The Institute of Chartered Financial Analysts of India University 2010 C.A Chartered Accountant Professional Competence (PCC) Revision Test s- 5 - Taxation - Question Paper
May 2010: The Institute of Chartered Accountants of India - Revision Test ques. papers (RTPs) Professional Competence Course (PCC) Examination: Paper five - Taxation: May 2010 University ques. paper
PAPER - 5 : TAXATION
QUESTIONS
1. State with reasons whether the following statements are true or false [A.Y. 2010-11] -
(a) The benefit of deduction under sections 10A and 10B were to be allowed only up to A.Y.2010-11.
(b) Advance tax would be payable only if the advance tax liability is Rs. 5,000 or more.
(c) While computing Capital gains in respect of enhanced compensation, cost of acquisition shall be taken as the cost to the previous owner.
(d) The qualifying amount of the preliminary expenditure under section 35D can be claimed as deduction over a period of 10 years in equal installments.
Residential Status and Scope of total income
2. Gourav, citizen of France, is appointed by a multi-national company to its branch in New Delhi in 2005. Gourav has never been to India before this appointment. He arrives in Bombay on 15th April, 2006 and joins the New Delhi office on 20th April, 2006. His wife and children join him in India on 20th October, 2006. The company allotted him a leased residence for the purpose of his stay. This residence is occupied by him from the beginning of October, 2006.
On 10th February, 2007, he is transferred by his employer, on deputation basis, to be the regional chief of his employer's operations in South East Asia having headquarters in Hongkong. He leaves New Delhi on 11th February 2006 and arrives in Hongkong on 12th February, 2007. Gourav leaves behind his wife and children in India till 14th August, 2008, when they leave along with him for Hongkong. Gourav had come to India earlier on 15th June, 2008 on two months' leave. The members of the family occupied the residence till date of departure to Hongkong.
At the end of the period of deputation, Gourav is reposted to India and joins the New Delhi office of his employer as chief of Indian operations on 30th January, 2010.
In what residential status Gourav will be assessable, for the various years, to income tax in India?
Incomes which do not form part of total income
3. Discuss the exemption limit for taxation of anonymous donations under section 115BBC as amended by the Finance Act (No.2), 2009.
4. Explain the tax treatment for Limited liability partnerships.
5. Three brothers Arun, Babloo and Chandan having equal share are co-owners of a house property consisting of six identical units, the property was constructed on 31-5-1993. Each of them occupies one unit for his residence and the other three units are let out at a rent of Rs. 9,000 per month per unit. The Municipal Value of the house property is Rs.
5,00,000 and the Municipal Taxes are 40% of such Municipal Value, which were paid during the year. The other expenses were as follows:
Rs.
(i) Repairs
25.000 6,000
12.000 2,50,000
(ii) Collection charges
(iii) Insurance Premium (paid)
(iv) Interest payable on loan taken for construction of house
One of the let out units remained vacant for three months during the year. Arun could not occupy his unit for six months as he was transferred to Mumbai. He does not own any other house. The other income of Arun, Babloo and Chandan are Rs.1,90,000, Rs.2,00,000 and Rs. 2,20,000 respectively.
Compute the income under the head "Income from House Property" and the total income of the three brothers for the assessment year 2010-11.
Income from house property
6. Ownership itself is the criteria for assessment under the head income from house property. Discuss.
7. State with reasons whether the following statements are true or false [A.Y. 2010-11] -
(a) If two or more persons jointly own a property and if their shares are definite and ascertainable, then the income from such property can be taxed as income of an association of persons.
(b) Where the total income of an assessee includes any income, arising from the transfer of long term capital asset, which is chargeable under the head "capital gains, such long term capital gain shall be charged to tax at 10% rate.
(c) Where the Commissioner of Income-tax is satisfied that the activities of the charitable trust, which has been accorded registration is not genuine, he can cancel the registration by passing an order in writing.
(d) Where an urban agricultural land owned by an individual, continuously used by him for agricultural purposes for a period of two years prior to the date of transfer, is compulsorily acquired under law and the compensation is fixed by the State Government, resultant capital gain is exempt.
Profits and gains of business or profession
8. Compute the gross total income of Mr. Sunder on the basis of the following particulars: Profit and Loss Account for the year ended 31st March, 2010
Particulars |
Amount (Rs.) |
Particulars |
Amount (Rs.) |
Interest |
2,000 |
Gross profit b/d |
1,25,000 |
Repairs and Renewals |
2,500 |
Interest on debenture of an institution (Gross) |
12,000 |
Insurance |
4,500 |
Rent from House property |
40,000 |
Depreciation |
6,000 | ||
Compensation |
11,000 | ||
Law charges |
5,500 | ||
Labour Welfare expenses |
4,000 | ||
Subscriptions |
6,000 | ||
Net Profit |
1,35,500 | ||
1,77,000 |
1,77,000 |
(a) (i) Interest includes Rs. 400 on loan taken for purchasing debentures of a
company and Rs. 500 on loan taken for reconstruction of house property let out.
(ii) The expenses relating to house property let out are 40% of the repairs and renewal expenses.
(iii) Depreciation includes Rs. 1,500 on house property let out.
(iv) Compensation was paid to an employee whose dismissal was in business interest.
(v) Insurance includes 30% for fire insurance of the house property let out, 30% for workers accident insurance and the balance for life insurance.
(vi) Law charges include Rs. 3,000 relating to a petition filed against breach of contract and the balance regarding Sales tax appeal.
(vii) Subscriptions include Rs. 3,000 given for election purpose to political parties.
(b) The amount not debited to profit and loss account are as follows:
(i) Expenses incurred on the occasion of Diwali Rs. 1,500.
(ii) Theft of cash from iron safe Rs. 1,000.
(iii) Expenses for new telephone connection in the business Rs. 3,000.
9. Mr. Amit, a widower, has 3 children of 19 yrs, 15 yrs and 5 yrs respectively. The first child derives Rs. 1,20,000 income every year. The income details of his second and third child are as follows:
Particulars |
Mr. Amit |
Second child |
Third child |
Rs. |
Rs. |
Rs. | |
Business income |
70,000 |
--- |
--- |
Interest on FD invested out of gifts |
--- |
20,000 |
--- |
Bank interest |
8,000 |
9,000 |
2,000 |
Salary earned on application of skills |
50,000 |
25,000 |
-- |
Interest on salary income saved and invested |
9,000 |
3,000 |
-- |
Compute the gross total income for the assessment year 2010-11.
10. Manish, a resident but not ordinarily resident individual, is employed by an Indian company. For the previous year 2009-10, he submits the following information:
Salary of 4 months of service in New York (paid by the foreign branch in USA) 1,20,000
Salary of 8 months of service in Delhi 2,20,000
Bonus of 2008-09 (not taxed earlier) 30,000
Employer's contribution towards recognized provident fund @ Rs. 4,000 per month for the entire previous year [provident fund is maintained in India;
When Manish was posted abroad, employer's contribution was transferred to a separate account in USA and later on along with employee's contribution it is 48,000 remitted to India]
Free car facility in Delhi only for private purpose of Manish and his family 58,000 members; Expenditure of the employer
Car allowance in New York @ Rs. 11,000 per month (one third of which is 44,000 utilized for private purpose)
Besides, the employer-company provides a rent-free furnished flat both in Delhi and New York. While lease rent of the flat provided at Delhi is Rs. 14,000 per month (rent of furniture: Rs. 9,000), lease rent of the flat provided at New York is Rs. 20,000 per month (rent of furniture: Rs. 7,000 per month). During 2009-10, Manish is paid a special allowance of $15,000 by UNO in appreciation of his services rendered in New York. His
income from other sources is Rs. 2,10,000. On March 10, 2010, the employer sells a computer to Manish for 16,500 (it was purchased by the company for Rs. 62,000 an April 10, 2007, and up till its transfer to Manish it was used by the employer for business purposes).
Manish makes the following payments: (a) his contribution to the recognized provident fund: Rs. 65,000 (contribution was remitted from USA when he was posted abroad); (b) contribution to public provident fund: Rs.19,000 (c) life insurance premium to an American insurance company : Rs. 35,000 (sum assured: Rs. 1,50,000); (d) investment in equity shares at a notified company which is engaged in maintaining and operating on infrastructure facility: Rs. 26,000; and (e) tuition fees of Manish's son: Rs. 4,000 per month.
Determine the taxable income and tax liability for the assessment year 2010-11 on the assumption that he holds 20 per cent equity share capital in the employer company and an April 1, 2010, he pays Rs. 300, being professional tax pertaining to the previous year 2009-10. Manish gets a pension of Rs. 10,000 per month from the Gujarat Government (date of retirement being March 31, 2007).
Capital Gains
11. Dinesh owns 2 residential house properties. Property X was purchased by him in 1978 Rs.75,000 and property Y was purchased in 1991-92 for Rs.3,50,000. Market Value of property X and Y on 1-4-1981 was Rs.1,50,000 and Rs. 1,00,000 respectively.
Both the house properties were sold by him on 6-7-2009 for Rs.15,00,000 each. Brokerage of Rs.25,000 was paid by Dinesh for the sale of each such property.
The sale proceeds was invested by him in the following manner:
Rs.
8,00,000
(1) Purchase or residential property on 5-3-2010
(2) Purchase of agricultural land on 15-5-2010
(3) Deposit in capital gain scheme for construction of additional floor on the residential house property purchased.
Date of deposit
4,00,000
Amount Deposited Rs.
16.5.2010 3,00,000
25.6.2010 1,50,000
31.7.2011 2,50,000 Compute capital gain for the assessment year 2010-11.
Set-off and Carry forward of losses
12. Briefly discuss carry forward and set-off of losses in case of closely held companies. Income from other sources
13. Mr. Ram, who follows the accrual system of accounting, purchased land for Rs,
26.00.000 in June 2001. This asset was transferred to the Government by way of compulsory acquisition in September, 2006 for an immediate compensation of Rs.80,00,000. However, Mr. Ram disputed the compensation and an enhanced compensation of Rs. 25,00,000 was awarded to him by the court in November 2008. Interest accrued on this compensation as on 31st March, 2009 was Rs. 5,00,000. The enhanced compensation was received by him in May, 2009 along with an interest of Rs.
6.00.000, which has accrued till date. Discuss the year of chargeability and appropriate heads of income under which the above transactions would be taxed.
Deductions from Gross Total Income
14. Ramesh a resident individual, submits the following particulars of his income 2009-10:
Rs. | |
Business income |
85,000 |
Interest on debentures |
50,000 |
long-term capital gains on transfer of gold |
4,20,000 |
Short-term capital gain on sale of shares taxable under section 111 A |
25,000 |
Other short-term capital gain |
15,000 |
Contribution towards public provident fund |
45,000 |
Payment of medical insurance premium on own life |
5,000 |
Donation to the National Trust for welfare of persons with Autism |
6,000 |
Donation to the fund set up by the Gujarat Government for providing relief to victims of earthquake in Gujarat |
5,000 |
Donation to Rajiv Gandhi Foundation |
2,000 |
Donation to the Prime Minister's Drought Relief Fund |
7,000 |
Donation to approved public charitable institution |
12,000 |
Donation to a poor boy for higher education |
7,000 |
Donation of clothes to an approved institution |
15,000 |
Donation to a charitable Institution for construction of a rest house only for particular religious community Determine the total income of Ramesh for the assessment year 2010-11. |
9,000 |
15. Vicky is employed by a private sector company, monthly salary being Rs. 50,000. He
holds 100 shares in the company and is a member of Board of Directors of the company.
The employer-company provides the following allowances / perks:
1. Free car only for personal use, expenditure incurred by the employer (including depreciation and salary of driver): Rs. 1,25,000, 10 per cent of the expenditure is attributable for covering the distance between office and residence.
2. Expenditure on providing computer training to Vicky (Rs. 9,000), his wife (Rs. 4,500) and his children (Rs. 4,000).
3. Sale of goods manufactured by the employer at discount (discount availed during
2009-10: Rs. 10,000). The same discount is given by the company to its dealers.
4. Special allowance: Rs. 1,15,000.
5. Ordinary medical facility in a hospital owned by the employer: Rs. 16,000 (being cost to the employer).
6. Reimbursement of expenses on medical treatment of Mrs. Vicky outside India -expenditure on medical treatment: Rs. 7,00,000 (permission of RBI is taken), expenditure on travel of Mrs. Vicky and Mr. Vicky outside India for treatment of Mrs. Vicky : Rs. 3,00,000, expenditure on boarding and lodging outside India of Mrs. Vicky and Mr. Vicky Rs. 3,50,000 (permission of RBI is taken).
7. Furniture provided to Mr. Vicky: Rs. 15,000 (being market rent of the furniture, original cost to the employer: Rs.2,50,000).
During the previous year 2009-10, Mr. Vicky has the following other income:
1. He sold a residential house on May 5, 2009 for Rs 12,50,000 (it was purchased in 1986; indexed cost of acquisition: Rs. 12,25,735). He purchases a house property on April 6, 2009 for Rs. 12,55,000. He, however, sells the new house on March 30,
2010 for Rs. 13,95,000.
2. On July 10, 2009, he has withdrawn Rs. 60,000 (capital Rs 45,000; interest: Rs
15,000) from the National Savings Scheme, 1981.
3. He owns a flat which is self-occupied for residential purposes (municipal valuation being Rs. 80,000). A loan of Rs 8,50,000 was taken from LIC to finance purchase of the flat. During 2009-10, he pays Rs. 35,000 (Rs. 19,000 interest and Rs. 16,000 as repayment of loan) to LIC.
4. Winning from lotteries: Rs. 1,20,500 (gross) received on December 17, 2009.
5. Interest on company deposit received by minor son of Vicky: Rs. 25,700 (income of Mrs. Vicky is lower).
6. Income from agriculture in India: Rs. 1,80,000.
7. On June 29, 2009, Vicky gets a cash gift of Rs. 45,000 from his friend in foreign currency outside India. No other gift is received from any person during the previous year.
During the previous year 2009-10, he donates Rs. 15,000 to a public charitable institute and deposits Rs. 70,000 in the public provident fund. Compute the total income for the assessment year 2010-11.
16. Suman, an employee furnished the following particulars for previous year ending 31.03.2010:
(a) Salary income as computed 6,00,000
(b) During the year arrears of salary were received not 15,000 included in the above ) related to F.Y. 2001- 02
(c) Assessed income of Financial Year 2001-02 66,000
(d) On 25.3.2010, amount deposited in Public Provident 50,000 Fund Account
You are requested to compute relief u/s. 89 in terms of tax payable.
The rates of tax for the A.Y. 2002-2003 are:
On First Rs. 50,000 Nil
On Next Rs. 10,000 10%
On Next Rs. 90,000 20%
On the balance 30%
(Surcharge @ 2% when taxable income exceeds Rs. 60,000).
Profits and gains of business or profession
17. Parvesh is a trader of electrical goods paid hire charges to a goods carrier on different occasions as detailed here below:
(a) Rs. 26,000 by way of cash on 28-09-2009.
(b) Cash payment of Rs. 31,000; and Rs. 9,000 for one invoice on 11-10-2010.
(c) Rs. 10,000; Rs. 15,000; and Rs. 8,000 all by way of cash on 13-03-2010.
Advise on the admissibility of above payment.
18. The Finance Act (No.2), 2009 has inserted a new section in respect of mandatory requirement of furnishing PAN in all TDS statements, bills, vouchers and correspondence between deductor and deductee. Discuss.
Provisions for Filing of Return of Income
19. Is it compulsory to file a return of income? If so what is the time limit for submission of the return of income.
20. Answer the following with reference to Notification No. 17/2009 dated 07.07.2009 relating to exemption to specified services received by an exporter and used for export of goods (refund of service tax paid) :-
(a) What is the minimum amount of refund claim admissible?
(b) What is the time limit for filing the refund claim?
Special provision for payment of service tax
21. Explain the special provision for payment of service tax in case of services provided in relation to purchase or sale of foreign currency including money changing.
Exemption to services provided to SEZ
22. Singh Transporters are engaged in providing the services in relation to transport of goods to a unit of Special Economic Zone (SEZ) engaged in carrying out the authorized operations. The said services are consumed wholly within the SEZ. You are required to advice Singh Transporters as to what are the conditions which should be fulfilled in order to claim exemption in respect of the said services provided.
23. Compute the net VAT liability of Rishabh using the information given as follows:- | ||||||||
|
| ||||
Rishabh sold the goods to Rajul and earned profit @ 10% on the cost of production. VAT rate on sale of such goods is 12.5%. |
Subtraction method
24. Briefly discuss, under what circumstances subtraction method of computing VAT is normally applied?
Demerits of VAT
25. Illustrate the demerits of VAT system.
SUGGESTED ANSWERS/HINTS
(a) False - The Finance Act (No. 2), 2009 has extended the benefit of deduction under sections 10A and 10B upto A.Y. 2011-12.
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(b) False - The Finance (No.2) Act, 2009 has revised the limit. Accordingly, from financial year 2009-10 onwards, advance tax would be payable only if the advance tax liability is Rs.10,000 or more.
(c) False - While computing Capital gains in respect of enhanced compensation, cost of acquisition shall be taken as Nil.
(d) False - The qualifying amount of the preliminary expenditure under section 35D can be claimed as deduction over a period of 5 years in equal installments.
On analyzing the information given about the period of stay of Gaurav in India, the
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following position emerges:
Assessment year Previous year 2006- 2007 2007- 2008 2008- 2009 2009-2010 2007- 2008 2008- 2009 2009-2010 2010-2011 |
Period of stay (Number of days) 303 61 61 |
Considering the number of days of stay during each of the previous years, the residential status of Gaurav is determined as follows:
(i) For the assessment year 2007-2008, Gaurav has stayed for not less than 182 days during the relevant previous year 2006-2007. Hence, he is a resident. Also he
satisfies the two additional conditions for not ordinarily resident. Therefore, status of Gaurav for the A.Y.2007-08 is Resident but Not Ordinarily Resident.
(ii) For the assessment year 2008-09, he has never stayed in India. Therefore, he is a non-resident, as having not fulfilled any of the two basic conditions.
(iii) For the assessment year 2009-10, the period of stay is 60 days. According to section 6, an individual who stays for 60 days or more should also fulfill the requirement of stay of 365 days or more during the preceding 4 years. This limb of the basic condition is not satisfied and therefore, he is a non-resident.
(iv) For the assessment year 2010-11, the period of stay does not satisfy any of 2 basic conditions. Therefore, he is a non-resident.
Note : -
The information about stay of Gaurav's wife and children in India is not relevant to determine the residential status of Gaurav. Similarly, maintenance of a residence in India is not relevant for determination of residential status.
3. Exemption limit for taxation of anonymous donations under section 115BBC
(i) Anonymous donations received by wholly charitable trusts and institutions are subject to tax at a flat rate of 30% under section 115BBC. Further, anonymous donations received by partly charitable and partly religious trusts and institutions would be taxed @ 30%, only if 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 donations in excess of this limit would be subject to tax@30% under section 115BBC.
(iii) The exemption limit is the higher of the following -
(1) 5% of the total donations received by the assessee; or
(2) Rs.1 lakh.
(iv) The total tax payable by such institutions would be -
(1) tax@30% on anonymous donations exceeding the exemption limit as calculated above; and
(2) tax on the balance income i.e. total income as reduced by the aggregate of anonymous donations received.
(v) The following table illustrates the calculation of anonymous donations liable to tax @30% under section 115BBC -
Situation |
Total donations during the year (Rs.) |
Anonymous donations received during the year (Rs.) |
Exemption (Rs.) |
Anonymous donations taxable@30% (Rs.) |
1 |
15,00,000 |
4,00,000 |
1,00,000 |
3,00,000 |
2 |
30,00,000 |
7,00,000 |
1,50,000 |
5,50,000 |
3 |
40,00,000 |
10,00,000 |
2,00,000 |
8,00,000 |
4. Tax Treatment for Limited Liability Partnerships [Sections 2(23) & 140]
(i) The Finance (No.2) Act, 2009 has incorporated the taxation scheme of LLPs in the Income-tax Act on the same lines as applicable for general partnerships, i.e. tax liability would be attracted in the hands of the LLP and tax exemption would be available to the partners. Therefore, the same tax treatment would be applicable for both general partnerships and LLPs.
(ii) Consequently, the following definitions in section 2(23) have been amended -
(1) The definition of partner' to include within its meaning, a partner of a limited liability partnership;
(2) The definition of firm' to include within its meaning, a limited liability partnership; and
(3) The definition of partnership' to include within its meaning, a limited liability partnership.
The definition of these terms under the Income-tax Act would, in effect, also include the terms as they have been defined in the Limited Liability Partnership Act, 2008. Section 2(q) of the LLP Act, 2008 defines a partner' as any person who becomes a partner in the LLP in accordance with the LLP agreement. An LLP agreement has been defined under section 2(o) to mean any written agreement between the partners of the LLP or between the LLP and its partners which determines the mutual rights and duties of the partners and their rights and duties in relation to the LLP.
(iii) The LLP Act provides for nomination of "designated partners who have been given greater responsibility. Therefore, clause (cd) has been inserted in section 140, which lays down the "Authorised signatories to the return of income, to provide that the designated partner shall sign the return of income an LLP. However, where, for any unavoidable reason such designated partner is not able to sign and verify the return or where there is no designated partner as such, any partner can sign the return.
(iv) Since the tax treatment accorded to a LLP and a general partnership is the same, the conversion from a general parternship firm to an LLP will have no tax
implications if the rights and obligations of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. However, if there is a change in rights and obligations of partners or there is a transfer of asset or liability after conversion, then the provisions of section 45 would get attracted.
(v) The LLP shall be entitled to deduction of remuneration paid to working partners, if the same is authorized by the partnership deed, subject to the limits specified in section 40(b)(v), i.e., -
(a) On the first Rs.3,00,000 of book Rs.1,50,000 or 90% of book