The Hindu Business Line : Not a tough nut to crack

The November 2006 CA (PE-II) paper on income-tax and Central Sales Tax (CST) has six questions carrying 117 marks, and the students have to attempt for a maximum of 100 marks. Four questions relate to income-tax account for 87 marks, of which, the students can attempt for up to 75 marks. In CST, two questions account for 30 marks, of which 25 marks can be attempted.

The first question consists of two parts, with 20 and 10 marks respectively. In Question 1(a), the HRA (computed) is given as Rs 1,80,000. A student could assume the taxable HRA (computed) as Rs 1,80,000. Similarly, for transport allowance, the statutory exemption as per rule 2BB is Rs 800 per month. The question does not mention for how many months the transport allowance was received by the employee. If it has been received for 12 months, the taxable portion will be Rs 2,800. If it has been received for eight months, the taxable portion of transport allowance will be Rs 6,000. Students would have had to make such assumptions because of the lack of clarity in the question.

The question also states that "a loan of Rs 20 lakh for the consumption of the property" has been taken. A typographical error has crept in here. Instead of "construction", the word "consumption" has been used. As regards house property loan, the question says "repaid Rs 1,05,000 (including interest Rs 40,000) during the year". While computing "income from property", the deduction under Section 24 in respect of interest is on accrual, and not paid, basis. Whereas in the case of repayment of housing loan principal, the actual paid amount is deductible. The question does not talk of interest payable on the housing loan and, hence, the students may have assumed the interest paid as payable and computed the deduction accordingly.

Question 1(a) deals with all heads of income except "income from business or profession". But for the ambiguities (intended or otherwise), the question is of the required standard.

Question 1(b) requires computation of capital gain and the amount to be invested under Section 54 EC for getting maximum exemption. For computing the capital gain for land acquired in April 2000, the cost inflation index is required. But this has not been given in the question. This is a major error and only students who knew the cost inflation index of 2000-2001 could have answered the question correctly. It appears that the examiner was under the wrong impression that the year in which the advance was forfeited is to be taken for computing the indexed cost of acquisition. It is only fair that full marks be given to those students who attempted that part of the question which had the error.

Choice one of Question 2(a) deals again with capital gains. Here it has been stated that some portion of the machinery could be salvaged from the fire accident. The question only requires a brief comment on the tax treatment of loss of stock, machinery and gold ornaments and does not seek computation of capital gain or loss. Whether the assessee has replaced machinery before the end of the previous year is not given. This could have confused the students.

Choice one of Question 2(b) requires finding chargeability of income in the previous year instead of the assessment year.

Choice two of Question 2(a) is on the latest amendment relating to Section 80-E. This would not have been difficult to answer. Similarly, Question 2(b), on transactions where permanent account number (PAN) would be required, is a routine.

Question 3, the `true or false' section, should not have posed any difficulty.

Question 4(b)(iii) may have been difficult unless, of course, the student had undergone some practical training.

Question 5(a)(iii) should have read "if a declaration in prescribed form is furnished by the exporter selling goods" and not "dealer selling goods". The dealer making penultimate sale must obtain declaration from the exporter in Form H. Perhaps the examiner wanted to test the students' grasp of the language.

Question 5(b), being a multiple-choice one, is on expected lines.

Question 6, a theory-based one and with a choice as well, should not have posed any difficulty to the students.

The paper did not have any questions on computation of business income, clubbing provisions, carry-forward and set-off provisions and assessment procedure. The paper has given excess weightage to capital gains (17 marks) — a portion in the first question relates to computation of capital gain from sale of shares. The question paper also has some typographical errors and ambiguities