Rs.)
Income form other sources :
Loss
Loss on maintenance of race horses

15,000
(Rs.)
Determine
the net income of Gulshan for the assessment year 2008Salary income
09. Income from house property : House - A
(7 marks)
8,00,000
(b) Suresh is the owner of a house. The actual rent of this house is Rs.9,000
per month and municipal valuation of this 25,000
house is Rs.7,500 per month. Other
informations about the house are

(i)
Municipal taxes are Rs.10,000 out of which the tenant has paid

Rs.6,000. (ii) House

Suresh
- B has accepted a deposit of Rs.1,00,000 from the
tenant on which
30,000
Suresh
has paid interest @ 6% per annum.
(iii) The tenant is also liable for meeting the expenses on repairs of the
house. (iv) The tenant has paid Rs.25,000 as premium for the house. The
premium is
non-refundable. The lease period of the house is 5 years.

Assuming that the house is built on free-hold land, determine the value of
the house under the provisions of the Wealth-tax Act, 1957 for the
assessment
year
2008-09.
(8 marks)
Answer 5(a)
Computation of Taxable Income of Mr. Gulshan for the Assessment Year 2008-09
Particulars

Rs.

Rs.

Inter-source adjustment :
(A) Income from Salary
(B) Income from House Property
: House A
Rs. 25,000
House B
Rs. 30,000 (Loss)
5,000 (C) Profits and Gains of
Business or profession :
Business A
Rs. 12,000
Business B
Rs. 20,000 (Loss)
Speculative Business :
Business C
Rs. 22,000
Business D
Rs. 35,000 (Loss)
(D) Capital Gains :
Short-term Capital Gains
Rs. 10,000
Short-term Capital Loss (-) Rs.
30,000 (-) Rs.
20,000
Long-term Capital Gain
Rs. 16,000
Income from other Sources:
Loss on maintenance of Race Horses

8,00,000

(-)

(-) 8,000

(-)13,000

(-) 4,000
(-)15,000

Net Income = Rs. 8,00,000 Rs. 5,000 = Rs. 7,95,000

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EPTL December 2008

Notes :

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54

(i) The house property loss can be set-off against salary income.
(ii) Loss from business and profession cannot set-off against salary income
[Section 71(2A).
(iii)

Loss from speculative business cannot be set-off in the assessment year

under any other head and it has to be carried forward to next assessment
year [Section 73].

(iv) Short-term capital loss will be carried forward to the next assessment year.
(v)

As per section 74A, the loss incurred by the assessee, in the activity of
owning and maintaining race horses, shall only be set-off against the income
of such activity. It cannot be set-off against income from any other source.

Answer 5(b)
Computation of the Value of the house under the provisions of the Wealth Tax Act,
1957 for the Assessment Year 2008-09
Rs.
Rs.
Actual rent paid by the tenant Rs. 9,000 x 12

1,08,000

Add :
(i) 1/9th of repair expenses are borne by the tenant i.e.,
1/9th x 1,08,000

12,000

(ii) Municipal Tax paid by tenant

6,000

(iii) Interest on deposit 15% of 1,00,000 =

Less : Interest paid
(iv)

15,000
6,000

Annual

5,000

(iv)

9,000

premium
Annual

25,000/5
Rent

(a)

1,40,000
Municipal Value (b) 7,500 x 12 = Rs. 90,000
Gross Maintainable Rent (a) or (b) whichever is higher
Less : Municipal Taxes

10,000

15% of 1, 40,000

21,000

Net Maintainable Rent (NMR)

Capitalized Value of the house:
House is constructed on
freehold Land

NMR x

12.5
=

1,09,000 x 12.5 = Rs.13,62,500

1,40,000

31,000
1,09,000

Question 6
(a)

Nikhil, Gagan and Suman are partners in a firm with equal shares. The
profit and loss account for the year ending 31st March, 2008 shows a net
profit of Rs.42,300 after debiting the following items :
(i) Salary of Rs. 24,000 each to Nikhil and
Gagan. (ii) Bonus to Suman Rs.18,000.
(iii) Commission of Rs. 9,000, Rs.10,000 and Rs. 15,000 to Nikhil, Gagan
and
Suman respectively.
(iv) Interest on capital @ 15% amounting to Rs. 4,500, Rs. 6,000 and
Rs.15,000 paid to Nikhil, Gagan and Suman respectively.
Assuming that all partners are working partners and the firm fulfils the
conditions of section 184, compute the total income of the firm and taxable
income
of
the
partners
in
the
firm.
(8 marks)

(b) Indicate the amount of deduction available to an assessee from his gross
total income under section 80GG in respect of rent paid. Point out the
circumstances
when
the
deduction
will
be
denied.
(7 marks)
Answer 6(a)
Computation of total Income of the Firm
Rs.
Net Profit as per Profit & Loss Account
Add : Disallowed items :
Salary to Partners : Nikhil
24,000
Gagan
24,000
Bonus to Suman
Commission to Partners : Nikhil
9,000
Gagan
10,000
Suman
15,000
Interest on Capital in Excess of 12% =
Nikhil = (4,500 x 3) 15 =
900
Gagan = (6,000 x 3) 15 =
1,200
Suman = (15,000 x 3) 15 =
3,000
Book Profit
Less : Remuneration under section 40(b)
Actual Remuneration
OR
90% of Book profit on
First 75,000 =
67,500
60% of Book profit on
Balance of Rs.72,400 =
43,440
Total Income of the Firm

42,300

48,000
18,000

34,000

1,00,000

5,100
1,47,400
1,00,000

1,10,940

1,00,000
47,400

Computation of income of Partners from Firm

Nikhil

Gagan

Suman

3,600

4,800

12,000

Salary

24,000

24,000

---

Bonus

---

---

18,000

9,000

10,000

15,000

36,600

38,800

45,000

Interest on Capital (12%)

Commission
Answer 6(b)

Deduction in respect of Rent Paid (Section 80

GG) Deductions admissible under this Section is:
Actual rent paid less 10% of Adjusted Total Income.
25% of such Adjusted Total Income.
Amount calculated at Rs. 2,000 p.m.
whichever is least.
Adjusted Total Income is the adjusted Gross Total Income under Section 80G
except exempted income less long term capital gain.
However, certain conditions as given below are required to be fulfilled/satisfied
for claiming deduction u/s 80GG
The assessee should not be receiving any house rent allowance exempt
u/s 10(13A) or rent free accommodation.
The accommodation should be occupied by the assessee for the purpose of
his own residence.

The assessee fulfills such other conditions or limitations as may be

prescribed having regard to the area or place in which such accommodation
is situated and other relevant consideration.

The assessee or his spouse or his minor child or an HUF of which he is a

member does not own any accommodation at the place where he ordinarily
resides or performs duties of his office or employment or carries on his
business or profession.

If the assessee owns any accommodation at any place other than that
referred to above, such accommodation should not be in the occupation of
the assessee and its annual value is not required to be determined under
Section 23(2)(a)(i) or Section 23(2)(b).

Allowed only to an individual assessee after furnishing Form 10BA along with
return of income.
PART B
Question 7
Attempt any four of the following :
(a) What do you mean by taxable services in the context of service tax ? How
is the value of taxable services determined ?
(5
marks)

(b) Explain the procedure of registration for paying service tax.

(5
marks) (c) Under certain circumstances, the service receivers are liable to pay
service
tax. Indicate such cases.
(5 marks)
(d) Choose the most appropriate answer from the given options in respect of the
following :
(i) Tax on service is
(a) a direct tax
(b) an indirect tax
(c) multipoint tax
(d) None of the above.
(ii) Appeal to Customs, Excise and Service Tax Appellate Tribunal can be
filed within
(a) One month
(b) Two months
(c) Three
months (d) Four
months.
(iii) Service tax is administered by the Department of
(a) Central Sales Tax
(b) Central Excise
(c) Revenue
(d) Customs.
(iv) Service tax collected by mistake is required to be deposited under
section 73A of the Finance Act, 1994 to the
(a) Central Government
(b) Account of the person who paid such tax
(c) National Defence Fund
(d) Chief Ministers Relief Fund.
(v) Service tax is applicable in the case of
(a) All Company Secretaries
(b) Company Secretaries in Practice
(c) Company Secretaries below the age of 65 years
(d) All services rendered by a Practising Company Secretary other
than representation services before any statutory authority. (1 mark
each)
(e) Re-write the following sentences after filling-up the blank spaces with
appropriate word(s)/figure(s) :
(i) The Superintendent of Central Excise is bound to grant certificate of
registration for service tax within
days of the receipt of
application.

(ii) Taxable services provided to any person by the Reserve Bank of India is
from service tax.
(iii) Under section 77 of the Finance Act, 1994, a maximum penalty of
Rs.
is payable for late filing of service tax return.
(iv) The threshold limit for service tax exemption applicable in the case of
small service providers has been increased to
.
(v)

When there is no consideration received for services rendered freely,

the service tax
apply.
(1 mark
each)

(f) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i)

Service tax is to be paid to the credit of Central Government by the 5th

of the month immediately following the calendar month in which the
payments are received.

(ii) In case the taxable services are provided from more than one premises/
offices, the assessee can opt for registration of only one
premises. (iii) The facility for e-filing of returns is not applicable to
service tax.
(iv) There is no system of getting advance ruling in respect of service tax
matters.
(v)

The CENVAT credit rules do not extend its scope to service tax paid in
respect of input services.
(1 mark each)

Answer 7(a)
According to Section 67 of Chapter V of Finance Act, 1994, the value of any
taxable service shall be the gross amount charged by the service provider for such
service rendered by him. Gross amount means the amount actually charged by the
service provider without making any deduction. The service provider will have to
make a bill on the receiver of service showing clearly the gross amount charged.
For determining the value of taxable service, the following factors regarding
identification of services have to take into consideration.
(a) Services to be included;
(b) Services to be excluded;
(c)
Items which are statutorily includible or
excludible;
(d)

Items which are includible or excludible according to departmental

clarifications; (e) If permissible, reimbursement of out of pocket expenses have

to be excluded; (f) Inclusion of service tax element separately in the bills;
(g) General and specific exemptions services on which no service tax is leviable
at
all are not required to be considered for determining the value of taxable
service. Such services are the services which are not covered under Section
65(105) of the act and also those services which are provided in the State of
Jammu & Kashmir where a service provider is providing more than one
taxable service, the gross amount in respect of all the services should be
determined separately in respect of each such service so that specific
exemptions applicable to each service can be availed.

As per Section 67 of the act, if the consideration for a taxable service is in terms
of money, the value of such service shall be the gross amount charged by the
service provider for such service. If the consideration is not received in money, the
value of taxable service shall be the amount of money (together with service tax)
equivalent to the total consideration thus arrived at.
If the gross amount charged by service provider is inclusive of service tax
payable, the value of taxable service will be equal to = Gross amount charged x
100/100 + Rate of Service Tax.
Gross amount charged includes payment by cheque, credit card deduction from
account and any form of payment by issue of credit or debit notes and book
adjustments.
Answer 7(b)
Procedure of registration under service tax
Section 69 of the Finance act deals with the procedure of registration for paying
service tax. The procedure of registration is as follows :
(i) Every person responsible for collecting service tax has to register with Central
Excise authorities. He has to apply in Form ST-1.
(ii)

The application for registration is to be made within a period of 30 days from

the date on which the service tax is liable.

(iii) ST-1 Form shall be accompanied with copy of PAN, an affidavit declaring the
commencement of services, proof of residence, photograph of the assessee
etc.
(iv)

If the assessee is a partnership firm copy of certificate registration and

partnership deed must be attached to Form No.1.

(v)

Where the assessee is providing more than one taxable service he can
obtain registration by making a single application mentioning all the taxable
services provided by him.

(vi)

The Central Excise Officer shall after satisfying himself that the applications
form is in conformity with the prescribed guidelines shall grant a certificate of
registration in Form ST-2 within 7 days of the date of receipt of the
application.

Answer 7(c)
Service receivers are liable to pay service tax
Though the service provider is primarily liable for payment of service tax, there is
one exception when the service receiver is liable for payment of service tax. As per
Section 68(2) read with Rule 2(d) of the Service Tax Rules, 1994, in case of nonresident service provider who does not have any office in India, the service receiver
is liable for payment of service tax. Moreover, Finance Act, 2008 changed the
recipient name from
client or customer to any person. CBE&C TRU Letter F.No.34/1/TRU dated
29.2.2000 clarifies as follows. In number of taxable services, recipient of service is
specified as
client or customer. Service tax is levied on services received in India. For
example, some musicians under a entity (established abroad) performs in India
through a Indian

entity. The musicians are of foreign nationality. The service receiver in India who
are conducting the show has to pay the service tax. Other examples are :
insurance companies paying service tax in respect of service provided by insurance
agents. Service provided by mutual fund distributorservice receiver to pay service
tax on brokerage/ commission received.
Answer 7(d)
(i) (b) An indirect tax
(ii) (c) Three months
(iii) (b) Central Excise
(iv) (a) Central Government
(v) (d) All services rendered by a Practising Company Secretaries other than
representation services before any statutory authority.
Answer 7(e)
(i) 7 days
(ii) Exempt
(iii) Rs.1,000
(iv) Rs.10,00,000
(v) Will not
Answer 7(f)(i)
Correct
Rule 6 of the Service Tax Rules 1994 provided that any assessee who is providing
taxable services and receives payment for the services, shall pay service tax to the
credit of Central Government account by the 5th of that month immediately following
the month in which the payments are received.
Answer 7(f)(ii)
Correct
Section 69 of the Finance Act provides that in case the taxable services are
provided from more than one premises/offices the assessee can opt for registration
for only one premises if there is a system of centralized billing accounting with
permission from department.
Answer 7(f)(iii)
Incorrect
Service tax providers can avail the benefit of e-filing of returns through internet.
The assessee can go to the e-filing site Home page by typing the address http://
servicetaxefiling.nic.in in the address bar of the browser. Assessees having a 15
digit STP code and falling under certain categories can avail the facility of e-return.

EPTL December 2008

Answer 7(f)(iv)

61
61

61

EPTL December 2008

Incorrect
Chapter VA has been added to the Finance Act, 1994 by the Finance Act, 2003
to provide for advance rulings in service tax on the lines of the similar provisions
contained in the Central Excise Act, 1944 and Customs Act, 1962.
Answer 7(f)(v)
Incorrect
Under CENVAT Credit Rules, 2004, now credit can be taken for inputs, capital
goods as well as for input services used in or in relation to manufacture or production
of final products or for providing of any taxable services.
PART C
Question 8
Attempt any four of the following :
(a) What are the different modes of computation of value added tax (VAT) and
what are the advantages of adoption of tax credit method ?
(5
marks)
(b) In the old sales tax structure, there were problems of double taxation of
commodities and multiplicity of taxes, resulting in a cascading burden. In
the light of this statement, explain how VAT is an improvement over the old
sales tax structure.
(5
marks)
(c) Dinesh purchases raw material from Ram and Shyam for manufacturing goods.
Dinesh sells goods to wholesaler Mohan. Mohan sells goods to Trilok, a
retailer, who sells goods to consumers. Calculate the amount of VAT
collected by the government from the following particulars based on the fact
that Shyam charges VAT @ 4% and other sellers charge VAT @ 12.5% :
Price without VAT
(Rs.)
Raw material supplied :
Ram to Dinesh
5,000
Shyam to Dinesh
8,000
Manufactured goods sold :
Dinesh to Mohan
18,000

(5 marks)

Mohan to Trilok

25,000

Trilok to consumers

30,000

(d) Input tax credit is generally given for the entire VAT paid within the State on
purchases of taxable goods meant for resale or manufacture of taxable
goods. In the light of this statement, enumerate the cases of purchases of
goods
in
respect
of
which
tax
credit
is
not
available.
(5 marks)
(e) Write a brief note on rates of VAT.

(5 marks)

(f)

State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) Zero rating transaction is the same as an exempt transaction.
(ii) VAT helps in checking tax evasion and in achieving neutrality.
(iii) The departmental audit also helps to check tax evasion.
(iv) Introduction of VAT has increased the professional development
opportunities for the Company Secretaries.
(v) As a result of introduction of VAT, the central sales tax will be phased
out in due course.
(1 mark
each)

Answer 8(a)
There are three different modes of computation of VAT :
(i)

Addition Method : Under this method identification of value added is

estimated by adding values of all the elements of production wages, profits,
rent and interest. Under this method, the incidence of tax evasion is greater
because it does not require matching of invoices.

(ii)

Subtraction Method : In this method value added is computed by

subtracting inputs from outputs. This is also known as the product approach.

(iii)

Tax Credit Method : Under this method, Vat payable by a dealer is arrived at
by deducting tax on inputs from the tax on sales. This method is known as
the invoice method. This method is universally used because of the
advantages of computing tax liability under this method. As rate of tax is
different in respect of inputs and outputs, the addition method and the
subtraction method are not practicable in the case of a manufacturer.

The advantages of using tax credit method in estimating VAT liability are :
(i) Under this method exports are exempted from levy of domestic indirect taxes
as exports are taxed at Zero rate and refund of input taxes paid.
(ii)

Under this method, dealers at intermediate stage are indifferent to tax rates
because burden of VAT is dependent upon rate of Tax at the final stage.

(iii)

Under this method, cross-checking of tax paid at earlier stages is

comparatively easier because of the fact that dealers are required to specify
the amount of tax in their invoices.

Answer 8(b)
In the old sales tax structure, there were problems of double taxation of
commodities and multiplicity of taxes, resulting in a cascading burden.
Earlier the local sales tax was based on single point tax. The single point tax was
either at first point or at last point. The First point tax (FPT) was convenient to the
revenue but had inbuilt cascading effect. The Last Point Tax (LPT) is an ideal system
but it was evasion prone resulting into loss of revenue to the government. The VAT
system on the other hand reduces the disadvantages of both FPT and LPT and at the
same time draws the advantages from resulting into both. The VAT system
obviously is more transparent,

uniform and less prone to tax evasion. The following illustration may show the
difference between first point tax and last point tax.
Assume the base price of the commodity is Rs.1000 and the government wishes
to collect sales tax of 10% on base price i.e. Rs.100.
Taxation
F.P.T.

Rs.

Price paid by A
Tax paid by A
Total

1,000
100
1,100

Margin @50% added by A

Price paid by B
Margin @50% added by B

550
1,650
825

L.P.T.

Rs.

Price paid by A

1,000

Tax paid by A

Nil

Total

1,000

Margin added by A @50%

Price paid by B 1,500
Margin @50% added by B

2,475
Tax

Nil

Price paid by Consumer

2,475

500
750
2,250

Tax

100

Price paid by Consumer

2,350

In both the cases as above, the tax collected by the government is Rs.100 but
consumer would pay more under F.P.T. than under L.P.T. Under VAT, the consumer
would pay the same amount as under F.P.T. but the government would get the tax of
Rs.225/- instead of Rs.100/States continue to tax declared goods on single point basis under the existing
system subject to a rate of 4%. Under VAT, declared goods will also suffer tax at
multiple levels.
Under the existing Sales tax systems, inputs used for manufacture, whether
capital or otherwise, are eligible for concessional rate of tax on furnishing the
requisite forms. However, under the VAT system, there is no place for concessions.
Goods will be taxed at their respective rates, of course, with a provision for set off in
future. There will be no incentive schemes under VAT, barring those carried forward
from the existing system.
Note : Students may give any other alternative example.
Answer 8(c)
Computation of Amount of VAT collected by the Government
Particualrs of Sales

Price without
VAT

Gross VAT

Net VAT
payable
by dealer
Rs.

Rs.

Rs.

5,000

625

625

8,000

320

320

Sales of Raw materials :

Ram to Dinesh Ltd. [VAT 12.5%]
Shyam to Dinesh Ltd. [VAT 4%]

Particualrs of Sales

Price without
VAT
Rs.

Gross VAT
Rs.

Net VAT
payable
by dealer
Rs.

Sales of Goods :
Dinesh to Mohan [VAT 12.5%]

18,000

Less : VAT Credit to Dinesh Ltd.

[Rs.625+Rs.320)
Mohan to Trilok [VAT 12.5%]

945
25,000

Less VAT Credit to Mohan Ltd.

Trilok to Consumers [VAT 12.5%]

2,250

3,125
2,250

30,000

Less VAT Credit to Trilok

1,305
875

3,750
3,125

Total VAT collected by the Government

625
3,750

Answer 8(d)
Input tax credit means setting off the amount of input tax by a registered dealer
against the amount of his output tax liability. Input tax is the tax a dealer pays on his
local purchases of business inputs which include the goods he purchases for resale,
raw-materials, capital goods as well as other inputs for use in his business directly or
indirectly. Output tax is the tax that a dealer charges on his sales. Adjustment of
input tax from the amount of output tax is known as input tax credit.
The input tax credit is to be given for both manufacturers and traders for purchase
of inputs meant for both sales within the state as well as to other states.
The essence of VAT lies in providing set-off for the tax paid earlier through the
system of input tax credit. For example, suppose a dealer purchases raw material
worth Rs.5 lac and sells his output for Rs.8 lakhs. Input tax rate and output tax rate
being
12.5%, input tax credit shall be computed as follows :
Input tax paid on raw material = Rs.62,500 [Rs.5 lakhs x 12.5%]
Output tax collected on sales = Rs.1.00,000 [Rs.8 lakhs x 12.5%]
VAT payable = (Rs.1,00,000 Rs.62,500 = Rs.37,500
This shows that the assessee has availed input tax credit equal to Rs.62,500.
However, credit for payment of taxes on capital goods may not be immediately
available from output tax as it is available in respect of input tax on raw materials.
Input tax credit on capital goods may be granted over a certain period of time in order
to soften the burden on states due to high value of the capital goods. Also, input tax
credit on capital goods may not be available to a trader because he does not use the
capital goods for manufacture.
Purchases in respect of which no tax credit is available :
Input tax credit is generally given for the entire VAT paid within the state on purchases

of taxable goods meant for resale/manufacture. However, input tax credit is not
available in respect of the following purchases :
(i) Purchases of goods from unregistered
dealers. (ii) Purchases of goods from other
states.
(iii) Goods purchased for manufacture of exempted goods.
(iv) Purchases of capital goods where credit is available in some cases in
instalments.
(v) Goods purchased for use as fuel in generation of power.
(vi) Goods purchased for being dispatched to outside states as branch transfers.
(vii) Goods purchased for use in manufacture of goods to be dispatched outside
any
state as branch transfer.
(viii) Goods purchased where invoices do not show amounts of tax charged
separately by the dealer who sold goods.
(ix) Purchase of non-creditable goods.
(x) Purchases from a dealer who has opted for composition scheme.
Answer 8(e)
Rates of VAT : Under the VAT system five different rates are applicable as
follows: (i) Zero percent in the case of unprocessed agricultural goods and
goods of social
implications. This rate is also applicable in case of items which are legally
barred from taxation.
(ii) One percent in the case gold and silver ornaments and other precious and
semi- previous metals.
(iii) Four per cent in the case of inputs used for manufacturing i.e., industrial
goods, declared goods; capital goods and other essential items;
(iv) Twelve and half per cent in the case of all the remaining goods other than
luxury goods.
(v) Twenty per cent in the case of luxury goods.
Answer 8(f)(i)
Incorrect
Reasons : Zero rating means that the tax payable on sale of a commodity is fixed at
0%. Though apparently, it looks similar to an exempt transaction, there is
significance difference between the two. While in an exempt transaction, the tax paid
on inputs lapse i.e., it cannot be set-off under the Zero rated sales, prior stage tax is
set-off against the
0% tax paid and effectively the entire tax paid on purchases is eligible for
refund.
Answer 8(f)(ii)
Correct

Reasons : A cross checking through computerized system shall be done on the

basis of coordination between tax authorities of the State Governments and the
authorities

of Central excise to compare constantly the tax returns and set-off documents of VAT
System of the States and those of Central Excise. This comprehensive cross
checking system helps in reduction in tax evasions and also leads to significant
growth of tax revenue
Answer 8(f)(iii)
Correct
Departmental Audit is conducted on the basis of sample checking in case of self
assessment cases. If some disparities are noted, then audit of those cases is done
thoroughly. It helps in checking tax evasions.
Answer 8(f)(iv)
Correct
With the inception of VAT, Company Secretaries are now able to act as
authorized representative of their clients in some states, through statutory provisions
provided in the respective VAT Acts.
Answer 8(f)(v)
Correct
With the introduction of VAT in majority of states in our country, Central Sales
Tax Act, 1956 will be phased out by 2010, it becomes imperative for our economy
that the VAT system should be implemented all over the country