Bhagya Achievers Test Series

CA Final

Paper 4: Direct tax laws

Mock Test 1: Full Syllabus

Total Marks: 100

Time: 3 Hrs.

Working Notes should form part of the answer. Wherever necessary, suitable
assumptions may be made by the candidates and disclosed by way of a note.
However, in answers to Questions in Division A, working notes are not
required.

All questions relate to Assessment Year 2024-25, unless stated otherwise in

the question.

Division A – Multiple Choice Questions

Write the most appropriate answer to each of the following multiple choice
questions by choosing one of the four options given. All questions are
compulsory.

Case Scenario 1 (4 x 2= 8 Marks)

Omega Inc., a Country F company, maintains an online web-platform

through which it provides end user computer software through an End-user
Licence Agreement (EULA). Trailor Ltd., an Indian company, has entered into
a contract for Rs. 6.7 crores with Omega Inc., for the Financial Year 2023-24,
which is approved by the Central Government.
The broad terms of the EULA between the two companies are as follows-
Grant of licence. Omega Inc. grants Trailor Ltd. a limited non-exclusive
licence to install, use, access, display and run the click wrap web-based
Computer Software (CWCS) on a single local hard disk(s) or other
permanent storage media of one
computer. Trailor Ltd. should not make CWCS available over a network

1 www.bhagyaachievers.com
9878791366
where it could be used by multiple computers at the same time.
Reservation of rights and ownership. Omega Inc. reserves all rights not
expressly granted to Trailor Ltd. in this EULA. The CWCS is protected by
copyright and other intellectual property laws and treaties. Omega Inc. owns
the title, copyright and other intellectual property rights in the CWCS. The
CWCS is licenced (only for use and not any other purpose), not sold.
Omega Inc. does not have any offices outside Country F.
Extract of Article 12 of India-Country F
DTAA Royalties and Fees for Technical
Services

1. Royalties and fees for technical services arising in a Contracting State

and paid to a resident of the other Contracting State may be taxed in
that other State.
2. However, such royalties and fees for technical services may also be
taxed in the Contracting State in which they arise and according to the
laws of that Contracting State, but if the recipient is the beneficial
owner of the royaltiesor fees for technical services, the tax so charged
shall not exceed 10 per cent.
3. The term "royalties" as used in this Article means payments of any kind
received as a consideration for the use of, or the right to use :
(a) any copyright of a literary, artistic or scientific work, including
cinematograph film or films or tapes used for radio or television
broadcasting, any patent, trade mark, design or model, plan,
secret formula or process, or for information concerning
industrial, commercial or scientific experience, including gains
derived from the alienation of any such right, property or
information
Based on the facts of the above case scenario, choose the most
appropriate answer to Q.1 to Q.4 below:
1. Is Trailor Ltd., India required to deduct tax at source on the payment
made to Omega Inc.? If yes, what amount of tax is required to be
deducted at source on the said payment?

2 www.bhagyaachievers.com
9878791366
 (a) Yes, Trailor Ltd. is required to deduct tax at source
of Rs. 1,42,14,720.
(b) No, Trailor Ltd. is not required to deduct tax at source.
(c) Yes, Trailor Ltd. is required to deduct tax at source of Rs.
2,84,29,440.
(d) Yes, Trailor Ltd. is required to deduct tax at source of Rs.
67,00,000
Answer: (b)

2. Is equalisation levy attracted in respect of the consideration received

by Omega Inc., Country F from Trailor Ltd.? If so, in whose hands and at
what rate?
(a) Omega Inc. has to pay equalisation levy @6% of the consideration
(b) Trailor Ltd. is required to deduct equalisation levy @6% of the
consideration
(c) Trailor Ltd. is required to deduct equalisation levy @2% of the
consideration
(d) Omega Inc. has to pay equalisation levy @2% of the consideration
Answer: (d)

3. Would Trailor Ltd., India be required to deduct tax at source on the

payment made to Omega Inc, if there was no DTAA between India
and Country F? If so, what amount of tax is required to be deducted at
source on the said payment?
(a) Yes, Trailor Ltd. is required to deduct tax at source of Rs.
1,42,14,720.
(b) No, Trailor Ltd. is not required to deduct tax at source, since
such sumis not taxable in the hands of Omega Inc.
(c) Yes, Trailor Ltd. is required to deduct tax at source of Rs.
2,84,29,440.
(d) Yes, Trailor Ltd. is required to deduct tax at source of Rs.
71,07,360

3 www.bhagyaachievers.com
9878791366
Answer: (a)

4. Is equalisation levy attracted in respect of the consideration received

by Omega Inc. Country F from Trailor Ltd., if there is no DTAA between
India and Country F? If so, in whose hands and at what rate?
(a) Omega Inc. has to pay equalization levy @6% of the consideration
(b) Trailor Ltd. is required to pay equalization levy @2% of the
consideration
(c) Omega Inc. has to pay equalization levy @2% of the consideration
(d) No, equalization levy is not attracted
Answer: (d)

5. ABC bank provides the following information relating to cash withdrawals

by its two customers during the P.Y.2023-24:
Date of cash Mr. Arjun (Savings XYZ Co-operative
withdrawal Account) (Rs.) Society
(Current Account) (Rs.)
12.04.2023 20,00,000 -
9.05.2023 - 68,00,000
15.06.2023 25,00,000 -
19.07.2023 - 85,00,000
18.10.2023 35,00,000 -
5.11.2023 - 88,00,000
22.12.2023 25,00,000 -
03.01.2024 - 57,00,000
Co-operative society regularly files its return of income However, Mr.
Arjun has not filed his return of income for the last three years.
Would cash withdrawals by Mr. Arjun and XYZ Co-operative society during
the P.Y. 2023-24 attract deduction of tax at source? If yes, how much tax
would be deductible by ABC bank.

4 www.bhagyaachievers.com
9878791366
 (a) Yes; Rs. 1,85,000 and Rs. 3,96,000, respectively
(b) Yes; Rs. 1,85,000 and Rs. 5,56,000, respectively
(c) Yes; Rs. 10,000 and Rs.3,96,000, respectively
(d) Rs. 1,85,000 in respect of cash withdrawals by Mr. Arjun and no tax is
required to be deducted from cash withdrawals by the co-operative
society. (2 Marks)
Answer: (d)

6. ABC Ltd. took on sub-lease a building from Ms. Jhanvi with effect from
1.7.2023 on a rent of Rs. 20,000 per month. It also took on hire machinery
from Ms. Jhanvi with effect from 1.10.2023 on hire charges of Rs. 15,000
per month. ABC Ltd. entered into two separate agreements with Ms.
Jhanvi for sub-lease of building and hiring of machinery. Which of the
following statements is correct with reference to ABC Ltd.'s liability to
deduct tax at source, assuming that one-month's rent was received as
security deposit, which is refundable at the end of the lease period?
(a) No tax needs to be deducted at source since rent for building does
not exceed Rs. 2,40,000 p.a. and rent for machinery also does not
exceed Rs. 2,40,000 p.a. Security deposit refundable at the end of
the lease term is not rent for the purpose of TDS
(b) Tax has to be deducted@10% on Rs. 2,00,000 and @2% on Rs.
1,05,000 (i.e., rent including security deposit)
(c) Tax has to be deducted@10% on Rs. 1,80,000 and @2% on Rs.
90,000 (i.e., rent excluding security deposit)
(d) Tax has to be deducted@10% on Rs. 2,00,000 (i.e., rent including
security deposit). However, no tax is to be deducted on rent of Rs.
1,05,000 (i.e., rent including security deposit) for machinery, since
the same does not exceed Rs. 1,80,000 (2 Marks)
Answer: (c)

7. Mayank, aged 50 years, sold his residential house for Rs. 30 lakhs during
the previous year 2020-21, whereas the stamp duty value of the same was
Rs. 38 lakhs. He computed a long-term capital gain of Rs. 5 lakhs by taking

5 www.bhagyaachievers.com
9878791366
 the full value of consideration as Rs. 30 lakhs and paid tax accordingly by
filing his return of income under section 139(1). During the previous year
2023-24, he wants to correct the full value of consideration by filing an
updated return under section 139(8A) for A.Y. 2021-22. In this case, what
would be the additional tax liability (ignore interest) as per section 140B?
(Assume that capital gain was the only income of Mayank for A.Y. 2021-
22).
(a) Rs. 57,200
(b) Rs. 83,200
(c) Rs. 1,66,400
(d) Rs. 1,14,400 (2 Marks)
Answer: (b)

8. ABC (P) Ltd. engaged in trading goods availed the following interest-free
loans from XYZ (P) Ltd. –
(i) Rs.8 lakh by ECS through bank account on 10.4.2023
(ii) Rs.18,000 by cash on 18.8.2023
(iii) Rs.12,000 by cash on 19.9.2023
During the year, ABC (P) Ltd. repaid the following loans to XYZ(P) Ltd. –

(i) Rs.6 lakh by account payee cheque on 15.6.2023

(ii) Rs.50,000 by cash on 3.7.2023
(iii) Rs.1,50,000 by ECS through bank account on 3.8.2023
(iv) Rs.15,000 by cash on 1.9.2023
(v) Rs.15,000 by cash on 1.10.2023
What is the amount of penalty leviable on ABC (P) Ltd. for availing and
repaying loan in cash?

(a) Rs.30,000 under section 271D and Rs.80,000 under section 271E
(b) Rs.18,000 under section 271D and Rs. 50,000 under section 271E
(c) Rs.12,000 under section 271D and Rs.80,000 under section 271E

6 www.bhagyaachievers.com
9878791366
 (d) Rs.50,000 under section 271E (2 Marks)
Answer: (d)

9. Mr. Arvind opened a bank account in Country “P” on 1.7.2020. He has

made deposits of foreign currency equivalent to Rs. 5 lakhs on 1.7.2020,
Rs. 7 lakhs on 1.10.2020, Rs. 12 lakhs on 1.9.2022 and Rs. 25 lakhs on
1.3.2024, in that bank, out of Indian income which has not been assessed
to tax in India. The deposit of Rs. 12 lakhs on 1.9.2022 is made out of the
withdrawal of earlier deposits made on 1.7.2020 and 1.10.2020 with the
said bank. Further, out of Rs. 25 lakhs deposited by him on 1.3.2024, Mr.
Arvind withdrew Rs. 2 lakhs on 31.3.2024. The value of an undisclosed
asset in form of bank account under the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 will be taken
as:
(a) Rs. 49 lakhs
(b) Rs. 47 lakhs
(c) Rs. 37 lakhs
(d) Rs. 35 lakhs (2 Marks)
Answer: (c)

10. Which of the following transactions should a bank report in its statement
of financial transaction?
(i) Cash payment in aggregate of Rs. 6 lakh by Mr. X for purchase of
bank drafts during the F.Y. 2023-24
(ii) Cash deposits aggregating to Rs. 26 lakhs by Mr. Y in his current
account during the F.Y.2023- 24
(iii) Cash deposits aggregating to Rs.12 lakhs by Mr. Z in his savings bank
account during the F.Y.2023-24
(iv) Withdrawals of Rs. 55 lakhs through bearer cheque by Mr. A from
his current account during the F.Y.2023-24
(v) Credit card payment of Rs.12 lakh during F.Y.2023-24 made by Mr.
B by account payee cheque

7 www.bhagyaachievers.com
9878791366
 (vi) Credit card payment of Rs. 80,000 made by cash during F.Y.2023-24
by Mr. C
The correct answer is –

(a) (ii), (iv) and (vi)

(b) (iii), (iv) and (v)
(c) (ii), (iii), (iv) and (vi)
(d) (i), (ii), (iv) and (vi) (2 Marks)
Answer: (b)

Case scenario 2 (5 x 2 = 10 Marks)

A Ltd. is an Indian company which has invested in shares of other Indian

and foreign companies. During the P.Y.2023-24, A Ltd. received dividend
from these companies as follows:

% of Date of Date of Amount Interest

holding declaration distribution of expenditure
of A of dividend of dividend dividend on loan
Ltd. by the by the [Gross] borrowed for
company company (Rs.) investment in
shares (Rs.)
B Ltd., an 10% 20.6.2023 3.7.2023 2,00,000 45,000
Indian
company
C Inc, a 22% 17.9.2023 12.10.2023 4,00,000 90,000
foreign
company
D Inc., a 30% 13.11.2023 28.11.2023 6,00,000 1,30,000
foreign
company
E Ltd., an 15% 14.1.2024 2.2.2024 3,20,000 70,000
Indian

8 www.bhagyaachievers.com
9878791366
company
A Ltd. declared and distributed dividend of Rs. 6 lakhs for the F.Y.2022-23
in December, 2023 and dividend of Rs. 7 lakhs for the F.Y.2023-24 in July,
2024.

Mr. Aakash and Mr. Aarav are two brothers who have invested in shares
of A Ltd. Both of them were born in India; their parents and grand parents
were also born in India. Mr. Aakash is an Indian citizen who lives in
Hyderabad. He is employed with a leading textile manufacturing unit at a
salary of Rs. 1 lakh per month. His brother, Mr. Aarav is settled in Country
Y since the year 2010. He is a citizen of Country Y and is a partner with a
software development firm in Country Y. His share of profit in the Country
Y firm for the F.Y.2023-24 is CYD 1,20,000, which was credited to his bank
account in Country Y. The value of one CYD may be taken as Rs. 25. He is
not subject to income-tax in Country Y, since the share of profits of a firm
is exempt in the hands of partners in Country Y. Mr. Aarav visits India for
four months (in continuation) every year. He earns interest of Rs. 14 lakhs
from fixed deposits with Bank of India.

The details of investment in shares of A Ltd. by Mr. Aakash and Mr. Aarav
are given below –

Name of the % of Month of Amt of Interest

shareholder holding declaration & dividend expenditure on
distribution of [Gross] loan borrowed for
dividend (Rs.) investment in
shares (Rs.)
Aakash 10% December, 2023 60,000 15,000
10% July, 2024 70,000 15,000
Aarav 15% December, 2023 90,000 20,000
15% July, 2024 1,05,000 20,000
On the basis of the facts given above, choose the most appropriate
answer, on the basis of the provisions of the Income-tax Act, 1961 [Ignore

9 www.bhagyaachievers.com
9878791366
 the provisions of DTAA, if any, with Country Y for the purpose of
answering these questions] –

11. What is the amount of dividend income includible in the gross total
income of A Ltd. for A.Y.2024-25 under the provisions of the Income-tax
Act, 1961?
(a) Rs. 11,85,000
(b) Rs. 12,16,000
(c) Rs. 13,15,000
(d) Rs. 13,36,000
Answer: (b)

12. What is the deduction allowable under section 80M to A Ltd. for A.Y.2024-
25?
(a) Rs. 6,00,000
(b) Rs. 7,00,000
(c) Rs. 9,20,000
(d) Rs. 13,00,000
Answer: (d)

13. What is the tax liability (rounded off) of Mr. Aakash for A.Y.2024-25 under
the provisions of the Income-tax Act, 1961 if he wishes to make maximum
tax savings (ignore TDS)?
(a) Rs. 1,04,830
(b) Rs. 1,03,580
(c) Rs. 1,78,780
(d) Rs. 93,290
Answer: (d)

14. What is the residential status of Mr. Aarav for A.Y.2024-25?

(a) Resident and Ordinarily resident
(b) Resident but not ordinarily resident
10 www.bhagyaachievers.com
9878791366
 (c) Non-resident
(d) Deemed resident
Answer: (c)

15. What is the tax liability (rounded off) of Mr. Aarav under the provisions of
the Income-tax Act, 1961 for A.Y.2024-25, if he wishes to make maximum
tax savings (ignore TDS)?
(a) Rs. 2,64,260
(b) Rs. 2,60,520
(c) Rs. 1,53,920
(d) Rs. 1,75,760
Answer: (c)

Division B – Descriptive Questions

Question No. 1 is compulsory

Attempt any four questions from the remaining five questions

Question1. (14 Marks)

Shubh Fragrance Ltd. established in 2015, is engaged in the

manufacturing and selling of pharmaceutical products. The net profit
of the company as per profit and loss account for the year ended 31st
March 2024 is Rs. 900 lakhs, after debiting or crediting the following
items:
(i) Payment of Rs. 50 lakhs in the month of November 2023 to a
foreign company for obtaining know-how for a product launched in
the month of December 2023.
(ii) Electricity charges of Rs. 7 lakhs for the month of March 2024 were
unpaid up to the due date of filing of return of income.
(iii) Loss of Rs. 4 lakhs due to hedging contract against future price
fluctuations in respect of import of raw material, used in the course
of manufacturing.

11 www.bhagyaachievers.com
9878791366
 (iv) Depreciation charged to the Statement of Profit and Loss was Rs. 45
lakhs
(v) Loss of Rs. 2 lakh from hedging contracts entered into for mitigating
the loss arising due to fluctuation in foreign currency payment
towards an imported machinery purchased from Japan for Rs. 65
lakhs, which was installed in the month of December 2023.3
(vi) Rs. 20 lakhs received from Z Ltd. under an agreement in the form of
non-compete fees for not carrying out any business in a
particular product.
(vii) Advance received amounting to Rs. 20 lakhs on proposed sale of
land, forfeited due to non-receipt of balance amount of Rs. 70
lakhs on time, as per terms of agreement. The land was
purchased during F.Y. 2019-20
(viii) Excess on sale of unlisted shares - Rs. 15 lakhs (Sold on 15th
February 2024).
Additional Information:

1. Normal depreciation allowable as per the Income-tax Act, 1961 Rs.

35 lakhs [depreciation, if any required to be computed on the
amount debited or credited to Statement of profit or loss is not
included].
2. The unlisted shares were acquired on 29.3.2021 for Rs. 80 lakhs.
3. Cost Inflation Index F.Y. 2019-20 - 289, F.Y. 2020-21 - 301, F.Y. 2023-
24 - 348.
The total turnover of the company for previous year 2021-22 was Rs.
282 crores and for the financial year 2022-23 Rs. 405 crores. The
company has MAT credit of Rs. 20 lakhs of the assessment year 2016-
17. The book profit (computed) for the assessment year 2024-25 is Rs.
1520 lakhs.

Compute the total income and tax liability (computed in the most
beneficial manner) for the assessment year 2024-25.

Answer: 1. (14 Marks)

12 www.bhagyaachievers.com
9878791366
 Computation of total income and tax liability of Shubh Fragrance Ltd. for
A.Y.2024-25 under the regular provisions of the Act
Particulars Amount (in Rs.)
I Profits and gains of business and
profession
Net profit as per Statement of profit and 9,00,00,000
loss
Add: Items debited but to be considered
separately or to be disallowed

(i) Payment towards know-how for a 50,00,000

product
[Payment towards obtaining know- how
is capital expenditure i.e., an intangible
asset and eligible for depreciation. Since
the same is debited in statement of profit
and loss, it has to be added back]
(ii) Electricity charges unpaid upto the due-
of filing return of income
[Electricity charges are not included
within the scope of section 43B1,
therefore no disallowance would be
attracted. Since the same is already
debited in statement of profit and loss,
no further adjustment is required]

(iii) Loss due to hedging contract in -

respect of raw material
[Loss due to hedging contract against
future price fluctuations in respect of
import of raw material is not deemed to
be speculative transaction. Hence, the
same is allowable as deduction while
computing income from

13 www.bhagyaachievers.com
9878791366
 manufacturing. Since the same is already
debited in statement of profit and loss,
no further adjustment is required]
(iv) Depreciation as per books 45,00,000
of account
(v) Loss from hedging contract in respect 2,00,000
of imported machinery from Japan
[Loss from hedging contracts entered for
mitigating loss arising due to fluctuation
in foreign currency payment towards
import of machinery has to added to the
actual cost of the machinery as per
section 43A. Since the same is wrongly
debited to statement of profit and loss,
same has to be added back].
- 97,00,000

9,97,00,000
Less: Items credited but chargeable to
tax under other head
(vi) Non-compete fees for not carrying
out any business in a particular product
[Non-compete fees for not carrying out
any business in a particular product
would be chargeable to tax as business
income under section 28(va). Since the
same is already credited in statement of
profit and loss, no further adjustment is
required]

(vii) Advance forfeited in respect of sale 20,00,000

of land
[With effect from A.Y. 2015-16, advance

14 www.bhagyaachievers.com
9878791366
 forfeited in respect of sale of land due to
non-receipt of balance amount of
consideration taxable under the head
“Income from other sources”. Since the
same has been credited to the statement
of profit and loss, the same has to be
deducted while computing business
income]
(viii) Profit on sale of unlisted shares 15,00,000

[Profit on sale of unlisted shares is

taxable under the head “Capital Gains”.
Since profits has been credited to the
statement of profit and loss, the same
has to be deducted while computing
business income]
35,00,000
9,62,00,000
Less: Depreciation as per Income-tax Act,
1961 [other than on imported plant &
machinery and know-how] 35,00,000
Deprecation on:
Plant & Machinery 65,00,000
imported
Add: Loss on hedging 2,00,000
contract
67,00,000
- Normal depreciation @7.5% of
Rs. 67,00,000 [only 50% of the 15% is
allowable since machinery is put to use for
less than 180 days] 5,02,500

15 www.bhagyaachievers.com
9878791366
 - Additional depreciation @10% of Rs.
67,00,000 [only 50% of the 15% is allowable
since machinery is put to use for less than
180 days]
6,70,000
Know-how @ 12.5% of Rs. 50,00,000 [50% of
25% since know how was obtained in the
month of November 2023]
6,25,000
52,97,500
9,09,02,500
II Capital Gains
Long term capital gain on sale of unlisted shares
[Since shares were held for more than 24 months]

Full value of consideration [Rs. 95,00,000

15,00,000 + Rs. 80,00,000]
Less: Indexed cost of acquisition
[80,00,000 x 348/301] 92,49,1692,50,831
III Income from Other Sources
Advance forfeited on sale of land 20,00,000
Total income/Gross Total Income 9,31,53,331
Total income/Gross Total Income 9,31,53,330
(rounded off)
Computation of tax liability under the regular
provisions of the Act
Tax on Rs. 2,50,831@20% under section 112 50,166
Tax on Rs. 9,29,02,500@25% [Since the turnover of
the company for the previous year 2021-22 does not
2,32,75,791
exceed Rs. 400 crore] 2,32,25,625
Add: Surcharge @ 7%, since the total income of the 16,29,305
company > Rs. 1 crore but ≤ Rs. 10 crores

16 www.bhagyaachievers.com
9878791366
 2,49,05,096

Add: Health and education cess @ 4% 9,96,204

Tax liability 2,59,01,300

Computation of tax liability of Shubh Fragrance Ltd. for the
A.Y. 2024-25 under section 115JB
Particulars Rs.
Minimum Alternate Tax @15% on book profit of 2,28,00,000
Rs. 15,20,00,000
Add: Surcharge@12%, since the book profit of the 27,36,000
company > Rs. 10 crores
2,55,36,000
Add: Health and Education cess@4% 10,21,440
Tax liability under section 115JB 2,65,57,440
Since the regular income-tax payable is less than the minimum
alternate tax payable, the book profit of Rs. 1520 lakhs shall be
deemed to be the total income and tax is leviable @15% thereof
plus surcharge@12% and cess@4%. Therefore, the tax liability is
Rs. 2,65,57,440.
MAT Credit to be carried forward
Tax liability under section 115JB 2,65,57,440
Less: Tax liability under the regular provisions of the Income- 2,59,01,300
tax Act, 1961
Amount of Credit (115JAA) 6,56,140
MAT credit of Rs. 20,00,000 of A.Y. 2016-17 is allowed to be carried forward
till A.Y. 2031-32 and MAT credit of Rs. 6,56,140 relating to
A.Y. 2024-25 is allowed to be carried forward till A.Y. 2039-40.
Note - Shubh Fragrance Ltd. is eligible for concessional rate under
section 115BAA @25.168% i.e., tax@22% plus surcharge@10%
plus HEC@4% subject to tax at the rates mentioned in the said sections
in Chapter XII. In case Shubh Fragrance Ltd. opted for concessional
rate of tax u/s 115BAA, it would not be eligible for additional

17 www.bhagyaachievers.com
9878791366
 depreciation on plant and machinery. In that case, its total income
u/s 115BAA would be-
Particulars Rs.
Total income/Gross Total Income under regular 9,31,53,330
provisions of the Act
Add: Additional depreciation on plant & machinery 6,70,000
Gross Total Income/ Total Income 9,38,23,330
Tax on Rs. 2,50,831@20% under section 112 50,166
Tax on Rs. 9,35,72,499 @22% under section 2,05,85,950 2,06,36,116
115BAA
Add: Surcharge @ 10% 20,63,612
2,26,99,728
Add: Health and education cess @ 4% 9,07,989
Tax liability 2,36,07,717
Tax liability (Rounded Off) 2,36,07,720
Suggestion to Shubh Fragrance Ltd
In case Shubh Fragrance Ltd opts for section 115BAA for assessment year 2024-
25, it would not be eligible for balance 10% additional depreciation on plant &
machinery in A.Y. 2025-26 and would also lose MAT credit of Rs. 20 lakhs. Further,
once option under section 115BAA has been exercised for any P.Y., it cannot
subsequently be withdrawn for the same or any other P.Y. However, in such a
case its tax liability for
A.Y. 2024-25 would be Rs. 2,36,07,720 which would be lower than tax liability
under regular provisions of the Act including MAT.

Question2. (14 Marks)

(a) Mr. Rajesh is a resident unitholder of PQR Ltd. and Shipra Ltd. PQR Ltd. is
incorporated as an Investment Fund and Shipra Ltd. is a Real Estate
Investment Trust. (REIT), which holds 100% shareholding in GPL Ltd., an
Indian company. Mr. Rajesh holds 10% units in both Shipra Ltd. and PQR
Ltd. since the year 2021.
The particulars of income of Shipra Ltd. and PQR Ltd. for the previous
18 www.bhagyaachievers.com
9878791366
 year 2023-24 are given below:
Particulars Shipra PQR Ltd.
Ltd.
Dividend Income from GPL Ltd. Rs. 2
crores
Interest Income from GPL Ltd. Rs. 3
crores
Short-term capital gains on sale of Rs. 1 crore
developmental properties
Business income Rs. 35
lakhs.
Long-term capital losses Rs. 27
lakhs
Interest income Rs. 52
lakhs
GPL Ltd. does not exercise option under section 115BAA for A.Y. 2024-
25. Shipra Ltd. and PQR Ltd. distribute 90% of its income to the unit-
holders during the year after deducting applicable TDS. Compute total
income and net tax payable by Mr. Rajesh for the A.Y. 2024-25,
assuming that he has opted for section 115BAC.
(b) Trex Ltd., a company incorporated in Country "T", has the following
incomes in India during the year. Compute the total income and tax
liability of Trex Ltd. for the Assessment Year 2024-25, assuming that its
POEM is outside India.
(i) Interest of 2,85,000 earned on debentures of 30,00,000 issued on
1st August 2023, in consideration of providing technical knowhow
to MNO Ltd., an Indian Company, for the purpose of business
carried out in India.
(ii) Dividend of 6,50,000 earned on Global Depository Receipts of YL
Ltd., an Indian company, issued under a scheme of Central
Government against the initial issue of shares of the company and

19 www.bhagyaachievers.com
9878791366
 purchased by Trex Ltd. in foreign currency through an approved
intermediary.
(iii) Dividend of 15,50,000 earned on equity shares of Indian
companies.
(iv) Income by way of royalty amounting to 12,56,470 (net of TDS
@20.80%), received from Z Ltd., an Indian company, in pursuance
of an agreement approved by Central Government.
(v) Business Income of Rs. 8,50,000 from a unit established at Delhi.
(vi) Long-term capital gain of 1,32,000 on transfer of unlisted shares
of Black Pvt. Ltd., an Indian Company (computed with indexation
benefit). If computed without indexation benefit, the long-term
capital gains would be 2,32,000.
Notes -
(i) No DTAA exists between India and Country "T".
(ii) The Unit in Delhi is not involved in provision of technical
knowhow/royalty (i.e., No PE). (6 Marks)
Answer: 2. (14 Marks)

(a) Computation of total income and tax payable in the hands of Mr. Rajesh
Particulars
Particular Rs.
(i) Dividend income from GPL Ltd. (SPV) -
As per section 10(23FD), the component of dividend
income distributed to unitholders is not taxable in the
hands of unitholders, since GPL Ltd. (SPV) has not
exercised the option u/s 115BAA. Accordingly, Rs. 18
lakhs (10% of Rs. 1.80 crore, being 90% of Rs. 2 crore),
being the dividend component of income received by
Mr. Rajesh from Shipra Ltd. is not taxable in his hands.

(ii) Interest income from GPL Ltd. (SPV) 27,00,000

As per section 115UA(3), interest income distributed to

20 www.bhagyaachievers.com
9878791366
 unit holders would be deemed as income of the unit
holders. Accordingly, Rs. 27 lakhs [i.e., 10% of Rs. 2.7
crores (90% of Rs. 3 crores)], being the interest
component of income distributed to Mr. Rajesh, is
taxable in the hands of the Mr. Rajesh.

(iii) Short-term capital gain on sale of development -

properties by Shipra Ltd.
As per section 115UA(2), STCG on sale of development
properties is taxable at maximum marginal rate of
42.744% in the hands of the REIT. No tax liability arises
in the hands of Mr. Rajesh on Rs. 9 lakh (10% of Rs. 90
lakh, being 90% of Rs. 1 crore), being the capital gain
component of income distributed to him, by virtue of
section 10(23FD).

(iv) Business Income of PQR Ltd. -

Business income of an investment fund is taxable in
hands of investment fund. Consequently, as per
section 10(23FBB), business income accruing or arising
to or received by a unitholder of investment fund is
not taxable in his hands.
(v) Long-term capital loss of PQR Ltd. -
Long-term capital loss of Rs. 2,70,000 (10% of Rs. 27
lakhs) can be carried forward and set-off by Mr.
Rajesh, since he holds such units for more than 12
months, against income from long-term capital gains
arising in the subsequent years, since there is no long-
term capital gain in the current year. It can be carried
forward for a maximum of 8 assessment years.
(vi) Interest income of PQR Ltd. 5,20,000

21 www.bhagyaachievers.com
9878791366
 As per section 10(23FBA), interest income would be
exempt in the hands of Investment fund. As per
section 115UB, Rs. 5,20,000 lakhs (10% of Rs. 52 lakhs)
would be taxable as income from other sources in the
hands of Mr. Rajesh. Even if investment fund
distributed only 90% of its income to the unit holders
during the year, remaining 10% of income would be
deemed to be credited to account of each unitholder
on the last day of previous year i.e., 31.03.2024.
Total income 32,20,000
Computation of tax payable by Mr. Rajesh Particulars
Particulars Rs. Rs.
Upto 3,00,000 Nil

3,00,001 -6,00,000 @5% 15,000

6,00,001 -Rs.9,00,000 @10% 30,000

9,00,001 - 12,00,000 @15% 45,000

12,00,001 - 15,00,000 @20% 60,000

15,00,001 - 32,20,000@30% 5,16,000 6,66,000
Add: Health and education cess @4% 26,640
Tax liability 6,92,640
Less: Tax deducted at source 2,70,000
- under section 194LBA @ 10% by Shipra Ltd. In respect of
interest income from SPV 52,000 3,22,000
-under section 194LBB @10% by PQR Ltd.

22 www.bhagyaachievers.com
9878791366
Net Tax payable 3,70,640
(b)
Computation of total income
Particulars Rs. Rs.
Profits and gains of business or profession
Business Income from a unit established at 8,50,000
Delhi
Fees for technical services [would be 30,00,000
equivalent to the amount of debentures of
30,00,000 received from an Indian company,
issued in consideration of providing
technical knowhow] for the purpose of
business carried out in India
Royalty income received from Z Ltd., an
Indian company, in pursuance of an
agreement approved by Central Government
[12,56,470 x 100/79.20, since tax have been
] 54,36,452
deducted at source @ 20.8%]
15,86,452
Capital Gains
Long-term capital gains on unlisted shares 2,32,000
(without indexation)
Income from Other Sources
Interest on debentures issued by an Indian 2,85,000
company
Dividend on Global Depository Receipts
(GDRs) of YL Ltd., an Indian company, issued
under a scheme of Central Government
against the initial issue of YL Ltd. and
purchased in foreign currency by Trex Ltd. 6,50,000

23 www.bhagyaachievers.com
9878791366
Dividend income on equity shares of Indian 15,50,000 24,85,000
companies
Gross Total Income/Total income 81,53,452
Computation of tax liability
Particulars Rs. Rs.
Business income of 8,50,000 [taxable @40%] 3,40,000
FTS of 30,00,000, taxable @20% u/s 115A 6,00,000
Royalty income of 15,86,452, taxable @20% 3,17,290 12,57,290
u/s 115A
Long-term capital gain of 2,32,000 23,200
(computed without indexation benefit) on
unlisted shares taxable @10% under section
112(1)(c)(iii)
Interest on debentures of 2,85,000, taxable 1,14,000
@40% [Since debt is incurred in Indian
currency, it is not eligible for concessional
rate of 20% u/s 115A]
Dividend on GDRs of Rs. 6,50,000, taxable 65,000
@10% u/s 115AC
Dividend on equity shares of 15,50,000, 3,10,000 4,89,000
taxable @20% u/s 115A
17,69,490
Add : Health and Education cess @ 4 % 70,780
Tax laibility 18,40,270
Note - Since the unit in Delhi does not play any role in provision of
technical know/royalty, the provisions of section 44DA are not attracted in this
case in respect of fees for technical services and royalty.
Question 3. (14 Marks)

(a)
(i) The Head of Accounts of Heathy Wealthy Foundation, a trust,
established for the purpose of promotion of Yoga has
24 www.bhagyaachievers.com
9878791366
 approached you to guide about the tax implications of the
following:
a. During the financial year 2023-24, it received a voluntary
contribution of Rs. 150 lakhs with a specific direction that it
should form part of the corpus of the trust. The trust
invested such amount in the shares of M/s. ABC Private Ltd.,
a private sector company.
b. Apart from the above-mentioned Rs. 150 lakhs, during the
financial year 2023-24, it received Rs. 80 lakhs as other
voluntary contributions and Rs. 50 lakhs as fees towards
providing Yoga classes. (4 Marks)
(ii) Mr. Shyam is the founder of UVX Trust, a public charitable trust
registered u/s 12A of the Income-tax Act, 1961. The trust runs a
hospital for the treatment of various diseases. Mr. Umesh, son of
Mr. Shyam, was admitted in May 2023 in the hospital for treatment.
He was charged a total fee of Rs. 2.20 lakhs as against the amount
of Rs. 3.50 lakhs charged by the hospital for similar treatment to
the general public.
The Board of trustees were served with a notice by the income tax
authorities for cancellation of registration u/s 12AB
Discuss whether registration can be denied to the trust. What are
the further tax implications? (4 Marks)
(b) Mr. Mani Prasad, aged 71 years furnished the following information
in respect of income earned by him for the previous year ended31-
03-2024:
Particulars Amount (Rs.)
India
Pension from State Government 4,80,000
Short term capital gains on sale of plot 3,20,000
Deposit in PPF Account 1,50,000
Speculative Income 1,56,000
Country M

25 www.bhagyaachievers.com
9878791366
Agricultural Income (gross) 86,000
Dividends from a company incorporated in Country M 68,000
(gross) [Exempt in Country M]
Country N
Business loss (proprietary business) [Not eligible forset off 1,16,000
against other incomes in Country N]
Gross rental income from a house property (No statutory 3,20,000
deduction was available in Country N)
Municipal taxes paid in respect of the above property (not 21,000
allowed as deduction in Country N)

Additional Information:
(1) There is no agreement under section 90 for relief for avoidance of
double taxation between India and Country M and Country N where
the incomes have accrued or arisen.
(2) Mr. Mani Prasad is resident in India, and he has paid applicable
taxes on incomes earned in Country M and Country N, where the
applicable tax rates are 10% and 5%, respectively.
Compute the total income and net tax liability of Mr. Mani Prasad
after providing relief under section 91 for A.Y. 2024-25. Mr. Mani
Prasad is paying tax under default tax regime under section
115BAC. (6 Marks)
Answer: 3. (14 Marks)

(a)
(i)
a. Voluntary contribution of Rs. 150 lakhs received with a specific
direction that it will form part of corpus of the trust would be
exempt from tax only if it is invested in any of the modes specified
under section 11(5) specifically maintained for such corpus. If the
same is not so invested, then, it would not be exempt under section
11(1)(d) for P.Y.2023-24.

26 www.bhagyaachievers.com
9878791366
 Investment in shares of private company is not a specified mode
under section 11(5). Hence, Rs. 150 lakhs received by Healthy
WealthyFoundation would not be exempt under section 11.
b. Yoga is included in the definition of “charitable purpose” under
section 2(15).
Accordingly, voluntary contributions of Rs. 80 lakhs and fees
towards providing Yoga classes of Rs. 50 lakhs would be income
from property held for charitable purposes and eligible for
unconditional exemption of 15% under section 11.
Exemption will be available under section 11 subject to the
fulfilment of the necessary conditions.
(ii) As per section 13(6), UVX Trust shall not be denied the benefit of
exemption under section 11 in respect of its entire income
merely due to the reason that the benefit of medical facilities
have been provided to Mr. Umesh, son of Mr. Shyam, being the
specified person. Accordingly, the registration of UVX Trust
cannot be cancelled by the Income-tax authorities on this basis.
As per section 12(2), the value of medical facilities provided to
Mr. Umesh, being the specified person, at a concessional rate
would bedeemed to be the income of the trust and such income
would not be eligible for exemption under section 11. Hence, Rs.
1,30,000, being the concessional value of medical services would
be deemed to be the income of UVX Trust.
The remaining income would be eligible for benefit of section
11.
(b) Since Mr. Mani Prasad is resident in India for the P.Y.2023-24, his
global income would be subject to tax in India. Therefore, income
earned byhim in Country M and Country N would be taxable in India.
He would, however, be entitled to deduction under section 91, since
India does not have a DTAA with Country M and Country N, and all
conditions under section 91 are satisfied.

27 www.bhagyaachievers.com
9878791366
Computation of total income of Mr. Mani Prasad for A.Y.2024-25
Particulars Rs. Rs.
Income under the head “Salaries”
Pension from State Government 4,80,000
Less: Standard deduction u/s 16(ia) 50,000
[Allowable as per section 115BAC]
4,30,000
Income from House Property
Rental income from property in Country N2 3,20,000
Less: Municipal taxes 21,000
2,99,000
Less: Deduction u/s 24(a)@30% 89,700
2,09,300
Profits and Gains of Business or
Profession
Speculative income in India 1,56,000
Less: Set-off of business loss from proprietary 1,16,000
business in Country N undersection 70

40,000
Capital Gains
Short-term capital gains on sale of plot in 3,20,000
India
Income from Other Sources
Agricultural income from Country M [notexempt 86,000
u/s 10(1), since it is earned from land situated
outside India]
Dividend from a company in Country M 68,000
1,54,000
Gross Total Income 11,53,300

28 www.bhagyaachievers.com
9878791366
Less: Deduction under Chapter VI-A [No
deduction allowable as per section 115BAC] - -
Total Income 11,53,300
Computation of net tax liability of Mr. Mani Prasad for A.Y.2024-25
Particulars Rs.
Tax on Rs. 11,53,300
Upto Rs. 3,00,000 Nil
Rs. 3,00,001 to Rs. 6,00,000 @5% 15,000
Rs. 6,00,001 to Rs. 9,00,000 @10% 30,000
Rs. 9,00,001 to Rs. 11,53,300 @15% 37,995
82,995
Add: Health and education cess@4% 3,320
86,315
Less: Rebate under section 91 (See Working Note below) 11,101
Net tax liability 75,214
Net tax liability (Rounded off) 75,210
Calculation of Rebate under section 91: Rs.
Average rate of tax in India [i.e., Rs. 86,315/
Rs. 11,53,300 x 100] = 7.484%
Doubly taxed income pertaining to Country M
Agricultural income 86,000
Dividend from a company in Country M [Not
includible, since exempt in Country M] -
86,000
Rebate under section 91 on Rs. 86,000 @7.484%
6,436
[being the lower of average Indian tax rate (7.484%)
and Country M tax rate (10%)]
Doubly taxed income pertaining to Country N
Income from house property less business loss set- 93,300
off against income chargeable to tax in India (Rs.
2,09,300 – Rs. 1,16,000)

29 www.bhagyaachievers.com
9878791366
Rebate under section 91 on Rs. 93,300 @5% [being
the lower of average Indian tax rate (7.484%) and 4,665
Country N tax rate (5%)]
Total rebate under section 91 (Country M + 11,101
Country N)
Question 4. (14 Marks)

(a)
(i) During the previous year 2023-24, Mr. A purchased scrap of Rs. 55
lakhs from Mr. B for the purpose of his manufacturing unit. Mr. A also
furnished a certificate to Mr. B that the scrap shall be utilized for
manufacturing process carried on by Mr. A and shall not be used for
trading purposes. Mr. A made the payment of Rs. 45 lakhs during the
year to Mr. B. Assume turnover of both Mr. A and Mr. B from the
business carried on by them exceeds 10 crores in the financial year
2022-23. Comment upon TDS/TCS implication in the above case. (3
Marks)
(ii) Mr. P provides technical consultancy to its various clients who deduct
tax u/s 194-J of the Act. Mr. P applies for lower tax deduction
certificate u/s 197 from the TDS officer in respect of his receipts from
consultancy. Mr. P was issued the lower tax deduction certificate
allowing him to receive the consultancy payments after deduction of
tax@1%. Mr. P forwarded this certificate to his client Mr. Q asking him
to deduct tax@1% on payments of Rs. 15 lakhs to be made to Mr. P.
Mr. Q has approached you to advise on the amount of tax to be
deducted from the payment to be made to Mr. P. You gathered the
information that Mr. P is not filing his ITRs for the last two Assessment
years and TDS credit in his 26AS is more than Rs. 1 lakh in each last two
years. What would be your advice to Mr. Q? (3 Marks)
(iii) Ms. Roshni sold her house property at Delhi to Ms. Shalini for a
consideration of 60 Rs. lakhs. She has purchased the house property
for Rs. 36 lakhs. The Stamp duty value of the property on the date of
sale is Rs. 82 lakhs.

30 www.bhagyaachievers.com
9878791366
 Determine the TDS implications in the hands of Ms. Shalini as per the
Income-tax Act, 1961, assuming both Roshni and Shalini are resident
individuals. (2 Marks)
(b) Aster Ltd., Australia, holds 30% equity shares in Bhuvan Ltd., India.
Bhuvan Ltd. develops software and also provides related support
services. Bhuvan Ltd. during the year billed Aster Ltd., Australia for
150 man-hours at the rate of Rs. 2,700 per man hour. The total cost
(direct and indirect) for executing this work amounted to Rs. 4,52,000.
However, Bhuvan Ltd. billed Gaurav Ltd., India at the rate of Rs. 3,800
per man hour for the similar level of manpower and earned Gross
Profit of 40% on its cost.
The transactions of Bhuvan Ltd. with Aster Ltd. and Gaurav Ltd. are
comparable, subject to the following differences:
(i) While Bhuvan Ltd. also derives technological support from Aster
Ltd., there is no such support from Gaurav Ltd. The value of
technological support received from Aster Ltd. may be put at
15%of normal gross profits.
(ii) As Aster Ltd. gives business in large volumes, Bhuvan Ltd.
offered to Aster Ltd., a quantity discount which may be valued
at 10% ofthe normal gross profits.
(iii) In the case of rendering services to Aster Ltd., Bhuvan Ltd.
neither runs any risk nor incurs any marketing costs. On the other
hand, in the case of services to Gaurav Ltd., Bhuvan Ltd. has to
assume all the risks and costs associated with the marketing
function which may be estimated at 20% of the normal gross
profits.
(iv) Bhuvan Ltd. offered one month credit to Aster Ltd. The cost of
providing such credit may be valued at 5% of the normal gross
profits. No such credit was given to Gaurav Ltd.
Compute the Arm's Length Price alongwith income to be adjusted
under the cost plus method.(6 Marks)

31 www.bhagyaachievers.com
9878791366
Answer: 4. (14 Marks)

(a)
(i) By virtue of section 206C(1A), Mr. B is not required to collect tax at
source under section 206C(1), since Mr. A has furnished a certificate
to Mr. B that the scrap purchased from him is for manufacturing
process carried on by him and not for trading purposes.
However, as clarified vide Circular no. 13/2021 dated 30.6.2021 and
Circular No. 20/2021 dated 25.11.2021, TDS under section 194Q will
be attracted in the hands of the buyer in such cases covered under
section 206C(1A), if the conditions specified under section 194Q are
fulfilled.
In this case, tax is required to be deducted at source under section
194Q by the buyer, Mr. A, since his turnover in the immediately
preceding financial year exceeds 10 crores and he has purchased
goods of the value or aggregate of such value exceeding Rs. 50 lakhs.
TDS u/s 194Q would be 0.1% of the sum exceeding Rs. 50 lakhs and
the same has to be deducted at the time of payment or credit of such
sum to the account of resident seller, whichever is earlier.
Therefore, in the present case, Mr. A is required to deduct tax at
source @ 0.1% of 5,00,000, being the amount exceeding Rs. 50 lakhs
(45,00,000, being the payment made plus Rs. 10 lakhs, being the
amount credited to the account of Mr. B).
Note: It may be noted that section 206C(1H) would not apply where
section 194Q is applicable
(ii) As per section 194J, Mr. Q is required to deduct tax at source @2% on
Rs. 15 lakhs in respect of payment for technical consultancy to Mr. P.
However, since Mr. P has furnished lower tax deduction certificate
issued under section 197 specifying lower rate of 1% to Mr. Q, tax
would be deducted at such lower rate of 1%.
However, as per section 206AB, since Mr. P has not furnished his
return of income for the last two Assessment years, and the aggregate
of TDS and TCS in his case is Rs. 1 lakh, which is more than the

32 www.bhagyaachievers.com
9878791366
 threshold of 50,000, Mr. Q is required to deduct tax at source on
payment of fees for technical consultancy to Mr. P, at higher of inter
alia the following rates
(a) at twice the rate prescribed in the relevant provisions of the Act
i.e., 4%;
(b) at 5%
Accordingly, Mr. Q is required to deduct tax at source @5% on Rs. 15
lakhs, being the amount paid as technical consultancy fees.
(iii) In the case of transfer of any immovable property and the transferor
is a resident, where the consideration or the stamp duty value,
whichever is higher, exceeds Rs. 50 lakhs, tax is deductible at source
@1%.
As per section 194-IA, Ms. Shalini, being a resident transferee paying
Rs. 60 lakhs to Ms. Roshni, a resident transferor, as consideration for
transfer of house property at Delhi, is required to deducted tax at
source @1% on Rs. 82 lakhs, being the higher of Stamp duty value of
82 lakhs or consideration of Rs. 60 lakhs.
Therefore, tax to be deducted = Rs. 82,00,000 x 1% = Rs. 82,000.
(b) Two enterprises are deemed to be associated enterprises where one
enterprise, directly or indirectly, holds shares carrying not less than
26% of the voting power in the other enterprise.
In this case, since Aster Ltd., a foreign company, holds 30% equity
shares in Bhuvan Ltd., an Indian company, Aster Ltd. and Bhuvan
Ltd. are deemed to be associated enterprises. Since the transaction of
developing software and providing related support service by
Bhuvan Ltd. to Aster Ltd. is an international transaction between
associated enterprises, the provisions of transfer pricing would be
attracted in this case.
Computation of Arm’s Length Price as per Cost Plus Method
Particulars % %
Gross Profit mark-up on cost in case of Gaurav Ltd. 40%
Ltd. [an unrelated party]

33 www.bhagyaachievers.com
9878791366
Less: Adjustments for functional and other
differences
- Value of technology support [Aster Ltd. 6%
provides technology support, but Gaurav Ltd.
does not provide such support. Therefore, value
of technology support shall be adjusted] [15%
of 40%, being gross profit]
- Quantity discount to Aster Ltd. [Quantity 4%
discount is allowed to Aster Ltd. as it gives
business in large volumes, but the same is not
provided to Gaurav Ltd. Therefore, it shall be adjusted] 8%
[10% of 40%, being gross profit] 18%
- Risk and cost associated with marketing [Bhuvan Ltd. has
to bear all the risk and costs associated with the
marketing function in case of Gaurav Ltd., while there is
no such risk in case of services to Aster Ltd. Therefore,
market risk and cost shall be adjusted] [20% of 40%, being
gross profit]
22%
Add: Cost of credit to Aster Ltd. [Bhuvan Ltd has provided
credit of 1 month to Aster Ltd. but not to the unrelated
party. Therefore, adjustment for the cost of such credit
has to be carried out to arrive at the ALP] [(5% of 40%,
being gross profit]
2%
Arm’s length gross profit mark up to cost 24%
Cost incurred by Bhuvan Ltd. for executing Aster Ltd.’s 4,52,000
work
Add: Adjusted gross profit (Rs. 4,52,000 x 24%) 1,08,480
Arm’s length billed value 5,60,480
Less: Actual Billed Income from Aster Ltd. (Rs. 2,700 x 150 4,05,000
man hours)
Total Income of Bhuvan Ltd to be increased by 1,55,480

34 www.bhagyaachievers.com
9878791366
Question 5. (14 Marks)

(a) Answer any two of the following three sub-parts (i), (ii), (iii) on the
basisof decided case laws, bringing out the following –
(1) Issue involved
(2) Relevant provisions of law
(3) Analysis and Conclusion
(i) In the case of M/s Hyper Ltd., the Income-tax Appellate Tribunal
decided against the assessee and issued order under section 254.
The assessee filed an appeal to the jurisdictional High Court by
framing the substantial question of law under section 260A(2)(c).
The High Court, without framing the question of law u/s 260A(3)
at the time of admission of appeal, issued notices, heard both the
parties and decided the appeal affirming the order of the
Tribunal on the questions raised by the assessee appellant. You
are required to discuss whether the High Court was justified in not
formulating the substantial question of law as required under
section 260A(3) and adjudicating merely on the questions put
forth by the appellant under section 260A(2)(c).
(ii) Krishna Cooperative Society, the assessee is engaged in
marketing of fertilizers and purchase and processing of seeds. The
assessee had claimed deduction under section 80P(2)(d) on
dividend income received from NAFED and one Cooperative bank
and also on interest on deposits with Co-operative banks. The
Assessing Officer contended that the aforesaid income were not
included in the total income and wants to invoke section 14A by
disallowing the expenditure incurred with respect to earning
income which is not liable to income tax.
Discuss whether the action taken by the Assessing Officer is
tenable in law.

(iii) On 1st May 2023, M Sudarshan, a resident individual, received

1,500 bonus shares from Sugam Pvt. Ltd. in which he held 3,000
equity shares. The Assessing Officer held that since the assessee

35 www.bhagyaachievers.com
9878791366
 has not paid any consideration for bonus shares, he was under an
obligation in law to offer the market value as income from other
sources under section 56(2)(x) of the Act. The Assessing Officer
computed the fair value of these bonus shares and added the
amount to the income of M Sudarshan as “Income from other
sources”.Whether the decision of the Assessing Officer is
correctin law?(2 x 4 marks = 8 Marks)
(b) XYZ GmBH Germany is a foreign company engaged in
manufacturing and sale of LED lights. It opened a branch in
Gurugram for sale of LED lights in India. The profit mark up was cost
plus 40% in respect of sales made by the branch. The XYZ GmBH,
Germany also supplied the goods directly to various customers in
India. The turnover of the Gurugram branch for the year is 155
lakhs and direct sales by XYZ GmBH to Indian customers is 80 lakhs.
The Assessing Officer wants to tax the profits arising to XYZ GmBH
from direct sale to customers in India though PE (i.e., branch in
India) had no role to play in it. Decide the validity of the Assessing
Officers view in the context of OECD and UN Model tax Convention.
(8 Marks)
Answer: 5. (14 Marks)

(a)
(i) Issue Involved: The issue under consideration is whether the High
Court is justified in not framing any substantial question of law
itself and adjudicating merely on the questions put forth by the
appellant.
Relevant provision of law: Section 260A(1) provides that an
appeal shall lie to the High Court from every order passed in
appeal by the Appellate Tribunal, if the High Court is satisfied that
the case involves a substantial question of law. As per section
260A(3) and 260A(4), if the High Court is so satisfied, it shall
formulate that question and the appeal shall be heard only on the
question so formulated.

36 www.bhagyaachievers.com
9878791366
 Analysis & Conclusion: There lies a distinction between the
questions proposed by the appellant for admission of the appeal
to the High Court and the questions framed by the High Court.
The questions, which are proposed by the appellant, fall under
section 260A(2)(c) whereas the questions framed by the High
Court fall under section 260A(3). Section 260A(4) provides that
the appeal is to be heard on merits only on the questions
formulated by the High Court under section 260A(3) and not on
the questions proposed by the appellant.
In case the High Court is of the view that the appeal did not
involve any substantial question of law, it should have recorded a
categorical finding to that effect that the questions proposed by
the appellant either do not arise in the case or/and are not
substantial questions of law so as to attract the rigour of section
260A for its admission and accordingly, should have dismissed
the appeal at the preliminary stage itself. However, this was not
done in this case. Instead, the appeal was heard only on the
questions urged by the appellant u/s 260A(2)(c).
The High Court was, therefore, not justified since it did not
decide the appeal in conformity with the mandatory procedure
prescribedin section 260A.
Note – The facts given in the question are similar to the facts in
CIT v. A.A. Estate Pvt. Ltd. [2019] 413 ITR 438, wherein the issue
came up before the Supreme Court. The above answer is based
on the rationale of the Supreme Court in the said case.
(ii) Issue Involved: The issue under consideration is whether the
provisions of section 14A can be invoked in disallowing the
expenditure incurred in respect of the income for which
deductionis claimed under Chapter VI-A.
Provisions applicable: As per section 14A, expenditure incurred
in relation to income which does not form part of the total income
under the Act, will not be allowed in computing the total income
of the assessee.

37 www.bhagyaachievers.com
9878791366
 Analysis: Deduction under section 80P covered in Chapter VIA is
different from the exclusions/exemptions provided under
Chapter
III. Section 14A is applicable only if an income is not included in
the total income as per the provisions of Chapter III of the
Income-tax Act, 1961
Income which qualifies for deductions under section 80C to 80U
has to be first included in the gross total income of the
assesseeand then allowed as a deduction.
Therefore, no disallowance can be made u/s 14A in respect of
income included in total income in respect of which deduction is
allowable u/s 80C to 80U.
Conclusion: Accordingly, the action taken by the Assessing Officer
in disallowing the expenditure incurred with respect to income for
which deduction under Chapter VI-A is claimed, by invoking the
provisions of section 14A is, therefore, not tenable in law.
Note – The facts given in the question are similar to the facts in
CIT v. Kribhco (2012) 349 ITR 0618, wherein the issue came up
before the Delhi High Court. The above answer is based on the
rationaleof the Delhi High Court in the said case
(iii) Issue Involved: The issue under consideration is whether bonus
shares received by shareholders would be taxable under the head
‘Income from other sources’ as per the provisions of section
56(2)(x), as they are received without consideration.
Provision Applicable: Section 56(2)(x) brings to tax any sum of
money or value of property received by any person without
consideration or for inadequate consideration from any person.
Analysis: The issue of bonus shares by capitalization of reserves
is merely a reallocation of the company's funds. There is no
inflow of fresh funds or increase in the capital employed, which
remains the same. Thus, there is no addition or alteration to the
profit- making apparatus and the total funds available with the
company remain the same.

38 www.bhagyaachievers.com
9878791366
 On the other hand, when a shareholder gets bonus shares, the
value of the original shares held by him goes down and the
market value as well as intrinsic value of the two shares put
together will be the same or nearly the same as the value of
original share beforethe issue of bonus shares.
Thus, any profit derived by the assessee shareholder on account
of receipt of bonus shares is adjusted by depreciation in the value
of equity shares originally held by him.
Conclusion: Accordingly, the action of the Assessing Officer in
including the fair value of bonus shares as Income from other
sources of M Sudarshan is incorrect.
Note – The facts given in the question are similar to the facts in
PCIT v. Dr. Ranjan Pai (2021) 431 ITR 250, wherein the issue came
up before the Karnataka High Court. The above answer is
based on the rationale of the Karnataka High Court in the said
case.
(b) Business profits of an enterprise can only be taxed by the
Residence State. Source State would have the right to tax business
profits of an enterprise only if a PE exists in its jurisdiction.
Taxability as per OECD Model Convention
The OECD Model Convention provides that if the enterprise of the
Residence State carries on business in the Source State through a
PE situated therein, then, the profits that are attributable to the PE
alone may be taxed in the Source State. OECD Model does not
incorporate "Force of Attraction" rule.
Accordingly, only profits from turnover of 155 lakhs, representing
sale of LED lights made by the Gurugram branch would be taxable
in India in the hands of XYZ GmBH, Germany.
Thus, in this case, Assessing Officer's proposed action to bring to
tax profit earned by XYZ GmBH, Germany from direct supply to
customers in India, in which the PE had no role to play, is not valid.
Taxability as per UN Model Convention

39 www.bhagyaachievers.com
9878791366
 The UN Model Convention amplifies this attribution principle by a
limited Force of Attraction rule, which permits Source State
taxation of the enterprise, not only in respect of the business
carried on by it through a PE in the Source State, but also on
business profits arising from sales in Source State of same or
similar goods or merchandise as those sold through that PE.
Accordingly, profits from turnover of 235 lakhs, representing sale
of LED lights made by the Gurugram branch as well as the direct
sale of LED lights made by XYZ GmBH, Germany to Indian
customers would be taxable in India in the hands of XYZ GmBH,
Germany.
Therefore, in this case, the Assessing Officer's proposed action to
bring to tax profit earned by XYZ GmBH, Germany from direct
supply to customers in India is valid, even though the PE had no
role to play.
Question 6. (14 Marks)

(a)
(i) A search was conducted u/s 132 of the Income-tax Act, 1961 in the
case of LMN Jewellers (P) Ltd., a gold jewellery retail chain. As part
of the post search enquiries, data from the billing software was
analysed. On analysis of this data, it was found that the company
was involved in violation of section 40A(3) in a major way to the
tune of 20 crores in the purchase of old gold.
In order to verify the findings culled from digital data, some of the
customers whose whereabouts were available from computer
records were contacted and their statements were recorded under
oath. These customers admitted under oath that they had sold old
gold and received the amounts (all exceeding 10,000) in cash. The
fact which emerged from the enquiries is that LMN Jewellers (P)
Ltd. purchase old gold and make payments for these purchases in
cash, even if they exceed 10,000.
However, the tax auditor had mentioned "Yes" in response to the

40 www.bhagyaachievers.com
9878791366
 statement in sub-clause (A) of Clause 21(d) on whether the
expenditure covered under section 40A(3) read with Rule 6DD
were made by account payee cheque drawn on a bank or account
payee bank draft. The tax auditor submitted that standing
instructions were given by the management of the entity to the
employees to make payments above 10,000 only through account
payee cheques and/or bank drafts or other permissible electronic
modes; and copy of these instructions were verified by him. He
further submitted that he had also taken a representation from the
Management that net payment in cash to any person in a day did
not exceed 10,000. Also, he mentioned that the test checks
conducted by him did not reveal any violation.
Examine the ethical implications in this case and the consequences
thereof. (6 Marks)
(ii)
(a) Critically examine the following cases and discuss whether
the provisions of General Anti-avoidance Rules (GAAR) can be
invoked in these cases?
(i) Shiva Ltd., an Indian company has 2 manufacturing units, unit X
in the Special Economic Zone (SEZ) and unit Y in non-SEZ.
Manufacturing activities are carried out in unit Y while unit X
only does the packaging of the goods manufactured by unit Y.
In its books of accounts, it shows the manufacturing to be
carried out in unit X and claims allowable deductions.
(ii) Vishnu Ltd., an Indian company has 2 manufacturing units, unit
M in the Special Economic Zone (SEZ) and unit N in non-SEZ. It
transfers the goods manufactured by unit N to unit M at a
price significantly lower than the market value of the goods
and thus becomes eligible for higher deductions.(4 Marks)
(b) Explain the correctness or otherwise of the following statements
giving proper reasons thereof:
a. Mr. Rakul, a resident individual, is aggrieved by an order
passedby the Board for Advance Ruling on 1.10.2023. Since

41 www.bhagyaachievers.com
9878791366
 the decisionof the Board is binding on the applicant, he has
no other option butto accept the ruling of the Board.
b. M/s Sun Ltd., an Indian public sector company, wants to seek
advance ruling from the Board for Advance Rulings (BOAR) in
respect of a matter relating to computation of its total
income involving a question of law relating to such
computation. However, the matter is already pending before
the Income-tax Appellate Tribunal (ITAT) as on the date of
application for advance ruling i.e., 12.12.2023. It cannot seek
the BOAR ruling till the matter is pending before the
ITAT.(4 Marks)
Answer: 6. (14 Marks)
(a)
(i) As per section 40A(3), where the assessee incurs any expenditure,
in respect of which payment or aggregate of payments made to a
person in a day otherwise than by an account payee cheque drawn
on a bank or by an account payee bank draft or use of electronic
system through bank account or through such other prescribed
electronic modes exceeds 10,000, such expenditure shall not be
allowed as a deduction.
Clause 21(d) of Form 3CD requires the tax auditor to report, on
the basis of the examination of books of account and other
relevant documents/evidence, whether the expenditure covered
under section 40A(3) read with rule 6DD were made by account
payee cheque drawn on a bank or account payee bank draft; and
if not, to furnish details mentioned thereunder, namely, date of
payment, nature of payment, amount etc.
The Guidance Note on Tax Audit issued by ICAI states that there
may be practical difficulties in verifying whether each payment is
made through account payee cheque or bank draft or ECS or other
prescribed electronic modes. Where the reporting has been done
on the basis of the certificate of the assessee, the fact has to be
reported as an observation in para 3 of Form 3CA.

42 www.bhagyaachievers.com
9878791366
 The tax auditor is required to point out in tax audit report, the
violation of the provisions of section 40A(3) thereof involving
expenditure to a person in a day exceeding 10,000 otherwise than
by way of account payee cheque/bank draft, ECS and other
prescribed electronic modes. However, in this case, the tax auditor
has certified that there was no such instance, though such
instances aggregate to a large quantum of 20 crores.
The tax auditor should have considered the nature of business i.e.,
jewellery business of the assessee and accordingly undertaken
necessary checks to verify whether there are cash payments in
violation of section 40A(3). He should have made use of the audit
tools which are available to find out such payments expeditiously
and accurately where the data is voluminous.
In this case, considering the nature of business of the assessee,
namely, jewellery business, the onus was on the tax auditor to
verify the same before reporting ir. Form 3CD. Mere reliance on
certificate issued by the management is not acceptable in such a
case. Also, even in a case where the reporting has been done on
the basis of the certificate of the assessee, the fact has to be
reported as an observation in para 3 of Form 3CA, which he had
failed to do.
Thus, in the case, the tax auditor had failed to exercise due
diligence in the conduct of his professional duties. He had also
failed to obtain sufficient information which is necessary for
expression of opinion. On account of such failure, clauses (7) and
(8) of Part I of the Second Schedule to the Chartered Accountants
Act, 1949 may be invoked.
(ii)
(i) In the present case, Shiva Ltd., an Indian company has 2
manufacturing units, unit X in the SEZ and unit Y in non-SEZ.Though
unit X only does the packaging of goods manufactured by unit Y,
the company, in its books of account, shows the goods
manufactured by unit Y as manufacture of goods by unit X to enjoy

43 www.bhagyaachievers.com
9878791366
 exemption under section 10AA. This is a case of misrepresentation
of facts by showing manufacture of non-SEZ unit as
manufacture of SEZ unit. Hence, this is an arrangement of tax
evasion and not tax avoidance.
Tax evasion, being unlawful, can be dealt with directly by
establishing correct facts. GAAR provisions need not be invoked in
such a case.
In this case, goods manufactured by unit N, a non-SEZ unit, being
a non-eligible business, are transferred to unit M, a SEZ unit, being
an eligible business, at a price significantly lower than the market
value of the goods to claim higher deduction under section 10AA in
respect of unit M.
As there is no misrepresentation of facts or false submissions, it is
not a case of tax evasion. The company has tried to take advantage
of tax provisions by diverting profits from non-SEZ unit to SEZ unit.
However, this is not the intention of the legislation.
Such tax avoidance is specifically dealt with through the provisions
contained in section 10AA(9), as per which provisions of section 80-
IA(8) would get attracted in such a case. Further, if the aggregate
of such transactions entered into in the relevant previous year
exceed the threshold of Rs. 20 crore, domestic transfer pricing
regulations under section 92BA would be attracted. Hence, the
Revenue need not invoke GAAR in such a case, though GAAR and
SAAR can co-exist as per clarification given in the CBDT Circular.
(b)
(i) The statement is not correct.
An applicant who is aggrieved by any ruling pronounced by the
Board for Advance Rulings may appeal to the High Court against
such ruling or order of the Board of Advance Rulings. He has to do
so within sixty days from the date of the communication of that
ruling, in the prescribed form and manner.
Therefore, Mr. Rakul may appeal to the High Court against such

44 www.bhagyaachievers.com
9878791366
 order within sixty days from the date of the communication of
that order.
(ii) The statement is not correct.
A resident falling within any class or category of persons as
notified by the Central Government i.e., a public sector
undertaking can seek advance ruling even if question raised is
pending before the Appellate Tribunal.

45 www.bhagyaachievers.com
9878791366